Surveillance: UK Credibility with Diamond

when he did for Barclay's. I'll cut to the chase because of time, go back and look did Barkley's get a ball out during the crisis? Bob Diamond, thank you so much. Honored to have you here in our studios with Bloomberg Today. I'm gonna ask one question in the city because John really wants to focus on Sterling. There's the city, there's this comedy of Reaganomics, re Dux as well. How does the city is an international venue, how does it move forward? How does it survive? Is the global institution?

So this is a really important question, Tom, and I think with all the debate around the announcements that were made in the last couple of days. Um, there is um much more support for the city. UH, something as simple as removing the bankers bonus caps, which as you know, was gamed by the banks and put the UK banks that a significant competitive disadvantage to the US banks. Any support for the city right now is UH, is important.

But what else would you like to say from this government to bring that kind of enthusiasm back to the city that I think was lost for many people after the Brexit vote. You know, I think right now credibility is the key and in uh, you know, Simon French said this morning that the only currency that Simon French from Panmore Gordon, the only currency that really matters in

the UK macro right now is credibility. UM. And I think the the announcement earlier today which I saw on the Blueberg headlines, which is that the Chancellor is going to spend time with the banks and and the traders and distributors of the of the guilt market, is important.

So I think step one is is credibility. Jonathan. If you put this in context, we had a you know, a hundred and fifty billion debt financed energy policy UM without really preparing the guilt market um for what was coming in terms of issuance, and I think people talk about the currency crisis. I think this is more crisis in the guilt market than it was in the currency market. We can you talk a little bit more about what some of those moves in rates would mean for a

big bank running a large mortgage book. We saw certain banks remove certain products in the last twenty four hours. You of course, that's what ever see a large mortgage book over at Barclays in your time running that bank. Well, can you tell me what you'd have to do when you see rates move this quickly this fast, and expectations for the Bank of England climb as quickly as they

have done. Well, if you put it in context, John, then the two year guilt um is recently as as recently as August was about one and a half percent, you know right now it's about four and a quarter. I think it touched four and a half in the last couple of days. So to your point, that's a sizeable, sizeable move um. That kind of volatility is not necessarily bad for banks, particularly banks with investment banking operations such

as Barclay's. But what it will do is it will really slow down the issuance of any new mortgages, So the mortgage books in terms of new issuance. UM, you know it's going to be as you said, there was the announcement that a number of banks have really kind of closed their mortgage issuance. Well, it's also going to slow down the economy dramatically. What are you expecting in terms of a downturn of potential response? Uh from England?

Given that the fiscal tool is kind of being blown up in the Bank of England kind of has to push back. So let's keep it in context. I talked about, you know, I think the communications and the credibility around announcing a dred and fifty billion debt financed energy policy. We talked about those issues. But the other things that were announced, there's some good things in there. I think.

I think the announce spent around both corporate and personal taxes UM, keeping corporate taxes at or lowering them rather than raising them to puts the UK in a credible position amongst its peers. UM. I think announcing some easing of immigration to to ease the labor supply issues. I think some of the things that we're announced around kind of infrastructure or reducing the bureaucracy to be able to get to building around infrastructure and around housing. So keep it,

keeping it in context. There were some positive things that were announced within this and I think because of the shock to the debt markets, to the guilt markets, we really have to find a way to hold the hands of the markets until late November when the budget is announced and we really get to look at what is meant here by the medium and long term fiscal program and somehow we have to we have to manage our

way through these markets. And I think the Chancellor meeting with the banks today and over the next couple of days UM is a positive step in that direction. Do you see some opportunities then absolutely, UM within the guilt market, within within stelling denominated assets more broadly, take your pick. Well, look, Jonathan, I want to put that in context as well. People

have talked about UM. The currency crisis, the move from one thirty down to where the currency is right now, has really been about the dollar, the dollar, the dollar. So the the UK currency is down maybe twenty five or thirty percent, the dollars up against every currency in the world. So we need to keep that in context of APIs mentions capital. Right now, we are going to stop worldwide and have a conversation with a definitive expert on e M arguably with Stanley Fisher. He invented our

