Surveillance: OECD Raises Growth Forecast

Can we just start right there the degree to which this stimulus plan, this relief plan down in d C, has shaped your forecast for the year ahead. So actually we're revising our forecast up words for two reasons. First, you know, countries managed a little bitter the pandemic. Some of them are even vaccinating that can reopen their economy.

And it is the one thing which has changed compared with December is the one point nine true and U S stimulus on top of the nine d billion in December WITHINK that we lift and global GDP growth by about a full percentage point. Lawrence, Good morning, Tom King in New York, thank you so much for joining us. I'm fascinated, Lawrens of the diffusement of the US prosperity over the China. Do you lift China up in step

with America? So you know, China had gone out of the pandemic a little earlier than the US, and it's still going fast. You know, it has has been efited actually from the demand for medical product, for I T product. Now,

there's one thing which hadn't changed in our projections. There were tension in trade, you know, related to intellectual property rights, transfer, technology support to state enterprises and there and with the renewed the multilateral um where today with the new head of the w T, within this this issue with start being addressed. So there's a question about whether this really will benefit the rest of the world. In the sort of reflationary mood that a lot of people were talking about.

If you do get the US driving growth, you get a stronger dollar. Typically that is not necessarily positive for a lot of the developing world. How do you see that playing out and shifting the landscape for growth going forward. So there's one thing we say in our projections is that the recovery is very uneven across the world. We're seeing divergencies widening um. That has to do in particular, I mean, in some instances with what's happening on commodity prices.

But in most cases, you know, the driving factor of the driving force and engine of this of this outlook is really what's happening on the headphont. So the divergencies that we are seeing across countries today, they have to do with health management, with the pace of vaccination and and with how many sectors and how large a shell of employee cannot work because of the health situation. I think we should really remain focus on this. That's how

main message. Other gir let's go to Europe. Then the challenges of Europe right now, I know this, that and the other thing I know Arounch you very much up to speed on this. What is your timeline for prosperity for Europe given the pandemic. So in Europe we have very revised our outlook. You know, we think that they renew with pre pandemic level by about mid twenty two, which is roughly a year later than the US UM.

And that again has to do with how how vaccination and the and the and the heath crisis is being managed. What we are telling you of is, you know, there's a lot on fiscal support which is being done. Economically, policies have been fantastic. Policy makers have done the job, but on vaccination they need to go much faster. If we're at war with the virus. Really, up needs to get on the wall footing now. Lauren spin always grit

to catch out with you. Thanks for being with us this morning, obviously chief economist right now, and this is a really really important interview. There's something about being in the crucible of market economics and market analysis and not only getting it right, but getting it right with a certain verve. Mark McCormick joins us now from Toronto Dominion Bank,

their global head of FX Strategy market. I want you to revisit how you frame the dollars three months and six months ago, and then of course give us the now what sure? Thanks, um. It's all about a rotation from the liquidity trade to one macro divergen straight and so the dollar kind of sitting at the epicenter of that. The market was positioned purely on liquidity, purely on low rates, low term premium, and that was the benefactor of a

week er dollars. If you only thought about what the FETE could be doing, you you extrapolated that trend into a week US dollar for the entire year, behind the scenes, growth was diverging, the vaccine campaign was getting off to better starts the United States, And if you fast forward to where we're at now, we're seeing a much stronger dollar reconnecting with real yields because we're seeing more macro volatility come through the markets, through the VIX, through the move,

and through currency ball, and that is flushing out all these stale positions right now, what do you respond? How do you respond? I should say to the week dollar crew, it's clearly consensus. I know they've got to cover that trade. But but how do you respond to them and say there'll be a resiliency to dollar? Well, I think it also depends to it's critical moving forward out of this positioning stage or this positioning element behind this transition of

which basket you're looking at. I absolutely we are still very bullish on the dollar versus the euro. But I think what you can think about is over the next month, after we see this rates move flushed out, there is an element where the factors that we're tracking in markets that are making in the effects. It's terms of trade, so it's linked to the commodity cycle. It's about Carrie. So again you'ld pick up is important, but it's critically

most important. It's all about economic growth. So you can see a world where in G ten European currencies underperform, but you could also see currencies that are leveraged to the global reflation cycle still doing well. So your commodity currencies, you're undervalued. Em currencies also em Asia can now perform. So it's gonna be I think a mixed dollar in the second half of the year. And that's part of this washout, this correlations break down, and it's no longer

dollar up, dollar down. You've used that phrase three times, wash out, flush out, and I want to talk about it with you right now. This is how you get whip sword making big trades. You get sucked into what looks like a flush out, then you extrapolate it out as the new trend. Mark how complex is that as you look at things right now, and how difficult is it to actually draw a line between something that's just a wash out and something that's the beginning of a

