Surveillance: Peak Yields with Rajappa

the Bloomberg Terminal and the Bloomberg Business Apps. Batterish Appa of silk Gen expecting another twenty five basis point hike at the fed's main meeting before holding rates study for the rest of the year. This is what's the batteris got to say at the moment, Tom, with the team at sulk Gen, with sticky inflation, a strong labor market and a Brasilian consumer WI, do you not expect the FED to pivot quickly brace for more volatility and rates

and the curve. This is the tension at the moment again, We're playing this game again, the separation between fattest guiding us towards in their projections and what this market is price for and this market is price for a lot of counts. And what's important here is a sack and heritage of derivatives where they slice and dice all of the different dynamics. So Broder, what is the dynamic of

service sector inflation that you see right now? That's a very good question, Tom, because the tug of war is really between the services side inflation higher rents, at least in the first half, which is going to really dictate what the thinking is on CPI. And we really this week's report in CPI is going to be very interesting because we might start seeing Mason signs of a cooling and the housing market, which is what we're looking to see. But that's really more of a second half story than

a first half story. But you know, the services sector, broadly speaking, is a chordinary strong. People have jobs. You've got a very very strong jobs report. So as long as people are employed, you're going to see more spending and more services side inflation. So Broder, in your research note of a while back, you go all birds on us. You've got the Roger mcgwinn David Crosby channeling here, and you say, turn, turn turn. Is that what we're doing

right now? We're going all birds in two every season or turn turn turn. Yeah, I mean the big question coming into this year. For us was when is that turn going to be. Was it October of last year when telling yeals peaked at for a quarter percent, or are we going to see another high in yeals before we start seeing a steady decline. Our view has been that, you know, yields peaked in the fourth quarter of last year, and then yields should gradually decline during the course of

the year. But again, accurately pinpointing where that turn is on inflation is going to be extraordinarily difficult in an environment like this, because you're looking at a variety of factors, you know, sort of the push and pull between sometimes higher energy prices leading to higher headline inflation. Sometimes it's it's certain sectors on the on the services side of the economy that are that are pushing higher. Rents are going to remain high for the first half of the year.

Second half the year, we should see some easing in rents and shelter costs, but really call it causing that in Calling that turn is going to be very, very difficult. But it looks to us like you'll seem to have peaked. It feels like we have one more hike in the cards for the for the main meeting, and the Fed keeps policy stable for the remainder of the year. Why because of the fact that the employment picture is still pretty strong. The labor market as well as the consumer

are still pretty resilient. So nearly the flow through has to come perhaps from tachning credit conditions, which is what you're starting to see in the banking sector a little bit. How important was that data on Friday that alluded to some of that subantra, Yeah, I know, it was very important in my In my view, we've been tracking uh, you know, both the FEDS h DOT four data as well as the h DOT eight data to see what the takeoff has been in some other facilities, as well

as what the deposit runoffs have been from from smaller banks. Um, you know, I think it last few a couple of weeks back, we had you know, Dallas FED President x Dallas FED President Kaplan talk about the credit conditions broadly

tightening for small and medium sized banks almost ceasing. I mean, when you see this sort of tremendous amount of deposit outclass coming from the smaller banks, guess what the smaller and medium mid sized banks are going to really tighten credit conditions, and that's really where you're seeing a credit crunch. It's not in the top ten banks, it's in the small to medium size banks, mid sized banks where you're seeing that sort of tightening of credit conditions are a

credit crunch, as we would call it. So batter I've asked this question a few times mixed responses so far on Friday. What do you consider to be the more important data point, the data that you alluded to just moments ago talked about or the payroll support that came

earlier in the morning. I think both. I mean, that's what makes this whole fair equation very confusing, because they're trying awaigh financial stability concerns over inflation and employment, you know, being quite strong and inflation continue to rise, and that's the balancing app that the FED has to, you know,

play meeting after meeting. I think that they're going to really focus on getting rates to a certain level, which we think is around five to five and a quarter percent and FED funds and then keep policy stable while they assess an actual stability concerns across this arc. Will foreigners continue to bid for bills, notes and bonds? Absolutely,

