Surveillance: There's Potential For Some Inflation, Mann Says

Catherine too. Can we talk about the faith in en rate hikes that seemed to take a big smash in the face last week? Does it make much sense? What have red hikes? Know? The fact that the Federal Reserve's resolve is seriously being tested by this market, and the implied rate hikes through safe Fed fund futures has rolled over well. I think that there's on the horizon and some potential surprises UM that might change the market's view on whether or not there's going to be more rate hikes.

I mean, there's inflation has been extremely quiescent, and I think that's really the key ingredient, UH, that's keeping the market um complacent about what the trajectory should look like for the um policy rate going forward. I think that there's a potential for some inflation surprises coming in the

at the beginning of the year. I want to pick up on that word complacency because we've had some communication from the Federal Reserve recently that some people have sort of latched onto and said, look, this isn't about complacency anymore. I can see the Federal Reserve is stepping back a little bit from projections for next year. What do you make of that? Well, I think that you know, there are data driven institution. We've had data come in and

suggests that the global economy is slowing down somewhat. Uh, and yes, that's going to have an impact on the US economy. What is in an important ingredient in thinking about what the Fed has to do is they have to bound onto what the signals are coming from the global economy with the signals that are coming from uh, sort of the domestic economy, and the domestic economy is really very strong and continues to be so. It also

has to take signals from the financial markets. And again there's a distinction between companies that are sort of more domestically oriented, they are not financially market engaged. Uh. Those companies are feeling very good. They did get a tax cut there using it to enhance their capital and labor. Uh. And then there are the other companies who are outwardly oriented. In other words, they care a lot about the gluble economy,

and they are very financially market engaged. They they look at Wall Street, they worry about Wall Street volatility, and it's very important for the Fed to balance those two. Uh. One is a tailwind, one's a headwind. Dr Man the news. So this morning has been so extraordinary. We really haven't gotten to that wheelhouse discussion with you, which is the meetings of the G twenty over the weekend. Vice President and pens I guess advanced the story into a non

story and that both sides see miles apart. Is that going to be the outcome that we see in Buenos Aires? Well, if we think of Apeck as being the the triple A ball compared to the big leagues of me, I think a lot of our listeners really don't understand what is it as Pacific economic cooperation. Thank goodness, ye, I've worked with them before, so I don't know which one is the big league. Perhaps I should not have said

one's the big league in one's triple A, indeed. But the point is is that if this was the dry run, if APEC was the dry run for G twenty, you can either you can say, well it was a dry run. We're going to be very tough. We're gonna say we don't have any grounds for agreement. Uh. And then let's

see what the market responds. How does the market respond to that kind of behavior, and then use that as a key for well, maybe we should agree to something in the G twenty, or maybe we shouldn't, depending on how the market absorbs this. We all wake up to the same headlines, Catherine, and sometimes they say tensions rising than twenty four as they say tensions rolling go for things are getting better. But it just seems to me that different parts of the administration say different things about

the same thing the same topic. So Vice President Mike Pence seems to be playing bad cop, and fun enough, President Trump seem to be playing good cop on the trade issue over the last few weeks or so. How do you sort of distill that and communicates clients exactly what is going on ahead of the G twenty. Well, I think there are multiple voices that are are coming out of the administration, and um that is the administration.

People are also taking their cue from the data as they come in and some of the market volatility as it comes in, and are tuning what they think they should be doing based on that. That's not unreasonable. It's a good idea to plumb the opinions of the business community, and of the policy community, and and of your own base.

So all of that's important information for thinking about how you should move forward with an agreement or or no agreement in twenty in the G twenty, Well, I'm just wondering how you frame it for clients as well, because there are some people that have this very short time horizon who are looking for a truce at the end of the month, which generates a real squeeze into year end in risk assets. And there are some people that take a thirty five thou feet view and say, look,

this is a generational problem. It's not going to be solved at the G twenty at the end of this month. It's going to take years, maybe decades to play out. Where do you stand on those two things, Catherine, Well, I think, there, of course some some some market participants that just like the volatility from from who says what, when and and and play off of that. So there's plenty of plenty of things to do there if you're

that type of market participant for the longer term ones. Um, it does matter if there was to be positive language that came out of the G twenty as as I was saying earlier. Um, you know, if you can't even agree on a sentence that has ten words in it to have it as a as a as a communicate, you know, that's that's pretty that's a pretty low bar because it's not a legal agreement. Whatever you say in

