Surveillance: Recession Reset with JPM's Michele

Liverpool for later in the conversations? You want to start with markets. You had an interview with bloom Bake News yesterday. It was really really interesting about the risk that maybe this FED does not do enough. Can you talk to us about that risk? Yeah? I can't get two thousand and six out of my mind. The FED had raised rates from one percent to five and a quarter percent, four and twenty five basis points. Here we are today.

They've raised rates by four hundred and twenty five basis points and then they stopped and was it enough or wasn't it enough? It took a while for things to slow down, and ultimately it ended in a financial crisis. But they got to five and a quarter. We're still at four in a quarter. Will they get to five? I think there's still a lot going on the labor markets type. China's reopening the housing market. Although prices are coming down, the competition for houses still very very high.

So how conservative are you when it comes to this rally that was seeing a merge in the last couple of weeks, the last few months. Well, we've we've been part of it. We thought at the end of last year the markets were ripe for a rally. I was out meeting lots of clients in a lot of places, and a lot of them were telling me they're going back into the bond market for the first time in a while. And they didn't mean a year. A lot of them meant for the first time in sevent to

eight years. But a lot of them were saying this is the first time they've been in the bond market since the financial crisis. So there was a lot of money desperate to get into bonds, waiting for high really else they got it. It's come in. The Fete's thrown a lot at this market. They're probably ripe for a pause. I think the market runs a bit more and then it pauses when the Fete pauses, I want to go back to two thousand six and your observation pre GFC

and what's so important to me? And this goes without question the observation of the year last year, not seeing Toleb saying the gravity has returned to the system all of a sudden, the dynamics hearkened back to two thousand six, And what I remember then was the overshoot in real estate. It was hugely advanced, hugely inflated down we came in overshot through the lag regression. Are we going to see that this year with bonds where the yields the price

moves so much that we overshoot in certain ways. Well, well, the overshooting real estate occurred because the apple supply of pretty much low cost money was around everywhere, and that's happened over the last couple of years. So that costless liquidity has been slashing around for a few years, and we've only recently started to remove it from the system. So yeah, I do get concerned that there will be an overshoot. We do get concerned that there are bubbles

out there that will burst. It's really hard to identify them. But the one thing we're pretty sure of is the only way this ends is with the recession. You have to have a recession to really cool things down and reset. And REVS appreciated the Telegraph yesterday with Ken Rogoff. Lisa bram was talking with Kennan Dabos and Ken Roof may clear this is a different shadow bank than two thousand six, but nevertheless there are shadows within the banking system. How

does that devolve in the JP Morgan fixed income? Well, by definition, shadow banking is shadowy. Um, so we need to be we can yeah, we need to be concerned about that, um. But there's a lot of shadow banking that's occurred in the private capital markets that have financed a lot of things that may have made sense two or three years ago, do they make sense today? Are there rightdowns coming there? Where? Will? There is there existence

within private equity? I think we look at private capital in total, and we look at a lot of the private credit transactions. For sure, there are going to be restructuring exchanges. Is he talking about Menu? I'm not sure. I don't think so. Given us about this company, can we talk about how what's happening in private markets could

introduce a new set of risk into public markets. I'm told repeatedly you are too that how you're the stronger, that the quality is much higher than it was maybe a few years ago, five, ten years ago, especially in the last decade. But do you push back against that knowing that there is this risk here in private markets that could spill into public markets. So I've heard those arguments before every single recession. This time, high yield will

hold in. We have to remember, really the high yield market got started in the eighties when it became public and investors could get invested in it. So it's not been around for a long time and there have only

been a handful of recessions. Every single time headed into a recession, it holds in well because this time is different, and every single time in a recession, credit spreads blow out to the minimum of eight hundred over and yes, it may look higher quality, but when defaults start to hit, when the economy goes into recession, when corporate profitability comes under a lot of pressure, investors will reprice that market.

