Surveillance: Soft Landing with Oppenheimer

your accent has changed this week. It's worse than normal. Just to be Claire. I am funded in dollars Tom for the tenth time, and that's where I pay taxes as well. I want to clear that up. And for the second point, I'll mate Tom the chancel. I was only here to warm up the seat for Peter Roppenheimer, a common Sacks, the chief Glove Electritly strategist. Peter knows that anyway, Petty, you're a popular man this year. And good afternoon to year slash, good morning. I guess European equities,

that's what it's all about. It's front season. When you go around doing these conferences, do they buy the hype in Europe after hearing it for the tenth time in the last ten years. Very slowly, people are warming up to it and it's been a long time coming. I

know that. But performance attracts investors, and we've seen, you know, thirty percent rebound in the European market since October, at least in dollar terms, and that is starting to energize a bit of interest in the region, and it reflects the big shift we've seen towards value again, something we haven't seen now for more than a decade. So clearly we've priced that recession. We've priced in stagnation stagnation, and

investors are focused on the difference between the two. I get all that, but now we need to talk about the difference between stagnation and real recovery and expansion. And that's been a theme for us this week. When do we start to focus on the fact that there is no growth in Europe is just an absence of a recession and what we've seen so far is a bit of a squeeze and relief rally and perhaps nothing else. Well, I think we need to put it in context here.

We think that the loloibal economy is in a relatively good shape, and we expect to see a soft landing in the US, but we also now expect to see a relatively soft landing in Europe. The falls and gas prices have helped to pick up in China as well. But the absence of recession, as you say, doesn't mean we're yet into a strong recovery cycle. And I think the rebound that we've seen in risk assets in the last couple of months is overstating the potential from here.

At the index level, We've got flat returns in the US this year, slightly positive returns in Europe, so we prefer Europe. We think most of the action is going to be below the surface of the index. Let's talk about those opportunities banks have ripped in Europe. They're up about fifty from the July lows. I picked out a minor because I know you like some of those names as well, Rio since October's up something like these are

huge monster moves. And credit to you, guys, because you've got on board this bank's trade in Europe at a time where I was sitting there thinking, you've got to be kidding me. We're gonna get great hikes from the E c B. It's going to crush the economy and peripheral spreads are gonna blow out all over again. Why has that trade worked and why do you think it will continue to work? Well? I think there are three things. First of all, the recession that people feared six months

ago is not happening. There was a point where the market was pricing in quite a big downturn in the European economy. The expectations there are adjusting pretty quickly. We actually have points six percent GDP growth across the Eurozone this this year, so the economy is growing, not shrinking. That helps a lot. Second, of all, the rise and interest rates we're seeing is material given where we've been

where they came from. Remember, you know, just a year and a half ago, all government debt in the world had a negative yield. Now that doesn't exist. European rates were negative, now they're positive. The leverage to that in terms of net interest margins is the real game changer. And bear in mind that corporate balance sheets are reasonably healthy, so low losses and the risk of the big downturn hitting bang is just evaporating. And the third, factories they

were just really cheap and they remain pretty cheap. They're cheaper now when you look at the multiple relative to the market than they were even during the sovereign debt crist We started this conversation by you talking about how challenge the index level is. We've talked about that a lot in Europe. The absence of tech in Europe as a big waiting in the overall index was seen as a weakness for a long long time. Is that a

strength this year? Because I'm looking at the year to day performance of some of these tech names, Leasa, We're just going through them, those tech names in the US, despite everyone's saying it's game over, they're flying here today. Is the absence of big tech in the index in Europe a weakness or strength? Structurally, it's a weakness because there is going to be more growth in the tech sector. It's going to remain the most important driver of growth

I think for the next decade. The constituents are likely to change over time. That's always been true of technology in the past. You'll get new innovations which will generate higher return and so I think it is a problem in a way that Europe doesn't have many big tech names.

