Surveillance: Slight Hope for '23, says Yu

in London is Jeff. Jeff is great to see you. Likewise, pleasures be here. The title of your out looks Stepping Back from the Brink, is that what we're doing. We are stepping back from the brink. And as you mentioned, it's it's amazing that would fall it where not falling,

and I'm stepping back. And given the amount of tightening that's gone through and heading into next year, the general viewers of probably every reason to be slightly hopeful as well, especially with the China News coming through five hundred basis points of tightening within a year. What is it nine months worth of ten eleven? Whatever it is, Jeff, that hasn't hit yet. What's the price we've got to pay for that? But it's five points of tightening against how

much in leverage? Right? How much in terms of shadow leverage? Where was the financial system in two thousand and two thousand and nine? Where's the financial system now? And one keyword here regulation? Where was regulation or where should it have been heading into the GFC and whereas it now? So I think now those are the things which on the upside you could say it inhibited any potential rallies.

To the downside, it actually prevents things. Do you think the price we pay for this then is just down draft in the SMP five hundred, we've had five hundred basis points of tiening, they've leried on QT on top of that, and we walk away. Now on the contrary, the price we pay for this is going to be

in a sustained and structural inflation. A lot of things, those returns, you know, the easy money, you know, the low risk premier uh, the great moderation which enabled all of that we've had in twenty years now, that isn't coming back anytime soon. So what does it mean to step back the brink? Then? Because it doesn't sound like we're going to some lovely place. Well even so, you know,

if you look at you know where we are. You know, for the US economy of the Eurozone economy next year is still a chance of recession, absolutely right, but probably best in a mild one, both in the U S and the Eurozone of course, and how the award develops is going to calibrate that to um. In China, clearly

there's going to be a growth push. But just going back to the inflation view, the stagflation problems that we've seen this year, they're not going to go away anytime soon, and there's going to be a nasty inflation sting in

the tell Whichina is reopening. Well, Jeff, this is to me a really interesting question because people talk about recession as though that's a negative case for the economy, but how much is that Actually the best case scenario is if we get a recession sooner that actually accelerates this process of disinflation and gets us to the end quicker. So for center backs, and I think the ECB is

a good example of this. You know, they present a headline scenario baseline scenario than an alternative and scenario, right, depending on the wall. So from their point of view, they looked at an alternative scenario where you in in June and March. You know, they're looking at growth contraction of two percent or the headline. Okay, that's sure, we're going to drive down growth, but no, it's not. That's very stagflationary, right, So you've got to calibrate this very

very carefully. They certainly want moderation. That's what the BOE you know, has signaled no two years of household income contraction. Sure, friends, you know Backham John are telling you know the situation of the housing market now the life So Governor Bailey and the MPC they thought that was necessary, but not too much. So there's a delicate range there and we think we're going to be in the okay side of that. Right, So next week be away, ECB, feder Reserve, CPI one

more event you've got to look at. Now, Sam bank Man Freed, it's willing to testify on the thirteenth. He's come out with a couple of tweets months ago. I'll share some of them with you. I still do not have access to much of my data, professional or personal. So there is a limit to what I will be able to say, and I won't be as helpful as i'd like, but as the committee still thinks it would be useful, I am willing to testify on the thirteenth.

At least. She goes on to say, I will try to be helpful during the hearing and to shed what light I can on the following f t x US is solvency and American customers pathways that could return value to use as internationally what I think led to the crash and my own failings. And he rounds things out by saying the following I had thought of myself as a model CEO who wouldn't become lazy or disconnected, which made it that much more destructive when I did. I'm sorry.

Hopefully people can learn from the difference between who I was and who I could have been, whatever that means. So we're looking ahead to next week. To me, and this is my layman's interpretation, trying to paint this as incompetence or a failure in terms of what he came through on, rather than some sort of malfeasance. I'm curious about what kind of legal input he's gotten, given that he's been talking a lot more than they would like.

You're not alone, Shiney bast is going to join us little bit later this morning, looking forward to that, and Marie is going to be with us here in the studio in New York to break down what you can look forward to next week. Jeff, I want to come to you. We started this conversation talking about a lack of leverage. Maybe at lack of leverage in the traditional places.