The one thing that I wearry about this time that is genuinely different is the amount of investment in the private credit markets. And if you start to have problems there where you start to get restructurings to fall exchanges that are in the neighborhood. Investors in no spaces may only have the public markets as their relief valve. You sound what you can, not what you want, defeature of

what we could say. There's a question that's just been asked on the Bloomberg by a terminal subscribe, but I'd like to share with you. Could you ask Bob about how what's different this time versus two thousand and eight, and that we know the fen has que and they know how to use it. The risk of severe credit risk contagion was real back then, not anymore. Question mark, how would you respond to that? Um? I think what what is different this time is everyone's on the lookout

for a bubble. There is there complacency or not. We've all been expecting a recession. It hasn't come yet. There are a lot of reasons why it may be pushed off until the back half of this year or maybe into two next year, and you do have new tools out there. I think one of the problem Albems is that while we have QUEE, we're also running QT now and that's an experiment that we haven't lived through before. I mean, let's face it, we are living through history

and we don't know how it will be written. But we shut down the world for some period over the last three years, and now the last of it is just starting to emerge and return to normal, and we've got to adjust for all of that. It just seems very aspirational to me that it's all going to end in a soft landing, will reset and move on. Nothing about this is normal, that's for sure. But Michael J p muk and ASI management is going to be sticking with someplace to say going through to retail sales in

about twenty minutes time. I think we can squeeze in some sport now. But what's going on your beloved Liverpool. We can talk about the Eagles in a moment because that's a better story, but your beloved Liverpool. I can take it this year last year with a bond bear market. If Liverpool had gone off the rows, that would have been a disaster. Right out there is a bond ball market. There has been some reset money's coming into the market. I can live with some restructuring of Liverpool. I like

what Klop did in the f A club. He played the younger players. I'm hungrier they were live. You know, I'm the amateur here. Does the World Cup screw this up? I mean the TODs are playing in a cloud. Liverpool's SUBPARTI say the least. I mean, I get Arsenal there in the World Cup too, But the World Cup, as you say, in the middle of the season, has that it's disrupted. It's just it's disrupted me. I mean, I was just so I thought it might disrupt the teams

with momentum in the Premier League. That was Arsenal in Italy, that was Napoli. We've restarted the season. No, I just thought. I just thought stopping for a month would disrupt the momentum of the high flying teams. And that hasn't happened. That was such a I'm learning every day. NOI they pulled it off. It was a great World Cup. Before we come back, Come on, is that a which one?

Liverpool Chelsea not about thank Everton. There's another blue team up in Merseyside something code Evertson or you would code Avidson. So so full hamm is on the way in the Heathrow where so that would be a West London Derby Chelsea Fullham well it, thank you. The dysfunction here of the flows in the capital ownership of debt is tangible, and you see it with a Japanese another percentage of debt.

Do you have an inherent fear within your strategy when you see ratios like two or where another nation on the eight percent of France's debt. I've got so many thoughts on the Bank of Japan one. I think they missed an opportunity. I would have done something today and keep the process going of get to something that looks normal while the rest of the world is doing it. We talk about the top end of the band is half a percent, the targets actually zero, and official rates

are actually minus ten basis points. So there's a lot of room to get things looking somewhat normal while you're printing for percent inflation, and then start the process of transitioning the bond market out of the b o J hands into public hands, into private investor hands. Get that

process going. Now. As I'm saying that, I also get concerned about what that means for assets in the rest of the world, because many of us in the markets for a long time have known that Japan is the mother of the carry trade that Japan finances carry trades in the US market car market someone from the Todds and borrows that. I get that that's jargon. What is

a carry trade? A carry trade is to use the very low cost of funding in Japan and then take your capital at your call to funding and then send it to somebody like me to invest in the US bond market, in the corporate bond market at yields of

four or five percent or higher. So you're enjoying a much higher yield than you would have by staying in the Do you think these changes that we're seeing in the last month, potentially again in March will change how you do business and ultimately on the behalf of other people who want to invest abroad from Japan. Well, I think we're already starting to see some signs of repatriation. We're starting to see some clients that have had money um in the US market start to take it back

