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We're going to start with a quick good view here to get to June.
Thirtieth onn On for the next six months from ing. Anikatrian joined US Global out of Private Banking and Wealth with their workout of the London School of Economics. Anika, have you written a midiar review or do you in the Netherlands have to rewrite it given the news.
Flow a midiar review? What you mean by a midia review?
In America?
Everybody in banking has to write a June thirty twelve.
Oh it is dead July fifteenth. That's the way it ruled. If you've written a minsiorry reviewer, are.
You people smarter than this and you don't even do a midgir review, Well.
We're not doing a long memo like that. No, we're fortunates.
I would say, son, what's the conversation you're having with your clients these days? I mean you know, there's you know, the uncertainty surrounding the geopolitics over in Iran, not to mention Ukraine. What are your conversations like with your clients.
Yeah, I think it's I mean, it's a sad it's a sad thing, I would say, because of all the human sort of tragedies going on around the world. But it feels like volatility is becoming increasingly normalized. And that's exactly what we see with our conversation with clients. And I mean practically you see it in markets, but we
see it in parallel and clients' behavior. So you know, post a COVID you saw a market reaction minus thirty percent, post Ukraine minus twenty, post liberation Day minus fifteen, and post the recent Middle Eastern conflict minus ten. So you see that clients are just increasingly resilient and steadfast with what they're doing, why they're doing it, and sticking to convictions.
So what is the conviction. One of the trades that we saw when you know, the teriffs were initially put out last year was some asset flows out of the US into other parts of the world, including in big way Europe. Is that still the sentiment out there or is that reversed a little bit in your mind.
Well, it's really interesting. So I think two things. First of all, indeed, that that happened, and I think Europeans were very excited because it's been a long time coming. We've been talking about systematic valuation mismatches between Europe, US, etc.
But then something happened. And what happened was, of course we've had this amazing earnings bonanza and that's especially driven by the US US companies, US equities again year today, it's been an amazing quarterly earning season, and I think that is just reforged the notion that European companies are just not able to grow at the speed of US companies. So I mean twenty percent earnings growth for US equities this year is expected ten max fifteen for Europe. So
I think that makes things tricky. On the other hand, what's interesting if you talk about Europeans and how Europeans are deploying their capital. Number one, we're seeing a lot more Europeans start to actually invest, and this is a really important thing. And number two, you do see quite a home bias. You do see that Europeans like to buy europe We do notice this also this year.
I think this is a brilliant, brilliant statement. And in America, our understanding is that Europe believes in American technology, Europe believes in American initiative, innovation and the rest.
What's the first derivative of that right now?
Is Europe leaning into America in twenty twenty seven?
I think Europe. I think there's two things. First of all, we've waited for a long time for the continent of Europe to basically lean I call it leaning in into capitalism, right, really putting capital to work. We have trillions lying in deposits, and the US versus Europe is a very different story. Right The average European household has less than a third of the wealth invested, the average US household more than half. So number one, you're seeing that Europeans are really starting
to invest. We don't have the four oh one K system that you have in the US, so these are deliberate choices that are being increasingly made, also by younger populations, which is great. The feeling towards the US from Europe is talking about earnings growth. I think what's happening is we're in a world where you know, we used to be very demand driven in the last decade, and I think what's happening now supply is the new demand, right.
So all these enormous supply constraints, the need for computes, the need for data set towers, etc. All the AI technology you see, there are just these US champions and Europe is just keen to get involved and keen to deploy capital in that way. So I think Europeans are very pro US constructive on growth that comes out of US companies, but they don't want to neglect their own continents.
And again one final question, I want to dive back to the economic history of the London School of economics.
The model is a war ends.
And there's like celebration and all that, as there should be with any ending war, and then there's a vector of disinflation and at times outright deflation.
Should we expect given the headlines that with an end of this Middle War in Iran within the Eastern Mediterranean, that we're going to be surprised by some form of tone of disinflation.
You know, it's interesting because we've indeed been walking a disinflation path. Then this conflict spiked up pricing, etc. We've even seen the ECB have to just rates in a response. But indeed, you know, if things are settling down, which they seem to be, that can bring us back to the path. What is interesting though, AI, which we I think we all believe will be a disinflationary force, it does feel like it's going to be inflationary before deflationary.
And back to what I was saying earlier, there is a radical issue when it concerns supply shortages, shortage of power, shortage of compute, shortage of labor, you know in a less of a globalized labor mobility world, etc. And this supply shortage I do still think has an inflationary edge to it.