concept of emerging markets. This is a guy where Damien Sassaure of Bloomberg hangs on every word. Mark Mobius was a communications major who got parchment from M I T years ago and basically invented for Sir John Templeton the emerging market business. We're honored that Mark Mobius joins us from Dubai this morning. Mark, just what a pleasure to have you with. Let me cut to the chase that every pro wants to know. How close are we to

the instabilities of I think we're very close. Actually, we're in a really a strange situation because on the one hand, you've seen this incredible increase in money by it and my definition of inflation is the evaluation of currency, and if you increase fund sup life as we've seen in the US, then that's what the evaluation of the money is going to be, and it goes that's where prices

are going to go. But we're in a very strange situation now because we've got these cryptocurrencies and here in Goodbye, I've noticed that there's so many people transferring money in cryptocurrencies. And if you look at the emerging markets in particular places like Nigeria, they do a tremendous amount of turnover in crypto counties. Uh, what is money supply? That's a

big question about, right. I look, Mark, and you and I were on the stage at the World or for Story, I wanna say eight years ago, and you stuck your neck out and said Bologny that the rules have changed for e M. There's this uh, this conceit right now that e M is more financially solid. E M as air act together unlike do they It depends on the country, you know. That's a great thing about emerging markets. You see such variety. You see some countries that are doing

a terrific job. By the way, Brazil, which used to be a basket case, has been doing a pretty good job and stabilizing the economy. And then you go to a place like Taiwan, even Indonesia, they were doing a very good job in uh managing their economies. So it really depends on where you're going. And then you go to Turkey and then you have a tremendous amount of evaluation of the Church Lera and really a lot of

instability financially. But there are even opportunities in Turkey. So Mark, at this point you started by saying that there are some analogs that we're getting close to that. What's the dividing line between now and then the trigger point that makes this evolve into something that needs to be immediately addressed rather than just a rapidly ball a rapidly evolving

ball of pain for debt investors. Uh, the real situation now is that, unlike what we had in the past during the Asian financial crisis, is that the dollar debts are not as big as they were because all these

countries learned their lesson. They was not a good idea for them to get into dollar debts, so they realized that and didn't do it, except for a number of countries that have been involved in the Belton Road projects that China's been doing, where they've lent an awful lot of money in women and b and dollars to these countries which they can't pay. So here again you have tremendous differences between countries and in some cases, as I say,

we're closer to these Asian and financial crisis kinds of situations. Mark, I'm glad that you brought that up to Belton Road initiative of China, which by some accounts has significantly soured. There was one report recently, it was published in the Wallster Journal yesterday that nearly sixty of China's overseas loans are now held by countries considered to be in financial distress,

up from five percent back in two thousand ten. This really raises a concern for China, which has acted more like a banker than say that I m F when it comes to these types of loans. How does this develop? Mark? How does this evolve into something that could potentially have contagion effects in markets? Are their countries that are going to just basically be flatten their backs unable to pay their bills that you're looking at. There are a number

of countries in that situation. I was in Sri Lanka six months ago, and of course they're flat on their backs that can't pay, and they owe the Chinese so much, and of course they owe other donors. The problem is is that nobody knows what the numbers really are because the Chinese signed agreements with these countries that they should not disclose again not disclosed what they owe and what the Chinese lent to them. So we're really in a dark spot. And if you talk to i MT people,

they are really very unhappy about the situation. Mark I've got a fancy chart, really fancy chart. It's a very weak extrapolation of how we get to another plaza accord. And the naive chart is two thousand thirty two. I don't buy it for a minute. With a race of change first and second derivative dynamics that we see right now, how close are you were I having a beverage of

our choice at the plaza hotel? Yeah? Yeah, this is a really interesting question because here you have the dollars hold strong, okay, and uh, prices in America are not down. In fact, I just took a one month ship all over America and people are spending like crazy. Then you are to London. Now the London, the pounds devalued against the dollar by what and yet try to find a hotel at decent hotel in London of the low three hundred or four hundred euros or founder pounds. It's crazy,

the whole situation. And that's why I say, I think we're in a situation where nobody really knows what the money supply is. And I believe a lot of this is because of the crypto world. Mont You've got standards. I'm guessing you're looking for a different kind of quality hotel compared to many of us. I mean, you can't do five start more. Mom times have changed. It's not just inflation at the chain hotels. And by the way, in the US, I checked into a marrier and they