and put it back into the Japan bond market. And when you look at US assets hedge back to end, you're actually coming out at a yield that's significantly lower than where the j GB market is. So a lot of it is the dynamic of the inverted yield curve in the U S, so so that's pretty punitive. I think the Bank of Japan has to be careful how they unwind all these things so they don't create this frenzy of repatriation. But as I said, I think they

can be consistent without creating this sort of frenzy. There is a part of me that thinks, great price discovery returns, we can start calling these places markets again. Then I look at the size of the balance sheets and I just think, well, there's a real stock effect here that's going to exist for a long long time. But there's two ways of looking at it. Isn't that this is the final anchor around the neck global bond yields about to be released by Japan and that should should have

some real consequences. The other way of looking at it is still we have these massive balance sheets at the ECB, the Federal Reserve, the b LJ. They're going to be around for a long time. Which one is it? I

think it's both of those. This is the conversation I'm having a lot with our clients because we think we have put in a secular low and bond yields and a secular, the end of the secular free for all in ustless capital, and and we're in a trend that will return the cost of funding to something that looks historically more normal central bank rates, bond market rates to something that looks more normal. But it doesn't happen all

at once. You don't go from zero to but on their time continuing, whatation are you in two years, two months, in three months, library to diamond. We got to be in three month library com It took twenty seven years to get the Fed funds rate from t to zero person, and you had a series of lower lows and lower highs. I think we're seeing the mirror image of that. We're going where we're going to have a series of higher

highs and higher lows. But every three to five hundred basis points shift in the cost of funding through central bank rates will have an impact, and then they'll have to come back and take some of that back, and then they'll start up again. I got two minutes on the clock. I've got to fit this in. And I've talked about this before. This is a huge thing that I think you're really at the forefront of. You're basically saying that it's going to take several cycles to basically

unwind what we've seen over the last several decades. Can you tell me what's changing the secular story of the last thirty years and why you're projecting that out the next several cycles. What's changed? What's that powerful story that's going to unwind all of this? Well, there's one, certainly in the developed markets. I remember after the financial crisis, we're all sitting there going, oh my god, what do

we do with all this housing stock? The baby boomers are rolling over into retirement, and the millennials are too young. The one burst at the time were what they were seventeen years old. Well, guess what, fourteen years has just passed.

The births are now thirty two years old, still living with me, but well they're they're hitting their peak of earning, spending, and saving, much like the baby boomers did in the nineteen eighties, and suddenly all the housing we didn't invest in after the financial crisis we need it back again.

So there are some real capital expenditure plans out there, sustainable investment, defense, infrastructure, healthcare, education, Those are things that a new emerging population of millennials X Y Z whatever you want to call it, they're going to be willing to spend an invest in. But Michael, this is awesome from Jay fantastic. It was too smart. I couldn't you go?

Second question? Maybe next? Well, I want to try and understand from the Europeans time is whether the situation we went through this summer, last summer fearing this winter, whether we repeat that act this coming summer approaching next winter. Someone who help us with that? Simon French chief economist Pamer Gordon in the British media, particularly writing some really thoughtful essays. Simon, thank you so much for joining today.

At the margin, it seems like Europe is being buffeted by good news, including Chinar reopening his Pam your Gordon shifted the two thousand twenty three euro call. No we haven't. We went into the year thinking that it's actually the behavioral response you were looking for across two parameters would play out in terms of a more dynamic behavior. One of those two parameters first of all, energy usage, and I think Jonathan gave a good sort of tea up

in terms of next winter, what are the dynamics. Well, the strongest argument for why the dynamics might be more favorable than consensus, is that you're seeing quite significant behavior change in terms of energy consumption, which there is no reason with the extra twelve months why that can't actually

be amplified. And the second thing we're seeing in corporate results, not just across Europe, but you mentioned, you know, corporate results in the United States as well, is signs now that households, which have paradoxically strengthened their balance sheets over the last two to three years, starting to divest more rapidly. Actually in the US them all the way through that cycle.