And you can thank you so much, really really appreciate it. This morning with IG and this special edition of Bloomberg Surveillance from Queen Victoria Street in London.
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We continue to be fortunate with Janet Henry, global chief Economist at HSBC and truly a wonderful student of the linkage of the United States with a continent.
In all of these events.
Jennet, you've got to rewrite your global economics overview unfinished Business, get James Palmerroy to work. How do you rewrite the HSBC midyear review.
Well, like a lot of central banks, Tom, we have been thinking about the world with different scenarios, and for our base case scenario, i'd say we actually have a higher degree of confidence than we did just just a month ago because we've been working on the basis that the Strait would start to reopen in the course of June. We were getting nervous that that might not happen, that we would be in our bad or our uglier scenarios. So, yes, we still talk about scenarios, but the news could have
could have been a lot worse. There's still a love that can go wrong, But at least we can look towards some kind of gradual reopening at the moment during this sixty day cease fire, and hope that during that time some progress has made towards some kind.
Of a deal.
So we'll still be fallout from it. But yes, we're still in a scenario overlay, but a little bit more confident on that.
What's amazing about this part. I think we're staggering to day fifty nine, the first day of the sixty day ceasefire.
Yes, and the news has changed three times.
It has changed three times here. I'm not sure where we are, but so Jennet, given you know some of the crosswinds that Tom highlights here, how are central banks reacting? We heard from our Feeder Reserve on our new feederies chief this week, but it seems like they're staying put, but they might be thinking about raising rates at some point. How do you see that?
I think that's absolutely fair. You know, if we go back to even January of this year, or even late last year, we certainly never expected the FED to cut again. We thought there'd be seventy five basis points of easing
and that would be it. The US economy is pretty robust, and obviously we've got the tax cuts already, and relative to the rest of the world, and I do talk relative, it's relative winners and relatives losers, and the US obviously an energy exporter and absolutely at the forefront of this whole AI boom that is underway globally, so is a relative winner, and no central bank at the moment is going to give any hint that they are not prepared to take the kind of action that they might need
to take, because even in a positive environment, we haven't seen the lasting impact of it. At best, we're going to see a peek in inflation, but then get a hump for some time. They've got to keep all expectations very anchored.
Jenn and I've got to go to the stunning elections that we've seen, a set of elections of the United Kingdom, the HSBC collapse of real GDP four percent United Kingdom zero point four percent.
United Kingdom, maybe one.
Point four percent out there in an inflation that goes from nine percent down to three percent is well, what kind of economy will the next Prime minister, whether Starmer or Burnham, what kind of economy will they have?
Well?
I think if we start the year looking back on the UK, things were finally getting to a slightly better At least we had a fairly robust start to the year, without a doubt, without the spike in oil prices, we would have seen inflation below two percent as soon as April. We were certainly looking for some pretty big read cuts in the course of this year. So, unlike for the US, the outlook has changed considerably in the UK.
So it's not an easy.
Palette of choices that face has faced any of our recent prime ministers in the UK, and we've had quite a few in recent years. The fiscal dynamics are not easy. Difficult political choices are going to have to be taken, and you know, any prime minister is going to have to get people on board with making those necessary political decisions and to restore global confidence in the outlook for
the UK. But actually we now think that the Bank of England won't actually have to raise interest rates, even if they can't tell anyone that anytime soon.
HSBC has such a grasp before an exchange. What's your year old call here? Do we have weaker euro from a one to fourteen to sixty three?
Yes?
Actually we do now look for a slightly weaker dollar. Obviously, since the beginning of the war, the dollars have the upper hand. It's been moving with the oil prices, and while some of the oil exporting currencies have actually weakened a little bit, especially the likes of Norway and others. Actually, the US dollar has remained pretty firm on that whole AI exceptionalism story. So we look for a broad based Firmer dollar, and that does include a slightly weaker Euro, even from these kind.
Of levels, Doctor Henry. Thank you so much, Janet Henry. I have to say it. She knows they hate when I say this. The Hong Kong and Shanghai Banking Corporation.
There you go, it's so romantic.
I mean, you got to say it. HSBC. Thank you so much, Janet Henry.
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Joining us now, last time she was on spectacular. Vanya Stavrakova joins us here from the London Business School with all sorts of other good affiliations behind. It is prodigious mathematics from Franklin and Marshall. I want to talk Vanya about, as you say, of you from sixty thousand feet an.
Inflation persistence, slowing growth, geopolitics. The fact is looking backwards, Vanya.
I have a central bank regime, particularly the FED, at a three percent range, nowhere near a supposed two percent range. Are we in an era where we're losing two percent and we're going to a higher inflation regime.
