Surveillance: Recession Risk with Dutta

been a strident optimist through gloomy times. Neil, what does the gloom coup get wrong on this Monday morning? Well, first, I mean, I think it's important to recognize that the recession chatter is ubiquitous. I mean it's everywhere. I think. I was reading an article in The Economist talking about recession risk rising. Obviously, we're seeing a number of major cuth side research houses, um, you know, mark up their

expectations or probabilities for recession. Um. But you know, my view is at the risk of recession is really no higher right now than it normally is. I mean, I still think we're more or less in this inflationary boom type of economy, and I think that's more or less going to persist, um, you know, for the next twelve months. Um, you know, when I look at you know, what's going to drive the recession right now? I mean we're talking about how homes aren't being built and how cars are

not getting built. So I mean what's really stretched I mean potentially durable goods consumption. But it's hard to see how that in and of itself is going to drive a recession, particularly the time when consumers are still sort of flush with cash and seeing a very strong labor market. Um, you know, outlook, So Neil, we see a lot of calls for recession, but is that really what's being priced in?

I mean, yes, we have seen some declines that we have seen some areas that have gotten really hit, but also read just as many to report saying lean into cyclicals, go into retail. You know, by the dip. How much

have we actu priced and pessimism. I mean, if you look at most surveys of investor you know, sentiment, it's not exactly in a bullish so I mean consumers, for example, the Conference Board does data on you know, do you think stock prices are going to go up over the next twelve months or down, and you know, more consumers are saying they're gonna go down. So you know, I wouldn't say that there's optimism in the markets. Um, I think that, you know, uh, I think a sentiment around

around equities over the next year are pretty are pretty negative. Frankly, So how would you say, how would you position this? I mean the other way of looking at this is how aggressive should you get leaning into risk? And I know that we were you know, frame this, how to frame this? And rightly? So is that you've been a bull and frankly you've been right. Uh, but then how much do you say, Okay, well then you need to buy everything that's beaten up. You need to go into

the Russell two thousand, you need to buy banks. I mean,

where are you where are you taking that optimism right now? Well, I mean it's a it's a difficult situation because right now, you know, I mean interest rate We're in a rising interest rate environment and that's going to have a a negative impact on you know, certain industries that constituted very large waiting in the equity markets, like tech, right, I mean, so we're seeing that, I guess the way way, the way I'm thinking about it right now, is really how

much more room is there for the markets to price in a more aggressive FED for this year? And I don't really think there's much more the markets can do. We're basically pricing in neutral by year end. It's hard to see the FED getting more hawkish than that. They've signaled that they want to get up to neutral um, and I think they'll do that, but you know, the

markets are already there. So perhaps that brings some reprieve in terms of the interest rate backdrop for the back half of the year, and maybe that provides some catalyst for some of these cyclical areas of the market. But I think looking beyond that, you know, it's I still think that would probably be a trade you'd want to rent as opposed to own, because I do think that the markets fundamentally are haven't gotten their heads around just

how far the FED is likely to go in this cycle. UM. I don't think the term no rate is gonna be um, you know, two and three quarters per cent. I think it's gonna be higher than that. Why do you know how high? How high do you think it's going to go? I mean, right now, I'll say higher it's you know, you're I mean, this is one of these classic questions where you're like, what do you think the tenure is gonna do? I mean, I have no idea, but I

think it's like we haven't stopped. I mean, to the accept the markets are pricing and cuts in twenty four because of some sort of recession risk. I think those cuts are gonna get priced out. So I do think that there's probably some upside to the longer end of the yield curfew. UM. I don't see why the terminal rate can't be three and a half or four. UM. You know, nominal GDP. We're in a very strong nominal

GDP environment, and consumers are flush with cash. They're sitting on a large pile of excess savings, and they have substantial rooms, substantial room to absorb more normal levels of credit appetite. At the same time, we've seen basically China and potentially Europe slip in to economic weakness this year. Do we really think that's gonna be with US and twenty four? The U S economy is unlikely to go into a recession with China, and you're probably re accelerating

in those years. Neil I gotta interrupt the show. I think this is so important. You've just framed out, as Lisa notes, a terminal rate of three and a half to four percent of radio and TV listeners worldwide, was suggest that throws America into some form of stagflation, growth recession or outright n b er recession. Are you saying it won't Well, I mean, I think what you're seeing that may. But but I think the issue is where

does the consensus think the terminal ratings? And you know to me that the consensus thinks the terminal rate is basically what like two and a half percent, right, I mean that's why, uh, you know some of these parts of the curves are are already inverted. Um. I think that's frankly too low. So I think the markets underestimate the extent to which the FED can go without breaking being economy productivities slowly rising, the labor force participation rate

is continuing to climb. That all means that the FED can go longer without breaking the economy. Neils speaking of why the FED will go as far as it goes, CPI data tomorrow doesn't have any real bearing on the decisions that policymakers will make at least come may no, the DIACE cast, the DIACE cast. So then when does the data start to matter again? What would it take? Well, I mean I think that for me, I primarily view these questions around the labor market. And you know, to me,

it's about jobs, hours, and earnings. And when you look at the some product of those three things, it's growing, you know, eight nine at an annual rate um, you know, so far this year, and eventually that should slow. I mean, as you know, participation rates climb, we just start to moderate. He won't say strong jobs growth at low rates of unemployment.