that in that communicate, it's not a legal agreement. So you are in our house this weekend we had we had a ten ten word communicating the house this weekend. You agreed on we did not agree on it, right, But that's every weekend of the Kane house. It is. It is as a communicat. I like that. Can I steal that word? It's a standard word. It's a standard word communicating. Cather Man, thank you so much. We hope

to speak to in some form around the around. I feel like you would be great just for Tom King corrections the magic. I mean, why don't we do surveillance besides hanging out with Mike a bar and talking about the hideous Detroit Lion uniforms in silver gray. I mean, that's one of the reasons why we hang out. Well, who does I mean but John? The magic of having Luigi's in Gallis and Katherine Man in the same room,

same conversation, the history of that Luigi's up next. They're both at the Massachusetts Institute of Technology, and it's just the the history of what they live. Were you in seminar with Rudiger Dornbush. I know you're saying history as if it's like, you know, you seem like she's you, all right, She's not Rudy Dornbush. They're after you or Ruddy good Dornbush. He was your advice and Rudy dormbuschh

for my advice. I am channeling Rudy Dornbush every day when I go look at the markets and I think overshoot that is so. What was it like being with Ruddy Dornbush in clase and he was quick? Is what I remember? Absolutely fascinating. Katherine Man with us from m I T Luigi's and Gardless with US University of Chicago, Both School of Business Finance Professor Luigi Coan, morning to you. Good morning Luigi de Mayo, speaking in the last twenty

four hours the Italian deputy Prime minister. I wouldn't say he's ready for a reconciliation, but he's certainly open to dialogue. And it makes me wonder where these conversations between the Commission and the Italian government are going and where the Italian government can actually pull back a little bit in terms of the budget deficit. Yes, I think he did show some sign of willness to reconcile. To be honest, I think that the Luigi Maya has always been more

moderate visa vida European Union. That's just Salvini. So there is a little bit of a good cop get bad cap playing there, but also some strategic differences. I think that Salvini in the past did campaign to exit the You are LUIGII. Mayo never did that, and so I think that if it comes to the fist that movement, they are more willing to reconcile. They're less ideological, I think, more flexible. I fear that Salvini wants a confrontation for

political reasons. He understood that confronting the U buercrets making gains vote at at home, and then he plays that they aggressive or just to sort of shine a light on that a Lega mat her Salveny. Now, while I had in the pulse, if you had an election today in Italy, who would win? I think that most likely the LEGA depends on whether the LEGA get allied with its former Allia Belusconi. With that alliance, they would probably

reach an absolute majority. But it's not obvious. But the important point that most people miss is that the Italy is not like the UK, where the prime minister called new election. It is the president who uh calls new election and the president as a Monday to try to find if in Parliament that are majority. So if there was a confrontation today, I think that the president will look for new majorities, and potentially there is an alternative majority which is not a majority, with a five Star

movement and the Democratic Party. So I think that Salvini needs to be careful in playing the game too aggressively because he might end up being out of power. I sound like a conversation in fifth century fifteenth century Italy dose singalles if we look at the split between Genoa and Italy. If you look at the actual culture here, the reality of me. I just looked it up. The Italian economy is eighteen or twenty times bigger than the

economy of Greece. I mean, I think first of all, all of us, including me, don't realize that does Germany and the rest in Europe? Do they understand how big the Italian economy is? Are they treating it like Greece? I think that they understand how big the Italian economy is, but they don't want to make any fence. And I think there is one point in which I'm pretty convinced is that if we go to a confrontation, Germans are willing to pay any costs not to give up on principle.

I think that unlike the Italians were very pragmatic, Germans are they dogmatic and they're willing to h lose significantly on the economic side in order to make a point on the principal side. Surveillance correction, John, I was doing math with the afterthought last night. In my head's all filled with decimals and fractions. Italyast ten times bigger than Greece. It's not just the economy. It's the problem, I'm Luigi. It's the debt market. I believe it's the third biggest

sovereign debt market on the planet. I mean, the Italian bond market is the real deal in terms society, Luigi, there is no doubt that it is a real deal. Um, and that's what what is everybody. I think that if Italy does not start going at a healthy rate again, that that is not sustainable. So I think that we fear greatly a recession coming because I fear the data session would be the Keece of death. We are the point in which we could start to bring down that

that ratio. But if we go back into our session, there's no way this is gonna happen. Not enough time. Let just in goals. Thank you so much, look forward to speaking and thank you. Thank you for the conversation with cat Man my last Massachusetts Institute of Technology moment as well. Let's bring in someone who synthesizes for Black Rocks so much of their multi assets strategy and particularly working off of the fixed income views of Jeffrey Rosenberg