Is the leverage ou swhere that maybe we can't see in the way that we can and say, public markets and equities, household banage, she's corporate bannag, she's that kind

of thing. And also private markets as well. If I think about the asallocation views over the last few years with my previous and the hats on for example, the increased watings and private equity into alternatives with that maturity premium right now where you lock things in for ten to thirteen years or beyond and then clip that longevity coupon. You know when rates are very very low, you know that still may come to the four you know BIS

talking about shadow lending, etcetera, etcetera. So yeah, that pitfalls out there still. Effects strategists have been coming on and talking about the housing market as underpinning a lot of their cars. Which housing markets are most vulnerable? Are you

as well? So yes, Nordics and the Enterpollion's right, So if you look at Australia, you know right now, if you compare Australia to New Zealand, New Zealand's basically saying, yes, we have a housing market issue as well, but the labor market is so tight, income growth is so strong

that they're not worried about it. They're probably the only G ten central banks that can hype more than their their five and a half, and I wouldn't rule out six, whereas the ib A saying and they might be wrong on this given the China situation, but income growth is slowing, job markets is slowing, so that means wage growth can't offset high mortgage rates UK. You know, that's a well

known story. Sweden is going to be interesting because finding ing there's the governor is leaving the overlap with greenspan for a month, right, that's how long he's been around US government. It is, But the new governor is was is current head of the Swedish Financial Services Authority knows you know, where the issues are in the housing market, so the risks but also the reforms needed. So you know, that's where things can really come off. What does Canada

fit in? So you know Canada as well. So when you are seeing a mortgage roads already seeing the BOC, you know, start to shift to the softer side. We saw initially in a Canada being like a high beta proxy, you know, to the US. Whatever the Fed's going to do, Canada and Mexico you know, will follow as well. But now we're clearly seeing that divergence UM and and off flow monitor and flotos for example, seeing clients diverge as well, and they're not owning the cab right now. Jeff, this

was great. It always says, it's great to have you with the same in New York, Jeff. You b Y Melon joining us now as somebody who has been absolutely amazing on all things having to do with the US economy from her experience at Bank of America now at MasterCard Economics Institute where she's chief US economist. Michelle Meyer joining us here in studio. Michelle, fabulous to have you

with us. What's your take on these numbers? Well, I think it says Mike summarized clearly there's still producer price inflation pressures, but you're seeing it different by category. So there's some relief in terms of some of the commodity price pressure that was a big part of the story earlier in the year. But there's still that lingering pressure that's happening more on the services side, and that's something that's very very clear on the consumer side too. We'll

presumably see that to some extent. It's CPI next week. This differential between core goods inflation, which is coming down in part because those producer prices are also coming down, um, but services inflation, which remains a lot stickier. Does this data point to a recession in the US in the first half next year. I don't think so. I mean, one of the things that we've been pretty clear on is that we don't think a recession is inevitable by

any means. I mean, I think, you know, looking at the data that we are examining on a regular basis, and consumer has purchasing power. They've had purchasing power throughout the year, and I think people underestimated the resolve of the US consumer to spend, the desire to spend, and the ability to spend and that's still here. Okay, so

you moved to the suburbs. You understand this. Everybody drives around and when you have to fill up your car and you actually get a lower price, you generally have more money in your in your account. So how much is the decline in gasoline prices perversely going to fuel

ongoing inflation for longer than people previously expected. Well, I might not be the best person to answer that because we moved electric, but sorry, car in general, that's exactly right, which is that you know, it's something that's tangible, and it's not just gasoline, it's also food as well. That's a big part of this story, which is you walk into a grocery store, you buy, you know, kind of the same type of items every week, and you see

those price differentials. So there's still those dynamics, these kind of cross currents. On the one hand, quite a lot of nice relief from lower gas prices. On the other hand, food price inflation remains high and problematic. Interestingly enough, we do have a number here. Gasoline Price Index fell six in the PPI in November, so a significant decline there, which, of course the Biden administration has been waving like a

flag recently to get people to figure that out. But uh, final demand goods thirty eight point one in the index for fresh and dry vegetables, So food prices are still going up. Yeah, people can feel that when they go to the grocery stores and it's definitely impeding pricing power there. But all of the is really confusing. It's a muddle, and that's the reason why people believe in this recession, and yet it doesn't seem to be feeding into this data.