So maybe that starts to cool off somewhe um. And that could take some pressure off of inflation, because obviously whatever doesn't go into uh, into quantity, whatever is not real, we'll just the remaining will be inflation. Um. So we have to see. But to me, it's really about the labor market. I don't think that's gonna happen anytime soon, because I do think there's probably additional downside to the

unemployment rate over the next several months. I mean, you're going to be in a situation where, uh, you know, the feed is probably gonna mark down their estimates for for unemployment UM, but I do think it's primarily about the labor markets. On the subject of unemployment, the Fed thinks three and a half percent is going to stay the case through three even if it moves aggressively. Do you buy that argument? No, No, I think they would have to go much more aggressively in order to keep

the unemployment rate at that rate. At at three and a half percent, will probably be in the low threes by the end of the year. So you know, either one of two things can happen, right, I mean, the Fed can basically UM pencil in more rate hikes UM in future years to make sure that the unemployment rate UM stays at three and a half percent or UM. They don't change their estimates for rates, and the unemployment rate continues to punch you a primer. Thank you so much,

Really appreciate that. Really important comments there. Our interview O the day on yield and it is yield up and it is decidedly priced down. Marilyn Watson is head of Global Fundamental fixed Income Strategy at black Rock and has a wonderful view of this strange idea. If it's not just about yield, it's about price as well. Maryland. I just took the Age fifteen ten ure series back to the time of bocre and we had lower yields and

higher prices of five standard deviations. In the pandemic scared a low low yields, we reversed and we are up, but up only one standard deviation off that long term create moderation. Can you and black Rocks say that the Great Moderation is over? I don't think that yet we

can say that the Great Moderation is necessarily over. I think what we're seeing now is we are in this period of correction having had incredibly suppressed yields for going back several years now and then exacerbated during obviously the pandemic.

So I think what we're really seeing now is an increase in volatility as the market really is positioning itself for the FED to be more aggressive in terms of quantitative tightening, both in terms of raising interest rates and also the runoff in the balance sheet that potentially will come maybe in May or in June um And I think as we do start to see the FED really start to shift away and try to move towards a neutral point, then it's you know, it's understandable that we're

seeing a lot more volatility in the market. I think it's also incredibly important when we continue to look at inflation just how high it is in the US and elsewhere around the world. Um, And as you mentioned before, there are a number of factors that are really exacerbating this, whether it be the lockdown in China and Changhai due to COVID restrictions, whether it's energy and the massive impact

that that's having in Europe in particular for example. So I think the whole confluence of factors are really you know, exacerbating the volatility and yields and the market's expectation of what we can see from interest rates from the FED and also from the ECB as well as you go forward this year. Merilyan Maryland. Earlier this morning, Tom Kennedy of JP Morgan at a private bank asked a really good question, how high do yields have to go to

restrain inflation? What's your view on that? Yeah, and so so at the moment, we do think that rates could go definitely a bit higher from here. It is our view that inflation will probably start to roll over pretty soon. It is obviously at very high levels, but given base effects, UM and other things that will sort of come into play. We do think that inflation will start to tack down, but obviously from very incredibly high levels. I think that's why you know, the FED has indicated it it will

be more aggressive. I think that's also why the ECB has started to signal that, you know, it's maybe potentially ending its asset purchase program maybe you know, in the July, the third quarter of this year, and it's too itself up to potentially raise rates as well by the end of this year. So I do think that rates could go higher. UM. I think could definitely go higher from here, but we also do need to keep a firm iron inflation,

and I think they're the risks are huge. As I mentioned, there are risks in terms of you know, pushing inflation higher if we start to see issues around you know, the restrictions in China, energy elsewhere, or we could start to see inflation actually roll over UM and the and the part of the equation of course is growth. You know, there's a large risks route now around the growth in the Eurozone. I think that's certainly a factor that was coming to play as we look at what the e

C B may do later in this year. But also when you look at the U US as well, I think growth, you know, remains relatively strong. The labor market is incredibly type um, you know, and will also you know, continue to see the consumer um and the high level of houssle savings that they still have the stud to run those down as they still continue to purchase when see vitail sales and other things. And it really depends whether we see a shift in sentiments like how much

further that has to go. But for the time being, I think growth remains relatively solid in the US, and really inflation and inflation data is absolutely crysical. Now, So in the Wall of Warrior Maryland that you talked about the potential potential increase in inflation, potential slow down in growth, what do you do? How much do you lean into a risk at a time when people already are somewhat bearish.