But of course the recent rally we've seen in tech is partly because of this rally again in bond yields, interest rates coming down because of fears of inflation moderating, and that's helped the longer duration parts of the market. I think really the whole concept of being in growth or value, which is really driving the markets over last decade,

is not really the story anymore. I think you need to have a much more eclectic mix, including deep value areas like commodities and banks, but also companies that can sustain stable margins and earnings, and some of that will

be in the tech sector as well. Europe does have many of these, maybe not specifically in technology, but our group of what we call the Granolas, the ten really, which you've talked about before, super size companies in Europe, which mainly in areas like consumer staples, luxury, healthcare, and some technology. These companies are about a quarter of the index, and they're still growing because they're generating stable margins and very strong cash flews, and I think they will continue

to do well. I've got time for one more. It's interesting to me that the market always seems to dictate the stories we talk about. Price shapes sentiment. You know that, and the headlines often come about from where the market is on any given week. And clearly we've rallied year today in Europe, and clearly we've rallied over the last couple of months, and clearly we've priced out of recession. And clearly off the back of that, the conversation and

the tone of the conversation has changed. Being here in London this week, you can't escape the fact there is still a war in Europe, and for many reasons, based on what's happened over the last month or so, there are reasons to sit here and say that war has the real potential of escalating again. I understand we've escaped what could have been a much much more brutal winter on the continent. I'm just wandering this down and I'm going to have this conversation with and read a center

of Energy Aspects in about forty minutes. How long before we start worry think about next winter in Europe and what is actually happening in Ukraine. I think you make a very good point. Part of the optimism that we've been seeing priced in is based on the collapse and

gas prices. That reflects really two things a very mild winter, which we can't assume we'll be repeated next year, and also a very weak Chinese economy that allowed and enabled European governments to to to find other sources of gas supplies. And as China recovers and Europe needs to re stock its gas supplies are probably higher prices, that issue will

come back. And that's a game where we're slightly more tempered in our optimism about the pace of the recovery at the index level over the course of this year, not just in Europe but across extras overall. Peter, this was great. We're gonna make it up to Manchester this evening to watch Arsenal mad cities that happening, But you're going to t t Case trying to make it happen for us. When she speaks the fixed thing come world just simply stops. It is the heritage of society general.

They own the high ground of French math and derivative science. Sobrato ra Jappa joins us this morning. Sobrata help me. Let's go sack gen derivatives right now, which is calculus, which is rates of change. What's the rate of change? Story in the bonds space this January as we see a bull equity market, so the biggest rate of change was at the end of the year. Coming into this year, we haven't really seen bonds move meaningfully higher or lower from around the three and a half percent level in

tenure yields. So for the most part, we seem to be kind of stuck here. Um. You know, part of the reason is because fundamentally bonds look rich relative to fundamentals, and then you have a story where there's just a tremendous amount of demand for bonds. You get the auction stats for this week, we saw a very very strong demand, uh, you know, from bonds from a variety of investors. So the cash that's in the sidelines is being put to

work in the bond market. I totally agree, and we've spent a lot of time this week folks on issuance ideas. If there's a shortage of bonds, that's what Sir John Templeton would have said years ago, what happens to yield over the space of this year. I don't think that there's a shortage of bonds. There's going to be a decent amount of issuance coming from you know, corporate, corporate bond world. We're seeing a lot of issuance in treasuries.

If anything, our called going into the spring time frame was that the treasury will increase it's it's coopon issuance sizes because deficits are continuing stress. I mean that, of course, we'll have to wait and see because of the of the dead ceiling, but broadly speaking, I think that's a there's a there's a decent amount of supply coming into bonds, not just in the in the US and the corporate bond, but also in Europe in the first first quarter. So

there's a lot of bonds that out there to be bought. Uh. And that's why we were expecting perhaps a modest you know, modestly higher yields for the market to be able to take down the additional supply. But that's not the case. It's just tremendous amount of demand and people are willing to lop up bonds tenny years around three and a half percent about her how long all this last? This rally,

this optimism that you see preventing every asset class. You know, the data for the most part has been mixed, but but on the positive side, you look at the data from from yesterday that we got for the fourth quarter GDP, there's a decent amount of momentum going into into the fourth quarter, um, you know, and you're looking at an employment picture that's still extraordinarily strong, even though you're getting

a lot of news about layoffs in the tech sector. Uh. You know, look at initial jobless claims yesterday, it was very very low. That it tends to be very good leading indicator of the jobs market. So this sort of environment, the market is actually, in my view, underpricing the risk

of heights for this year. We're looking at perhaps two heights being priced in for the first half of the year, and then it cut being priced in as early as July or September of this year, which you know, that sort of trajectory doesn't make any sense in an environment where inflation is expected to remain high and sticky. I mean, look at what happened in Japan. I mean, we saw you know, an outside sprint, uh, you know, relative to

consensus on on on inflation. So there's always a possibility that, you know, we do get those sort of volatile inflation prints, and the market has to respond and the Fed has to respond in like as well, So what's the read through to market? So what kind of disruption and will there be if the Fed surprises to the upside, perhaps on a fifty basis point rate hike next week, but does indicate that they're going to go further than a lot of people are currently pricing in. How disruptive is it?