asked me do you want made service? I said, what do you mean? So we don't give maid service unless you ask for it, and it's only every seven days. Only every seven days's house. Yeah, I'm not sure that would work for me. Mark Mike, I wanted to bring up Raphael Bostick of the Atlanta Fed on the UK at least I want your view on this. He was basically asked about what was happening in the UK at the moment and whether it adds to the odds of a global recession, and he turned around and said it

doesn't help. And I just wondered what the rest of the world would like to say back to the Federal reserve Lee. So if if people are worried about the UK not helping, I mean, surely the Federal Reserve and aggressive rate hikes and a strong dollar is a bigger threat to the global economy than what is going on

in the UK. Well, and that's actually perfect segue mark into what you're looking for in terms of some of the distress that you're focused on, for some sort of sponse for the French Reserve, some sort of concerted effort like Tom was talking about. Basically, is there a cap on how much pain there can possibly be? Is there a trade that you're looking at. I don't think the FED is gonna care about the markets. They're gonna care

about the inflation. That's their person priority, and their playbook is to keep on raising rates until the rate is above inflection, which mean you're talking about nine percent inflation now apencent um. Now, if you look at the UK, to be fair, they have been reducing money supply um. Of course they've raised it as much as the US, but the U s money supply is still up there, it's not really going down that much. So I think we're in a situation where the playbook for the FED

is going to continue. Uh means they're going to continue raising rates and the markets that are just gonna have to live through it. And by the way, let's be reminded, high rates don't mean a bare mom. I mean there may have been many cases in history where the rates were high, but we had a good you know of a good bull market. So we have to watch that place space carefully. Mombias grant to catch up. I gotta catch up and give a short notice to Mom. Mabbias,

Thank you, sir of Mabias Capital Partners. William Dudley joins us now, the former FIT president. He's been of uncommon value before, during and after Jackson Hole Bill Dudley. Markets are moving the litmus paper of the system. The tenure real yield has gone from the bottom up to the pre Great Financial Crisis level of about a two point zero five. How to fancy people like you interpret where the real yield is, how far the real yield has come, and how it nears what seems to be some form

of historic normal. I think it tells you that the FED is finally getting his arms around making mo terry policy type chair. I'll talk about how you need to see real yields positive throughout the yield curve, and there the feed is moving pretty quickly in that direction. And seenti five basis points last week, and they're promising another maybe basis points before the end of the year, taking

the federal fund right well above four percent. So the feed is catching up, and I think the question at this point is will they stay in the course until they've actually finished the job to get inflation back down to two percent. Paul says, you'll do that, but whether the rest of themc will come along with them, I think it's an open question at this point. You like Richard Clarata, who joined us on FED Day, no, the mathematics the physics of modern economics, and then you discard

it the real world application. You did that at Goldman Sachs for decades and then at the FED. I want to talk about the inertial force in this odd word overshoot. Is it a requirement or is it efficacious that a central bank overshoot a given target. Ideally, you don't overshood, you do just enough to achieve your objectives. But as you know, monetary policy has a lot of long lags in terms of its effects on the economy, and it's

hard to judge those effects in real time. I think the FED is probably gonna be is probably gonna ultimately overshoot a bit, because they've said that they're the risks are skewed. The risk of doing too little is much greater than the risk of doing too much, because if you do too little, you end up in the nineties seventies with a more entrenched inflation problem, and then you have to do even more later. So I think you know, this is the consequence of the FED being late. If

you're late, you have to catch up. You catch up, you probably are going to overshoot. You overshoot, you're gonna have a recession. I think where I would fault the FED right now is I don't think they've been realistic about the pain that they're actually gonna cause. If you look at their forecasts last week, that employing a rate climbs a little bit, it climbs up to four point four percent, and then inflation melts away. I don't think

it's gonna be quite so simple as that. There's never been an example of the unemployer rate rising from three and a half percent to four point four percent point nine percent point rise if it rises more and a half a percentage point. Every every time that's happened in the post World War two period, US has end up in a full blown recession and the smallest rise and then a point of rate in those situations is two percentage points. So I think the FED is understanding the

pain involved. What what worries me about that then, is that people when the pain actually rise, people will start will start to pressure the FED not to follow through. And this is the point of the column that you wrote today that there seemed to be some doubts in

your mind and in markets minds right now. If the market had a mind that the FED is going to stay the course, what do you think they have to do to come out and say they're going to stay the course or do you think they're not going to that they're going to pull back on some of the rate hikes, say if unemployment rises above four and a half percent, Well, I think er Polo is committed to staying the course. I think he's you know, studied history

and knows the consequences of not doing enough. But whether it can bring the rest of the fiddle Open Market Committee along with them later. I mean right now, it's easy to be tough right because everybody wants to get inflation down. The labor market is still very strong, and

so the pain hasn't really materialized yet. A year from now, when the unemployer rates quit considerably higher, the e communist slowed inflation has come down a bit, there's gonna be people that are going to start to argue, do we really need to push inflation all the way back to two percent or can we take a break now? And how much is this going to be a political pressure on the FED? Well, I think the Biden administration will

be pretty good about guarding the Fed's independence. Typically, if an administration starts to pick on the FED, that just unnerves financial markets and that makes the central banks job even harder. So I would be surprised if the Biden administration started to attack the FED. But you already are hearing, you know, cries from the left wing of the Democratic Party about how unfair this is that low income workers are gonna be put out of work. Um, you know,

as if there's some alternative. The problem here is that once you're late, you have to catch up. Once you're late, the unemploying rate has to go up. There are no other alternatives, and so it's not not as if the FED has a better path to achieve better outcomes. They need. They need to do what they need to do to get inflation back down. It's just gonna be difficult if we see services stabilize and maybe reduce, if we see goods come down to the goods disinflation or deflation that

we saw pre pandemic. I guess that means we come back towards John Taylor's two percent. Are you wedded to two point zero percent? Or can Build Dudley construct a new normal at two point eight two point nine two point adam posing where do you stand on that? Bill? Well, I'm not If you're talking about the real real interest rate or inflation, I'll go either way. I'll let you make it up. But to me, it's it's just it's a level that we're aspiring to get to out there.

I think there's some people that's say the FET should raise their inflation target, but I think that's a bad approach right now, because that's like moving the goalposts because you can't achieve your objectives done that. I think that I think that would undercut the fence credibility a lot, and I think Paul has been very clear that, uh, you know, his pursuit of to percent inflation from his

perspective is unconditional. Whether he can bring the rest of the FLOMC along with him when the job starts to become more difficult really a fundamental question right now. Markets are you know, basically believe Powell inflation expectations stay well anchored. But the pain process that's about to unfold is just begun. That's the domestic pain, the international pain we're witnessing right now. Bill, Well that that that's happened already, Yes, absolutely, How do

you think they should respond to that? So well, you know the reality that they are not going to respond to that because at the end of the day, Montre Paulison, the US is about what's best for the United States in terms of the fit achieving its US inflation and output employment objectives. Obviously, this creates a lot of pressure on the rest of the world. You know, the stronger dollar holds down US inflation, a weaker foreign currency increases inflation.

So it's so the flip side for other countries is much much tougher. Bill fantastic to catch up great pace as a WISA that the former New York Fed president and booked like opinion columnist. I remember you telling me Ryanair it's three whatever on the Irish r y A. I d you said by it to three and it went three to eighteen. I mean that's what Ryanair did.

Did you buy it? No? I didn't. I mean, and it's been down in pandemic and all that, and somehow survives to move forward and does so with one of the most extraordinary chief executive officers, Mr Michael O'Leary, who has been medicated over the last three days and joins us this morning. Michael, John and Lisa have some very important British questions. I want to ask you what matters to every viewer and ever listener right now. And you own the high ground on this. If we don't fly

business class, we won't fly. There's a new addiction to business class versus economy, which you own the high ground on. Where are we in a couple of years with our addiction to business class like New York to Paris eighteen thousand dollars? I mean, it's a good question, but you know there's two different markets here. Business class will continue alonghould you know, I don't. It's a different business model. But business class has disappeared on North American domestic and

business class has disappeared on trans European as well. Um, you know, people will not pay a ludicrous premium on one and to our flights to be stuck in some whole airport that looks like resemblance the black hole at Calcutta as he throw scapeall and and PARTI Sharts has

all had much of this year. Happily, the vast majority of European pastors have switched sensibly to Ryanair for the most on time, class, the lowest airfares and a really and say, every time we speak, every time we speak, Michael, there's always a pitch, there's always a sales pitch. Let's talk about immigration, Michael and this new government. You've complained about it for so so long. We've got an opportunity

for change. What do you want to see happen? Well, you're particularly talking about the UK and the elegant version, Okay, and the UK coming in Brexit has been the greatest economic foot shooting in the history of economic developments as the Second World War. It is the stupidest, dumbest economic

activity no to mankind. It was led by Boris Johnson, Michael go Over a number of other legendary idiots who decided that the way forward for the UK who was to leave the biggest trading block in in the world. Now you know, there's no point in arguing over Brexit. Brexit has happened. But at least if you're going to leave the European Union, leave with the most intelligent free

trade agreement in place with the European Union. Of course, what these morons did was they left with the worst great agreement in things and they had their remarkable situation that we are and we're one of the biggest employers in the UK. We employ more than eight thousand pilots in capital in in the UK. This year, all of the airlines are struggling to recruit people because a lot of the English people don't want to work in a service industry like the airline industry. Despite our high pay,

we couldn't get visas for Europeans. They would give us visas for non Europeans, but not for Europeans because they want to take back control of their border and now they don't have much control because it's about a thousand refugees each day coming across in Dinghies from France. Apparently they're freeing persecution in in France. Who knew that France was such a terminal country, but it is. Uh. The

UK is currently a country that has no labor policy. Uh. And the restrictions in the labor market are inhibiting growth, never mind the crazy budgets they've just announced that week. Michael there, it's clear that you have some pretty strong feelings about this. I can say that, uh, And and

it's nice that you can share them with us. Your perspective as one of the biggest employers in the United Kingdom, how much as things are now at the labor policy is currently in place, how much have wages gone up on average for you? And do you expect them to keep climbing with no change into the year? Fun enough, wages haven't gone up that much. I mean, there's clearly

upward pressure on wages because of pay inflation. But you know, the the challenge for a lot of industries in the UK, whether it's retail, hospitality, air transport, is wages haven't gone up because nobody wants to do the jobs even if you increase to pay, people still don't want to do the jobs. We're bringing in people from Morocco and from Turkey, and we can get visas for those guys to work in the UK, but they won't give us visas for Portuguese, Italians,

Germans and Polish people. It's a crazy system. But I'm pleased to say that lots of people are fleeing the UK. All of them are flying with Ryan Air on very low airfairs to more than two hundred destinations all over Europe and saving a fortune, making a fortune taking up to paid jobs all over Europe. Michael, I don't think Let's Trust is coding you anytime soon after this one.

But but but revenue revenue at Bloomberg is going to call for the two advertisements I want to squeeze in a foreign exchange question if we can, can you just tell me, as a CEO, given the moose we've seen and pounds sterling in the euro, given some of the costs in US dollars, how have you hedged any of that? What if you've done, have you had to adjust to

that story? Yeah? I mean the UK sterling were reasonably instutated because we have were we essentially balanced our sterling revenues with sterling costs and say, like we employed by the fails and people in the UK, we have a lot of airports and handling costs. In the UK we are short euros long dollar. Thankfully, in Ryaner we've been very fortunate. We've hedged our dollar exposure and all of

our topics. We've ordered more than two hundred aircraft from bowling out to six We hedged all that at one twenty four uh dollar dollar euro one twenty four, so we are significant beneficiaries. That I think a real challenge for a lot of our competitors in Europe is they're not hedged on the dollar and therefore they're paying about had more in terms of cost for their aircraft and

their spares. Thankfully, we've largely headed on capex are opics is heaged out until the middle of twenty twenty three, which would largely be oil, and we we headed the oil as well, so we we both out to the next April at about sixty four dollars of ours. So we've been lucky and fortunately been very well hedged. But a lot of our competitors in Europe who are buying a US dollar assets and for the airline industry, aircraft fuel and spars are all in dollars. It's a very

difficult time. Michael. Let's spend some longer, spend some more time next time alonger conversation about the mess that Europe is in, and you let me have the Prime Minister gives you a code. Europe is okay, Europe is growing strongly and you're right now, michaelums show up. The paper might have a different view on that, Michael Leary of Ryan f Let's get right to an important conversation within

your collective gloom. Victoria Fernandez says, no, chief market strategist across Mark, she is in the trenches of what do you actually do with money? Victoria? You say no to cash? Why? Yeah? I mean look, tom If when we talked a couple of weeks ago, we had increased our cash position a little bit because we felt like we would get some inflection point and that would be an opportunity to go in and shift the portfolio a little bit. And so

that's what we're doing. We're using up that cash. We're putting a little more beta, a little more cyclicality into our portfolios. I'm not a raging bull at this point, but I think you can take a little defense out of your portfolio and start building it up again. As we're probably getting closer to a bottom. We haven't hit a lot of those metrics that people are looking for. We have a negative earnings yield. You typically don't hit

a bottom with the negative earnings yield. But we're also also not in there trying to time the bottom exactly. We think use some of the events like we've seen this week to start building more positions in your portfolio. Does that mean find the banks? So we're not buying banks per se, but we are buying credit cards. We like Visa, we like American Express. We're buying some of the energy names too. As you know, we've been underweight energy for a while and we've been building that position.

But we've added quite a bit. We've added to Philip sixty six X on mobile Valero. We've gone in and added a lot to those names and even more cyclical names like UPS. I know a lot of people didn't want to be in the space after the things that fed X said, but we think that that was more idiosyncratic for fed ACT and we think there's some opportunity in the fourth quarter for a company like ups as well.

What about Facebook, Google, Amazon? Yeah, so that those high flying tech names, those communications services names, I think that's really where you've got to be careful. We have some exposure to those fang names, but it's not an area that we're adding to right now. Um. I think you have to be very careful on those because there's probably more downside as yields continue to go higher on those. Think if you're gonna play in that space, Apple is

probably your safer bet at this point in time. They just closed out their fiscal year end over the weekend, and from what we're seeing from analysts, they had a pretty strong year. So I know a lot of people are waiting for Apple to make the big turn to say we've hit the bottom. I'm not sure we see that in their earnings coming out after this quarter end. Victoria,

I want to understand your parameters. We've been talking a lot about the FED pivot and whether that's sort of underpinning some of the bullish sentiment that we here on the fringes of Wall Street and hunt necessarily mainstream. What's underpinning your conviction that we're getting close to a bottom. Well, I think a lot of it has to do with the momentum that we've seen, the trend lines that we're watching.

There's a lot of contrarian um signals out there. You look at the bullbear ratio, you look at the put call spike ratio. I know that Tom was mentioning the VIX earlier this morning and we're surprised the VIX isn't higher than where it is, but we want to see the VIX continue to move higher in the with a three handle um. So I think you have to look at a lot of these trends and say we're getting

close to where we think we need to be. Victoria cross Marks clients like everywhere else, are absolutely shell shocked with the news flow. All the nuances of it comes down to revenue and the dynamics of unit and price. How important is revenue into this earning season. It's extremely important because it's gonna tell us what the margins look like.

I mean, one of the themes that we just talked about last week in our investment committee for all of our strategies was quality, quality of earnings, and quality of balance sheet. And so revenue is highly important. We know with prices being higher that top line will be there. It comes down to what do those margins look like and look EPs The expectations for this quarter have come down from north of nine percent to ride around north

of three percent for the quarter. But I still think they're going to be strong enough to hold out of the market until the FED pushes us over. John Victoria's next investment management committee happens to be in the great state of Alabama. It's Texas, A and M Alabama. That's happened in October eight. You think we could make it down? People across Mark I want to go and watch Bama play Tom I'm told us the closest thing to Fernandez. Come on, it works, We make that happen. Let's go,

y'all come on down. We're gonna do a Survina special. Do you like that? So I still love Victoria? Put that on? Just then the fight in Texas Egg Victoria, Fernandez across mort Global Investments love that. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television. Each day from six to nine am 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 In. This is Bloomberg m