and others, and that is Isabel Mateos at Lago. Always enjoy to have her uh with this Smith Mateos, Sit Lagos, Good morning to you. What is the yield pullbacks signal? What do we what do we think when we see us full faith and credit yields set at a three oh seven? Good morning Tom, and thanks for the kind words. Pleasure always to uh to answer your questions. So, look, there's there's obviously different drivers. It's it's hard to pinpoint

anyone in particular. But but but I think, as your comments just made clear, people are very much trying to read the tea leaves in terms of f MC members commentary, and certainly there was a bit of a sense that maybe they were dialing back on some of the earlier more hawkish comments of of term in Powerell. That may be a little premature. We'll see, we'll, we'll, we'll, we'll

see pretty pretty soon about that. But um so, certainly, uh, that's going to be a key driver for that longer term, for that longer term rate, what does the feed do? And really it's the first time in a in a while that there's some uncertainty about about what the FED is going to do, not you know, not for December obviously, but in terms of when is when is the Paul's going to come are and and and that's been driving

some of that volatility in rates. You know, in addition to the to the sort of risk on risk of environment is about I expect a range of opinions at the Federal Reserve. I do also expect that the Vice Chairman and the Chairman to be quite closely alligned. So it's interesting that within the space of about six weeks we've had the Chairman say that we are a long way away from neutral and the Vice Chairman suggest we're a lot closer than that. Is the truth somewhere in

between or is the communication changing? What do you make of the communication of the last six weeks. Yeah, I mean, look at as they as the Fed gets close. I mean, the thing that they probably all agree on is they're getting closer to neutral, They're closing in on it, and that means at some point in the not to distant future, policy is no longer going to be accommodating. That's a big turning point, and so they have to kind of

really adjust how they how they communicate about it. Now, let's assume, like you know, by our estimate, it's we've got the we've got the short term neutral rate at around a hundred twenty basis points. So that's kind of you know, four rate hikes from uh uh from here? Is that a long way or not? How do you describe it? You know, maybe they didn't sit down altogether and say, Okay, this is exactly the terminology that we're

going to use to describe where where we are. And I think we're seeing the results of that in and and and sort of trial and error communication. But I think they're going to need to be a bit more specific in the in the next meeting and then certainly in the next statements. What's the operative plan for next year? Are we going to clip a coupon? Or can we dream of total return? There's a raging debate, isn't it. Yes. I think we're still I mean, obviously, as you said,

there's uh, there's uh, there's different views. Uh, we're I think in the camp of modest total return. Uh. To to to put in that way, credit spreads winding out through last week is about if you're in the camp

of modest total return, what does that mean for credit specifically? Well, so you know, the last I don't know how do they many weeks, but there's been clearly something else driving higher interest rates than than just than just FED expectations or growth expectations, and that's been uh, growing rice premium frankly,

across all all risk athetes. We think that has a lot to do with geopolitical risks and in particular trade tensions, which you know affect people's I mean, create uncertainty around macroeconomic outcomes. And we think if we could get some relief on the front, and if it's not great or terribly long lasting, but that would help, you know, irrespective of what the FED is going, okay, but within and this is important, folks, because this works with multi multi

assets strategy, which I think we all do. What is the multi assets strategy of black Rock? Away from this political story, that political story, what's the actual to do across assets? So at this point, you know, we still have a clear preference for for equities over bonds, but that equity risk, we want to take it in a way that is that is resilient to to growth scares or to interest rate scares, frankly, and that means focusing on focusing on quality, focusing on the less liverard balance sheets.

The corporates with the strongest cat close. Uh yeah, and you know, maybe moving towards a bit of a barble strategy if you will, you know, take both equity risk and then and then some some some safe bonds, preferably at the short end of the curve. Thank you so

much for the black rock today. Treat them works light today, and we really want to dive back into that and we can do that best with Brown Brothers Harriman's Win Thinn, who joins us uh this morning, head of Currency Strategy and Foreign Exchange at Brown Brothers Harriman, Dr Thin, Good morning to you. Let me begin with the base call for two thousand nineteen, a wide set of opinions at Bloomberg Surveillance on dollar weakness, dollar strength, dollar range bound,

dollar ambiguity. Which is it? Well, first, thanks again for having me, Thomas with a pleasure. I'm right now. I'm thinking with my strong dollar call. Up until about a week ago, I was extremely confident because the market had had taken their form C meeting as a hawker signal from the Fed. But I went out of the country for the last week. I was down in South America.