I mean, look at what's happening. You're all the cash that's going out of the smaller region exactly into the into the larger banks, is going all into into money market funds. Why, because cash is keen. That's really where you want to keep your money if you don't know how things are going to pan out in a high

volatility environment. And this is typical of end of cycle dynamics that you see in almost every FED cycle, is that the market has to be very volatile, you know, because we don't really know how things are going to pan out. And in that sort of environment, it probably makes sense to put your money in cash. And this time, relative to past cycles, you're actually getting a pretty decent return in putting your money to money market funds. So you're seeing this rush to rush you put money to

money market funds. You're seeing demand from foreign investors for short term investments. On a duration adjusted basis, your returns are pretty good. By being in the very very front end of the treasy curve. I look at the treasury curve and I'm sorry, give me the mystery here of curve disinversion. Janet's the one thing not in the literature right now. And a messages of station recently. Tell yeah, is a vision of where where's the curve and version going to be in six months or a year? I'm

not hearing about this. So we've actually looked at past cycles and what we notice is that typically when the curve of inverts or where peak conversion is, and then about after peak conversion of a year, about six months after that is when defense policy starts to pivot. So I think we've probably seen peak conversion. We've seen a pretty dramatic rise in the two stents part of the

eel curve and the deepening of peel curve. That tends to be sort of a leading indicator in my view of the risk of a recession or a meaningful surround and the economy. So again, you know, a peak conversion looks like it's behind us. If policy is U is

on a pivot, this is kind of you're getting. You're starting to see nascent signs, if you will, of a switch in the policy from hiking to perhaps more easing posture or easing bias, if you will, so, Patra, wonderful, O Kate if you on this pad market as always, thanks for beaming with a spatra men Jampa there of suck gen with us this morning around the type one place to site, pay to chip at a macro strategy at Academy Security, it's moaning Pat Morning, John, which might

cannot pay ROSA put on Friday, leaves the door opened green life for the FED to come again. My fit. Yeah, I think there were some mixed parts of the data, but if the Fed wants to go, they've got the excuse to go. Twenty five BIPs. We've got a lot more data coming out. I think they should have stopped. I think they should have passed last time and just said, hey, let's see what goes on with the banking, because I

think that's a bigger concern. But they seem intent on driving rates higher, so they'll use that LORI kieviously, you know looks the neutral urine. Timor says, you know, there's a set of fears out there which leads to just nowhere. I love what you say. You call it the comfort zone. Define the comfort zone right now now. I think we're all waiting to see how the economic data plays out.

It's generally been weak, it's been turning back down after a really strong string, and finally we gets to the earnings. I think the earnings are what's going to actually drive it. The biggest thing I'm looking for in this kind of comfort zone is to see how company how the market responds to, say, weak earnings. Do we get a huge bounce on weak earnings, I'll tell me that I'm being

too barished. If we actually don't respond well to earnings, then I think that we had lower Is it ten stocks, seven stocks, twenty stocks, or can it broaden out given a more optimistic tone, I think the market's still going to take its cues from those ten to twenty stocks that we've been looking to for a while. I think you can hide out and do very well. And some of these stocks that have underperformed I'm certainly looking at, like the Russell two thousand verses the Nasdaq one hundred.

The underperformance has been stark, and it's been unusual because high yield's done well, and usually if the Russell two thousand's doing well, high yields struggling for it tends to be a correlation. So maybe that's what we get. Does he no, Bramo's not here. He does he's a wind Oh that's why he's doing it, just to fill in give credit to mad Time. Pete. Talk to me about bank lending data, the bank lending data that we got on Friday. How important is that going to be for

this market going forward? So some people will take the fact that the banks are boring less from the emergency facilities is a good sign. I would agree with that, except we saw a big in bank lending as a whole. So I think banks are pulling back on the lending, which is why they don't need to borrow as much. That's negative. And we also saw the tenth straight week of deposit outflows of the reason I believe sixty five

sixty seven billion of deposit outflows. And my concern is that we've shifted from a credit risk concern to just like, wow, my bank's only paying point two percent or point four percent. I can get three three and a half four percent relatively easy. So I think you see that drain on the banking system continue. That's going to affect lending. So this is just a slow burn, I think, and it's

going to be a big headwin for the economy. Why do you believe that's a signal of what's to come and not just the reflection of what's happened over the last month. You know, I think part of it is I tend to view these things as cycles. Right, So we get this negative data, everyone's worried about banks, everyone's worried about the faults. So you go into panic mode. Then you take it back. Now you get that time. Okay, maybe we have too much money sitting in bank deposits.