So thank you so much for having me, and it's lovely to join it from the London office. I do believe Kevin Walsh is laying out a completely different playbook for the Federal Reserve, which in many ways I do believe is a positive change. So we are in the beginning of a regime change that acknowledges that effectively the fact has to regain control over inflation because it needs to be prepared for fiscal dominance regime. And I believe that his first speech that we witnessed just a couple
of days ago was precisely about that. Now the job is not going to be easy because even though he emphasizes the importance of regaining control over the broad money supply so effectively, the balance sheet of the central bank, which is front and center in his view of how central banks should conduct montary policy. One thing that he kept mentioning during that speech is that at the moment, the fact that we have such high stock valuations is
probably an important driver of the inflation that we're seeing. Right, we have a key shape growth in the US economy. So the stock market is the more demand there is by the high income consumers that also hold the stock market. And even if you hike interest rates to the extent that the stock market is driven by this AI boom, you might need to hike by a lot in order to put a dent in stock market valuations, which we in turn put a lot of pressure on housing markets
clearly the cost of borrowing for government. So it is a very difficult situation he finds himself in, given that getting the stock market under control is not something that is easy to do or he might be willing to do. But it's an important driver. But this wolf effects an important driver of the inflation that we see in the US at.
The moment, Professor, we know you have some political issues there. The Prime Minister does with the election earlier or yesterday, and up at Birmingham talked to us about the divergence between kind of the past of economic growth in the US versus the UK. What is it all AI or what else is going on?
Well, sadly, the UK has been hit by a number of negative productivity growth shocks. So first of all, the global financial crisis in acted London and the UK much more and much more negatively than the US. Granted that the financial sector was the main driver of growth in the United Kingdom, whenever recovered from that. And you can see it from the pound right, the pound is a
very good parameter of the state of the economy. And after the pound depreciated with the onset of the global financial crisis, it never really recovered against the door and the second big shot whose breaks it. So essentially the UK hasn't really had much of a growth since the global financial crisis. The US is a very different story. We have, of course, the high taxation, the high tax burden, which doesn't help with innovation, creating new job pretention of companies, startups,
attracting high talent individuals. So yeah, the UK is no much more challenging position than the US in that sense.
So here one of the other phenomena over the last several years has just been the decline of globalization, the on shoring, maybe the French shoring and some concerns that that structurally will push global inflation higher.
You describe to that.
Thought, Well, what's interesting is that, yes, we have seen inflation being higher, and probably a big chunk of that inflation is because of the globalization, if you wish. But also what surprising is that the global economy has remained
quite resilient. It is possible that a lot has been absorbed by firms lowering markups in sectors and industries that are essentially more competitive, But I'm not seeing the main issue with inflation around the globalization, at least as of yet, because the facto tarifrates are not as high yet and hopefully it will not be.
Van I'm sure at Franklin and Marsha you crushed your first exam on dynamics stochastic general equilibrium theory.
Clarita told me that said Vinue is down at Franklin and Marshall is just killing it. Vanian.
When you look at the mathematics of all this is the worst FED going to be is post after the fact is the power FED is. The bottom line is you're just going to have to wait to see what the data is like. Mere mortals they put their pants on one leg at a time.
I mean, they will look at the data, but I think they will try to use completely a new set of tools. They will try to push unconventional MONTI policy to completely a new level. I'm not talking about for what guidance quantity visiing. This is old news at the moment. I do believe he is going to try all kinds of new instruments. And you know, it's no surprise that he favors the old regime where we had to required reservations that could be used to manipulate the manupply, et cetera.
You know, he's a fan of essentially regaining control of the BROADGMA is supply. So in principle is that useful. Yes, the more tools you have, you don't have to use a single blunt instrument. Having said that, it's not easy to achieve. So we'll have to wait and see. And it's one thing to say I want inflation to go down to two percent. It's another thing to deliver and you would have to show some actions behind that, any.
Right, Doctor Servakava, thank you so much for joining us today from London Business School.
Really I appreciate it. Stay with us.
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We are honored to bring you now a gentleman who, perhaps more than any American, spans Robert D. Kaplan's The Loom of Time from Morocco over to Persia. Ambassador Puoni Tower is the United was former United States Ambassador to Morocco and is directly involved with many negotiations with an ambassador. Thank you so much for joining Bloomberg this morning.
It's great to be with you both. Ambassador.
I look at this moment at hand, and I want you to take it back to Albert Harani and his definitive one volume on the history of the Arab people is the Arab World from your Morocco to yur Iran.