It will be destructive. That's why I think that they are. The Fed typically tends to stick with the market pricing. If the market is not fully priced, they'll find ways to communicate the fact that they're going to be delivering more than what the markets pricing in and then the market will adjust. Um. But broadly speaking, I think that you know, twenty five basis point a hike, uh and at next week's meeting makes sense, and then you know

another twenty five basis points in subsequent meetings. But I just don't see them stopping or pausing anytime. So, like the Bank of Canada suggested they will at this week's meeting. So then how does the dollar play into this because that might be actually a very different story than what people are pricing in there. Yeah, I mean I think the dollars come off. It's it's very lofty levels. Um. Broadly speaking, you're looking at the dollar versus say, the euro.

H you look at the ECB. The CBS poised to high rates for the remainder of the year. Our economists are expecting that the ECB will raise its its deposit rates up to three point seven five. The markets underpricing that level as well. So broadly speaking, at least versus the the Euro, I think that the dollar could come under a little bit of pressure. The Bank of Japan as well is starting to adjust. It's it's it's y c C. So I think that you know, dollars definitely pete.

I don't see a precipitous decline, but but a gradual decline as other central banks catch up on the policy front. So Brata, thank you so much, Sobrata Rajapa with us, with society in general. This is a joy because it is the heritage of what Neil saw Us did at Credit Sweeze. He is Ray Ferris, their chief economists joining us, and he and I are on the same page that everybody inflation adjusts. And Mr Harrison, I go, maybe not nominal GDP matters. What does the global credit suits outlook

on the dynamic of nominal GDP with disinflation in place. Well, that's absolutely right. The key thing I think for corporate profitabity, the outlook for earnings is really nominal money and nominal GDP growth. After a boom in two thousand and late two thousand, early two THOWO is now slowing a lot. That's the disinflation process. So what that means is that at the top line, revenue growth is going to come down. We're already seeing that there's a good link between nominal

GDP growth, swings and margins. Margins are going to come down and we're seeing that. And although we think that there will be consumption growth in two thousand three, that consumption growth, especially in the good sector, is going to be very very weak. So slowing revenues, squeezed margins, and

not a whole lot of volume growth. Sitting in that chair this week have been a number of people modeling out some form of reaction function, trajectory, whatever you wanna call it, down to a level of disinflation that I think with shocker listeners, shocker viewers, some even modeling under three percent is an inflation picture for the United States. Are central bankers prepared to have their minds change when

the facts change. Oh, the Fed's already moving. I mean you can see that the FED that this shift from fifties to five. And I suppose recently the comments out of UM Leo branderd suggests that the FED is beginning to kind of adjust to the fact that the economy is weakened and that it views itself as being in restrictive territory and at some point it's gonna pause. That's the right thing to do. UM. What they're not ready to do because of the level of inflation. It might

just identify this, I think nicely. There's the month on month stuff, which looks pretty good, but then there's the fact that what the public cares about is the year on year numbers, and those things are still high. So the FED is going to have something of an asymmetric biased toward hawkishness until it can get those year on year numbers down safe territory and I think that's below three percent. So you mentioned Leo Brainard. Let's go there.

Some people, including city groups Andrew hollin Horst, saying that if she does take the job with the White House, this could actually increase the hawkish tilt of the Federal Reserve that she was actually more of a moderating voice, saying, maybe the risks are a little bit more balanced. Do you agree, Well, maybe, or you know, I think there's probably some extent to which she's also been a trial balloon,

you know. And this FED seems to me, in their communication strategy, to have been much more coordinated, um and and sort of game planned than say Feds of three or four or five years ago, when it was really just a talking shop in public. When it comes to the actual economic data. How much of people overlooking the Chinese coming online, the fact that China ended zero COVID and we're going to get some sort of boost with the consumer spending that perhaps could also juice and for

commodities and for other goods exactly. We just wrote about this, and we think that at the global level, the impact this year is going to be pretty modest, at about zero point two percent of global GDP. Most of that is going to be focused outside of China. Most of that's going to be focused in Asia countries like Thailand and Singapore. The Philippines are gonna benefit as the Chinese begin to travel abroad again. UM. In Europe, maybe a small boost one and a half, sorry, zero point one

to zero the United States, very small. The key thing is going to be the impact on energy prices, and this is one of the reasons why the FED at this stage, even with a succession a pretty good month on months, can't take for granted victory. If for whatever reason, the Chinese managed to drive up boil price as well above a hundred dollars a barrowable headline, inflation is going to return to being something of a problem. But you're not.

