Surveillance: This Is The New Normal, Amoa Says

Asset Management, Senior portfolio Manager. I won't start with the politics. I want to focus with the markets. This morning, we had a really ugly German business confidence read, not on current the current situation, but on expectations of what was about to come. The data really isn't stabilizing in Europe, Dana, what you'll read on things at the moment, I think we're almost at the point where we're moving on to

the second act of this weakness in Europe. Where first first bit of weakness we saw last year was being blamed on all sorts of supply side constraints, on trade wars or what's happening in the auto sector. Now we're starting to see that spill over into the consumer side and into the demand side. So weak demand is coming

through on a lot of the surveys. Additionally, we're starting to see companies saying some of the constraints that had been done the supply side that are actually fading because they just they don't see the demand too match it. So much more concerning, I'd say for the outlook for the German economy, what's the circuit breaker for this weakness? Because quite clearly many people come on this program and don't think it's the e c B. So where does

the circuit breaker come from? The circuit breaker comes from the politicians. We need to see physical stimulus come in UM. That's ultimately what's going to shift the trajectory for growth. The longer discontinues, the moil start to impact potential growth UM. Now, they've been hesitant to act because they don't see the weakness in the labor market. But the minute you get an indication that the labor market is starting to slow down and we are seeing the momentum on job growth fading,

then the policymakers will be forced to act. I mean, we have built Dudley this question yesterday about one trillion dollars US deficit, and what do you do with fiscal expansion the United States if you need it? What's the ability to have fiscal expansion in Europe? I haven't seen a good article yet actually laying out what the catalyst will be for individual governments to do with Madame Leguarde or Brussels wants to do. I see no evidence of it. Yeah,

I think it's on a case by case basis. Unfortunately, I think the big conundrum is the countries that have some flexibility on fiscal are the ones that needed least. Germany, however, now is becoming more of an issue. They certainly have the space, um not necessarily the willingness to act decisively, but they do have space to do some significant fiscal spend. But that's just one part of Europe. What is it?

It's acluding the UK, which we often do now we do do it, Yeah, we do data that now we say twenty seven plus we say twenty seven plus one. I mean, I mean the basic theme here for our listeners, and this includes those coast to coast and Bloomberg Radio, is when does this low interest rate environment end? I mean I talked to your job Norman or others at JP Morgan, and there's just like a desire to get back to normalization. What's the glide path to get back

to normal? Yeah, so it depends on what normal is. I would argue, this isn't the new normal, this is the normal. So you're managing a fixed in comport for ailio assuming this issis this is the new normal where the lower bound on money tree policy has decisively shifted um and we seek we see investors starting to acknowledge that.

Hence the yield grab that we've been seeing. People are actually thinking, if this environment is here for the for the medium term, and inflation expectations and rising, why should we not look to lucky meals where we can find them right now. A conversation that came up again and again and again in the last couple of days with Tom and on this program and elsewhere, was the policy

response from China that we've seen so far. The central Bank, the governor speaking again in the last twenty four hours, reluctant to aggressively ease, the Finance minister speaking I believe overnight, saying that the tax cuts will be bigger than expected. The nature of the stimulus in China has changed as the character of the spill over changed as well, because we've been looking at China trying to stabilize the situation for a long time, and I haven't seen any positive

footullout from that effort. No, completely agree. I think China's response has changed. They've accepted a lower growth environment. We saw those statements last week saying getting growth back about six six percent is going to be challenging for China. So there's an acceptance to accept. There's a willingness to accept lower growth at the at the at the because for them, the big issue is keeping debt levels stable, so they don't want to increase net leverage in the system.

So those two things act in different ways. They are focused more on um stimulating consumption domestically rather than historical in structure spends which have boosted the external growth, and I think for now it's drips and drops for China. We're not going to get the big bazooka that we had in twenty fifteen or two thousand and eight from China unless things really really become diet from here. Dinna always loved catching up with you, Dinamo, Jpmorganescent Management Senior

portfolio manager joining us here in New York. I can tell you that talks about talks are leading to more talks, the Treasury Secretary, later confirming with Fox News later later confirming with Fox News that those talks would commence on the week October seven in Washington with each Chinese Vice Premier. Marilyn Watson of Black Rock, please weigh in on this craziness. Where are we in all of this? Yeah, I mean