What do we do with it? And that's a multi week, maybe a multi month process for a lot of corporations to go through. Right, We've got to figure out can we do it? How do we manage this? So I think that's a slower process, But that's the phase that we've moved into, and a lot of that's just coming

from discussions with customers. I've got to ask you, because more than anyone on Global Wall Street, you have you have Academy securities, you have a military vision, a set of board of people completely tied into geopolitics, which is what we're hearing about each and every day. James Travitas wrote two thirty four, Are we there now? Is what he wrote about that would be out there somewhere. Does your board think it's now? And how does that play

into the investment guests? So, yeah, We've got the nineteen retired generals and admirals who serves this Geopolitical intelligence group. We see the world probably as the most dangerous it's been in a long time. And whether it's Russia, Ukraine, whether we're now seeing tensions pick up in the Middle East with Iran. We do not like the fact that China seems to be getting the Saudiast to embrace China a little bit more, playing us away. So everywhere we look,

I think there's this danger. It's growing, and I'm getting a little bit nervous that a lot of investors pay lip service to geopolitical risk but then kind of push it off. Oh this is too far down the future. Oh this is five years away, ten years away. Oh I'm an American company, How does this impact me? While it's going to impact rates, it's going to impact everything. So I think we're being a little bit too complacent on the geopolitical front. Gold over two thousand and yet

Peter Shears saying, look at the Russell two thousand. Which two thousand do I want own gold or the speculation of the Russell two thousand. You know, for now, I think probably neither. I can watch gold. I try not to get too involved in gold. It's almost a religion to me. So I just did ever feel like I've got a good handle on gold. On the Russell two thousand, I'm watching. I want to see how Arnie's got my little bit barish on stocks. But if I get positive,

that's where I jump into Pete. You mentioned that maybe people were underestimating, under appreciating what was developing on the geopolitical front. Well, let me ask you the question what should people be doing? And I think that's what they struggle with. They see the news of it a weekend, ministry drills, military exercises from China around the island of Taiwan. People to sit here and say, sin it before it's important, I'll keep it on it. What are they meant to do?

You know? I think you're supposed to be lightning up on some of the tech companies there will be most effective of anything happens there. We don't see anything imminent happening there yet, there's this further element of fear. I think you're supposed to be looking though to South America Mexico countries that we are ultimately going to have to shift production too. I think you're telling me to sell

Apple and go long Bolivia. I don't talk about any individual stocks, but I'm certainly lightning up on QQQ, for example. Are you lightning up Okay, let me put you can't talk about single names, so let me freight it. In another way, are you lightning up on companies that have direct to exposure to China, to the mainland tech firms? In that sense, you're lightning up on chipmakers that get caught up in the cross test A little bit of people thinking about it. I think that's a little part

of it. It's also more driven right now by the fact that I think people are expecting this lower rates and a fad to juice up all these stocks, just like it did in two and twenty. I don't think that's going to play out the same way. So I'm thinking we're going to get some earnings, We're gonna get some fear coming out of those companies. So on the long side, then when you say get long some of these Latin American stories the near shore or in so to speak, is that an FX trite set a bonds trite?

Is that an equity trite? What is that? I think you can do it a little bit of each. I think you're going to have closer relationships, and I don't think it's an urgent trade. You don't have to put all your money in there, but you want to be kind of trading those from the longside and building and cumulating a larger position. Mexico's has got its own set of dangers. It's you know, basically at some point we're

going to have civil war. Is probably too strong, but either the cartel is going to have to get pushed back on to have the real development, or that's also going to be a problem. So there's no easy answer. But there with these geopolitical tensions, whether it's across this board of that board of the other or distant and removed, doesn't Global Wall Street find comfort in American equities institutional basis? What's the Norwegian Sovereign Wealth Fund going to do? At

the margin? So I think they are going to do that, but I think they're going to have had more and more into fix income, more and more into safe stocks, not necessarily the gross stocks. I still believe that there's this somehow hope that we are going to renormalize with China. Right every Chinese headline that talks about some sort of normalization, reopening China bit gets really treated highly well. Everyone likes that. And yet we've had a steady trend away from China

and to me with Taiwan. The one thing that's really accelerating is people reconsidering how they think about Southeast Asia as a whole. Right, this isn't back if we look two years ago, if you weren'ting to produce in China, you are likely to produce in Cambodia, at Thailand, Vietnam. Some are there. Companies who have the time are thinking of moving away from that area because it is clear that China has that ability ability to flex their might.