You're under playing your knowledge base here. You own the Pacific room for credits suites for years and years and years. Nobody's hit raffles barre like you about on line is the bottom line is you're suggesting Brent crude with Pacific rim oil demand coming back, are you suggesting it could pop above a hundred and find new levels up at one? That's not our forecast set. Our forecast set is, you know, kind of around ninety where about where we are right now.

What I'm saying is that it's been very, very difficult to predict. We have to recognize that the energy markets are very tight. You know, we're not getting as much of a response out of the United States in the shale patch, OPEC is sort of back in control. So you know is if I were the Fed, I'm sitting there is there a chance that for despite all my forecasting, that oil surprises to the top side and that really damages my inflation outlook, Yeah, there's a chance. So I

can't take that risk. Again with your history of the Pacific RIM, do you just model out yield curve control goes away and we get yen stronger, back to where we knew it. I think that's right, but only after the new governor comes in. It was going to till the So we need to get the new governor in April and then we need a policy review, and then probably in June will take away your curve control. But note that JAB the b o J has a new facility that allows it to lend banks against j g

B s at sub market yields. So it's created a facility that will allow it to manage the process of TENUA. It's almost like sterile it's almost like sterilized currency moves. They set up a sidecar move correct, almost like a sterilized yield curt control. So they it's the one place that wants inflation. You know, so externally the I M F may be excited about Japanese inflation, wells with the Japanese, except in the opposite direction they want it. Great, Farris,

thank you so much. With Curtis Sez, we are going to stop right now. We can do this. With Richard Hass, it was my book of the summer, book of the year. I can't remember right now, but his book on how to figure out the New Western Civilization one oh one the world was so important. And he comes back with the jewel. It is the Bill of Obligations, but far more, Lisa, this goes back and this is corny but unbelievably tangible.

Right now, a Scout is trustworthy, loyal, helpful, friendly, courteous, kind, obedient, cheerful. I memorize this once, thrifty, brave, clean, and Reverend Richard Hass takes us back to another time and primarily screams for some civility within our fractured American society. Congratulation on the ten habits of good citizens. Thank you, sir, it's so interesting you quote the Scouts oath. The Scouts are

one of the very few organizations in America. Girl, Scouts and boy Scouts that actually teach civics, they actually are invested in the fabric of the society. It changed me. It is that the whole legal scout thing long time ago and and all that. How did we get here? How did our society get to where you had to write a piercing a hundred and fifty pages on America? Get your act together? A couple of reasons. One is we don't teach our story. The fact that we don't

uh teach Civics in many schools. If we do teach it, it's an adequate. You can graduate from virtually any college or university nowt toime. And if you navigate your course distribution right, you'll never study physics civics. You won't understand the fact the basis physics for that. I sorry about that. Uh So there's that. I think media and social media has contributed to it. Increasingly people go into their own ecosystem or ecosystem, whichever you want to call it. They

go for things to confirm their biases. Social media is much more about social than news, but this is increasing where people get not their information but their misinformation. I think there's I think people have also become more skeptical of government. You know, things you talk about on this show, the failure to manage the economy, well, things like the wars in Iraq and Afghanistan. It's created a sense of populism in this country for any number of reasons. There's

been backsliding here. And by the way, it's not unique here. We see it in Brazil, we see it in Mexico, we see it in parts of Europe. I think democracies are under pressure. We just never thought it would happen here where the world's oldest democracy. Where the where the case? Jeff Sex screamed about this out of Columbia ten years ago, even twelve fifteen years ago, talking about the fractured American

education system. What's the best practice model out there worldwide that we can learn from to begin at the margin to improve our social education process. We have some good examples. Yeah, we still have the best higher education in the country, in the world. I would say the problem is, again we don't require certain things. We offer the model. I would not put that at the at the pin at the pinnacle. But now the people line up around the

world to go to American universities. The problem as universities let people off their campus without requiring to do certain things. Finland, for example, has just recently started an experiment for high school kids. You want to go through elementary school, high school, you have to become what's called literate and information. They teach you how to navigate, Uh, this this world of information, misinformation? What's the fact? What's what's what's something else? What's an opinion? Days?

