Irene:

Hi everyone. Thank you for joining today's Office Hours on inflation versus recession: Global Central Banks Walk the Tight Rope, where you'll hear from WisdomTree’s, Kevin Flanagan, Head of Fixed Income Strategy and Jeff Weniger Head of Equity Strategy, who will host our colleagues from Europe, Aneeka Gupta, Director of Macroeconomic Research and Nitesh Shah, Head of Commodities and Macroeconomic Research.So with that, let me turn it over to Kevin Flanagan for some opening remarks.

Kevin Flanagan:

Thanks Irene. We're going to cover all the time zones in our greeting here. Good afternoon and good morning for those of you in the United States. And to our esteemed colleagues on the other side of the Atlantic, Nitesh and Aneeka, good evening, I believe it is over there at this time of the day. Really looking forward to this. The timing couldn't be better. We had an ECB meeting today. We have a Fed meeting in less than two weeks. You had Chairman Powell today, making comments, Vice Chair Brainard yesterday, making comments. In my conversations that seems to be what a lot of people are really centering on or talking about. Walking that tight rope between fighting inflation and trying not to push the economies into a recession, or we'll get to that in a minute, what kind of a recession, but we won't go there quite yet. First up, what we want to do, we already have a question in the chat.We're going to answer that in a second. So we're going to throw up the first two out of three polling questions to get the ball rolling here. And in the meantime, Nitesh and Aneeka, I'm going to throw you guys right into it. And let's take a look at that first question about the dollar being potentially devalued and could it lose its reserve currency status? So Nitesh, Aneeka take us away while we get the answers to these questions.

Nitesh Shah:

Well I can start off. Thanks everyone for coming here today. I guess the problem with thinking about a devaluation of the dollar. Yes, we know that there is a lot more indebtedness in the US. Historically, we know that could put pressure on the currency, but currencies are relative value things. So if only one country is piling on lots of debt, then yes, I think the currency could devalue and become less prominent. But if every other country is following that same strategy, it becomes which one is looking the ugliest of the bunch.And from that perspective, I doubt that the US Dollar will be devalued or will lose its reserve status because every other country is falling down that exact same path. And in fact, the pain felt elsewhere is probably even deeper with the energy crisis being so deep in Europe. And the only way to really deal with that is to put things like price caps and things like that in place that could load up debts in Europe even further, and therefore give more prominence to the dollar rather than it lose its reserve status. But I don't know. What are your thoughts on this Aneeka?

Aneeka Gupta:

I absolutely agree with Nitesh. The dollar is the uncontested favorite currency amongst investors today. It's a safe haven currency. It's remarkable at a time when recession fairs are looming so large, you would imagine that the yen would be one of the strongest currencies, known for its safe haven status, but it's far from it. It's at its weakest point. And again, as you mentioned, if you look at net debt to GDP, it's just ballooning in Japan and that's again a big risk to the currency. So no threat to the dollar at this point in time. If anything, it's just getting stronger.

Kevin Flanagan:

So Jeff, let me throw this at you.

Jeff Weinger:

I'm trying to work the screen share. What do you got, Kevin?

Kevin Flanagan:

Are you ready? You're going to love this.

Jeff Weinger:

Okay.

Kevin Flanagan:

A few years back for those of you in our US audience here, Tom Brady, who some would say is the greatest quarterback of all time, is married to model Gisele Bundchen. And a few years back...

Jeff Weinger:

I remember this.

Kevin Flanagan:

She mentioned that she wanted to start being paid in euros.

Jeff Weinger:

Let's get the euro chart going.

Kevin Flanagan:

Rather than dollars. So Jeff, I wanted to throw that out at you. Give us a little sense here. What's going on in Euro land? Would you want to be paid in euros or the dollar?