They've developed what we call this bluewater navy. So a brown water navy is what China used to have, which is really a coastal navy. They are able to project their power much further into this blue water navy. They've set up the South Sea Islands, They've worked with the Solomon Islands to get planned. So I think you've got to be a little bit aware of their ability to blockade the region. To do things like that. Why bother

in this day and age when there are alternatives? This was great just fascinating gun into an ex sason thinking about some of these political issues as well. Put to share that of academy securities. And right now we get lucky as previously booked with us. But let me tell you, I'd be dialing one eight hundred missooo right now. Stephen Rashido joins chief economists at missoo O. Stephen, just perfect

time to have you on. I guess we can outdo guestimates of two two point two two point six three percent GDP, but I'm going to call that out of the textbooks a global recession? Are we heading for global recession? Even with buoyant China and India growth. I think what we're going to discover is that the industrialized economies are

suffering to a great degree. And I don't think the rebounding China is going to be enough, because even though there is an opening up of China and there will be some rebounded underlying economic activity, a greater grip that the Communist Party has over the economy I think will limit its ability to really surprise to the upside, and that will wind up being a continuous headwind for the

global economic environment. With that backdrop is the central banker to the world more restrictive than he thinks he is. Into the Many third press conference, does your own Powell face a forward restriction that's not priced into markets. Well, that's a good question. I think what you're really getting at in here is what is the right path for

monetary policy at this juncture. The market seems to continue to believe that they're going to raise rates one more time and that'll break something, and we'll wind up break something even bigger than we've already broken, and that'll create an environment whether it be forced to cut interest rates

later this year. I think the prudent path for monetary policy, and I think the debate that comes out of this week's fmc mans will lay the groundwork for the fact that it's more likely to be a pause with holding open the door or the wind night for additional rate hikes down the road. Oh, this is right where we have to go, because this came up. I'm going to say five six days ago. What mister Rashido is talking about their folks, is are we asymmetric in our view?

Given an action, a tangible action by a central bank. So Stephen, they come out and they say pause, And I would say. The reigning school of thought is echoed by Matt Lozetti over Deutsche Bank, is if you pause, your next step asymmetrically has to be a cut. You don't agree with that. I don't agree with that at all. No, I think you have to let the dust set on.

I think the details that you got out of the labor market report last Friday, and I think the way the inflation numbers this week and even the retail sales numbers at the end of the week are going to unfold, they're going to tell you that there's a lot more resilience in this economy than you thought. I still think you're going to go into a second half recession. But not all recessions are created equal. Some recessions are very

very shallow recessions. Some recessions are very very deep recessions. And I think most people in this market right now only remember deep recessions. They don't really remember shallow recessions. If you go back to even the twenty twenty recession, it was a very very shallow recession, and there was a bit more of a systemic credit crunch in that than there is in this environment. There's a lot of videosyncratic risk. But there's the key difference. John Taylor at

Stanford has lectured me on stabilizers. So we go under recession or we get a stabilizer, and one of them is fiscal oomph. Do we have the fiscal space to commit fiscal umph if we get a slowdown? Well, the question is where are we going in the recession. I mean, you know, we're starting from a three point five percent jobless rate. If we get back to four and a half percent, you know that's basically a balanced labor market environment. How much extra fiscal oomp do we really need in

that environment? If we're talking about getting to five and a half six percent, then we're going to need something. But I don't see that coming through. The labor market is tight enough, and we saw that from the details of the jokes numbers. All the people that answered the labor for us, the bulk of them got jobs, which is why the unemployment rate drifted low. We're not upwards as expected. Okay, well, let's frame this right now, folks. And this comes back to what I mentioned at the

top of the show. The fact is, with revisions and they'll change again, we've generated a million jobs in ninety days, you know, Steve and I, that's like price, that's like economy to perfection. And yet we're talking about negative non farm payrolls out there somewhere. We're talking about wages out