But we're starting to see the data in Europe suggesting that the backing of Q four, where it was thought of a slamming shut of the European wallets, was not that path. We saw both those behavioral changes coming to pass. I think the data is on our side, but look, we're still early days. There could be a new year hangover, right, Simon. We're talking earlier about the glide path and interest rates. There's an idea of disinflation, maybe ever so slight in

the United Kingdom as well. There's a I'm gonna call the zeitgeist understanding in the United States. We come down, we don't know where to five percent four percent? Dare I say three percent? Maybe not two percent? Is there a consensus understanding of a disinflationary vector in Europe? I

don't see it. No, No, there isn't in your the ECB commentary which you've been alluding to, if you like, reflect the national interests of the national governments in terms of how their economies may have quite different experience of stubborn core inflation, which really is going to be the headline piece of data, perhaps not on our screens each morning, but in terms of what's going to affect the ECB response function in each of the ECB Governing Councils decisions.

So the fact that we have amongst investors a very very different view as to whether actually you mentioned a

glide to five for three. I mean, there are quite a number of people who think will see active disinflation over or deflation by the sort of middle part of twenty four versus those people, and I think I sit in the latter camp who expect quite a lot of quite stubborn, quite sticky inflation because a lot of corporates are trying to rebuild margins, trying to delay the past through that they couldn't do in one go because of the price shocks of twenty twenty two, and therefore they're

going to pass them through in twenty five as part of rebuilding their corporate margins and a delayed pastor of invasionary pressures. Something. Can we talk about who's in the driving seat at the European Central Bank? I got the impression at the last meeting with President the Guard that really felt like the bunders Bank was back in control. It was so punchy, the most hawkish I've ever heard her in a news conference. What did you make of

that that it was going to be data dependent? Yes, it was hawkish, but as always, and we mustn't you know, this is far too clever an audience to fall into the idea that these are unconditional statements. For years both you know, when policy was left to the zero bound and we were talking about when we were going to leave that, and now when we're talking about the pathway through to a plateau through a terminal rate, we have to recognize that statements, even one as punchy as Decembers,

was conditional to how the data revolves. And though the fact that we have now in devils this week and we're going to get in the run up to the next ECB Governing Council different takes on that data is that if you like turf war going on on, how you interpret that stickiness of involation and the degree to which that commentary and December persists through Q one there was a phrase that echoed in December. It was sufficiently restrictive, started with the Fed. We heard it at the e

c B as well. If you'd ask me, Simon, what was sufficient restrictive for this c c B maybe a year ago, I'd say they're struggling to get to one, two, not three, because I thought this market would just completely collapse under the weight of what they were doing. Simon, that hasn't happened in a way that many people, including myself anticipated. I guess my question to you is, first of all, why do you think that is? Is the bondmarket more resilient than we thought it would be? And secondly,

where do you see sufficient restrictive now? With that in mind? Well, look, that's very honest, Jonathan. Myself, I would put also put myself in the camp the urine, which I didn't. I didn't see this so We have to have a degree of humility, don't we when we're appraising what happens next. But in terms of why we haven't seen the level of if you like, market capitulation in the face of a rising rescree rate, there are two things to know on There is a delayed pass through. Monetary policy has

famously long and variable lags. Have we seen the full impact of monetary tightening, particularly in private markets in fixed US every pricing the revaluation cycle though, I don't think we have, so the jury is still out in terms

of long term economic impact. But and I've written quite a lot about this, and I think Tom has alluded to this in is very kind intro is potentially a return to a higher risk free rate has a nice side effect in terms of productivity improvement, the allocation of capital, the type of thing that has undermined economic growth. You know, Tom, I know you've talked a lot about the impact of

financial repression on trend economic growth, on productivity. Potentially investors, and I've talked a lot investors who see the potential corallary of a high risk free rate return to more normalized levels of productivity and a welcome return that may be one of the explanatory factors. I mean, this is really important, folks in this centers on my optimism here

and things clear. Corporations change if there's a misjudge. I was suggest Simon's led by the European, the American, the Pacific rim consumer is well, it pam your gordons some together your confidence the consumer can deliver the goods well if you take the data points in terms of the excess savings that took place throughout the pandemic years one.