Is it blown up?
The Middle East has been in a period of incredible turmoil for at least a century, especially following the collapse of the Ottoman Empire. So what we're seeing today is really a continuation of this cycle that has been going on for many decades. Now it's intensified, it's quite for periods of time, but it has been largely in this period of disquiet and unrest for a long period of time.
And of course, as you know, Persia is not Arab, but they have a significant influence on parts of the Arab world, especially through their ties to the Shia communities and their support under this ideological Iranian regime for non state actors like Hamas hasbalah so, including non Shia groups.
When you look.
At Iran and you take it from the span of the seventy nine revolution to the horrific War of the Rock and the balance between the theocracy and maybe a middle class in Iran, where does the theocracy of Iran place right now versus the military that seems so dominant.
That's a great question and that still has to shake out a little bit. Prior to this war, the Islamic Revolutionary Guard Corps, the Defenders of the Revolution, if you will, have had the upper hand in the Iranian decision making process, and that has only been strengthened through this war. The campaign of assassinations, the taking out of the Supreme Leader who's a theocrat. The theocrat if you will, in Iran has been replaced now by his son, who's still untested.
And what we've seen is that the ir GC is in a more dominant position. So the hardliners have been strengthened through this war, and we have to see how this shakes out and whether the theocracy and the clerics will actually take more of a not a backseat, but maybe not having as dominant a position as they once did in the past.
Ambassardor can you give us an assessment of the memorandum of understanding? What's your view?
Sure, I think it's not a very good deal, but I think it reflects a reality, a reality of a war that was started on faulty assumptions, the assumption that Iran was so weak following those massive protests which killed thousands of innocent protesters, that a quick military operation could essentially either topple the government or force it to capitulate.
And neither of those things happen. So war that started on that premise actually has resulted in an Iran that is in a stronger strategic position, and this memorandum essentially will for sixty days reopen the Strait of horror moves, restoring it to the way it was after sixty days. It seems to contemplate the potential for Iran to collect fees, and if Iran is unhappy with US at any time, they can continue to regulate the flow of traffic. It's
not necessarily an on off switch. And they're getting a significant amount of upfront sanctions relief, which will undercut I think the leverage that the administration will want for the second phase of this deal to get into the nuclear discussions.
So I guess that begs the question. It seems like we're no better than we were before the war, maybe worse off. If this strait is now weaponized in the future, how does the US move from here?
That's a good question.
We are worse off. I think Iran certainly has been set back in terms of its conventional military capabilities, its defense industrial base. But the United States has now lost two key pieces of leverage. The use of force is no longer credible because we've shown the limitations of that
and Iran has withstood this powerful assault. And the oil sanctions, which were our most powerful piece of leverage on the sanctions front, those are being waived at this point, and so what we have to go back to is really the drawing board and what the administration can offer now to get to that nuclear deal that we all want to see to constrain their program and to prevent them getting a weapon is essentially incentives incentives of over three
hundred million dollars in a reconstruction fund, and we can have to try to rebuild our alligance structures as well, which are in bad in many parts of the world.
Ambassador to span this from the Arab spring in Tunisia, in Cairo and bring it over to your Morocco where you were our representative in Marrakesh and all of the kings Morocco. How does this war destabilize the distant Arab world? How does this war destabilize Morocco and Mohammed to sixth.
Well, Morocco, I don't think is fundamentally destabilized by this. Morocco's actually this is our two hundred and fiftieth anniversary we're going to be celebrating this year. It's actually a moment to remember that Morocco was the first country to recognize American independence. So this is an old, longstanding relationship. Morocco is an incredibly stable country. It's one of two countries in Africa that has has reached investment great status and it's going in a great direction under a very
progressive king. Now that said, they're having some influence from this. What we're seeing is that sulfur, for example, which is necessary for fertilizer exports, the biggest export earner for Morocco, those have been affected and as a result, Morocco's fertilizer exports will be hurt this year. Moreover, Morocco's no friend of Iran. They've broken relations with them twice. They actually
have no relations right now. Part of that goes back to the fact that they actually hosted the Shaw after he was overthrown, and so they have no love lost and they're probably very concerned, just like many other allies in the region, that Iran is apparently emerging from this in a stronger position. They want to see Iran put in a corner and not having the ability to expand hiss tentacles all across the region.
And Besser Tolmar, thank you so much for joining us today. Paul Swinian Time Kane heard Blowenberg. The former ambassador in Morocco, Peny tallar with US or global strategies and the course of the console un foreign all right relations.
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