there somewhere. Maybe you get some inflation. And I'm like, right now, sort of kind of like no, maybe, But the answer is, what's the rare shooto timeline here to the kind of labored data that forces a central bank to adjust? To me, that's completely ambiguous. Right now it is, and I think it's later rather than sooner. I think

that's the real neck conclusion. If you want to get the best real time sense of what's happening in the labor market, just continue to follow the weekly unemployment claims. And I know a lot of people trying to make a lot of hay out of the revisions the claims numbers last week and everything. The reality you've got to get into that three hundred and fifty ish type range. Your kid, they start seeing a deterioration and claims and we're nowhere near that. This is really important, folks. I mean,

I haven't brought this up. I'm doing it right now, folks. We can do this on the Bloomberg terminal. I bring up the four wall. I think a type correctly that would help I N J J C four. There it is the four week moving average of the Rashodo claims statistic two hundred and thirty seven. Right now, I didn't realize it was that high, Stephen, When was the last time we were at three something? And the answers a long time ago? Yeah, I mean, clearly we exceeded that

during the COVID recession. But then when you go beyond that, back to the previous one, we remember we had one hundred and twenty eight month long expansion that led into the COVID environment. So if you'd get into those kind of claims now was outside of the COVID recession, you're going back, you know, twelve fourteen years. Okay, Well, how do we get back to a twelve or fourteen year labor economy? My textbooks say you don't do that unless

you have a huge seventy four, seventy three, seventy four recession. Well, again, getting back to three hundred and fifteen claims would just be getting you to the three and the four and a half type unemployment statistic. To get to the five and a half percent number. Yeah, you're gonna need something more than mister Malpass was talking about in terms of the growth numbers for this year and next year or

even for what the fellow Reserve is talking about. And I think the market is discounting that, and I think the reality is what we're seeing is that's not coming to fruition. Even the retail sales numbers that are coming out this Friday. People have a very very weak headline number. Unit automobile sales held in very very nicely in the

latest month, and pricing is holding up. So it's hard to see that we're going to get the zero point five percent decline that people are looking for in retail sales. So I just looked it up in the Bloomberg while mister Roshudo was informing US folks three hundred thousand pre pandemic September of two fourteen. That's how far away you are from the reshooter caution well within that, and I

noticed use cars being resilient as well. Steven, what's the microdata you need to inform our audience of right now? The acclaim bizoo microdata away from use cars? Well, I mean, I think what we're looking at in here is just general labor market tightness creating income and that income is real really the driving factor, and I think the fact they use car prices are holding up so well is one of the important indicators that showing you the households

still have that income to drive the economy. And that's one of the reasons why I think the market's much too presumptuous in terms of the degree of economic slack. They're discounting it to forward structures of race and others including Neil dudda renaissance Stephen would say, if you get some rising income and even if you get a type of disinflation all of a sudden, real incomes inflation adjusted incomes, they're not gloomy. They may maintains some form of constructive tone.

Is that the missooo model without a doubt, and the I think, going even beyond that, when you look at the balance sheet of the household sector and you look at how much income was generated and provided to households during the COVID environment, we still are the belief that their substantial amount of firepower left in the consumer and that that additional firepower will keep the economy more resilient and that's than argues for the Federal Reserve to keep

rates higher for longer rather than pivoting. Is the market's anticipating, Well, then, what is your GDP number forward, I mean to the end of the year twelve months twenty twenty three is compared to what mister mail Pass of bear Stearns in the World Bank just commented on, Well, I mean, our view basically is the numbers at the Federal Reserve has laid out, which are basically that we're going to be in the very very shallow single digits this year, probably

in the decimal point year over a year or fourth quarter over fourth quarter type GDP numbers followed up next year by only a one point one percent in twenty twenty four, So we have a bit more weakness in the near term than the official institutions have, but we don't really have much of a rebound either in twenty twenty four, and that I think is again another differentiating point. Right, Well, then let me finish that with what I heard from

the managing director in Washington last week, Stephen Roshudo. You and I know how difficult this is to look out five months the IMF for the five year view the grimmest since nineteen ninety of three percentage sustained five year GDP real GDP. Does that get it done for the

world against the demographics, The answer is probably yes. Part of the reason why you have this grim outlook for the next five years is the demographic situation, you know, the aging of the global population, especially in the industrialized world, the aging of the population in China. In particularly where again you know, men retire at fifty five and women retire at fifty. You know, you have a very very rapidly aging population and his population's age, you tend to

see that reduced the overall potential ready to growth. Stephen Raschuto, thank you so much, greatly, greatly appreciate that with Missoi USA, very informative. There. Then we get this headline from from Teslas that both a large new battery factory and drum Row Shanghai, Shanghai. This is where the push is for that company at the moment. There it is for Elon