By the way past that interesting enough, One state in the fifty states has that rule, that law. New Jersey just passed it the other week. Every New Jersey high school graduate is going to have experienced information literacy. Well, you wrote this book. There is more than one page, but you hated us this card which had the ethos that you are trying to And how much is this really an indictment of the moment that we're in in

terms of people's attention span, ability to focus? In other words, do you see any progress in the places that you're basically saying for civics that could actually salvage what you're hoping for? I see, I see the potential for progress almost every group I speak to, And in some ways the reason I wrote this book. People know there's something wrong. Americans get it. Look at the polls there. They've lost confidence in the future. People know there's something There's a

lot of interested in teaching civics. People know that something's going seriously wrong in Washington, that they're alienated from the government. So I think the potential for reformers there. The question is whether we can get sufficient involvement. The fact in the recent midterm elections, given all the stakes, less than half the eligible voters voted. That's something wrong. We've got it. We've got to get people more informed and more involved.

How does this really dovetail. It's the US positioned internationally as someone who has been in the diplomatic world for your entire career, and considering the fact that the rest of the world sees the dysfunction in Washington and reacts

to it. The Chinese like nothing more than to show pictures of things like January six on their television and go see the quote unquote democracy is the same as anarchy, so that the authoritarians love it makes it very hard for us to say, emulate us, but we don't look very good. More important, in some ways, it makes it very hard for our allies to trust us. They see the discontinuities that have come into a into American politics.

They no longer have the assumptions of reliability, and I think our foes for the same reason, I'm much more willing to challenge us because they're not sure we're going to be there. On radio, on television, Richard hass with us as we celebrate his new book, The Bill of Obligations. Can't say enough about it, A hundred and fifty pages here and now we're gonna migrate to Richard hass oscar analyst expert on movies there. I was watching I call it The Banshees, the Irish movie that's up now for

and I thought of you. They're looking across the harbor at the war going on in Ireland you lived. Did you see that movie and wanted to bring back about the Irish tension that is and will always still be there. I did not say it. You have to see it. Yeah, yeah, but I'm kind of I've been kind of busy, Tom. But but two things. One is that a lot of those issues, not so much the Ireland English, but the

problems in Northern Ireland breaks it. One of the many consequences of bregsit it has reintroduced friction into Northern Ireland. Northern Ireland went through two terrible decades, three terrible tacks of the Troubles. I don't think now it's inconceivable that could we could see some sort of reintroduction. Clearly we're seeing greater friction uh there. And by the way, it's given what we're talking about this morning, it's a warning for this country. I'm not worried about a new civil war.

I am worried about an American version of the Troubles where we have politically inspired violence around the country. It is not inconceivable. No one should think the January six is a one off, like you've got a big business audience on this show. Businesses besides thinking about E. S, G and D e I, businesses ought to be thinking what can they do to promote American democracy? They have an enormous stake in the rule of law. Just real quick, care before we let you go. You were talking about

social media, the involvement there. There is a push to band TikTok in part because of the Chinese ownership. Do you think that restricting social media is the answer. It's part of the answer where we have to restrict We have to regulate what are the responsibilities of the carriers? Are they publishers? Are they simply pipelines? I think that. But more important is probably to make the people who go to social media more discerning what how do how

do we make them understand the limits of social media? Again, I want people to be citizens, to be critical consumers of information. Reagan called Ronald Reagan called for patriotism, but first he called for informed patriotism. What we need to do is make sure we are critical consumers of this information suit that we're all living in. Richard Oas, thank you so much in congratulations. And I don't like to cover the covers like a refluence sweater thing with the

American flag on it, torn away. And what I would really emphasize to our international audience, the Bill of Obligations is not just in American book. It is an international book about learning the civics that we all know. And I love that Glaus is your democracy is more than procedures and laws and ethical ideal Lisa. That sums it up. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday,

starting at seven am Eastern. I'm Bloomberg dot com, the I Heart Radio app tune In, and the Bloomberg Business app. You can watch us live. I'm Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening. I'm Tom Keane, and this is Bloomberg