I'm shocked um at how quickly the sentiments turned, the market is taken back a rate a rate hikes on the FED and and we've gotten to a more published take again amazing speed over the last week. I do think that the the reaction in the FED funds and futures market, the the financial market has overdone. Um. I think the Fed will continue to hike next year, but I think the market right now is in a consolidated phase and til we sort of clear up this, this

really quite muddy waters, now, you know whin thin. I look at the cover of your fourth quarter report, the Global Overview, and the title is Thorny Issues Threatening Foreign Exchange in Q four and it looks terrifying on the cover. It's red with thorns. I mean, I don't know where you cut the roses, but all I see are stems and thorns. What are people going to hurt themselves on this year? What do you think they're gonna do that's

gonna be changed because of the way the market really operates. Yeah, no, it's a good question. First of all, I I didn't choose the picture, but I think it's it's like something right out of American horror story. It is frightening. I keep it face down on my desk. Um, look the thorny issues that we pointed out. This came out at the the end of September. Uh, and it's coming true. Now. We've got Brexit which is a total chaos. We've got

Italy muddying the waters. We've got US trade attentions threatening a global trade that those things all I think will remain in play well until next year. Um. That's it's not going away soon. Um. I think to me that the problem is getting in deeper. I think that there's the risk of a no deal Brexit have written the significantly high levels. I think there's a risk that Italy will be sanctioned by the EU for its successive deficits.

And I think the U S and China will will eventually reach an agreement, but not until there's more pain felt. And that I think that's that's more a Q one Q two story. I mean Q one Q two and all that is the degrees of freedom that the FED has, particularly versus other central banks. One of your great charms, Dr Thinn is a focus on emerging markets. I mean, are they all going to be constrained by emerging market dynamics or do they act as they will in ammerging

markets follow on UH. In terms of FED policy making, its first and foremost UH done for the state of the U. S. Economy. I mean the FED officials fat efficials are dumb. They realized their repercussions. UM. But when all said and done, you know, buying some sort of triggering global financial crisis. The FED is basically saying, look, you guys, you guys em benefited from our low rates for for years and years. We're taking that back because the U. S. Economy is is on track and unfortunately

guys gonna have to deal with it. And I think that's to me, the basic message that that's sent. I think I think that's true. I mean, I think, you know, the world in general has just gotten too used to to abnormally low interest rates. UH. And you know we had that issued like there know tomorrow and at some point the pipe is gonna, you know, have to be paid. Okay, how much is a percent move on dollar? I mean, David Bloom at HSBC is is hugely optimistic, like you

on dollar consensus goes the other way. Give us a percent move on dollar that could upset consensus, surprise consensus. Okay, Well, I think Tom, I think you you hit the nail on the head, though, I think you know, there's more um dollar pairs have been emerged in the last couple of weeks. Uh. You know, I thought, you know, for a while, I thought are about bullsh dollar calls consensus, But I think it's it's moved a little bit out of consensus um, you know, due to developments with the etcetera.

So uh, you know, I think that in order to get the bears, uh sort of think again, I think we need to get another five percent move in the dollar. And likewise, you know, I think we have to get another five percent moved the other way for me to sort of throw in the towel. You know, I think we're still within recent I think I would point out him five percent is a large move in the world of windin Oh, yes, even one is a large win. Thin. You talked about paying the piper, should it be paid

in Chinese? You want or US dollars? Well, the Chinese with the value of their current to see. Well, you know, I've been the Chinese fessionals been downplaying that, and I take them about the word. They're not going to divide that. You want the trade US trade issues of one thing, but they pledged not to weaponize. And I think about the word remember in two last team when they valued had all sorts of unintended consequences, one of them being

massive taple outflows in China distabilizing global financial MARKUS. I don't think China wants to go down that road, um, But as I said, I think it's a separate issue. My view is that the Duan trades with with EM that's sort of become more market based. You know, obviously still a black box, but for the most part, if you look at them currency for promises, do you want to start in the middle of the pack within Thank you so much. We hope to get your back, particularly

for careful discussion on EM currencies. He has a head of all of currency strategy Brown brothers Ariman. This is a joy. His name is Bud Bogot. She's with Raymond James and over the years he has pieced together a definitive place in what we do with our living rooms are offices, are dining rooms. He is the guy who knows that pim Fox, you do need a new sofa,

you you do it? Well, there's that as well, but Becot's not only following big box like home Deep in Walmart, but legendary on furniture stuff out of pen and uh he majored in baking steel and he's got Knolls steelcase. Those are just majored in baking at HPS as well along the way. But are we furnishing our houses like we used to? What's the new calculus for the stuff