Musk and we're gonna touch on that right now. Usually with Daniel Ives, senior equity research analyst at web Bush, we go to things larger cap and maybe more stable, but today we don't Dan, I'm Tesla. John wants to talk about Shanghai, and mister Musk, I want to talk about Muskie and brand destruction. I get the novelty of a price cut and then a second price cut and

then a third one. Is Elon Musk committing brand destruction? Look, I think right now, I mean they're being aggressive on price cuts because competitions increasing and they got to put an iron fence around their custom base, and I think ultimately it's sacrificing margins for volumes and naturally the balance right now, I looked on the Masters, which is basically a Mercedes Benz commercial wandering around the beauty of the golf course, and Mercedes was flagging their electric vehicle. I'm

sure I can't get until two twenty seven. Is that Gorgiosity that I saw driving around the Masters? Is that car going to compete with Elon? Yeah? Look, I think what's happened with Mercedes, I think with a while of the other European players, of course with Detroit in terms of you know, GM and Fordians increasing across the board. And that's why Tesla and Musk, that's why they're being so aggressive on price carts. Because This is right now an eve the arms race that's playing out. They have

a queer lead. But that's why the price cuts right now. It's a necessary I'll call it near term pain for long term gain. That's so far paying out the town. You talked about who's got to stomach the pain, and it's not Testa, it's the competitors. Then, as you look at things, some of these big manufactress order manufactures on this massive investment cycle to shift towards a few who

do you think is most vulnerable? Look, I think right now the one that has the most to gain and probably the most to lose is GM because I think they've laid out the Strategyy Marry and the team have done a great job, especially on the battery side. But you talk about hell to a different standard. Mean investors are lease are focused on the profits, on what that margins is. And for GM, you're competing against Tesla and that's gonna be the uphill battle here. But I believe

GM is ultimately going to be successful. It's not a zero some games. There's gonna be many winners of this green tidal way of playing out. Don told to me about multiples, the appropriate multiple for these companies and how we should think about them exactly. Okay, I think what you're seeing here and I think one key earnings is going to be a key theme. Tax holding up a lot better than feared, and I think Moost, you're looking you're going into two twenty four numbers where I think growth,

especially areas like software cyber security. You looking at growth anywhere from eighteen to twenty five percent. So I think multiples now are really starting to reflect what I viewer is a really growth elevated relative to a non growth environment. And that's why tech it's a green light in my opinion,

to own these names. You know, Dan, you don't know this with John and I are on the phone all week and we're watching Liverpool get it done against Arsenal and we're going back and forth on questions for eyes and John just nailed it there. Where teslasm twenty four months, Let's say they're making twenty cents on the dollar right now, it's some form of margin down the income statement. Ford Motor is doing a half as much ten cents on

the dollar. Does Teslam migrate from twenty cents on the dollar to ten cents on the dollar, and as they do it, Do they migrate from a tech darling to being a boring auto company. Yeah, And to that debat, I believe there's a line in the sand in terms of price cuts. And also they have the scale that no one else has in terms of from capacity from a battery perspective. That's really them flexing them muscles again in terms of what you saw with the China News

over the weekend. And that's the difference right now. They have, you know, ultimately a really i'd say, you know, a multiple reath that's happening behind them, but they continue to be the queer leader and they have that margin leverage which enables them to do these price cuts. Okay, great, But if they have lithium batteries in Shanghai, what do

they do? Are they moving over there? Because the environmental it's just they're not going to get as much heat from the Chinese government as they are if they plant the plan in Arizona or North Carolina. Look, they're starting to build out in the US. But the reality it's not just for Tasso, for Apple as well. I mean, you look at it, that's the hearts and lungs of

the supply chain of their production. And I don't really see that changing dramatically in the near term, despite what we're seeing from the tour to area occurred, and I think that's really what we're hearing out of Tassela, and I think that's something investors understand that's going to be a balance, and Kirk is no different. In Coupertino two or two area code, I think that's Washington. Thanks for transplant.