Do you buy into this massive disinflationary kind of feel that people are basically pricing into the dip and rip scenario that John was talking about. So one thing that we've seen in our data is that in this holiday shopping season, consumers are more promotional based than we've seen

certainly in the last two holiday season. So when we look at our daily data, we saw you know a bit of us softening at the end of October early November, and then this big surge of activity into the Black Friday perry, particularly for things like apperil, which was really

really strong. So I think consumers are being targeted there being you know, cognizant of how they're spending where they're spending what they're spending on UM, and relative inflation is playing a role, relative interest rates are playing a role. So there's, you know, a consumer that's aware of these headwinds that they've been facing throughout the year, and they're navigating it um But I think they've navigated a whole

lot better than people had and them credit for. Right now, we're looking at a potential for the FED getting a soft landing. Just like they said, what does that mean in terms of how high rates should go, Well, it seems very clear they're not done hiking UM. So in the upcoming meeting next week, the expectations for another fifty basis point have hikes, which makes sense. That is a

slowdown in the cadence of hikes. So they're clearly starting to see some signs that their monetary policy hikes, that it's transmitting into the economy. It's making a difference obviously in the housing market, it is in some of the good sectors. You're obvious you're seeing those those those ramifications as well. But I think that the next step after this will be that the FED continues to move up,

but they do so a little bit slower. They're trying to monitor how the economy is reacting to those hikes, and they are seeing dynamics in the inflation data that also is presumably encouraging, right, the fact that core goods is coming down. We'll see what o we are does

next week. That's going to be really important as well. Meanwhile, people are still poising in rate cuts, Mike, well, some people in the markets are, but interesting, Bloomberg has just done a survey of economists and the majority of economists think that the FED will now go to five percent, but they also think that the FED will keep it at five percent for the entire year, which is a little bit different than what you're getting in the futures market.

So we'll see if those two converge, you know, and then a lot of people think that whatever the Fed does is going to be enough to bring us back down to where we were before. Do you buy that? Yeah? So you know, one of the things that we we just published our economic piece um this week, and one of the themes there is this idea of a rebalancing

or normalization. So part of what's happening still in the economy next year, which the FED is trying to engineer, is a normalization of parts of the economy that we're in an excess. So think about the labor market. Um, should you have all these job openings relative to the number of unemployed. No, they want to cool that down,

they want to normalize it. Um. Some parts of the economy they need to do more than normalizing, which is housing where you've had a lot of accesses bill that they want to try to correct for and prevent a bigger shock into the future. So I think it's this rebalancing that's been you know, kind of desired throughout two which is what the FED was, you know, trying to achieve with higher interest rates, andree is going to be a story of those outcomes in our In our view,

what's the outcome in housing? I know you've been terrific on this for years. Do you think that we're in for a pretty protracted and deep downturn in terms of prices. I think housing is in for some real challenges ahead. I do, because when you look at how much affordability

has changed, it's it's huge. It's been a big, big shock because home prices ran well above income for a period of time, which was facilitated by these extraordinarily low rates for the extended period presumably too long um and that created this big imbalance. So we're already seeing home sales fall sharply. Home prices are starting to fall in a month a month basis, and it's particularly in some areas like San Francisco. It's fast. So I think there's

more to come and just quickly here. Is it going to be comparable to two in terms of the scope of the declines. I don't think it will because you won't have the degree of ario, so you won't have that force selling which creates a heavy price discounting. Michelle Meyer, thank you so much for being here, and have a wonderful holiday season. Michelle Meyer of the MasterCard Economics Institute. Always great to get that insight. Looking ahead to next week,

it's Cathy Jones, Chief Fixed Incomes Strategistic swab Canthy. Let's start with the Federal Reserve. It seems to me that at the moment we're focused on the way the chairman frames risk management, whether there is a focus on overtightening or UNDERTIGHTENINGE. What do you think the biggest risk is for this Federal Reserve. I think the biggest risk is if they under tighten because they've sent such a strong message about needing to get inflation down before they make

any other changes that that's the number one priority. I think they have to continue to send that message. The risk is though, that they probably will overtighten, and you know, we'll get a recession and things will break down. But I don't think that they can afford to not continue to send that message. Kathy, how does that inform your view of whether to go along some of these longer duration bonds ten year, thirty year notes versus perhaps pair back,

especially after the enthusiasm we've seen of late. Yeah, you know, Lisa, we were pretty enthusiastic a while back about where when your tenure yields hit four percent clause, they're pretty enthusiastic about extending duration. We still like extending duration on rallies are increases in yield going forward, but I think we're going to have to have a rough ride here over the near term because so much good news has been

priced into the market. But our long term view is that the tenure yields can follow as far as three percent this coming year, So we will use those that moves up and yield to extenduration. Cathy, you said that the biggest risk is under tightening, not overtightening. How much do you get pushed back? Is this basically not the consensus anymore? Are as people believe in this disinflationary story that will pick up steam throughout three Well, we're in

the disinflation can um. I think the problem is that because of the legs that are involved, it will take time to feat its way through and the market. When I look at the shorter end of the market, it's already discounted a re rated what the feed's going to do. And given that financial conditions haven't tightened or as much

or they've loosened over the last couple of months. Um, I think that the risk is that the Fed has to push back against that, and if they don't overtighten, then we're going to see inflation kind of bounce back again at the end of next year. So, Kathy, can we put some numbers on this? The Federal Reserve in their last projections from September they get updated next week.