there's a huge amount going on, obviously. I think the markets are really focusing still on the trade tensions and the talks that are going to be coming up in October. We have seen some concessions already from the Chinese in terms of as in buying more agriculture, in terms of pork, in terms of you know, sybeing, etcetera. UM, And I think to your point, it's really interesting now, especially as we have the U N Council to see all these

side talks. So it's not only the trade tensions, but also any discussions around the tensions around Iran, Saudi Arabia, Brexit, you name it. I think it's all going on, and I think that's why we're seeing a bit more volatility that we are in the market. Obviously, we had the announcement in the UK this morning, we saw the spike in sterling. But I think really there are a whole range of different issues that are very politically driven that are really sort of focusing the market on them at

the moment. The whole range of issues that could be addressed at the UM lace today. Just as far as the trade stories concerned, we've had a series of growth scares through this cycle. We mentioned the many times fifteen, sixteen and our eighteen coming into nine. Did the trade talks hold the keys to how long we will be going through this growth scare? Or can we come out of it because of something cow somewhere else, some kind of policy initiative that brings us out of this. Finally,

how does this play out in your mind? What's your base case? Maryland? So, I think that the trade tensions are really a core component of the global growth to CHETREE going forward. We've seen that in the export data coming out of Japan, out of Korea, in Europe, we've seen we're seeing the impact that it's having on the p M eyes in the uro Zone and elsewhere, and I think it really is starting to play a key role in global growth. Then a black rock in fixed

income which spread neros most advantageously for our listeners. If there's a permanence to this regime, as James Bullard would call it, where's the spread nearrowing opportunity. So at the moment in the U S we do like investment grade credit. We think in this environment where the third is gradually reducing rates, where it continues to support the growth of the economy, and then we do continue to like spread product.

We also like agency nbs, etcetera. I think in the Eurozone we do see spreads tightening further in the long end of the curve. In Italy and France, we think

we can see further compression there. But I think also so trade isn't the only thing, and we are seeing a ratcheting up of I guess a focus on whether we could see more fiscal stimulus in Europe, whether we can see more fiscal stimulus around the world as well as you know, a range of loosening from central banks around the world as well, so we could potentially see more in Japan, We're seeing more in China, for example.

In the Eurozone, so it's not just trade, but that is one of the key components that is having an impact on global growth. I was just quickly taking a look at one of your trade and looking for that compression, that spread compression in Europe. In Italy right now, the spread over Germany on a ten year maturity is a hundred and forty one call it a hundred and forty

two basis points. The tights of the q ERA are a t eight basis points, and I just wonder can we retest the tights of the q ERA the kind of levels we had back in early Is that what you're looking for Maryland? Well, so we've already seen a huge compression between Italy and Germany. We've really seen that

come down quite considerably. It's hard to see in the nert term them getting back to the tights that that you mentioned with between Italy and Germany, because we do still see a lot of political risk in Italy still. They've moderated, but they haven't gone away. Um. The Eurozone as a whole is still you know, struggling, and we've seen the very the way weak data coming out of Germany and elsewhere as well. So I think the ECB is doing everything it can. They've made it very clear

that we need to see more fiscal stimulus. I think really to get back to the tights in between Italy and Germany, you to see a lot more in terms of up for a formulatively politic politics, etcetera. Thank you, it's good to see it. Thank you to come to you this morning from the Bloomberg Interactive Broker studios in New York. We thank Interactive Brokers for their real commitment to our conversation and economics finance investment in Brexit, and

Brexit just keeps going. That's what you want to focus on, We're gonna focus on right now. We can do that with a gentleman who's really quite informed. He's a Chataw House, which is one of the great think tanks of London. I've walked by their their austin their fancy offices. They're very British and all that. Thomas Rains is in there having tea at the appropriate hour and he joins us right now. Thomas Rain's good morning. UM. I see just

one headline come out. I'm not quite sure how current it is that Jeremy Corbin at the Labor Conference will move up his speech one day. There's an immediacy of the next twenty four hours. Do you have a hint or a guestimate of what the Prime Minister will do? Worried about whether the mats will make it in Manhattan. That's a great question. Thanks for having me on. I think it's at this point probably Boris Johnson will just

hold fire. What we know will happen as a result of the court judgment is that Parliament will return to sitting very shortly. So the order of prorogation to suspend Parliament was unlawful, so MPs will go back to business in the Commons. But we don't actually know what they're going to do with this extra time that they have. There are lots of calls for Boris Johnson to resign.