Jeff Weinger:

Did I say this one time on a call and you remembered me saying it too? Because, I remember writing about this at the old shop. Somebody needs to help me where. So here's a 20-year chart. And I don't know Kevin, if we planned to have Nitesh and Aneeka on this call with the ECB meeting happening about two minutes ago. But this is very topical because the 75 bps. But I want to say that when Gisele demanded to be paid in euros, it was right here. Is that right? It was something like there, maybe it was right here. Pretty much peaked off the top now. Let me minimize you. I got all of your faces here, blocking my screen. Now this is a 20-year chart. I wonder if it'll go to a full year chart. Let's see if it'll give us a longer chart here on the euro. It's stopping me back. Oh, there it goes, it was just delayed. The sterling chart... Maybe we'll show that in a second is right back at those old Plaza Accord levels. But you can see here, we're still very far from the Plaza Accord here on a reconfigured Euro. The viewer knows, of course that the euro wasn't invented until 1999. But you can take the lira, the franc and the mark and go back and reconfigure it back here at... what is it, 64, 65 cents. So still very far. But this is the action that everybody's been talking about here. And it's critical if you... I'm assuming that the three of you and the viewer can see my cursor here. In this deciding line here for what 10, 20 days, I would say maybe 30 days as to what it wants to do with parity in the grand scheme of things.

It's really not even that of a bold move, but this is one of these things that I at least hypothesize. When you look at this chart, the other one I had was the yen. I'll show you this chart too. When you look at these various charts, let's do a 20-year on the yen. The Japanese don't have any inflation. Surprise, the Japanese don't have any inflation, but the Europeans do. And I'll pull up sterling when one of you starts talking. When we are at 8.5 down from 9.1, on our own domestic CPI, which hopefully we'll get into. And you start to see the extent to which the dollar has strengthened, relative to major economies... This is Japan here. That ship us things or that we compete with or post-COVID reopening, which is happening in Japan right now, or that you travel to.

There is some talk in Japan about, we're going to get an influx of tourists because of this. So we have a lot of moving parts here in the currency markets. And I suspect that with that dollar strength... I'll try to pull up chart after I start speaking. That what we do as a society is we focus on what's Jay Powell doing. Well Jay Powell's hiking raids, and it's going to be 75 bps. We sometimes forget that also there's a tightening happening, not just in Fed funds, but in two year T-notes, in five years, in 10 year T-notes, were at 335 yesterday, I believe Kevin.

But also there is another tightening occurring and that is the tightening in the availability of dollars. We have this strong currency, the dollar is functioning like the Swiss Franc right now. And it's why the Swiss never really had inflation. So you can almost hypothesize... This would be very good news for the Americans, maybe not such good news for the Germans or the Japanese. Is that if you're trying to consider the speed with which CPI inflation may decline, maybe it will be the Americans that will be at the forefront. Let's pass the baton back over to, how about you Kevin? To see where were we? Were we at 335 on the 10-year? I'll stop the screen share and try to populate some bond market charts here while you roll.

Kevin Flanagan:

That's great. So let's go with the questions here. I'll start riffing, as Jeff and I like to say on question number one. And we will have our compadre on the other side of the Atlantic. We'll let them do the riffing for more of question number two, since that actually just occurred today. So how close do you think the Fed is to going on hold? Obviously I think Powell's getting the message across here. It appears as if not close yet. We're still not there. The question is, how far are they going to take this? So it's interesting. I'm looking at some of the comments that we've seen from Fed officials. And for those of you who read our blogs, have tuned into prior office hours. I like to refer to the Fed in terms of their official messaging, the big three Chairman Powell, Vice Chair Brainard and New York Fed president Williams.

The other Fed officials tend to provide their own personal opinions, not official Fed opinions. Brainard and Powell have done an interesting job of really not trying to throw a level out there. However, other Fed officials who are voting members this year, as well as the New York Fed president Williams have thrown some levels out there. Shameless plug, I wrote a blog, for yesterday is 4%, is at a foregone conclusion. And it's interesting, you're seeing more and more Fed speak. Leaning in that direction that they could be headed to 4% as the terminal rate for funds. So you're hearing language, we need to be restrictive, we need to hold policy. It would be a mistake to cut rates or loosen policy too soon. These are all shots across the bow for the market participants out there who had been just a month or so ago, pricing in multiple rate cuts for next year.

Now we all know how this changes. We've seen it before. We've talked about this before from the Fed themselves, when they give us their dot plots, where they didn't look anywhere close to this kind of rate hike so far this year, and look what we've gotten. Could it happen in reverse? Theoretically it can. And Powell's track history is in all or track record. Look at the last time they raised rates to this level, two and a quarter or two and a half in December 2018 by July 2019, they were cutting rates again. So this is just going to evolve. It's just going to go on. But the rhetoric right now from the Fed is extremely hawkish and it does lead you to believe what's your starting point. At least another a hundred basis points in Fed funds is coming. And you could approach that 4%. That would be the way that I would look at this and don't forget quantitative tightening as well.