Of course, have p C a co PC at three point one at the end of twenty three, two point three at twenty four as party, because I think twenty three is hard enough. Where are you for three? There? At three point one? Yeah, I think we can get close to the three and a half area. UM. It depends really on wage growth and how quickly that starts to decline. They're starting to see some hints that it's declining, but not as much as anticipated I think at this

stage of the cycle. So we'll probably have to push that out and say about three and a half at the end of next year. So just to be super clear, that glide path to three and a half, does that include a recession to get there? Probably? Yeah? Yeah, Well, we think risk of recession is very high. You know the indicators from the inverted yield curve to um, you know the leading indicators. I mean, I could go a long list. Here are things that are rolling over housing, etcetera.

We do think a recession is pretty high risk. So it's important because I'm really interested in how you interpret their reaction function. If if they're gliding part fist down to three point one and you think three and a half year and next year you've got a recession in the mix as well, are they cutting in twenty three? In that world? I think they could at the end

of next year. I think it's reasonable that if we are in a you know, distinctly clear recession and inflation is pretty close to three and a half four pc, they could at the end of next year. But again, I think the playbook here is the Volker FED. You know, we've heard this over and over again that Paul doesn't want to be the Arthur Burns of his generation. He wants to be the Volker of his generation. So I think that they'll try to manage it to avoid a

deep recession. But I think if the choice is recession versus inflation, the choice will be recession. When when history books look back, Kathy, do you think that they will agree with Harvard University professor Jeremy Stein, formerly on the Federal Reserve, who says that it is astonishing that we haven't seen a financial system blow up. That if you had said a couple of years ago that you would have had consecutive seventy five basis point rate hikes, you

would have said it would have been financial armageddon. The fact that we haven't is testimony to what the FED has done. Can we actually say at already, well maybe a little too soon to say we won't have some blow up somewhere, but I would say that that, you know, the strength of the banking sector is really what's helped us out this time, and that's an outdoor of all the regulations from the Great Financial Crisis, where we look

for potential problems in the private markets. And you know, we've talked about this for months now, because of the build up of debt in the private credit area, that's where we would look for problems, so more simply because there's black and well quitted, a huge amount of leverage, and that's where the deterioration of lending standards really took place. Cathy Jones greed to catch up as always of cha Swab looking ahead to next week. Matt Miller joins us

in the studio. This is cool, Matt. We've got a couple of things to do. Need to work out what on earth is going on in Germany. Winters arrived, I'm told by Maria today. O need to work out what's going on to China as well, with the lightest news out of the Shanghai factory in Tesla. Yeah. Absolutely, And I think it's also interesting to look at the tug of war between the possibility of reopening in China driving demand up globally, uh, and higher rates around the world

causing a recession that drives it down. We've seen that play in oil and I'm uh. We have the honor of welcoming all Loucillennius in the studio, the CEO of Mercedes Benz. I want to get you to weigh on in on this because it's hugely important for your business as well. Um. If they reopen, more drivers are out on the roads in China and that's a big growth area for your business. Is that good, um? And is that good for Mercedes or are you more concerned about

rates rising around the world causing recessions everywhere? Good morning, great to be with you this morning. You said it. China is the biggest car market in the world. In fact, if you look at the size of the Chinese market, it's actually bigger than if you put the United States and EU together. So what happens in China matters for the auto industry and of course matters for Mercedes Spens.

We have now come through a period here in the fourth quarter where we have had some lockdowns in some places, actually extensive lockdowns, which shuts down dealers and frankly speaking, if you're if you're at home, you're not going to go to dealer and buy a car. But at the same time, the central government has now clearly communicated that they want to ease up the situation. So what's going to happen. Are we going to see a stop and go or are we going to see a gradual easing.