I suspect he will resist those calls for now, but in a way what he would like and what all of the parties have said that is a general election, and the question is really about how that comes about. I mean, maybe journal figure out what to do with the tats that seems to be in London. You really want to make this about sports, aren't you. Well it is a sport. You're bringing the mets for Thomas Raines because it's okay that in Brexit it's a sport. It goes on and on, and a sport that not many

people like watching at the moment. Look, Thomas, here's a question for you. The Prime Minister is quite clearly lost in Parliament, he's lost in court. Does that necessarily mean he loses in the court of public opinion. I think that's much less clear. So in some ways, and there is a theory that this court judgment isn't as bad politically for Boris Johnson as it is legally. He has tried to present the narrative that he is the one sort of true believer in Brexit who was committed to

making it happen. And against him, you have a Labor Party, you have a remained Parliament, and now you have judges. So in some ways it might add to the narrative that he has to say, look, I'm the only one who can deliver this the establishment against me trying to block Brexit. Having said that, this is such a clear and damning verdict, it wasn't a judgment about Brexit, as

much as he will be trying to frame it. It was a judgment about the power of the executive branch to suspend Parliament and this was a powerful assertion of the rule of law and of parliamentary sovereignty. I think it's quite difficult to spin that, but he will certainly try.

He wants to try and bring back as many of those Brexit Party voters, So people who've gone towards Nigel Farage's Brexit Party and the European elections he's had sort of risen out of nowhere in the last few months and he will try as much as possible to win them back. Tom Range, your claim as the tribes you talk about the European tribes, define the Farage tribe of England and how they and I mean England and how

they responded this historic moment for the nation. Well, what's what's interesting about this as a sort of subtext to it, which is that the chief sort of politic call adviser to Boris Johnson is Dominic Cummings. Now he ran the main Leave campaign, but he used to have terrible fights during the referendum campaign with Nigel Forage and his colleagues who ran a slightly different campaign which was much more

focused on on immigration and other issues. And there's a real political split there and they are coming out with the knives for Dominic Cummings. Now they're called on Twitter from actually all across both the Brexit Party in the Conservative Party for Cummings to resign. They hold him responsible for this proregration strategy. So there is a sort of political split behind the scenes between those two. I think Brexit Party voters, many of whom will probably not be

put off by by Johnson's condemnation by the Court. Um you know, there is a hard core of British public opinion which is disproportionately English. As you mentioned, it tends to be older voters, It tends to be people outside of the big cities who are who feel that Brexit is the most important political issue you that they face. They believe that Parliament and others are trying to block it, and I doubt that they will be too concerned in terms of their support for Brexit because of the judgment

of the Court and Thomas. This is embarrassing for the Prime Minister. I imagine the front pages won't be favorable to the Prime Minister tomorrow, but I wonder if the Prime Minister ultimately ends up with what he wants. Jeremy Corbin will address his party and the membership as soon as today. When he does that, Thomas, doesn't it make it harder for him to avoid the calls for a

general election. Now Parliament will come back tomorrow and I have no doubt the Prime Minister will present them with the same question, if you want me out, if you think I should resign, let's have an election. How is do they avoid that for the next six weeks with significant difficulty? I think one way to do it is that you could have a vote of no confidence in the Prime Minister and you try to install a temporary government. The real challenge here is about the expension of the

Article fifty negotiations. We have this deadline of October thirty one when the UK is too to lead the European Union. Parliament is determined that that date doesn't pass in the UK leaves with no deal. So you have this clear impasse and that and basically the Labor Party and the other opposition parties don't trust Boris Dumpson not to kind of move the UK over that clific. So the real question is can they find another way around that they feel that they can guarantee the UK won't leave with

without a deal. One way to do that would be to have a temporary leader in government. The real uh so you had a vote of noll the government of National Unity. But the only way I think that could happen is if Conservative members of Parliament who have had lost the whips so they've basically been expelled from their party vote for that. And it's not clear that they will now. Tam Marines. This is brilliant. It's so confusing.

You and I have to have a beverage of rejoice on the second floor of rules if we're going to get through this. Forget about the complexity. Doesn't the Prime minister college general election this morning in Manhattan, fly home and call their bluff and just have an election that that well is that it's not that the thing is with the change that we had under the under the previous Camera government. It's not in the gift of the Prime minister to simply call an election. He needs parliament support.