I appreciate that. I actually detonate that. Just to wrap things up, investments in Russia became stranded assets, particularly after what's developed with Ukraina for the last twelve months or so. Dan, do you see a similar risk on the horizon? How do you think about that issue at the moment with regards to China and Taiwan and some of the investments the US based companies are making in the mainland at

the moment. Look, I think right now it's clearly a broad or risk, but I think if you look from an investor perspective, it's contained. And I think the China Taiwan right now, bark's still worse than a bite. And that's why you look at names like Apple and Tessa, look at what those stocks are doing. I think investors are sort of looking through that risk right now, although obviously it's something in the horizon that that's ultimately going to be reflecting. These stocks just want to ful gave

few on things. And because every second here with this incredibly important guest is important, we're going to get right to it with a gentleman from King's College in Cambridge, Adam Two's joins us now with Columbia at university. But that barely describes this contribution to this discussion we're having on what our world looks like at one year, two years, three years. What's the difference between King's College and Queen's College at Cambridge? Like do they fight? Do they fight

each other at different chapels? Wells were competition? Are they like far apart from each other? It can two minutes on each other, okay, but they're barely on speaking. We should get unl area at something behind doing that joke. That's it's a really an impressive contribution he's making. It's he was very emotional about it. Actually I mentioned it

to him and he said, what's so important? He didn't expect this was these super bright kids from really difficult backgrounds that have to make this huge jump to the high falutin culture of Cambridge University. Yeah, it's can be quite abiding. It was intimidating. Right now, we're going to intimidate ourselves for the most important essay into these IMF meetings.

With great respect to Adam Posen, who I thought had a great essay on globalization, Adam Two's in the Financial Times where he writes often with a superb essay on the state of where we are in this new higher inflation. At the beginning of your essay, Professor Two's, you speak about we're trying to have pain free crises. I spoke to a leading government official in two thousand and eight about this. We're trying to let the zambie zambie out. We're trying to not have moral hazard. We're trying to

be pain free in our crises. How do we get out of that difficult process. Well, it's a funny way of describing the world of last year, right, I mean, in the sense that the bond market took the biggest hit in its history. And what I'm kind of focused on there is this question of how the double whammy of this sudden, sudden, unexpected surge in inflation and the

concomitant increase in interest rates. Well, that does to the balance of the biggest market that really matters, the fixed income market, and there is this huge trillion dollars shift underway. Part of it is simply lost to and on the accounts of the fixed income investors. Part of it's a kind of real transfer in that if we have a sudden shop, an unanticipated shot to the price level, it

shifts the balance between creditors and debtors. And we are seeing swings, say in the debt to GDP ratio, which is the standard measure of fiscal space that we've never seen before, twenty percent shifts in the US debt to GDP level over a matter of eighteen months to two years. And mondays who do math later in the conversation, we'll get to that in a moment. You end your wonderful essay by parsing the haves and the have nuts. The

cynics out there will say, we'll just blow up. And with this huge surgeon interest rates, by definition they have the elites win and everybody else's crushed. Is it that gloomy? We're not seeing that in the data so far, right, because the people who have money on the line in the fixed income market are generally the haves, right, This

is the top end of the income distribution. The entire struggle, if you like, between taxpayers on one end of this and bondholders on the other, is played out in the top twenty to thirty percent of the wealth distribution. The question I ask at the end, and I think we all have to be cognizant of, is what's happening to those folks who basically live paycheck to paycheck. They are

at a flow economy in not a stock economy. And what we've seen across the world for all of the wage price spirals is falling real wages and that we really need to be laser focused on as a long term effect of this sudden anticipated inflation. There was a huge study at London School of Economics where your work to think of robins and back before that beverage. Are

we in for a slag? Here is the managing director of the IMF talked about last week a sub three percent David moult bess out moments ago with two percent. Is it a slog for the next five years with permanent week real wages? I think it critically depends on where you look in the world economy, and I think that's where the IMF World Bank gloom is coming from. If you look at the emerging market low income world, we're definitely in a slog scenario. Their recovery from COVID