new trend. Yeah, it's a great question because it's the context of the economic cycle. Are rates rising because the global economy is doing better, and that's a critical element. The Taper tantrum was all about rates rising. We had mediocre economic growth through that period. What we see now is if we go back to two thousand seventeen, reflation

rates are rising because economic growth expectations are rising. What we absolutely are seeing now is a combination that is very similar to that, where rates are rising to validate the rising global growth expectations, which is coming through on

the normalization of economic mobility. We're starting to see the breaks between COVID numbers and economic mobility, which is a huge element where vaccines have changed the way that people can move around the economy more so it's not back to pre COVID levels, but there's a higher new level of equilibrium, which means we need more of all and we need higher real rates. So in the context of that, what matters for Marks now is that real rates are

validating the moving economic growth. And you know, on the side of it, there's obviously liquidity and other technical factors that are happening in rates, But once this settles down, it's a good equal librium for for risk assets, and so it's not purely a return to US exceptionalism. It's a blending of global reflation and exceptionalism, I think for the second half of the year. So another way of

saying that is there's been a pain trade. It might be ongoing for a bit longer, but once that's over, the narrative that was at the end of last year will continue and reassert itself. Can you just talk about how much further the pain trade has to go? Sure, I'd say we we got at least another month. If we look at our just our positioning model, think about the pain trade, Um, we're still talking about a dollar short that's a little under a standard aviation. So we

are not even close to neutral levels yet. Um So, even if you look at some of the valuation models that we look at, what we see is that G ten currencies are still slightly overvalued. We're e M currencies are the one trading at a discount. So we haven't seen the full wash out play out in effect, and again we still probably have. On the real rates models that we look at that are global macro based, we could still see another twenty five basis points in real rates.

So if you see that again within the content, it's the FED coming next week, DCB next week. We've got all these major central banks. If the moves are allowed to progress, suggesting that again that it's the economy is doing better, then that means there's more room for the dollars. So again it's maybe in broad terms, another one and a half two percent again against all major currencies. But again Euro is now testing the one A team level.

We could probably see a marginal breakthrough there. But again I would say this is probably about another month to six weeks um in terms of this pain trade across effects. Mark. I think the point you're trying to make here more broadly is that we're always looking for this broad based directional trade that we can all just get behind and it chucks along through the year. And you're talking about nuance and dispersion within the m Walk me through the nuance. Now,

just to wrap things up, what's the favorite? Is there a latam lane is in Mexico? Is it the Paso winner off the back of a huge plan in d C? What is it? So it's gonna be interesting is because each of those baskets gonna trade differently. So if you go through Latam, you'd probably want to pick currencies that are leveraged to the commodity cycle, leveraged to North American growth, and also trade it at cheap valuation. So um R e M team like selling dollar max rallies and again

you can see there's a nice discount. And if we get the one triller one point nine trillion in US fiscal in a three trillion US infrastructure package, North America looks solid. You got the Canadian dollar in the Mexican pay so should outperform other currencies across other regions. Um and again, if you go to something like the ruble, the ruble would do well in that backdrop as well, given its link to commodity prices. It's also like quicker, we're out of time. I know you're a rate strategist

as well to the foreigners show up to buy the auctions. Well, that's a that's a big element. I think that's a big part of what pre is UH call is along with the US rates team is there is an element where supply is going to drive up rates a little bit higher in the short run, so the auctions cannot go maybe as well as people are expecting, and that's part of the continued sell off. We getting rates in the next month, um, and that would also you know,

drive this pain trade Mark. Congratulations on your call. It's so out of consensus. Is just wonderful. Right now, we're gonna stagger the Minneapolis there was a freeze there. It's a gorgeosity sixty seven degrees heading towards New York. James Paulson joins us now Chief investment Officer luth Old at Wheedon as well. Jim, how do you reclibrate given all the turmoil of two thousand twenty into the first three

months of this year, how do you reset right now? Huh? Well, I I just I think I'm just most focused on you know, um, you know, in my in my entire career, going back to ninety eight three time, UM, my biggest, my fastest growth rade I've ever experienced in the calendar year was four when it was a little over eight percent. UM. I think we got a shot of taking that out

this year, of having growth that's north of eight. And if we do, that's growth that we haven't seen maybe only a handful of times in the entirety of post war history, and that is the big elephant in the room. Um. You can talk about UM inflation coming up a little bit, you can talk about interest rates coming up a little bit.