we put in houses? Well, we are. We are furnishing our houses like we used to, but we are doing it in somewhat different ways by using UH, by knowing the uh the products that we want before we go into a store. And when I had my business, and I had nine furniture stores at one time a long time ago, UM, people would shop upwards of four to six stores before making a decision. Today, that's not the case. Today, go online, you research what you want, and you you

may shop one most two stores. Is North Carolina is still dominant. Well, there's that. That's where you have the largest furniture market in the world in North Carolina and high Point that's still there. There's still about ten million square feet of display space down there, and they have

markets every April and October. But the products are made now globally, you may have moved a lot of the wood furniture has moved to Asia, primary starting in China, but then migrating to Vietnam and Indonesia and other places in Asia. And you still have some products. And of course that's the issue that you're gonna have with the tariffs, because you're gonna have an issue with some of those products now coming back to the States are coming into

the States and caused costing some additional money. We had deflation in this industry from essentially the late nineties to the mid teens of this year of two thousands, and now you started to see inflation again. Do you see more store closings, specifically small companies that are not aligned with large retailers like a Walmart. I think, well, Walmart is not really big and in furniture except through Sam's.

They do sell some furniture and mattresses in the Walmart, but not really in what I would call the major furniture way. Right now, I wasn't thinking just Walmart, but I mean among your coverage, uh companies. Yeah, you've had most of the store closings you've had, you've already had. Um, what's left today are really well run operators. Um and they will they typically will survive. So the credit quality

of what's remaining in the marketplace has improved. You've had significant dislocation really in the first decade of the two thousands, to Tom's point about whether we furnish our home in the same ways that we used to. Is it a focus on electronics first? And then you find the place to sit um to some degree in somehows it's certainly for the man cave. That's uh, that's the point um uh.

And you've seen different form factors in the electronics. When you had the big, big cath roat of it, the big deep cathode ray tubes or the big home centers, you would have to have fairly deep cases to handle that. Today a lot of those video products are actually hung on the wall, so changes some of some of the aspects. But where they run YouTube videos of face masks and girls stuff. I watched like seven minutes of football this weekend. Oh yes, there's that discussion as well. But give me

a single best buy. I mean one of the things, what's so famous, what's so wonderful? Bud? Is he actually like did it? How how unusual is that to go out and try to actually run a business and then he writes these hyper detailed cell side reports. What's your what's your number? One by? Right now, within the mix of all this, I think it would be legged and platt Um, which is a supplier to a lot of the industry. There's a lot going on in um in

that industry, right, isn't this beds electric beds? Well, they actually have seventeen business units and those business units are highly diverse, so you have you have not only beds, but you have they're the largest player in automotive seating as well, So it's a very diverse company. And I think another very well placed equity today is Temper Cilly and they are beds um. That's the combination of Temper ped Ainsillian Matris. But everywhere I go, Foam is winning.

They roll up the bed in their throat in a box cast or this. You know that I mean is

the traditional bed business work years? It all new? Well, you see that's that that accounts for some piece of the business perhaps, and that's where the growth has been marginally, although the major growth recently has actually been an import of low priced Chinese mattresses, and that's actually under attack because the Department of Commerces in the middle in the early stages of an anti dumping case UM, which could change the nature of that industry really probably sometime in

the spring to summer next year. Does the consumer have enough money to keep spending the way they have in the past, and does it all go on the credit card? Now, it doesn't all go on the credit card. The consumers have been very very well off, and we've had uh some pretty good spending in the in the industry mid single digits load of mid single digits year over year growth UM. And it doesn't all go on the credit card, but at the UH, at various places it does. It

goes on the credit card. And it's obviously in in other forms of credit of of a longer variety. But how do you respond to a South that made all this furniture? You know, the legacy is stickley out in all the fancy New York UH and you know, Northeastern and over to Wisconsin people. But the South has done most of this and a part of the jobs in the angst to the trade war is all these jobs disappeared proverb liable into China. Can we get jobs back in the bug bud bogats world. I don't think they're

gonna come back in that same variety. Um. We've seen variety. We've seen jobs come back to North America in a posty, in some cutting and sewing where you actually have the fabric imported from China. But you take a look at the posty, you need fabric first, and there is very little a brick and very little of the fiber is still done in this country. So that's a real problem, um, and that's unlikely to come back in any form, perhaps in you're in my lifetime, but we gotta leave it there.

Thank you so much for joining us today, but bigots with Raymond James. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.