I would just say people, I'm not gonna specify. So at the moment that we have been short duration, now we're relatively i would say neutral, and we still have relatively low duration. But I think now given that the risks are two sided, you know, we are being very flexible we now are starting to get a little bit will carry um in you know, front hand rates um, So we're starting to you know, just invess a little bit more there. We do like some mosment's securitized investment grade,

and we are looking to be very, very diversified. That being said, of course, we are still relatively conservative at the moment. I think the next two months when we see you know, the further inflation data, further data around growth, we see developments ongoing around you know, the situation in Ukraine, the impact of sanctions. So I think there's a lot that still needs to be factors in and that we really need to see evidence either way of how things

are starting to shape out. But I think there are areas now where we can see value, where we are starting to get some yield um, and I think diversification is really the name of the game, but also really really understanding liquidity and the risk reward and the liquidity around each position that we currently hold. Maryland, you talked to her about some geopolitical risk factors that need to

be put into the equation. What about domestic politics. I'm thinking specifically of France here and looking at a ten year yield that started marched around forty basis points were now in and around one what would happen to the French bond market if Marine Lapin were to win the

runoff on April. So we have seen, as you mentioned, a lot of politility also around around France around the potential election, and the market is clearly signaling that's positioning itself for it has a preference for in the market, in the euro in terms of keeping much of the same, so lacrowd obviously staying in power. It does remain to be seen. And we have this run off on the April, and I think we will start to see a lot

of volitility around that event. Um. If le pen does win, I think it's too hard to say at the moment. I mean, she has really been quite clear I think around some of her economic policies, um, and I think it really remains to be seen if she were to get into power, what her you know, the policies that

she actually implements would be. I do think it's maybe a little case of sort of as well, sort of just trading around this volatility, sort of like you know, buying the room with all the fact potentially as well. So I think for the time being it's more around the potential trade off between the two candidates, but in either scenario it really remains to be seen what policies would be implemented. Marilyn, Thank you so much. Marilan Watson there of black Rock, This is a true joy. He

is a prolific writer on Shankai check. He is a writer on Frances definitive. The History of modern France is an important read. I've read it cover to cover, but also a one volume on what there was before McCraw, before lepan and that is, of course his magisterial book on General de gall It can only be Jonathan Fenby. Jonathan, thank you so much for joining us. Can you explain the collapse of the center in the right around the thirty nine year old maverick Mr McCraw in his second term?

What degall rot seems to be politically destroyed? Is it? Well? The conventional left center, left, center right division on which the Fifth Republic has rested really for the last and fifty years or more, is now destroyed. Makon took away a lot of the support from the socialist last time around, and this time he seems to have taken away a

lot of support from the center right Republicans. Add to that, the rise of le Pen and other extremists on both left and right, and Francis politics have become completely fragmented in the in the tumult of America. There was a massive turnout in the last election, Mr Trump, of course, note seventy four million people chose to vote for Trump.

Tell us the mystery of this turnout, April Well, The question and now is how many of the people who voted for the hard left wing candidate Jean Luc Millen sew and there were twenty two percent went for him, which was an unusually high and unexpectedly high number. How many of those will who don't like Macon will still hold their noses and vote for him, or how many will abstain? And it's really in that uh equation that

probably the outcome of the runoff on will be decided. Jonathan, how much is the move toward marine le Pen indicative of this shift away from the Western order, something that we saw with the Trump presidency and certainly that we've seen on the margins in a number of nations. It is in part that, but the even harder right candidate Eric Zamore, who played the values card much more strongly than the PEN. He didn't do as well as many

people thought he might have done. And the PEN really picked up a lot of votes yesterday on cost of living issues, security, law and order, all these kind of grassroots issues which she made the center of her campaign. And what does Emmanuel mcral need to do as he campaigns between now in April? What is his largest task? His largest task is to show that he cares for

the French people. His opponents made the argument going into the first round that he was to obsess with his position as an international statesman, having once described the president as Jupiter like, that he floated above everyday concerns and he's got to get show the French that he cares for them. John, I'm absolutely fascinating by this and that in folks, this is very different than America. Paris is roughly thirty of the GDP of France. I mean, it's

Paris centric. Is this John? Just simply you know, as a generalization Paris and mc krow against the nation of the rest of France. That is certainly the way Lapin will try to pitch it. I think for the second round you're a metropolitan elitist who cares for the rest of the world, the the upper elite class looking after them, the president of the rich, and you've got the rest of France which is being left in the doldrums. And

that's really been her main campaign theme. Okay, but John, here here's the issue to our viewers in radio and TV. Their view of France, as you well know, is table twelve, table dues at oh petite France or petite sweets overlooking the Luxembourg Garden. I mean, you sit there in the sun and everything's great. That's not France. Is that what Frances saying to McCrow. You're not France. Absolutely, Tom, You've

got it absolutely right there. The rest of France, those who voted for La penn and fer melon Chan and I emphasized again that he got twenty two percent of the vote, althoughy finished third. They're basically telling Macon, Look, France doesn't just exist in the smart parts of Paris. It exists in run down towns and suburbs and deserted farm lands. And you've got to start paying some attention to us how much popular support is there within France.