With the U S consumer has begun quite a considerable divestment phase, but they still have While the savings ratio is normalized and will possibly unders it is starting to undershoot. There is still a stock effect that can support consumer spending Europe and I include the UK, and this is on a much more delayed pathway. We've only just begun that divestment phase. But it's it circles round to consumer confidence,

to sentiment. The degree to which balance she flecks from consumers is buttressed by the fact that the labor market remains strong. You think, UK, you don't need as much of a rainy day fund for potential redundancy unemployment because you think the labor mark will main strong. Those indicators are still very robust, and that allows if you like a divestment cycle to support the consumer. If the labor market starts turn, then we get a very very different

response function in terms of consumers. And we'll see corporate reporting replicate that sentiment. Simon super smart as always, buddy, And it has been way too long as said this against so Simon French. There of Penmilk, Gord and some on the latest on the European and I guess global economy as well. Let's get the economic look and John, I want you to help me out your Veronica Clark conframe for the city group conundrum, which John I believe is Mr Hall and Hors discusses fifty or twenty five

basis points? Do you want to bring Ms Clark in so we can decide and make some news that they had called a wonderful two let's talk about twenty three. Veronica, thank you for being with us. You've been leaning towards this idea. It that we get another fifty basis point move from this feder reserve. How challenge do you think that for you is now with the incoming information? Yeah,

I mean it was already a close call. I think even going back a week ago when we got cp I UM and certainly what we've we've heard from FED ever since. UM. I do still think though that the market could be under appreciating, you know, the chance that the FED would opt to go fifty UM. I think the market is misinterpreting. You know that the FEDS commitment to getting rates above five percent. Certainly, Veronica, we're all slaves to the data. Every FED in every textbook and

every history book is data dependent. You guys got out front of this, and the data has backed up the city group. Uh call, what is the data that matters to you? Less to February one and much more to look on to what we see May three or June fourteen. Yeah, I mean, I think the most important data is still inflation data UM and I would bump along with that,

you know, wage data. Maybe we've seen some signs of of wage growth slowing, but you still have such a tight labor market that I wouldn't necessarily expect wages slowing back to something consistent with supercent inflation UM and and the most important inflation data I think should be the Fed's preferred core PC measure UM and some of the details of pp I that we got this morning will matter for that we are still expecting, you know, stronger COREPC than than what the Fed even has UM, certainly

than what the markets expecting. Are you going to reaffirm right now? Fifty basis points? Is that what I'm hearing? Yeah, I think that that chance is still under appreciate it. We do have some some important FED speakers still to hear from UM, and the chances is lower, you know, certainly UM. But we also wouldn't necessarily adjust how high we think rates will end up going, even if it's not a fifty in February, would just expect that the

Feds hiking for longer. Did she make news? Then start to the script I'm trying it calls any Trump trying for that was great. Thank you for the clock their City Global Markets, Lisa Brando's They're justin from the piano bar. Let me get my surveillance watch out and look at the time changes. Lisa Brandmos was one of my favorite people. Foughty b Roll of I e a good morning, Lisa,

Good morning Tom, and thank you for that. I am here with Fotty b Roll executive director of the International Agency for Energy, And there is this question here at a time when you are the busiest ever of trying to get a handle in an energy market that has defied everyone. I was speaking yesterday with Chevron CEO and he said he could see an argument for oil prices going to a hundred and fifty are going to fifty dollars?

