To walk us through just the moves that we're seeing there's Nancy Pelosi trip to Taiwan obviously is bringing up a lot of
this kind of GOP politics back to the forefront. How do you see these moves right now. Any long lasting. I mean markets are
not too great when it comes to pricing and you've got risk almost by definition. It's impossible to. Yes and particularly
the timing. Personally I don't see a huge foreign policy reason or motivation for this visit. I do see a domestic politics
dimension which I suspect is driving more of the motivation than than the foreign policy side. To that extent I suspect the spike
in risk premium is likely to be short lived. I mean inevitably we may see some additional response by the mainland authorities
to make their point including possibly an acceleration in flyovers. But I suspect this will be a short lived spike in
volatility. I don't see an enduring risk associated with it but it just adds I think to the overall cloud that covers China risk
more broadly. And I think that's likely to endure perhaps a little longer. Well I mean there are many things to talk about.
I would imagine there's a lot less things that that matter to markets. It could be that. It could be something else. Is it
time to be adding risk right now to China. I suspect those investors wishing to add risk will be
focused more on the policy response we've heard today particularly the focus on a GDP broad target rather than an
explicit defined goal. And of course leaker Qiang guided and alluded to that two or three weeks ago. The fact is that the
government is going to have to unleash a substantial amount of stimulus even to get close to that five and a half percent. And
that's one of the reasons investors are focused on China. There is this broad view that the the level of stimulus is likely to
leak over into the broader market particularly the equity market. I think that's one of the reasons why we've seen such a
substantial outperformance vs. developed market benchmarks since the mid part of March. Admittedly this spectacular rally by the
S&P and U.S. markets more broadly during July has clawed back some of that China outperformance. But you know five six percent
of that still remains. And if investors are in China for a longer
longer strategy then perhaps maybe two to three months. I do think there's upside particularly as we focus on the senior
leadership elections in October November time. John great to see you. By the way just give me a sense of how
you look at the banking system in China and the property sector. The real estate market of course is spilling over. It is. We've
seen these mortgage boycotts and beyond and these things are gathering momentum. Does this
really represent an existential crisis for the banking system in the country.
The short answer is no I don't think so. It's important to point out that China's property sector is the largest single asset
class in the world. And of course the China banking system is essentially funding that the three red lines the so-called
deleveraging policy has put an extraordinary amount of pressure on that sector. But Russia wouldn't be at all surprised if at
some point the three red lines become three pink lines as those leverage restrictions are diluted somewhat and banks and
developers are given a little more breathing space in seeking to bridge this challenging gap that they have. My own view is that
the government has the flexibility and the ownership of the banking sector sector to withstand some of these insolvent.
These solvency challenges. And to that extent I'm not looking at this as a systemic crisis or an existential crisis as you put
it. So I mean hard to see if inflation speak. But is it time to start pricing this pivot from the Fed. Yeah I think the
coincident economic data is telling us one thing and the markets being three to six months in advance is telling us another. So
if you look at the the CPI the headline CPI data clearly that is ticking higher. The market is saying let's look through that.
Let's focus in to the second half maybe even to the first quarter of next year. And we've seen a repricing of Fed on
futures. We've seen a repricing of bond yields break. Even rates are telling us that peak inflation is yesterday's story and
today's focus is very much on growth. And essentially the probability of recession.
But what if whenever inflation peaks and then we just kind of say plateaued at White House how sticky is inflation on the way
down and what happens if it is pretty sticky. And that is precisely the question that is being debated now. Certainly I
think inflation will tick lower. There's no doubt about that. And commodity prices are telling us that supply side risks are
diminishing. But absolutely from a demand side inflation will not go back to the levels we saw pre crisis pre pre cove it and
we will see an enduring premium that the level of which is yet to be defined which suggests to
me that inflation rates are going to remain right. Interest rates will remain elevated. And this stagflation risk I think is
likely to become somewhat enduring if if by that we mean an elevated sense of inflation and at a lower rate of growth. I
mean our Credit Suisse now is assigning something close to a 25 percent probability of recession technical recession. Of course
we are already in. But if you look at the broader definition of being a rise in unemployment and a and and a reduced level of
growth then I think that's something that is more likely. Again the only debate is is a soft landing or a hard landing.
John with all that in mind the US economy does strike one as being a bit of a curate's good in parts terrible in others. No
wonder people are confused and thinking and asking does the Fed know what it's doing.
Well I think that's a reasonable question particularly given the amount of stimulus it injected into the economy at the start
of the Covid crisis. I mean for context M2 money growth accelerated to the levels we last saw in the Second World War.
Now admittedly we've seen a very sharp contraction in M2 since then and naturally we would expect to see
a commensurate decline in inflation. But yes there's been a big debate about whether the Fed is behind the curve.
And I think actually by front loading rates by this expectation that we will get to say three and a half percent by the end of
the year possibly three point seventy five in the first half. There is a sense of that's probably close to the terminal rate.
Rich. And I think beyond that we would start to see expectations ironically of some consolidation and subsequently rate cuts. The
investment advice is what is there also room for I guess let's say 60 40 for example longer dated bonds at this point. Well you
know David the performance of markets until the end of June really was an intergenerational phenomena where bonds equities
commodities except oil currencies against the dollar all traded off the month of July saw that reverse almost entirely in terms
of a complete flip in performance. So absolutely it's very much focused on balanced portfolio construction with a focus on time
in the market because these months like July can whip a portfolio apart and and inject substantial amount of volatility.
So focus we have to be focused on the particularly the benefits now offered by investment grade bond yields have been ticking
higher relative to last year. And this to us offers an opportunity to get invested and focus on investment grade. I
think that's one of the key takeaways.