Jonathan for France's approach to Russia towards going on in Ukraine. Well, Ukraine in a sense has been It's been there all through the campaign. But Macon's conversations with Putin I don't think did him any harm because he was seen as

putting France on the world stage. On the other hand, the far left and far right candidates who paled up to Putin earlier on are somewhat embarrassed by this, and Macrawl will make a lot of their those panels big loan for a Russian bank, for instance, A lot of that will come up in the campaign for the second round. Jonathan Fenby, thank you so much, greatly appreciate it. Wonderful

to catch up with you again in folks. I can't say enough about Mr Fenby's commitment to writing of France or been other great books on France, great one volumes under go. But Fenby is the one who over the years has just put together truly thousands of pages on this interesting, interesting nation. I know all right now ellen Will joined senior fellow in Atlantic Council and definitive as

well on the Saudis ellen Wald. With the oil issues and with demand in China, what did the Saudis do The saudia Is I think are actually in a somewhat difficult position at the moment with problems and in terms of these lockdowns and potentially really could into demand in China, especially with Russian crewde being available at a discount for the Chinese. They may really need to make their products

more competitive. So they do have long term contracts with certain Chinese refineries, particularly the petrochemical and refinaries that they themselves that that a Ramco has stakes in, so they don't need to worry about that supply. But it's basically everything else on the margins that they're used to selling to the Chinese that they may need to make their products a little bit more competitive to uh, you know, keep with this too, breac and oil and you could

see them offer a price cut. Okay, of our price cut, Ellen, let's go to walled one on one. Is oil one price this morning? One global price or not? Well, it's never really one global price. We've gotten the benchmarks and then we've got you know, the different blends that are sold. They saw the benchmarks. So Russian crew can you know, the Chinese can get this Russian crews for you know, it could be as much as thirty dollars off of the Brent benchmark, and that's a really good deal for China.

Even if they're experiencing a drop in demand, they could use this opportunity to um put more into storage. So I'm not sure that will necessarily see fewer in courts going into China if China thinks they can get a discount, but consumption in China could definitely go down and that would hurt the independent refinery business, which does a lot of you know business making products and selling them around Asia.

And if there's no demand coming for these products from you know, China and other areas, that could definitely hurt that sector in China. Is there a historical corollary for this period in terms of uncertainty in terms of volatility and oil price in terms of the fact that we're asking the question is there a global price for oil

or is it basically choose your own adventure. Yeah, it's I really think that that this is a very unprecedented period in historically because there is so much effect in terms of speculation and of all of these different prices going around uh in the market today. We used to you know, there were previous times when we had big oil incidents. We you know, remember the nineteen seventies oil shocks,

we had the Iranian revolution. Those were all massive issues in the oil market, except that at that time, uh, there wasn't this kind of financialization of the oil markets. You didn't have you know, traders trading oil every minute, or you didn't have algorithms that we're asking on the market in near seconds or even less than seconds. And all of this financialization introduces more volatility, and it makes any move much more uh, it makes it much more attenuated.

So you know, we may see, uh, the effects of these Chinese blockdowns, but the fact that there's so much money and so much trading and so much attention to the oil market just makes these swings even larger and even more volatile. Ellen you mentioned there are the Iranian revolution. Let's talk about around in a different context. It's saying today that the nuclear deal is in the emergency room.

It's not dead, but it's in the emergency room. What is your base case on whether or not a deal can ultimately be reached and how that will reflect in oil prices. Yeah, this is this is I think a significant issue, particularly because um several months ago, there was a lot of optimism that we would get in Iran deal. I remember speaking with people who are very much in tune in in the Iran analysis area, and they were very very positive that a deal would get done before March.

And now looking at the situation, it's a different ball game. And I do think that the incredible rise in oil prices and the war in Ukraine has given Iran an advantage because they are still selling their oil and they're making much more money, and so that doesn't that reduces the pressure on them to come to the table and to make concessions. So it's really created a situation in which Iran is in the driver's seat here. Ellen, Well,

thank you so much. On a global view, Bond can't say enough about her one volume on Saudi in the Royalty just a superb effort on Saudi Arabia. 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 In. This is Bloomer.