Surveillance: Recession Risk with Moec

You know, it's great to catch up, sir. As always, there is a hugel that things are better in Europe, and I'd love a reality check from you. How much better are they relative to what we feared late in the summer? Well much better. I don't think things have changed materially, meaning what we when we knew on the

energy slide. For instance, without Germany, which is the biggest potential victim of the end of of of Russian gas supply, the Germany had managed to get its consumption of gas significantly down actually in in the summer, which means that the inventory position is is better than what we could have feared maybe six months ago. But again we knew

that already at the end of the summer. Nothing has changed from from the side on the data flow in general, on on the fact that we are sliding into recession. All the data flow we've halps still goes in the same direction. I mean, if you look at the European Commission surveys, if you look at the messages we get for for the Bankloning survey, for instance, it is consistent with a slide into intercession with the next three two,

two to six months. So it's not really changed. What has changes and that you alluded to this, Uh, there was this one lower than expected print for inflation in the in the US market scrambles t pricing what it expects on the on the FED. Uh, they expected read differential for the next six months between the CB and the FED train. Um, well, you've got a euro rebounding. I would not read much more than that actually into the rebound of the euro. For me, it's uh an

interest red differential play. That's it. So as your walkers through your assessment of the inflation backdrop right now and how you think it's plays into well, I know it's especially two or three months ago, it was very unpopular to still use the word transitory, because it was a very persistent form of transitory. But it's it's it's what we were expecting that we would see some desideration in inflation towards the end of tween two and into two,

she says twenty three. The question is, um how quickly we will get closer to the kind of target as UH central banks are pursuing. And that's a different question from the fact that it is probably already starting to to to desiderate. UM. So in the US, it's definitely a labor market issue, and for now, let's say that

the data is ambiguous. Our contention is that we will see slow down in wages and that will help take core inflation down by the second half of twenty three, even if the first month of the next raging to be to be tough. But it's a sort of you know, UH, traditional usual macrical behavior, and you've had a very very tense labor market. Labor markets to soften, the wages goes

go down inflation. There in Europe it's much more complicated because you still have a very very significant share of our inflation which is completely ex genous, which is completely driven by external factors. At the depreciation in the Europe that we've had until very very recently, and gas prices

which remain extraordinarily volati. We also expect the slowdown inflation next year in Europe based on mechanical behaviors, the fact that you know these effects should play in the wrong in the right direction in twenty three, um, but it's much harder to assess. It's simply because it is not the usual traditional behavior of of microcomic patterns. We are completely dependent on where gas prices are going to be

in six months time, and we've been disappointed before. But on the basis of what we know right now, on the basis of forward gas prices, for instance, we should see the seration inflation in twenty three as well in Europe. So you just to sort of put that all together. Are you basically saying you're willing to push against the stagflation case in the United States, but that Europe looks much more likely to be admired in stagflationary types of

environments for a longer period of time. Yeah for me. For me, a key difference between the US and Europe is that, to some extent um, the the US, especially the FED, is too large extent in control the situation. If if the economy tanks in twenty twenty three UH and normally inflation that goes down more more harshly than what the market was is currently expecting, then you know the Fed can act. It is slow down its base

of titling and even cut rates. So there's a measure of control if you want, on the on the state of the economy in the US. In Europe, we don't have that level of control because it is it is not in our hands. And for all the activism of of of the c D, the fact that it's talking about a lot of these it's acting, it is normalizing, it's it's mijory policy. Truth is, and they've acknowledged it themselves.

They have very very little impact and they know it on on the inflation in in twenty three in in Europe. So yes, on the basis the balance of risks, we have more than some risks in Europe than in the US, I think, or to be more precise, we have less capacity in Europe to get us out of a recession in in in twenty three and that I think should remain reflected in our exchange rate. And for now we have this sort of knee jerk reaction to this Loan

October inflection print in the US. I hope it continues, but we had accidents before. Well, fundamentally, the problem is that you know, Europe doesn't look as as as as in control. It just makes me wonder when you're doing or your head outlook if you basically have a meteorologist there several of them showing you satellite pictures of what the weather is going to be like and what the trends are of al Ninia or La nina um in just in general, to get a better sense Gill, you're

saying that there isn't much that Europe can do. Is there anything that you are looking for, maybe not this year, but next to you to determine whether they've gotten the gotten a little bit more control over the energy situation so that they're not just susceptible to the next energy import There's one one. Well, energy importance is still the key in the sun starts. What we need to see in twenty three is the emergence of energy importing capacity