That's kicking in this month, but that's for another Office Hours. But in terms of rate hikes, I agree. They're not too close. Some of you feel the lion share of the front loading has occurred. I don't dispute that because even if you get to 4%, they went from basically zero to two and a half. So now you only have 150 left to do. So, the lion share may have occurred, but they, in our opinion still have a long way to go. So let me now switch it for polling question number two.

Jeff Weinger:

Before, you do polling question two. Nitesh can you see the 10-year Italian bond?

Nitesh Shah:

Yep. I can see it.

Jeff Weinger:

Okay, cool. So now let's have Nitesh take polling question two and I want to put Nitesh on the spot here and I know he can field this. This is a major issue. This chart right here is a big issue. We're looking at 4.06/4.09 on a 10-year Italian bond. Nitesh, why is this a big issue? And was 75 basis points from the ECB into this a good idea?

Nitesh Shah:

Great set of question you're bringing there. Let me start off with just informing everyone of what happened today. 75 basis points increased, fairly aggressive move and it comes in the context of, yes, there were lots of ECB members discussing putting something aggressive in, but the chief economist Philip Lane was throwing caution out there. Was talking a slightly more dovish tone, illustrating some of the risks around very aggressive move because the economy is on a weak footing. And not only is it on a weak footing, it's very uneven throughout the whole of Europe. And I guess that's really where your Italian bond chart really comes into play. Is that the bond yields in Italy are rising rapidly. And the pain threshold is being felt in a very uneven fashion across Europe. Now the ECB had known this for months going in, into this tightening phase and two months ago launched its anti-fragmentation tools.

So basically the TPI, which is the anti-fragmentation tool basically gives the ECB the ability to selectively buy bonds from countries where the yields are going out of what they feel is fundamentals and try to bring their yields down. But the problem has been when they made this announcement of this new tool, it's generally been quite vague in terms of the threshold conditions required to activate it. It's done through some of that committee process. And moreover they repeatedly say it's a tool that they hope not to use.A tool that they hope not to use may lack credibility in the sense that it may be so deeper crisis, before you start using the tool that it may never be used. And therefore it's just a theoretical thing. And I think that's one of the big difficulties behind this strategy, but for the moment it looks like ECB is pointing towards acting very aggressively, wants to match the... I don't think they'll quite get to where the Fed is in terms of its hawkishness, but at least for the time being, they want to front load a lot of their policy and deliver some pretty sharp rate increases.And another 75 basis points is what they talk about for the next month as well. And in addition to that, they're talking about starting the discussions on quantitative tightening in its non policy meetings. Aneeka I'm sure you've got some views on the rate increases we saw today. And where do you think it's going to go next for next month? Or do you think another 75 basis points is realistic for next month?

Aneeka Gupta:

That's a great question, Nitesh. I don't think we're likely to see another rate hike as aggressive as 75 basis points. I think we are tilting more towards a 50 basis point rate hike followed by 25 basis points. During the press conference. Christine Lagarde actually did mention their more aggressive stance with reference to further rate hikes at several meetings. That could clearly point to at least two more rate hikes. I think there's an unlikelihood of seeing five or more rate hikes to come, but that sentence definitely hinted at a much more hawkish stance that the ECB is going to take. Now, what I found quite puzzling was the fact that they rightly did increase their projections for inflation going forward, which are much higher than the previous projections that they had made. We're looking at inflation rates for 2022 averaging around 8.1 followed by 5.5 in 2023.

And then just around the 2.3% mark for 2024. But what was really surprising is, as far as president Lagarde is concerned, they didn't actually see the Eurozone heading into a recession. That was quite alarming because if the European Central Bank is of the opinion that given the war at hand, given the energy crisis, if they don't believe we're actually heading into recession and they're setting the key policy rates, then that was a bit of a mismatch in my opinion. So I think either just not wanting to confront the reality or just trying to push it forward, that was a bit of a surprise to me.

Kevin Flanagan:

Aneeka, let me ask you this question. So the main refinancing rate, if I'm not mistaken, that's about one and a quarter now, correct?