He is a very weak prime minister in Parliament. He has no majority whatsoever, and so he is not really so basically they will they could call his bluff and say, well, no, we'll wait until after the thirty post of October an election. Then, but then we still have this challenge of how do you get Boris Johnson who asked for the extension that we need, and then we might have another legal fight,

jan say, frustrated, like an American son. We have a six term Parliament Act, which ultimately means you need a certain amount of empres to vote for an election, and right now the Prime Minister doesn't have enough of those MPs to get that election through unless the opposition start to come with him. Oh yeah, the whole two years, a whole two years every four years, dawning up to the next one time, as we won't go there. If we had an election today, what would that result look like?

If the polls are any guide at the moment, Thomas Um, I hate to keep answering questions with with don't really know, but that nobody really knows. So at the moment, the Conservative Party are doing relatively well in the polls. Labor are doing relatively poorly. The Conservatives sort of mid thirties, Labor on mid twenties. A Liberal Democrats, which is the party most opposed to Brexit, are hot on labors here

and just behind them is the Brexit Party. So we have four parties in play in a system which is used to having sort of two or two and a half parties in play. So that makes all of the kind of modeling that people normally use to predict elections

very difficult to use in this circumstance. I think you could have a situation where the Conservatives end up as the largest party in the House of Commons but without a majority, and you have a labor minority government which is supported by the Liberal Democrats and the SMP, and that will lead it to and with certainly a second referendum on Brexit. Tom Rines, thank you so much for

the update Confusion Ring. We'll go through the morning here and of course Prime Minister Johnson schedule to speak this evening afternoon late late as well, and then he will fly back to the United Kingdom. Right now greeting him in the United Kingdom will be the mathematician from Cambridge Whale joins us. She is with black Rock and it really works in the emerging market area and the strategy forward um to give it a Matthew tilt Wale if

we could, we love having you on. Is the is e M such a value in equity and in bonds that you have to own some or do you have to own a lot? I think the start you have to own some. If you think about the percentage of emerging markets as part of the overall global benchmark for aquities is eaching towards under For fixed income, it's growing as well, and that has been accelerated by the fact that China China unctual assets across aquitism bonds are increasingly

getting included as well. So this year with UH Barclay's the Bloomberg Inclusion Global at JP Morgan Benchmark Inclusion MSCI inclusion on the aquity side, we're talking about over two hundred billion dollar worth of money in motion just also the back of this benchmark inclusion events along for China and more broadly, with the emerging market coming of age and markets increasingly growing, the direction of o oh yes is its own sound and potentially more so, Wait, just

give us a sense of what your global allocation is right now and what changes you may have made recently to that. Absolutely so. We have actually recently upgraded European equities from underweight to neutral and brought down our emerging market equity exposure UH from overweight to neutral as well.

On a tactical basis, and I tell you why. Specifically behind our European equity upgrade, that has been very much of the back of our expectation for the easy b to surprise on the upside versus UH consensus expectation in terms of the stimulus package and how far they would go. And we have seen part of that coming through, and we think that there is more to come with the incoming president Christine regards carrying over the baton as well.

UM specifically with regards to our emerging market equity bangoring from overweight to a new tool that had to do back then with the mood music in terms of trades tension between the US and China deteriorating, but now that is incrementally getting better. We're reviewing that right now as well. And so really as relates to the US market, are you expecting the feder reserve to be going to a

consistent easing here or maybe just kind of wanted done here? Well, m looking at the rest of the year, another rate card is very much on the table and upcoming fat meetings our life in that In that sense, Um, we very much take comfort from the fact that UH Chairman pause that at the press conference when needed, they stand by ready too, ready to act. And the fact that you know what, it's okay to have an economy that not propped up by central bank easy. If it can

go ahead by itself, that's even better. What is the tail risk right now? We have the advantage of you as a strategist and manager and emerging markets for black Rock, but define for us the sum of the tail risk right now within our global financial system. UM. I think as it relates to emerging markets, the incremental news flow with regards to trade very much weight and sentiment, which in turn drives as all location trend which in turn

also have been impacting UH price action as well. So yes, incrementally in the short term, they seem to be getting better as we're heading to the October meeting. But the strategic confrontation between the two superpowers in the world data

going away, especially as it relates to technology. So we have to bear that in mind very much as we think about kind of the overall topdown on the location and and beyond that growth slowdown, growth slowdown, and and and and and spilling over for manufacturing into service part of the economy that we pay a lot of attention to not our base case recession, but it's increasing created into our clients radar includ the fear, so we have to leave it there. Waily, thank you so much. It

is with black Rock in London. 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 Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio