Surveillance: We're Off The Grid Now For Yields, Weinberg Says

And just for John farre who was probably listening, he probably doesn't know that I studied to be as Zermatt mountain guide, did you years back in the days of my youth? He was, he you come out of Zoomatin, there's ferrale f you r l actually very sure, okay, excuse me. And I think he was above fury like he was really making a serious upon truck steg. I don't know what the climate. I'm sorry. How did you make your way from from being a mountain guide to

where you are today? Well, I was employed full time at a government agency in Paris and I didn't really have much to do, so I had eight weeks of year paid vacations you know, so it was a good way to have you climbed. No no, no, no no. When they took out the ropes, that's when I decided I didn't want to be a mountain guide. The skies, the coupons, all that stuff that I was fine with. But when they brought out the ropes and they said climb,

I said, no way. That's for some of my whole frameworks at Disney movie from like fifty five years ago that you know, we were riveted by his kids. I thought it was a Clint Eastwood movie from some time ago, the Iiger sanction. That's very inspiration. Yeah, that was it was as well. Let us get to the topic of the moment, which is your China note that you write a High frequencies what will your China note be for this week? How do you fold Hong Kong into your

China calculus? So luckily we're going on vacation at High Frequency Economics, so there won't be a China note. But if I, if I were writing, you know, the the question for Hong Kong, and the way I like to think about it is what's going to happen six months or twelve months from now? Is there's still going to be in Hong Kong. And do we tell companies are clients who have business stakes in Hong Kong and businesses that depend on being in Hong Kong, did they stay

or do they go? And I think that's really the core economic question right now. There's not a sign that anyone is leaving. And while some people are pessimistic on the latest developments, other people are saying that, well, you know, by becoming more violent, the protesters are isolating the middle class and that they lose traction therefore as a result of all that. So I'm looking for the longer term.

My guess is that there's still with Hong Kong, that it will still be China's gateway to capital markets, it will still be the gateway for businesses both ways in and out of China, and that it's too important to foul. But I can't tell you what shape it's going to be and with the format of that settlement is going to be. But I'm confident that this isn't the end

of Hong Kong. One thing that I'm struck by right now is it just adds to this growing feeling of worry in markets, both you know, stemming from China, setting from trade, stemming from just the global economic backdrop. With a growing number of economists saying that we are heading toward recession, I'm struggling to just sort of put this into that perspective. Have we reached a tipping point at which we are going to a downturn that central banks

cannot prevent at this point? Well, working your question backwards, A right, central banks don't have enough tools to deal with a lot of economic adversity right now. I mean, the c B is tapped out, despite when Mario Drocki says, the bank in Japan is tapped out, despite what Kuroda tells you. Uh, the FED has some room to maneuver,

and they're exercising it. But the problems that are facing the economy caused by uncertainty, caused by trade risk, caused by political risk, caused by i'll say a Trump risk, a right, caused by Italy risk. All right, these are not the things that monetary policy can fix. And it's a it's a hard fact that public policy may be able to soften a business cycle downturn, but it's never been able to actually prevent one. So if you say we have a twenty chance of a recession in the

United States. That's probably true, all right, Is it going to be this year? I can't tell you that for sure. Kind of FED prevented, I don't think so. Okay, But yields in right now, we are in six basis points in the tenure right now, in only five basis points in the heart of the matter. And again, as I mentioned earlier, I put you in class with Paul degra Else and Charles White plots of Switzerland. It's saying, why can't we work this out? Do you look at the

turmoil we're in now? Is simply nobody wants to clear markets, nobody wants to take the proverbial loss. Well, I think that right now investors are being reluctant, all right, to take on a lot of risk. They're putting their money into equities, I think, not because they want to take on risk, but because other e years of investment are not rewarding to them. Bonds have lower negative yields wherever you look. Cash has lower negative yields wherever they look.

So moving into risky assets is not a choice, it's it's a necessity to get any positive rate of return. So I think that we're in a peculiar place, a place that I don't remember being in before in terms of global financial marks. How do you look at the inertial force of the chronic nature? That's e excuse me, that's Chicago physics talk. How do you look at the inertial force or the chronic nature of negative interest rates? Does it matter that it's been a long time we've

been doing this? Well, I think the longer we go, the greater the risk of a systemic failure somewhere being caused by negative interest rates. Big pools of money can survive at negative interest rates, their cash flows go away. Banks can't make money lending at negative interest rates, and they make money anyway taking the positives deposits at negative interest rates, being paid to take money, and why take on the risk of lowering their rate and then lower

their rate of return by making a loan. So there's a credit crunch inherent in this negative interest rate thing, and a credit crunch is a known economy killer. All right, Since I'm on with Tom Keane, I'm going to rip

the script up because that's what we do. Right. I'm struggling to understand the flip side there's so much pessimism here and people are so ready for a downturn in the fact that central bankers don't have ammunition, that what's the risk that things are better than may seem, that things are actually pretty good, and that central banks are entering an easing cycle at a time when we don't need it and the economy is going to take off,

We're finally going to see inflation. I mean, what's that risk? Well, I admire your optimism, but no one has ever said that before something. But I don't share this as someone who's having listened to you. I think I'm at least as pessimistic as you are. But what I learned in two thousand and eight is that you don't know what you don't know when you move off the grid. And

we're off the grid right now. With negative YO curves in Europe, I mean, the German yo curb is negative all the way out the thirty year is the Dutch curve is not far behind that a right, the French curve is moving in that direction, even the pound sterling is moving that direction. I've never experienced negative interest rates like this, just as I never experienced falling house prices

and I didn't even know the right questions. Even though we saw house prices falling in two thousand and eight, we didn't know the right questions to ask about, you know, what to take out the financial system. So I'm very nervous personally, more so than ever before, because negative yale curve in Germany after thirty years is so far off the grid. I don't know. I would note Lisa, with Deutsche Bank and other EU banks breaking down this morning, sort of touching on loads of July. Deutsche Bank is

a thirteen percent from the enthusiasm of early July. Yeah, and Commerce Bank reaching a new record low as Milo. Yeah, Commerce Bank is tumbling right now. Uh, and really really kind of speaking to those incredibly negative yields in this feeling they're not going to get positive. But Carl, I mean what you said really really resonates with me. We're off the grid and we don't even know the questions to ask. How do we even get a framework for

what to be asked? Is it? Well? You know, right now, right now, right now, if you're an investor, what are your choices? All right? Money? If you're an investor in Germany, money has no value. You have to pay people to take it off your hands. That's what negative interest rates means. So you don't want to hold cash, you don't want to hold bonds because the government doesn't need your stinking money.

They're running a surplus, all right. Corporates don't need your stinking money because the ECB has driven their yield solo. They're sitting on piles of cash. So nobody needs your money. So what do you do with your money? So the outcomes from this our money goes into stocks, and you get a bubble in stocks that eventually bursts, maybe not tomorrow or the next day, but at some point. Or here's the scariest outcome of all that people who don't have use for money convert that money into things they

do have use for goods and services. And if that happens faster than the economy can create those goods and services, you get an inflation. And everyone thinks in the textbook you know, it says you print the money and you get the inflation today. But you don't get the inflation today, you get the inflation tomorrow, with the next day or the day after. And maybe what's lurking behind all of this is money dies and loses all of its value. Is that we get a big surge of money into

consumption and that's a problem. Carl Weinberg, thank you so much high Frequency Economics on this important day, Lisa Brandon Winson, Tim Keene right now, a really smart Bloomberg survey in recent months, Singapore the best airport in the world, then Haneda, Tokyo in Seon, Soul, Doha, and number five is Hong Kong.

Or Ivan Man provides leadership for all of Bloomberg News in Hong Kong, and she has traveled out to the airport uh today, Ivan I noticed on Flight Aware all the domestic flights to China disappeared, some of the longer Internet sational flights still landing. What is the likelihood that Hong Kong's airport would open on your Tuesday morning, say

about eight pm tonight New York time. It's hard to say so, but we have heard from the Hong Kong Authority at least earlier saying that they are hoping to resume those flights on Tuesday morning. But as of now, I'm looking at the screen right now, and in right red you see mostly, if not all, of the flights here today leaving Hong Kong have been canceled. The Hon Kong Airport Authority telling us they've never had to shut

down the airport like this before. Unclear just how many flights have been impacted, But what we're seeing right now is that but the crowds are sitting out a little bit here are things have died down just a bit, but there's still about hundreds, I would say, have not thousands of people still sitting out on the arrival halls. No sign of police officers just yet. A lot of questions on whether they were going to use force stick

throughout these crowds what we saw over the weekend. Evan, I guess this really highlights the big question at what point will the Hong Kong unrest bleed into the economy and cause a real problem with businesses moving out of the region. Are we seeing some sort of signs that this is a tipping point for businesses, that it is a sign that we're not going back to the way it was, Well, it's we haven't seen signs just yet.

I think most people are still not seeing that the thread of capital outfloads, but businesses are certainly Really we've seen during these protests in the last ten straight weeks. Now, businesses are not opening, They're not opening their doors while therese protests are marching. And we even saw it today with Kathy Specific shares humbling to that ten year low after Beijing added pressure on these businesses as well. There was several staff members that turned out and showed up

in some of these demonstrations. We've heard from sources telling us the Chinese Chinese state run company is engurging their employees not supply Kathy Pacific, whether for personal or business trips. So we are seeing Beijing adding one the more pressure to businesses who are supporting, if not tolerating with So it's the demonstrations we've seen. At what point do you expect Beijing to send in troops? I mean, this has sort of been the expectation that at some point the

mainland will clamp down more seriously. Are we getting to

that point at this point? We're not not yet. I mean we've we've heard from the Hong Kong macalais on office folkesmen there earlier at a press conference, and they ratted up the rhetoric at least right now, saying that these protesters are committing serious crimes that they're seeing signs of terrorism, but in terms of actually supporting police officers in Hong Kong or sending the p l A, we haven't seen that quite yet Hong Kong though, mind you

today earlier this afternoon, showed off some of their new water cantons out there to the media, which we saw similar signs of that back and occupied Tway four teams. So perhaps they're preparing for further escalations town, you know, and I could make a joke about it and talk about Ivon Man's eight bedroom, twelve beeth house up Mount Nicholson, Uh,

you know here in Hong Kong. But seriously, Von, what is what are you feeling on the streets and in the neighborhoods is people try to get on with their lives in Hong Kong away from the media. What is a tone you observe in Kowloon and in Hong Kong.

It's interesting, John, because when you take a look at Internet, national media, and it seems like all we see is violent and and certain aspects you do see that there are, you know, extremes from both sides where we've seen both sides hardening their stands violence arresting protesters throwing petro bomb, do you have police find pure gas inside subway stations and whatnot. But if you take with the rest of of Hong Kong, relatively speaking, I would say there are

areas that are still safe. I mean I have people from abroad asked me are you safe? And and for the most part we are. And but the one thing that people are worried about the impact on the economy. We had Caroline that you've executive speaking over the weekend saying the impact of these protests the economy could be worse and stars perhaps even a worse financial crisis. More imports today with our Evon man at the Hong Kong International Airport. Right now we look at international relations in

I guess China, but through the prison of Washington. Jeffrey Wright joins us with eur Asia Group as we consider some of the China themes in Washington. Jeffrey, you've got a brilliant note on Huawei. This is the Chinese company with a big uproar about whether they should be in this country or that country you're doing business. Let me begin with the basics. Do the Republicans and Democrats on Capitol Hill do they agree about the president's approach to

Huawei or there points of nuance. Uh, there are some points of nuance, but I think there's quite a lot of agreement on Capitol Hill that the person that's perhaps having second thoughts as Trump himself, who's more interested in trading Huawei away for something else. It looks like, well, what if we trade him away, what do we trade them too? I mean, you know, it's not like you know, your trade Oriental avenue for New York avenue and monopoly. I mean, what do we trade what do we trade

them away to? Well, this opportunity may have passed over the last week or two as things have gotten worse, but I think if you go back to Osaka early June, Trump was interested in trading a Huawei settlement for trade concessions from the Chinese. I think maybe that ship has sailed at this point, but that was the hope. So

here's one question that I have. Jeffrey just sort of speaking to this morning's big news as the Hong Kong protests, the fact that the airport was shut down, and I'm trying to understand how why Washington views all of this in light of the trade negotiations with China. With mainland China, how does that unrest factor in if at all? I

think it's a pretty limited factor From the U S side. UH. There are certainly some people who would like to see the US more forcefully come out in favor of these protests in Hong Kong, but but Trump is not one of them. The way it becomes really interesting is what the Chinese perceive as US support for these protests, which makes them much more hesitant to deal with the US as they blame them in their state media for the

protests in Hong Kong. But it really highlights the sort of growing fissures not only socially for China and jij and Ping trying to solidify his control UH and his reign, but also economically. We got data overnight showing that China's credit growth tumbled to the second lowest amount this year amid week demand, not because the Chinese government is cracking down necessarily on leverage anymore so much. How does that help or hurt negotiations? I think it makes them much

harder or even two ways. One is that it's hard obviously for the Chinese, would be hard for them to do a deal with the US as they blame them for fomenting the protests in Hong Kong. The other way, though, is that it puts she on the defensive internally within the CCP, and so I think it makes it harder for him to pursue a trade deal. What is your update on his relationship with the Communist Party and particularly after the summer meetings on the beach there was East

rather of Beijing. I mean, what is his power this morning as he confronts the images from Hong Kong. Well, I think gets It's hard to say with any certainty, but that what's going on in Hong Kong certainly makes it I think it puts his position uh in a little bit of trouble. I mean, not that he is in any imminent danger, but it would make selling an agreement with the Americans harder, which she already had issues

with doing in April and May. So one thing I'm struggling to understand, especially as we confront this wall of pessimism this morning, this wall of worry, is just how much the trade tensions have already eaten into global growth. And I'm wondering what negotiators in Washington, d C. Look at in order to assess that and how much that's weighing on them as they do proceed with his negotiations. I think it's an interesting question. I think they're mandated

from Trump is much narrower though. I think there are the trade negotiators themselves are focused on, you know, these issues between the US and China, which are actually, you know, relatively long standing, and I think they're their remit from Trump is to you know, work on the trade issues and let him worry about the economy. It's a I think those broader economic worries there something for the political

leadership and not the trade negotiators themselves. But you know, I think Trump is going to be very sensitive to any sign that what he's doing with China head is has sort of slowed the economy in a way that could be dangerous for his free election. We're distracted by all sorts of things. If we're looking for Argentina to open up weaker pay so, all the protests in Hong Kong,

the airport shut down. But you bring up Jeffrey right an incredibly important point, which is we're poised and waiting what is the next step we're going to see from the President of the United States. Uh, well, that the tariffs will go into effect on September one if nothing is done. But yeah, but what what are you looking for if he tweets out in the next forty eight hours. I mean, Lisa's glued to every presidential tweet. But Jeffrey, right, what are you looking for? I think you know what

the most important two things. One is whether the meeting between negotiators in September is still going forward. If it if it gets canceled, they take us a very bad sign that the Chinese are are losing interest in this. Secondly, the the expiration of the general license for Huawei, which she is a week today. Uh. The way the US handles that is going to be uh, you know, pretty important for the future of the negotiations and how the

Chinese see them as a negotiating partner. So, Jeffrey, I want to go back something that you said, which I found really interesting that negotiators don't really care about the economic followed or it's not really their mandate to consider it. So is that not even on the table for them? I mean, in other words, uh, you know, ultimately it just comes down to certain ideals and certain uh sort of perfect goals that President Trump has, but not necessarily

what the fallout is. I think, you know, Trump is concerned about those things, uh to an extent, but his view, it seems to me, is that, uh, the US is in a stronger position visa via China, and so if he keeps pressing that advantage, then he'll eventually get uh something out of the Chinese that will make it all

worth it. Uh. You know, you can you can say that that will work, and and that that's a bad theory that I think they look at the Chinese trade data and the uh the economy flowing there, and they see an advantage for the U s which you know, has an economy that's still relatively strong. So I think they're preoccupied with their advantage over the Chinese, and let's focus on what it's doing to the divisit monament is. Jeffrey thinks so much. Jeffrey right this morning with your

rage group. One of the joys of trying to be so smart, you're bloomberg as I got a little bit of help this morning, among others, one Pablo spinetto George Lay and of course the wonderful Daniel Canceled helping US with Latin America. One of the energy a d r S priced to New York is down fifty that's an equity um the argentinean et F down twenty seven percent, the ms C I argent et F and of course pay so right now UH fifty nine on pay so that I don't know the percentage move on that other

than it's large. Someone to fold this in to what it means for markets in US economic policy is Julia Cornado, Macro Policy Advisors. Julia. It's idiosync insyncratic until it's not. How not are we this morning? Are we still idiosyncratic? We're getting pretty pretty We're dancing pretty close to non linear dynamics, I would say. I mean there is global geopolitical risk on the rise pretty rapidly around the world, and that's coming against the backdrop of a swelling economy.

So these two things can easily combine, UH to a self fulfilling downward move and confidence. So I think we're teetering right now. I've used the word gamma more on television and banners in less since weeks that I have in the last six years to remind and now no vet Bill's name is not Gamma, it's vet Bill. But gamma is acceleration on a linear basis. It's a big curve, and scary is on a log rhythmic basis. In finance, when you get a curve on a log chart, that's

not good. There's a lot of those out there right now, isn't there? There are? And the question is are those isolated cases or where we always have, you know, certain pockets of distress around the global economy, so we can absorb a few isolated cases. The question is whether more material China is moving in that direction or is starting to hit those kinds of dynamics, And that's what we're watching very closely. So there was some weak credit data

out overnight. The Hong Kong unrest could be very disruptive to a major global financial so um I think that's that's as material or more material than potentially the Argentine situation, which is also quite and US AM ten am Wall Street time in about eleven hours, we'll get some kind of China fix off of seven point zero six you want per dollar fold this into the August. The chairman Powell's enjoying, I mean, I know he's central banker to

the world. It's five It's like it's three hundred miles more Julia from New York to Buenos Sarres, and it is from New York to Honnolulu. I mean it's a long ways away. How does Chairman Paul interpret that? Well, I would say he's probably not enjoying his August so much. I mean after a July meeting where um, it seemed like there was a lot of disagreement on the committee about whether they should be cutting rights at all. Now we're back again talking about a fifty basis uh potential

cut in September. So you know, it's very difficult to calibrate policy to these uncertainties that haven't yet material materialized in US data. Uh. So I think that's the challenge for him. I think they they have signal that they are in preemptive mode, preemptively addressing risks. So if there's no doubt they're going to be cutting rates in Remember, the question is how much I want to read this

as carefully as I can. Again, the T Live go for those of you are the Bloomberg term or I can't say enough about keeping T Life fixed on your screen. I'm gonna go quickly. Here bank O b b v A Argentina and group of super vil sank as much as sixty five six five, while group of Financiero Galicia and bank oh Macro tumbled only six six zero. This is after downgrade some Morgan Stanley, I mean it begins

to feed on itself, Juliette. I'm gonna say, and if the I S curve is the real economy and the money curve is l economy, in the L M curve is rather the money economy, all of a sudden, it becomes a real economic discussion, doesn't it. Yes, yes, yes, I mean there is. There is a lot of leverage around the world. There's a lot of dollar leverage both in Argentina and China and other places that could be

affected by these disruptive moves. So, um, yeah, we maybe we may be at a point where some of these pockets of distress will start to hit institutions that um then been pulled back on credit to other credit worthy borrowers. And that's the that's the seeds of a downturn, right when when bad credit starts to affect good in it, That's that's when when when economies start to contract what's your run rate on the US economy right now, and if you brought it in is others have in the

last seventy two hours. Yeah, we're running it just just below one on Q three, which is still a very respectable performance. What we're watching for is retail sales later this week. We saw in the jobs report the hours growth has started to slow a lot, and so that should manifest itself and other indicators that we haven't seen yet. So we're going to be watching those demand indicators for signs of that slowing. Let me do a data check

here with Julia Carnado Macro Policy Advisors. UH the doubt negative to thirty six thousand and seventy three, sp X negative twenty four to eight nine four on the sp FI vix out two big figures back above twenty that long long term average twenty point one six, and yields come in and critically, yields are making new loads today. I'll do this four digits ten year yield one point six seven seven eight, make out a one two year yield well under a one six the one point five

nine as well. Julia. One final question or discussion point I should say comment on not the forecast of a zero percent tenure yield. But people modeling the what ifs of a tenure yield? Are we just bored because the red sox are terrible this year? Or is this actually a legitimate debate. I mean, we've see we see negative

yields in a lot of countries. Those countries tend to have much lower potential growth UM and UM much more intervention if they've seen much more intervention from the Central Bank. Is it possible in the US? It certainly is. UM. It's disruptive though, if we start looking at negative yields around the world, think of the what that does to the models for pension funds and insurance companies. How does our financial infrastructure manage UM? How does saving an investment

proceed in a negative interest rate world? Oh? Um, we're still a ways away. We're only at one eight on the on the ten year tom, so we've still got a hundred and sixty eight basis points to work with here. We've got less than nine basis points on the two is tent spread eight point five seven six on that massive curve flattening we've seen, Juliet. When you gotta talk here as soon, Juliet Cornado. Thank you so much, Dr Cortinado,

MECRO Policy Advisers. 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 eight