Aneeka Gupta:

Yes, that's right.

Kevin Flanagan:

Okay. So let's just play this out for a second. The lower band of the current Fed funds target is two and a quarter.

Aneeka Gupta:

Correct.

Kevin Flanagan:

Can you see this spread continuing? Or do you think based upon what you were saying at some point that spread could actually widen, in other words, if we're going to say three and a half, 4%. That would argue if the hundred spread stays that the ECBs going two and a half to three, do you think that's unrealistic or no?

Aneeka Gupta:

No. I think that is a strong likelihood, given the situation that we're in and given their projections on inflation going forward. So I think we will likely at least moving into the first quarter of 2023, maintain that a 100 base point spread.

Kevin Flanagan:

Let's go back to that first question we got from the audience about the dollar. If we maintain that 100 basis points level, is that baked in already or do you think that could have some impact dollar/Euro? Jeff, what do you think about that?

Jeff Weinger:

Well, I'm up here pulling a bank of Canada chart in the background.

Kevin Flanagan:

We don't have any Canadian counterparts on this call, Jeff. Come on.

Jeff Weinger:

I know but I was going to try to pull up an image that showed... Came to my mind was because we're three and a quarter up there in Canada, just showing how competitive all this is. You start to wonder, is the reason Lagarde in Europe is doing 75 because she has to chase Jay Powell. And certainly that's what's happening up in Canada. We had that huge surprise, Bank of Canada is one of the most hawkish ones out there. That it was in July, that they went a hundred bps and they are full force. And what I wanted to think about is, we're trying to keep this very global and think about how all these interactions. I have a hypothesis that I want to throw towards Aneeka.

My hypothesis is I don't think the typical American has more than a really passing knowledge of what's happening to UK electric bills and utility costs. In a massive German industry, for example, there's the mid-sized firms and how natural gas intensive it is. And I think Americans, this would be New York Wall Streeters. I think they get it, but maybe don't fully appreciate it. And meanwhile, in the background with the Canadians doing 75 and a 100, and the Americans doing 75, every time you turn around. What's happening at the bank of England and maybe also tied in with Liz Truss suddenly also in the equation.

Aneeka Gupta:

Well you've hit the nail on the head as far as the UK's concerned. So we're definitely not in a very great position regarding our electricity bills compared to you guys. You're playing it a lot safer. So to start off, we've just had an election within the conservative party and Liz Truss has been put into power. So she's just come out within literally a span of two days with a new proposal. And essentially it has a total price tag of around 150 billion. It's a support package for households as well as businesses. For households, we're looking at nearly around a 100 billion, which accounts for around 4% of UK GDP. And there's further measures for businesses, which essentially takes that overall price tag to around 150 billion. Now, what is she trying to address? She's trying to address the fact that UK households are currently facing a cost of living crisis. To just give you a very simple example, we've just had Ofgem... Which is the UK regulator.

Raise the energy price cap to 3,549 pounds from 1,971 pounds just the last month. What Liz Truss is trying to do is, she's trying to bring that cap down to 2,500 pounds. So the average UK household starting in October is going have a price cap of 2,500 pounds. So, if you try to just get a handle of what those numbers mean. That means starting in October, an average UK household's monthly bill will rise to 208 pounds on the face of it and that's rising from 164 pounds. But if you look within the details, everyone's getting a 400 pound grant paid out over six months. So, that's around 67 pounds per month. So essentially your average UK bill now after this fiscal support package has been put in place is falling to 142 pounds per month from October to March.

So I would say for after this support package, we're relatively insulated from this hit that we would've been faced with, had this fiscal package not been introduced. So what does this mean for Bank of England? Well, compared to the ECB, the Bank of England has been a lot more proactive in terms of, it was one of the first to start with rate hikes even before the Fed and even before the ECB and it's been quite aggressive. But the reality is inflation is continuing to go higher. Again, what this fiscal package is going do is, it's going to lower the trajectory of inflation instead of it being 12.8% in Q4 and 30.3% in Q1 of 2023, we're now likely to see inflation at around 10% year on year.

So we still are expecting further rate hikes from the Bank of England, which just puts the UK in a very tight spot because we've got very high inflation. We still have a tight labor market, but we are seeing businesses struggle overall, and household struggle. The support package puts us in a slightly better position, but the Bank of England has an extremely hard task, that they're actually being faced with right now.

Kevin Flanagan:

So let's turn this in a second over, what about broader commodities in general? So if I'm not mistaken, part of prime minister, is she official prime minister or is it Prime Minister elect Truss at this stage?

Aneeka Gupta:

She's the new UK prime minister.

Kevin Flanagan:

So she's no elect. So this is official. She got the stamp of approval and I believe part of the other part of what she was talking about, was opening up fracking as part of the proposal. And you're reading about what France wants to do in terms of expanding nuclear power in Belgium. What's going on in Germany that they want to close some things, but there is a but in there as well. So Nitesh, for you is this too little too late from a commodity standpoint of what we should be expecting? Is it priced in natural gas, oil markets, electricity? Or is this something that's like, let's wait and see what happens.

Nitesh Shah:

I think it's indicative of an energy policy throughout Europe, including UK. That's just been completely disorganized and not well thought out for decades. And yes, sanctioning projects to allow for more fracking for more drilling will provide a bit more energy, but not immediately. These projects take many years to deliver. And if you also at the same time, got net zero obligations. And in most of mainland Europe, in the EU, for example, there's the Green Deal, which is enshrined into law. They want to reduce greenhouse gases by 55% relative to 1990 levels. It's impossible to deliver that if you're using these other energy sources. So the more sensible thing possibly could have been to accelerate the Capex into the alternatives that would allow for that goal. And everyone can plan along that trajectory. The problem is that there's been loads of promises being made about what's going to be delivered from an environmental standpoint, but without the roadmap and how to get there.

And this is why we're in this problem right now, we are in this energy shortfall. When Russia withdraws it's energy into the European Union... European union produces very little natural gas. Netherlands, which has the largest natural gas field is actually shutting down this natural gas field this year because it's causing lots of earthquakes in the region when they actually pull the gas out. So, that is a real big problem, that the energy resource doesn't exist in the Union. They want to look for alternatives, but going for an alternative that accelerates their existing problem is probably a bit of a full Harvey strategy, but it is yet to be seen. What we are seeing right now is extremely volatile prices. For example, in natural gases, you can have one day where prices are 25% followed by the next day, where they're down 30%, that's the level of volatility we're seeing right now.

Kevin Flanagan:

So that we've just got a comment and a question come in and it's right up the alley of what you two are talking about. So the first one is more of a comment. Given the unique structural problems in the EU. I'm going to ask the question based on the comment. Should the ECB perhaps rethink future rate increases? And then the second question was, with this potential energy rate cap in the UK, is there a concern consumption doesn't demonstrably decrease? So let's see what you guys think about that. Don't be shy. Come on.

Nitesh Shah:

Let me start off with the second one first, because it links into the energy point. I guess the old adage is, the cure for high prices is high prices, that we need some demand destruction to be able to get the balance right. And so if you don't have sufficient amount of energy, the high prices could encourage lower consumption and therefore get markets into balance. Now, if you are providing some sort of subsidy that doesn't achieve that goal, you get over consumption, but let's look at the uniqueness of this problem. If households, especially poor vulnerable households, can't get access to energy. That means that they can't heat their homes. They can't cook their food. There is a humanitarian problem that the government has to step in and address. Otherwise, there will be anarchy. There will be a social uprising.

And we saw a glimpse of that a few years ago in France with gilet jaune movement. So I think for political stability, this is almost an essential, but how exactly do we really reduce energy consumption to match the supply is a difficult question, but how on earth you do any of that without avoiding a recession is also the more difficult thing. And I think looking for alternative supplies of energy is the key aspect. Two key things that could help on that front, the US, which is the large natural gas producer. It can export more when it's export facilities are up and running.

There is a big LNG terminal in the US, which is offline because of fire that started in June. It's supposed to come back online in November, so that could get more shipments out from the US. And that's close to 20% of USs export capacity, which is a large amount. Also storage facilities in the UK. There's been a big storage facility that's been offline since 2015. And that is about 70% of our storage in the UK. Which is hoped later this year, going into next year. That could help on that front. Maybe just addressing the question right in front of me.

Kevin Flanagan:

Aneeka, Why don’t you come in on the ECB. Should they be rethinking rate increases?

Aneeka Gupta:

Yep. I think they did allude to that at the press conference, Kevin. One of the key questions that were raised when the decision was made was everyone was quite startled by the fact that president Lagarde did not actually acknowledge the fact that we are heading into a recession quite unlike Governor Andrew Bailey at the Bank of England. But during the press conference, she did allude to the fact that should we actually witness a growth slowing down quite dramatically, that would put a pause to rate hikes for the whole of 2023. So we just essentially pause after the following two hikes that we get in the next two meetings and then for 2023, we'd be on hold. So I think they are aware of that and they would definitely be on hold for the whole of 2023 in that scenario.

Jeff Weinger:

Let me just tell the viewer a few things, ways that you can get access to Wisdom Tree. We won't mention any tickers here because we got our British compatriots here and we don't because regulations do tickers on the calls that they are on, but please hit the website and invest with us. Of course, we would love to have your business and we've flattered every time someone goes for one of our ETFs. What you're watching is called Office Hours. And we just start talking about things. The next thing I want to talk about is the US housing market, which I think is very relevant to the question of whether or not Jay Powell can keep going. What do we have? We have Kevin's got the Basis Points podcast. You can find several of us on Twitter, the white paper that I was scrolling through maybe 10 minutes ago, if you saw that, that's our new white paper. We just put that up there today. I think we put that on the website. It was wirrten by the four of us. You have the China pod. You can find that as well. That's from Liqian, that's on the website. You got the Jeremy Radio Show with Jeremy Siegel, that two Jeremys. That on Fridays on Sirius XM, 132. The blog, Market Insights. It's like seven or eight different ways, whether you like to listen to us or read stuff. We have a lot of material and there's a new blog everyday. So, that's various ways that you can find us. Now the six month change in new home sales, is that something like the worst we've ever seen or what is second or third lowest rating is down 29% from six months ago in the US housing market. Now some other things that we know, I know we're not supposed to talk about Canada, but up there at the Toronto real estate board, Kevin. Home prices are absolutely dying up there in greater Toronto.

And I've pointed out in the past that Toronto's influence on the Canadian economy is like New York times three, because it's a sheer population zone up there. Meantime, I saw the other day that Sydney and Melbourne had home price declines on a matter of 4,5, 6% month over month. Sydney and Melbourne being very, very notorious. A lot of Chinese money that had always come into Australia trying to find a haven, get it out of China. What are we going to do? Put it into an apartment in Sydney, right? This is exactly what's happened on our own Western seaboard. It's just like, get it out of Russia, put it into Miami, get it out of Venezuela, put it into Miami. This is how home prices levitated down in South Florida for the last 10, 20 years. We watch it unfold, that Miami is a global city now because of all this real estate money that's been parked.

Now, the question is if we backed the envelope, that's this the US housing market peaked. Is it going to be like 07. There's not the ninja loans, no income, no job, no problem, go ahead. Here's a 100 cents on the dollar loan. There's been a lot of cash buyers. People actually have to put 20% down, but housing is now slowing and probably in net deflation, it'll probably start showing up in the case shiller metrics soon. Everything I pull up the state of Illinois saw 4% month over month, home price declines in July. State of California, the most populous, just really ugly, certainly in Orange County, relative to what it was. Which was basically like a NASDAQ stock on the way up. So who knows? It's not like even if you retrace 10, 15%, you're back to home prices where you were a year ago or even earlier this year.

But you really start to wonder, can Jay Powell... Who was saying this, was it Brainard? This morning. Was it this morning or yesterday? Kevin talking about four on Fed funds. You wonder how high they can go. A lot of people are getting quoted a six, want a conforming mortgage end on jumbos. Some people are getting quoted five and a half. They will see if the 10-year T-note wants to oblige and be friendlier to the mortgage rate. But for now it really seems difficult to tighten into that. Maybe I'm just more bearish on housing.

Kevin Flanagan:

I think it's a good time, Irene throw that last polling question up because this all ties in together. Thank you. Are the markets fairly priced for further rate hikes? So we'll take it here from the US and we'll pass it to our euro colleagues in a second. So back to the thoughts of 4% Fed funds, I would argue treasuries are not priced for that. You can't have a 348, 2 year note and we're going to 4% on Fed funds. Rates are going to have to go higher. And here in the US, in that kind of an environment, for sure. The question I think that you pose Jeff is... It's all going to come down to I think 2023. Is going to be, does Powell and Company have the courage of their convictions? Are they going to continue to tighten or not cut rates? In an environment where the chinks of the armor that we're seeing now could become far more worrisome potentially in 2023?

Or are we just going to be talking about a shallow recession. Shallow recession to me based upon their comments, it seems as if Powell, Brainard, Williams, it's just like, we're going to keep going. We want to take air out of the balloon. Notice, I didn't say bubble. We want to take air out of the balloon and that's what they're trying to do. And I think they're probably a little discouraged right now here in the US, the Fed. Because, financial conditions have actually loosened from where they had been tightening before. You're seeing the stock market no longer down 500 points every day. Yes, I'm a bond guy. So I quote the Dow. That's right, Jeff, don't hurt me on that one. But I think for us, the bottom line message here for investors in the US, is we're still not there. Don't chase duration yet. Curves are probably going to continue to flat or invert from where they are right now.

If you believe the Fed and they're going to three and a half, 4% beyond the shadow of a doubt. So in our opinion, it's not time. There's the law of diminishing returns. Why would you move out in duration if there are risks going forward. If you can clip the same or a better coupon in something that's a little bit shorter in terms of duration. So I wanted to throw the question back to Nitesh and Aneeka. Is it a similar thought process in Europe that I just outlined here in the US? We saw the Italian 10-year BTP. We've seen where the 10-year bond has gone this year. Having those conversations? Are clients saying to you, as they have to us here in the US, "Hey, is it time to start looking at duration?" Are these questions you're getting? And even if you're not, what are your thoughts on what we should be doing on the other side of the Atlantic?

Nitesh Shah:

Aneeka, I can start off here. I think being so early in, to the rate hike cycle for the European Euro area, I think thinking about duration is probably a little too soon. We are nowhere near that tipping point where going further in the curve, it makes a lot more sense, because there's a lot more pressure on the short end for right now. And in terms of broad evaluations, I think we could be in for a bit more of a shock just because the uncertainty levels are just so deep right now with the energy crisis in the background. But one thing I would say is that we talked a little bit about fragmentation of the European Union and Euro area in particular earlier on, but there're reasons for, I think that the Eurozone could come closer together in some ways, because of the crisis itself, in the sense that more and more countries are having to load up on the debts.

But in the past it'd been the case that countries like Germany had a very strong current account surplus, because it exports more out to the world than it is importing. But right now with this energy bills, having risen so much, it is really in danger of going into our current account deficit. And becoming more aligned with the parts of the European Union. And therefore the policy that's delivered may actually be matching all members more in this current rate hiking phase, we've seen in the past. That's a thought to leave with. What do you think of that Aneeka?

Kevin Flanagan:

So Aneeka, before you answer that, wait a second. So Nitesh, are you trying to tell me with this new program that the ECBs trying to potentially prop up, what everyone thought were Southern economies is Germany? They're going to have to start buying boons instead of Italian paper. Is that where you're going with this?

Nitesh Shah:

I don't think it'll go to that extreme, but at the margin, the ECBs wish for never actually using the tool that is creating make them true just because everybody's problem is getting worse. And the rate to which Italian problems are getting worse may not be that farther away from the rate at which Germany problems are getting worse. But buying boons, I'll probably put that off the table right now.

Jeff Weinger:

I have to direct Aneeka towards China because we're at 45 minutes past the hour and we must cover China. Aneeka open-ended tell us about China.

Aneeka Gupta:

Well Jeff, the key thing is with recession, risks looming so high. Typically, everyone will look to China to bail the world out. So this time China's not bailing the rest of the world, China's got its own problems. It's grappling with its own domestic issues. Now the only plus side for China, is it doesn't have the problem that the rest of the world has, which is inflation. So it's not having to deal with high inflation and hence it has a lot more cushion to actually continue to maintain a much more accommodated monetary stance, but it's still not going all out because it can't go all out because the rest of the world is tightening so much. But at the end of the day, everything that China put forward in 2021 of cracking down on disciplined leverage, on the common prosperity rule, it's all being dialed back on because it's backfired on them.