It's it's difficult to say, but how that play out will definitely define what the biggest market for US is going to do. But hiding beneath that has been generally a little bit weaker Chinese economy than we have been used to for the last years or decades, and I can now see that the central government is trying to put some some stimulus into that and see if they can restart the economy together with opening up so glass

half full twenty three could get maybe better. You know, the other thing about your company is that you're really working on a strategy. You go back to a Mercedes Bends of the past, where you make the luxury car that everybody wants, and you're focused on those higher margin products rather than trying to be everything to everyone. Right, um, that coincides with pricing power. That's tremendous um and a lack of inventory around the world. So the supply side

has really been tighter because of supply chains. Can you keep that pricing power if we go into a session when all the chips come flooding back onto the market and everybody can sell as many cars as they want, can you can you keep from going back to the rebates and the full lots that we used to see or Sadespence has always been a cumbination between on the on the one hand, innovation and technology, but on the other hand, luxury something special. When you get a Mercedes,

it's almost like you reward yourself. And even before we got into this situation with chip shortages artificially keeping supply down, we had already pivoted our strategy towards being let's say more thoughtful and go to market, uh, look at building stronger contribution margins, watching our pricing powers. You know, don't you fleet deals that don't make sense. So that that was something that we had started before this chip crisis.

Now it goes without saying that if you have higher demand, as has been the case for the last couple of years, and you're held back by supply, that provides for very very very strong pricing if we now get into situation next year where the economy cools down and we get back into an equilibrium. So it's demand that controls the sales volume as opposed to the chip supply. Yes, of course, we've got to stay disciplined, there's no doubt about it.

We have done a lot of work on our break even point to make sure that we can lower the break even point in our plans so we're not forced to keep the plant running at a certain number. So we'll see what happens, but in general it is our target to to stay discipline. Do you mentioned your plants? And we've been hearing this morning about winter has come in Germany. Obviously the gas issue is a difficult one

for factory um for factories. You can't run a paint shop right without gas, you can't run your line without gas. What will you do if it comes down to rationing well after an unusually warm fall. Indeed, it's now getting colder. But the task force to deal with this really started on February in Germany. We had we had a scenario already at Mercedes Spence what if what if we get cut off and we have been working on on optionality

and resilience. So if we look at before the war started, if our gas usage was index hundred, we can go now to an index fifties, So reduction of while maintaining production for Mercedes Spence. How do we do that? Yes, efficiency is part of the equation. Yes, the government has

suggested that in all buildings temperatures are lowered. We do that as well where a sweater, So efficiencies has been one part of the answer wwitching to electricity away from gas, but also in some cases switching from gas to oil and oil is available. So there's been quite significant resilience package in our company but in Germany in general. So I think we're we are quite strong compared to where we were nine or ten months ago to go through

this winter. But we're not out of the woods. So people have to work on efficiency, not just companies, private citizens as well. We are in America. So let's talk about the Inflation Reduction Act just briefly. It's been criticized by European leaders for us to see, I was Mercedes, do you criticize it as well? As it's a good thing or a bad thing for messides The underlying idea to support and accelerate decarbonization. I'm all for that. In fact, it is Mercedes strategy to go all in on electric.

We're going to put the company in a position by the end of this decade to have an all electric lineup and be able to serve markets that are ready fully electric. So any policy that supports that to start with is a good thing. Now there's another side of the coin here. We shouldn't do that while at the same time up end free trade. So one has to be mindful that over the last thirty years of globalization, why have been we've been able to grow economy is as strong as strongly as we have It's been w

t O driven free trade. So if we take a step back on that and we create barriers again, that would be a bad thing. And uh And in that case, I'm hopeful that between the EU and the United States, waste can be found to uphold free trade but at the same time accelerate towards the carbon free And that's the hope. You're not a policy make you receive have you got to put more money to work here in America, investment here, and produce more here. Because of this even

before the Inflation Reduction Act, we had started that. We call it region for region strategy. So of course our three biggest economic or markets are the three big economic regions with Europe, United States, and China, so our vehicle production in general, but also the battery supply chain. And we have put a billion dollars into our plant in Alabama and built the brand new battery factory that I opened myself earlier this year in fact, so we had

started that already. So can we expect more? That is happening. But what you can do, especially if you're a premium luxury manufacturer, is you can't divide every single model into three pieces and make it in every region. It economically doesn't make sense. So we also rely on on the ability to export, and we will see how that plays out. You know one thing that Americans have imported Formula one. We've got that Miami, Anally, Vegas, Austin. You must be

happy about that. How cool is that the Formula one is finally broken this country. A Formula one has grown tremendously over the last year. So I think uh Liberty, who owns Formula one management, has done a tremendous job and We have helped them doing that by providing a very exciting show. United States. Is Mercedes good at ye? And you are you trolling? Well? We can next year. We want we want one race. So there was redemption

about us seeing any sport. There's always next. You've got to give Louis Abetta cow come on, it was upset this year. That is our job. That is our job, and we're working on it. This is great. Thanks for Fami with us. 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 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