in Germany. Now, as you know, at the moment, you have energy importing capacity in Italy, France, in Belgium, et cetera, et cetera. You don't have it in Germany. They have a project to have the terminal coming out that needs to come out. We need to have this energy capacity in Germany to make us sure that twenty three twenty four is not going to be a replication of what we're going through through right now. So that would be

definitely positive. Another point, which is probably less UH discussed is um the capacity of the French nuclup power generation UH to really reach it's it's potential in twenty three. That adds actually to the difficulties we have right now. As you know, you've got lots of new club power stations in France which haven't a restarted. There's a plan to restart them gradually over the next of the next

few months. We need to see that plan UH complete by the end of this winter again to give us a measure of comfort in terms of electric generation for for for twenty three. So that that is less discussed, but I think it's almost as important. Your wonderful to hear from is a bit of a ranny to check around the European story from Showmabak. There of acts for investment managers joining senior recordy strategist to Federated Hermis, Linda, I'll make it simple for you. Do you want to

chase this rally? No, we had Federated Hermes, do not want to chase this rally. This was a predictable rally, and we've been bouncing up and down all year long, pretty much in two month increments, if you remember the June low, and then bounced uff for a couple of months later and then bounced right back down. And what we saw last week was that great day I think was on Thursday. We saw money flowing into tech stocks

um into an outsized degree. So there's still a lot of money out there slashing about looking for where to invest. And you know, I travel all the time in my job. The most common question the last three months was what should I buy now? There is not the fear out there. So as much as a hundred percent of people thought we're going to have a recession next year, maybe a hundred percent of people thought you need to buy into

this rally. We've seen a lot of cuts from big tech Mezza eleven thousand, Twitter, potentially half the workforce is set to go. The reports from the New York Times on Amazon yesterday. The week before it was the Journal talking about a cost cutting review under Andy Jess. Does that bring you confidence, Linda, about these tech companies making

the required counts removing the excess that they've built up. Well, yes, and of course that's where the big increases word during the COVID shutdown or in the tech stocks hundreds of thousands I think, UH added onto Amazon, so of course they're going to cut. What we're watching is is this the beginning of you know, is this the tip of

an iceberg in terms of layoffs? And of course we think layoffs will increase next year, but what I expeag will happen in three is really a slow motion realization that we are going into recession and that earnings are going to come off. And as much as we're talking in these last couple of weeks about lots of issues, there's not a lot of talk in our view and federated hermes about what is likely to happen to earnings estimates coming down in through next year. But it will

be slow motion because of all cash out there. Linda wish sector of the market right now do you think is most overpriced based on the expectation that you put out there of downgrades to earning estimates next year. Uh, well, you know, the most expensive sector out there right now if you look at forward pees versus like thirty years of history, is actually utilities because people just poured into utilities. And that's not because of people getting earnings wrong. It's

because people massively going into the defensive sector. Indeed, what happened in these last few months was that the tech sector, which was the most expensive sector all year long, and pockets still are very expensive, other pockets not as much, was really brought down to earth a lot, so people feel comfortable in getting back in. So it's really a motion moving all back and forth. Right now. It's that one sector, utilities that was really overbought that's coming back

down now. But in general, those high quality dividends sectors are in expensive versus history, and that's what we're focused at. Federated Herman's that's where you're focused and order to buy or in order to sell, Linda, do you look at that area as accurately pricing in stagflation that other areas of the market perhaps are not. Now we're looking to buy, okay, think to buy the defensive sectors. We're looking for income. Cash is king. That's sort of an idea, remembering to

remain deface defensive. In fact, when you go into recession, if we really think you're going into recession, cyclicals historically underperform the defensive by so far only seven percent, earnings estimates only down four percent now from the peak in June for this entire market, and it's likely to go down we think ten anyway. So we're staying defensive here, and we're selling what looks expensive into this rally. And that is some tech, for sure, some tech. But Linda,

wonderful to hear from you. It always is, Linda to so the Offederates at hermits go ahead down to Washington, d C. And just a warning going into this conversation, there's a lot of noise behind Andy Bark, the Republican from Kentucky and ranking member of the House Subcommittee on Oversight and Investigations. Congressman, you and I were joking in the commercial break, is the chaos of Washington, of the case of Washington returns and that noise comes back. I'll

let you go, sir, for sure. You made easy work of Kentucky sixth congressional district. Other Republicans struggled, let's start their congressman. What went wrong with the party at these mid terms. Well, I'm a I'm an optimist, I'm a bit of a have a positive attitude. And so however you cut it, uh, And no doubt Republicans are disappointed that the red wave did not materialize. But however you cut it, we made material gains in the House, and it looks like we're on track to taking the majority.