Do you agree? I think he's a businessman. I am sure he knows what he's talking about because he makes money or loses money, and I hope he is a good view about the markets. But an allocate the markets this two empty three. There are many many uncertainties. But if you ask me who is the big biggest uncertainty, I would say it is China. The reason is very simple. Last year two, for the first time since forty years, Chinese oil and gas demand declined, so it never happened

in the last fourty years. And this year Chinese economy is reopening, and we may see Chinese economy growing strongly. And if Chinese demand for oil is strong, it would put upward pressure on the process. So China is for me the biggest perhaps uncertainty, followed by the oil producing countries policies. Okay, so we'll get into the oil produces

countries policies. Sticking with China for a moment, do you have a sense of how much energy, how much call, how much crude they've already stockpiled to get ahead of a reopening they could potentially dampen, how much activity could translate directly into demand for cruite. No. I think the Chinese oil demand will definitely increase this year. The question

is how much. There is no question that. I don't believe that if there's a reopening of China which cost smoothly, as the Chinese leaders here and in China claim, it may mean and that the Chinese oil demand will increase unluck last which decline. So it means that it will be the biggest driver of the global oil demand because when you look at it in the in a normal year, about half of the global oil demand growth comes from China. Other half of the growth comes to everybody put together.

So therefore Chinese oil demand will bring about eight hundred nine day additional oil demand growth to the markets. You just put out a paper that said that we're actually oversupplied right now, that there is more oil than there is demand in the markets. How much would it take to change that? Very little, because the cushion is not as big as the consumers of the would like to see.

It's a very tiny bit. If the Chinese economy, for exams, surprises us on the higher side, if the economic grows instead of four persons in five six percent, that cushion will disappear very quickly. So therefore, VI should be relaxed to see that the oil markets this year will be comfortable and we have that any problems this will be more on the optimistic side. Looking from the the words consumers point of view, are there any lessons taken? And from what we saw in the summer of last year

with respect to demand destruction? At what level the price has to get to include where people to stop buying? And there's sort of a natural ceiling. And it's depending on the country. I mean, it's different in the United States, different in Europe, different in India and the lower income countries. But I see that if the process come around seventy seventy five dollars, it is that a good signal for the consumers around the world, but that that's a good

conflict that they will continue to buy. But higher than that, not so much. It's especially for the value located numbers. It's especially for the developing world, which is the most important one, because their financial musters are much weaker compared to North American or the European or the Japanese consumers.

I think it's above SI it becomes a very difficult for them to absorb that increase In the presence, Do you feel like there needs to be more investment in fossil fuel companies that have been abandoned in the past couple of years for E s G types of priorities. I think the when talk about for some United States, I don't think that the oil companies have difficulties to

invest in terms of available toy of the money. They have a lot of money in their pocket, and I think what they have preferred instead of investing, they have preferred to pay it back to the the shareholders. And when you look at the last year twenty two the oil and gas industry, the windfall revenues reach for trillion US dollars. In a normal year, normal it's about one point five trillion, and last year they make four trillion. So nobody can commission that they don't have enough money

to invest. To be honest with you, it missed. They don't have the intention they pay back to their shareholders. We've been talking about the potential for an upside surprise with respect to demand if China comes back online. What if there is a fairly deep recession or even a mild recession. How much could oil prices fall from here just because of people honkering down and not being as active. I think if depending on how deep recession is, how

vital recession is. But if it's a mild recession, I don't think that we will see a big drop of the the oil process as we have seen during the COVID times, but it would definitely put a downward pressure on the process if there's a wide spread session around the world. But I don't believe that China, the largest oil important of the world, we'll go to a recession,

hopefully not this year. How do you think that the refueling, the refilling I should say, of the strategic patrol reserve in the US this year, potentially starting next month, will affect pricing. Do you think that this is sort of going to be a swing factor in I don't believe so. I believe the US government will make it in a gradual manner and a careful manner so that it doesn't

create a major challenge for the oil markets. And we should not forget it when the process shoot up about our hundred dollar The spr created a very good role for US and for the global oil markets. So you actually thought it was a positive move very much. So I think I believe all U S citizens and the entire gold should be very hippy to have sprs in the United States and many other countries in the world. Fatty buall of the I A A thank you so much for being with us, John setting it back to you.

Thank you fantastic work Ans always she missed over here in New York City. Laser pramis alongside Fanny Baby Robert of the I A with the iconic Bank Trump in Dallas, Switzerland, SUMP. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment,

and international relations. And subscribe to the Surveillance Podcast on Apple Podcast SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene and this is Bloomberg