was much much tamer. Indeed, in many countries it's barely happened, whereas in the United States we're dealing with a very strange situation of a really buoyant labor market but with falling real wages for much of the time, right month after months, we've seen falling real wages. So it's a it's a strange reallocation and the priorities are rebalancing between

employers and workers. There's an incredible common ground between Kenneth Rogoff of Harvard and Olivier Blanchard of a school down the river at called Massachusetts Institute of Technology, And of course between the two they look at the future and they say, what will growth be. Olivier Blanchard suggests a more lower permanent our starred maybe there's many with him, and ken Rogoff is much more suspective of new high permanence to inflation. Where do you fit into that debate.

I'm somebody who I think thinks we're going to find it hard to get back to two percent, right. I think that is really going to be where the rubber hits the road. The decisions right now, I think are relatively strange. And Richard claridare writing in The Economists last week. He's been such a friend of the show on our

fed days. He agrees with you. Clarda as a former vice chairman, goes, you got to go two point xx yeah, because I just don't see the final squeeze down that the paid is going to be massively disproportionate for the benefit that we get that bringing inflation under control. When you're in the eight to ten percent rate, right, you do it. But once you get down in the four to two percent, this is also a Blanchard point, Right, you really have to begin to think hard about what

the trade offs are at that level. We're somewhere away from having that problem quite yet, but you know that, I think for Europe as well, is going to be a really tough choice. In everyone's life. There's a moment where it crystallizes. One of them for me was a my grandfather showed me his bond book from the nineteen twenties, and one day he made a three percent coupon all of Icano Babel. What's it mean for investment? Do we

get to forget about transitory in the Babbel now? But do we get to a new permanence of a lower rate regime in investment? I think the tendency is to go back there. I don't think we are going to stay at the kind of interest rates that we're currently at. Are we going to go back to the zero rate, the negative rate world that Japan that's off the table now, I think, And so the balance shifts there into a world where you have to pay for my but you're

not paying. You're not paying hard. If you're in the privileged group out there in the emerging market, low income world, it's tougher there. The rates are in the Nosebley territory. We welcome all of you, and particularly on Bloomberg Radio, Adam two's with US of Columbia University as we begin our coverage of the IMF from the World Bank into this week in Washington at tomorrow. Okay, let's go there, Adam.

Everybody's work up on a Monday morning. Italy, Italy has had a debt improvement that is absolutely superb Explain why it is a mystery. It is a fog of optimism where Italy is in much more trouble than the recent numbers. Un debt to GDP would say, yeah, I mean this is the classic case of a nominal GDP recovery. Right, this is what we've been begging for for years now, just some juice in the European economy. We've got juice. We've got juice. We saw seven percent DiPT in the

debt to GDP rat show. That takes us out of terror territory, right, It takes us out of the territory where we constantly worry about Italian spreads. We also have a backstop from the ECB. The longer term questions are really all about whether you can sustain that when inflation does come down, and that's where the worry is. You were citing earlier on the demographic numbers for it. But demographic, I think we shouldn't overdo the biological. It's about politics,

It's about institutions. The crucial factor with Italy is not so much, as it were, the quantity of labor. It's the quality of labor. It's the capital they have to work with. Its investment. It's investment in the university system in Italy, which is incredibly dilapidated at this point. It's rebalancing public expenditure, which is hard to do from the old to the young, so as to dynamize growth. You do that, you don't have to worry that much about

the demographic side of this as the key driver. Right. So I think it's really about the politics, and we see how hard those are in France. Right you try and move the retirement age by two years and you have somethink akin to an uprising. Right, So figuring out a good politics of this shift, of how we mobilize an aging population and maximize the quality of labor it's available, that's where I think a small politics needs to be. Oh,

we're going to continue this discussion. We're out of time, Adam, but you've got to come back and we've got to do like an hour discussion or something. We have to figure this out, Adam. Two's leading off intellectually, I think for all of these IMF meetings, really the first post pandemic meetings we've had with a phenomenal essay in the ft I'll get it out to you here. I put it out a number of times in the last number of days. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify,

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