But if we have anything in that ballpark or growth, we're also going to have earnings which are much higher than people currently have forecasted for this year, probably more like two in the SMP. And with that, at least for this year, it's just gonna be hard, I think to keep a good equity down long term here over

the course of this year, very long. If you're going to give me that type of growth, and if we're also talking like five growth in boy, you know, we we could have a lot of interest rate and inflation pressure and still have an equity market that could do pretty well in that environment. Jim, I think that final points the big point two and whether this year ends in June and people start thinking about hang on a minute, huge growth, we're all position for that. Now, what does

twenty two look like? What does twenty two look like to you? Well? I agree with that, I got Jonathan. I I'm pretty confident for this year. And and and if we run hard this year, let's say through the fall, we could get a big correction at some point two is going to be an adjustment year. I think, um, where we're gonna have to figure out whether inflation is for real or not. And I'm still a little bit

on the fence on that. We've certainly are police officials have done everything they possibly could to create inflation, in my book, and we've done more than ever before to create inflation. The problem is against that We've got a lot of disinflationary force in the world with nasty and continued bad global demographics, including here and also the leading the leading force of the emerging world story. China has worst demographics than any of us. Um, that's a pretty

powerful displaced force. We've got a technology sector leading the world which is nothing but excuse inflation or disinflation everywhere and its path and that's going to continue overall. Um, We've had falling monitor Harry velocity for more than a decade and and uh, you know, so you can maybe handle a lot of money growth with without the type

of velocity we used to have. We have disinflationary mindsets in the world after thirty years of disinflation that are that are tough I think to uh to change or altar, and I think we're gonna get a pick up in productivity, because when I look back historically, when you have a big run in growth stocks over the last several years, you typically that is fouled rather regularly by a pickup

in productivity. So, my guests, I tell a little bit, We're inflation is going to be a burst coming in the next twelve months, and then it's going to calm back down again and maybe allow this recovery to continue over for several more years. Game plans on, Jim, let's do it. Then growth is going to be better in the middle of this year, inflation is going to pick out,

the base effects kick in. We know all this, and what's amazing, I keep repeating it, Take a bill, take a bad agree on the same thing, and at some point you start to get a huge tug of wall between the people that think is transient and the people that think it's all the people who think rights will rise in the people that think they won't. If you start to get volatility off the back of that tongue of war, what's your game plan? How do you step

into risk or step out? How do you approach that story? Well, I think you do a couple of things. I I think you want to minimize your exposure to bonds yet uh in bonds exposures, UH interest rate exposure. They just want to just have that absolutely minimized. I think you want to stay uh more cyclically orientated here. UM. And

I think you want to be away from the United States. UM. I grow this is a synchronized recovery, and those markets are coming back to that, but they're not gonna feel I don't think they're the pressure uh that we're going to get here in the United States going into two from from overheat pressure. So I would have a good overweight away from the United States. Now beyond that, UM, I kind of I think it's gonna be really difficult to call this correction when it comes UM, but we

can all try. UM. If we really get excited here, Jonathan, and we go a lot higher, let's say we blow through four thousand, go up to something here. I probably would take some octane off in park it in cash for a period of time and see if we can't get a sentiment correction that could be pretty big and pretty nasty. UM. And if if we do have one of those, then maybe reevaluate that point, whether I think we have a sustainable recovery going on. Part of it

is more information is going to come. Yet, if we get towards this year end and the unemployment rate, you know, is heading towards four or something, I have a very different approach perhaps going in twenty two two. Then if we get there and we're still at five percent or something, how tight are the resource markets and looking as we head into that uh next year. So I'm gonna let some of that play out. But some of this also matters about whether the market goes nuts between now and

then or whether it corrects. So Jim, there's also a question about big tech because if you see the longer term trend remaining the way it has been, a low inflation, slower growth environment, is it time to buy big tech on the step? Well, here I'm underweight a big tag. I just think it's not so much you have a problem with technology. I think they're going to continue to dominate the world for over the next five ten years.

I really do, But I think they're earnings growth at this point doesn't look as good as relative to what small caps can be doing right now, our cyclical sectors, or or even more commodity oriented plays. Um so, but I would still own tech, and I still do. I. I just have an underway to position. If you're gonna win in this market, you've got to be in the broader market place, which are more cyclical. Lisa, the problem with that is it means that you're gonna be introduce

yourself to downside draws that could be fairly dramatic. The way to balance that is to continue to own technology. When this market pulls back on on overheat concerns. I think technology holds up a little bit and I'd much rather hold that than I would other defensive sectors. Jimmy small shop as always great to buy. Jim posting that healthwaite and capital management right now on the headline that I'm sure all of you saw yesterday from the c

d C of Atlanta, Amashdalga joins US with JOHNS. Hopkins Center for Health Security. Dr Adelga, I remember c DC is the cool place to work. A million years ago. They did malaria out of World War two and then built and built out the excellence of America in microbiology and virilogy. That headline yesterday, when you saw it, how did you respond? I thought this was something that was well anticipated that people wanted to get guidance like this, and I expected the CDC guidance to be cautious, and

I think they were pretty cautious. But at least it shows people what the future holds. And it's important to remember that this CDC guidance is a first iteration. It is something that will be that will evolve as more data becomes available and as the CDC gets more comfortable, So expect this to be revised and and more and more guidance changed of those who are vaccinated. And it really shows you why vaccination is important, why it will change your life and give you your life back. Dr Adulter,

Why are they being so conservative with their approach. I think they're being conservative because they're a big public health agency. They're talking about population health. They want to get it completely right. They they've had some missteps during the early parts of this pandemic and they don't want to relive that, so they're going to make a decision that's data driven.

So once they think enough data has accumulated, for example, on asymptomatic spread, maybe from countries like Israel where so many people have been vaccinated, they're going to have this threshold cross and then they're going to make it make a change. So I think it's it's not uncommon for public health agencies to be more cautious than what like what I, as an individual infectious disease doctor might tell

my patients who has been vaccinated. So so I do think it's it's it's par for the course, that's what we expected. That the weight of the risks, though, aren't equal. The idea that the more people who get vaccinated, the more the transmission mechanisms seems to be broken, and we

see a decline in the number of cases. Can we get a sense of how much the vaccination that have already been distributed have already reduced the spread of the virus, and if we got it that much more quickly, if we'd have that much slower of a spread, that the general principle hold, But it's very hard to untangle mask wearing social distancing. How much population immunity is around because

people got infected plus the vaccine. The vaccine component is going to increase over time, and each new vaccine that goes into someone's arms makes the life of that virus very very makes it more difficult because they have less people that they can infect. But it's hard to know exactly what happens there. But I do think you're going to see, for example, if you can gather indoors with vaccinated people, what's the difference between doing that and having

vaccinated people in a restaurant. It's probably not that big of a difference. And I think you're gonna see more guidance tied to reopenings of certain restaurants and capacity as they get more comfortable. As we get more data, we might tremendous progress. And some states are already moving forward pretty quickly. Texas reopening dropping the mass man date. I think Wyoming joining them in the last twenty four hours. That will start next week, I believe, doctor. How concerned

are you about that right now? I'm concerned about one aspect of it, and that's dropping of the mask mandates. I think there's an argument to be made for capacity, increasing capacity at stores and increasing capacity at restaurants, But in order to do that safely from a business continuity perspective, you want your patrons, you want your employees to still be wearing masks, because there's still tens of thousands of cases occurring every day, we still don't have enough people vaccinated.

So I do think keeping the masks in place for some time until we get further along than this vaccination rollout is going to make it easier to stay at that high capacity level without getting exposures, without getting cases among your employees and patrons, and having to do quarantine and contact racings. So I think that I think we should separate those two things. Dr Delga. The President will

lay out the path forward on Thursday. And part of this is the mystery of what you're very comfortable with, which is these viruses, How do they go away? If we all get vaccinated, like for small pox or name the other horrific illness or covid, where do the bad viruses go? Well, smallpox is the only human disease that's ever been eradicated, and that's really an exception that proves

the rule. It's very hard to eradicate a disease, and a disease like COVID nineteen, which comes from a family of viruses that causes about our common colds, spreads very efficiently and also has an unknown intermediate animal host, meaning we know it comes from batch, but we don't know where else. It comes from. It's already when it's put itself into MINX. That's not something that's going to ever go to zero. We're not going to eradicate or eliminate

COVID nineteen. What we're going to do is make it much more controllable. We're going to defang it so it cannot cause serious disease, hospitalization, death, or ever threaten the hospital capacity. Again. So so it's not something about making it go completely away. It's making it a manageable problem. More like other respiratory viruses and the vaccines, all of

them do that very very well. The question I think many people are asking doctor is if we do get a new variant, how quickly these vaccines, these new m R and A vaccines can respond to that. The lads on the lack of times that to spake, how quickly do you think we can respond immediately? M R and A vaccines can basically be tweaked at in a matter of days or may even a matter of hours. It's just the question of then doing having enough production capacity to put a new a new vaccine or a new

version of the vaccine out there. But I don't think we're across that threshold because even when you look at those variants, the variants of concern P one and one, three, five, all of those, even in the face of those variants of the vaccines still stop. What matters serious disease, hospitalization and death. And to me, that's the threshold that we have to worry about, not mild disease, but is are people getting vaccinated and then getting breakthrough infections that are

landing them in the hospital. The answer I to my knowledge, is no, that's not happened, and that to me is the threshold for where we tweak the vaccines. Such a good final point delta and we appreciate your time and your own gun contribution to this probabgram Jones Helkins, Sense for House Security, Sadi Escalta. This is the Bloomberg Surveillance Podcast.

Thanks for listening. Join us live weekdays from seven to ten am Eastern I'm Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and Internet sational relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal I'm Tom keene In. This is Bloomberg