In fact, so many outlets have already said we have in fact taking the majority. That was the principal objective, even not taking the Senate. Uh. What does that mean? It means that they don't give out small, medium, and large sized gabbles. They just give out gabbles. And by retiring Nancy Pelosias Speaker of the House, by having a news speaker, by having Republicans in charge of the gabbles and the committees, it means we set the agenda. We

have the ability to exercise oversight. We can put the brakes on the overspending and the threat of higher taxes, and we can exercise oversight over the regulatory assault on the free enterprise system. That's what the market should take encouragement by in this election is that we do have divided government, even though it's going to be a thin majority. So who would you like to see be the leader

of the House of Representatives? Is that Kevin McCarthy. Who would you like to see to be the leader of the Republican Party. Is it for a President Trump? No, it's Kevin McCarthy. Kevin Kevin McCarthy. There no one has done more for the House Republican Conference than Kevin McCarthy in terms of raising money, helping recruit candidates, helping members represent their districts, moving their legislation, assisting them understanding their districts.

So Kevin McCarthy is gonna have the votes not only to win his leadership election today but also become speaker. Now, look, there's competition. And the great thing about the Republican Party, both in these leadership elections in Congress and I anticipate in is there will be competition. There is no coronation in the Republican Party. That's the great thing about the Republican Party. We are not an authoritarian party. We are on libertarian party. We believe in free enterprise, we believe

in competition, choice. We don't believe in top down, we believe in bottom up, and so competition, iron Sharpen's iron, that's what makes us better leaders. How important is it to you, Congressman for President Trump, former President Trump not to run again in order for Republicans to kind of reclaim that mantel given the turnout what recently was the

vote in the previous two elections. Well, I think we have to do some soul searching in our party and recognize that certain candidates for Congress underperformed other candidates, and what do those candidates look like? What were the features of those candida It's again, We're the party of competition and choice. So I'm not one to say, Uh, this candidate shouldn't run or the former president shouldn't run. Um.

I think there will be a robust competition. I do not believe there will be a core nation for the nomination. But I want to say this too about we're getting ahead of ourselves a little bit. The the crises that are facing us right now have not changed since Tuesday. Inflation continues to be a massive forty year problem for our country. Uh, the crime problem is significant. That's why a lot of Republicans did well in places where you've

got a crime problem. The border crisis is significant, the energy crisis, the attack on American energy independence, it continues to be a big problem, and the president's approval rating continues to be so. Even while uh, the American people didn't give a mandate to Republicans, they certainly didn't give a mandate to the Democrats when they gave Republicans control

of the House. So it's it's dissatisfact and all the way around, and it means that Republicans and Democrats alike need to do a better job responding to the problems facing the American people. Republicans in the majority are going to be laser focused on this inflation crisis, and I will I want to say this to your audience in particular, no amount of federal reserve tightening is going to solve

this inflation crisis. There is a supply side problem as much as there is a demand side or excess demand issue in the economy, and we need to produce and supply more American made energy in this country. To fix the supply side, we need to take off the table the threat of higher taxes and over regulation, which impedes business investment, impedes the repairs that need to take place

in the supply chain. If we don't do that, we are not going to get out of this inflation spiral, and you're gonna continue to see aggressive tightening that will disrupt the financial markets. The Congressman, you said it, We've got an approval writing for the president in the falties, We've got inflation at a forty year high, and still this is the position that the Republican Party finds itself fit.

And most people think that speaks to the failure of this party not to secure a bigger majority in the House or any majority whatsoever in the Senate. You talked about self searching, So can you be more specific about what that actually means? What do you think And I'll go back to the question we started the conversation with, what went wrong? What needs to change? What is that soul searching actually involved? Well, look, again, I'm an optimist. I think to say, when you take the majority, what

went wrong? I think you have to give a little bit of credit to the candidates, the excellent candidates who did win and who did be incumbent Democrats, and look at those candidates. What what was the characteristics of those candidates. Those candidates were optimistic, They believed in America, They were patriotic, They believed in free enterprise as the solution, not the problem.

They believed they recognized that the government and fiscal policies and and policy errors are why we have this inflation crisis. And they have so Lucians, and they offered solutions in the form of the commitment to America to stop the overspending, to produce American energy again, to fund, not defund the police, to make sure we have law and order in our country again, and to secure our southern border, and to say, look, we are a nation of immigrants, but we're also a

nation of laws. And I think the candidates that had that positive uh message, or the candidates the one candidates that had a more divisive message um uh and we're only about opposition as opposed to policy solutions, those candidates struggled. So I believe in a Republican Party that presents a positive message about free enterprise, freedom, liberty, limited government, and upward mobility. That's how we're going to win the majorities

for the years the years to come. The congressmen, we're gonna have a longer conversation about your rolled on the House sub Committee on Oversigned Investigation in the next couple of weeks, and I'm looking forward to that conversation. And he bound That Republican from Kentucky, A MX, joined us now from Valley with the special guest to A Marie.

Thanks so much, Seoan. The fact that this guest is with me, So it sounds like things are looking hopeful for the joint Communicate leaders we're going to sign off for I'm joined now by the President's Deputy National Security Advisor, Mike Pyle. Mike, thanks so much for joining me. You're the representative at the table what they call and twenty

speak the sherpa. And the fact that you're here at a fifteen BALI now before the leaders signed off in it sounds like it's hopeful that all twenty leaders will sign this communicate. How are we able to get Russia on board? So I don't want to get ahead of

our leaders. Obviously they will speak collectively uh coming out of the summit, but I think we're constructive that there's going to be a statement from the G twenty that accomplishes what the President set out as his priorities coming in number one, to rally the world to speak in strong UH language around Russia's war in Ukraine, to condemn Russia, to condemn the consequences of Russia's behavior and terms of its stresses on the global economy, but then also to

present to the world an affirmative vision for what an action plan could look like to address those stresses, particularly on vulnerable countries in the emerging world. How crucial was Jing Pain in China to getting this communicate over the

finish line. So I think I think you know what I would say is, you know President Biden and his vision was very essential to getting this communicate over the vision line finish line again one coming in and working hard to rally a broad stretch of the G twenty. I think what you'll see in the communicate when it's released is that most of the G twenty came together to strongly condemn Russia's war, to strongly condemn those actions

and the consequences that's had for the global economy. And you you're also going to see reflected in that a lot of the priority priorities of the residents articulated, whether it's the need for reform at the multilateral development banks like the World Bank, whether that's the need to stand up UH and and effort to be more prepared for future pandemics, whether that's an issue like that relief where again, like what we saw in October, one country out of

the twenty was isolated while the rest of the nineteen stood up and said this is something we need to do to help vulnerable countries. I think you're going to see those priorities in the communic A, and I think

that's a reflection of US leadership. We're hearing a growing chorus on the margins or out in the front about some actions the United States has taken, one the Inflation Reduction Act giving subsidies to American companies, but also the curves on chips to China, where potentially a European company like a SML in the Netherlands might get caught in the cross fires between what the United States does not

want to happen. We've been selling to China. How have you been able to deal with your allies and these two critical issues that are going to help the U s domestically and it's going to hurt them. So with respect to the ira A, I mean I think the core point is we have a shared challenge globally around climate change, and that we have heard from the rest of the world for years. The United States needs needs to take major action to address that press to address

UH this UH this problem that we all face. And this is historic action, action that has never been taken before. The unities at this scale UN called it unfriendly though well again, I would say, with respect of what is the core global challenge that we face, climate change, this is historic action that will UH further the US is achievement of its climate goals, and the US achieving its climate goals is essential to the world achieving its climate goals.

Fair thing I would say is, you know the investments that we're making in clean energy, in electric vehicles, you know, really our investments that you can't make enough of. And we invite other countries to similarly make investments in their own UH, in their own clean energy sector, in their own UH secure battery supply chains. These are things that we think that we can do in a way that is going to serve everyone's interests, and the United States has taken a huge step forward to do that for

our economy and for the rest of the world. The President obviously came into this meeting with all these leaders with a pretty much a big boost in his step in the sense that the Democrats are able to maintain control of the Senate even though we stilln't know it's going on with Georgia and the red wave really was a red ripple. Do you think if that outcome was different, it would have changed the meetings and how the President was perceived here on the ground. So I'm the economics guy,

not the politics guy. But you know, the world right now, the economy and politics are everything. When a country's dealing with sky high inflation. The likes you think that, I think that, as I said before, um u S leadership, the President's leadership was on full display. I think they see a US economy that is resilient in the face

of of global challenges. They see a president and an administration that have delivered on their promises and terms of reinvesting in the US economy in terms of taking historic action on climate change. And I think as a result of that leadership, a lot of the things that I described as our agenda coming into this, the presidents of agenda coming into this, you know, really met with a lot of open ears and open arms from most of the G twenty. Mike Pile, thank you so much for

joining me and Bloomberg Television. John Lisa. That was President Biden's deputy National Security Advisor, Mike Pyle in the G twenty speak he is the sharp. He represents the U S interest at the table as they go through every single issue that they're going to sign off on this communicate, and at the moment it does look like they are going to get all or at least the majority of leaders on board. A nice great work, not just this morning, but over the last camp of Dice as well. I'm

Marie Hoodan that this is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am. Our 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