And what we're seeing now going forward is they're trying to do everything to help the property sector. The other key thing is, and that's why we saw oil have such a steep fall in the first few days of this week, is because what China was essentially trying to do was rebalance its growth model. It was trying to move away from that well known export model and rebalance the economy to more of a consumer led economy. Now with all of these stringent COVID lockdowns that have been happening, that isn't progressing as smoothly as previously designed. And hence we've also now started to see exports slow down because the world is slowing down and that's really hampering China. So what does China rely on? What does it do? It will have to do everything it can to prop up the property sector, provide that leverage in more organized parts of the economy within the property sector because it accounts for such a large portion of GDP.

And at the same time it'll have to help its technology sector, which again is a very important part for the Chinese economy and try to not be as stringent in its regulatory stance on the tech sector. So I think that's needed. And I think that's what the world is really worried about. And we definitely see it amongst commodities. Commodities... Especially in the industrial metal space reflect that fear element that demand from China is weaning. China isn't bailing out the global economy. So, who is bailing out the global economy. It's actually the US, which is why you continue to have that whole case stance on monetary policy. The jobs market still remain strong. Yes, housing is taking the first hit and housing is taking a hit in the UK as well. Housing has taken a massive hit in Canada, as you rightly pointed out. But the truth of the matter is China isn't here to bail out the rest of the globe and that is a serious problem, I think.

Jeff Weinger:

Interesting. Nitesh.

Nitesh Shah:

I mean think that's the thing with China. China has come up with lots of headlines about it's going to push out more infrastructure programs. The PBSC has been in leasing mode for a while, but it doesn't seem to be doing enough because part of its problem is, it's got the zero COVID policy. With one hand, they're trying to lease some policy, but zero COVID is a tightening policy. Shutting down entire cities, inhibits economic activity in a very meaningful way. And on top of that, China is also a victim of the energy crisis. It's having to shut down lots of its production facilities because energy prices have increased. On top of that, it's had a very dry summer and so electricity production from hydro has really knocked off as well. So the combination of the energy and climate crisis that's causing these droughts is putting a lot of pain. So all the fiscal loosening has to almost being double, triple effort with very little efficacy so that puts a lot of pressure on China at this point in time.

Kevin Flanagan:

Irene, if you could call up the results of the last polling question. Jeff, let's let have you give us the last word, essentially looking at this polling question. Your thoughts on this, because we're right up on the 50 minute mark, almost here.

Jeff Weinger:

We'll have to wait till next time for me to ask Aneeka about the very real issue of trying to transport goods down a dry river. This has been a major problem for the Germans, major problem for the Chinese here with these heat waves. We'll have to save that for another call. All right. Poll question number three was, the global stock and bond markets fairly priced or further rate hikes? Yes, got 57%. No got 43%. Well, I guess it depends on whether or not you think the further rate hikes will come through and the markets are mispriced or whether you think that the markets think that we won't get that many rate hikes, that's the other part of that equations of markets. That's why the four of us absolutely love this. Let's leave it open for anybody to comment on that question. And then we'll go ahead and wrap up at 51 past the hour here.

Kevin Flanagan:

I would only go back to what I said before in terms of the bond market. They're not priced for 4% Fed funds at this stage of the game. So I think three and a half, okay. I can live with that one. But still I think even with three and a half, you probably still need to see higher rates at the front end of the curve, but not 4%.

Jeff Weinger:

And thank you to the person who pointed out that Gisele demanded the euros in November of '07. I believe that the Euro did end up peaking in the summer of '08 or thereabouts. Unfortunately it also came across that the queen has passed while we were on the call. So very bad news on that front. Aside from that, focusing that here on the point of the call here, we want to thank Irene Webb off camera here and our two British compatriots Nitesh Shah and Aneeka Gupta. For Kevin Flanagan, I'm Jeff Weniger, this was called Office Hours. We do two or three of those per week. It's on various topics. This was basically big macro picture. Sometimes it'll be a Fed reaction call. Other times it'll be something about artificial intelligence or something like that with specificity. So just go ahead to the website, look up Office Hours and look at the calendar and go ahead and tune in. Thank you both. We appreciate as always.

Aneeka Gupta:

Thank you so much.

Jeff Weinger:

Kevin, great to see you again. Excellent comments. Thank you everyone. Bye.

Irene:

Thank you.