Bloomberg Markets it is still about inflation, it is still about the Fed so
far, has the Fed managed contain inflation with the multiple Senate 5
moves that we've seen so far? Well, clearly inflation is not where
they wanted to be. So it's clear where the journey goes to
get to continue to tighten interest rates and try to get inflation down.
I think the real question is at what cost?
Right. So this is really not about whether they
can get inflation down. It's about what the tradeoff is of doing
that in terms of the cost in the real economy.
Let's talk about that cost and damage, because we have Paul Marshall saying
that, you know, the UK pension fund crisis is just the first chip to fall.
Take a look at what may happen. What kind of damage might we see in the
months to come? I think the key problem here is that
disinflation is caused principally by supply side considerations, by supply
forces. And that means you have to really hit
the interest rate sensitive part of the economy very hard in order to realign
aggravate supply and aggregate demand. So the cost is going to be much higher
than you would typically see in a normal business cycle.
And that's going to be the challenge. And until the market knows how the Fed's
going to deal with this trade off for how central banks generally are going to
deal with it, I think the market remains on guard and remains uncertain.
And what's been priced in from what you're seeing from asset classes right
now, the prices we're seeing right now, because we have the likes of Mark Mobius
saying that, you know what, rates can go as high as 9 percent.
Well, you know, this is sort of the game that every week we seem to be pushing
rate expectations higher. At the moment, I would say we're
probably looking at a kind of priced in end rate of somewhere close to 5
percent. And to the extent that there is
uncertainty on that, that's what keeps the market on its toes.
And we said earlier that BlackRock sees market recovery longer than other
economic downturns. One.
Why is that, number one? When might that be?
When will we see bottom? What might be the trigger?
You know, the key reason is because this is this inflation is driven principally,
as I said, by supply side forces. And that means the Fed just has to be
all central banks have to be that much tougher if they want to get inflation
back to 2 percent. It really means, you know, you need to
crush the interest rate sensitive part of the economy.
If you want to realign this quickly and get back to 2 percent.
And I think this is where the debate is. Is it worth the price of doing that to
get inflation back to 2 percent, or do you at some point have to say the cost
is too high and you have to tolerate some inflation while you let the supply
side heal? That's that's out of the question the
Fed will face at some point early next year.
And in the meantime, the dollar at 20 year highs will remain elevated for
quite some time. How long do you think that will be and
where's the biggest pain that we'll see from that mighty dollar?
Well, I think, first of all, this is very hard for emerging markets.
That's clear. It's going to be hard for.
For the US economy. It's hard for the world economy as a
whole. And then the question comes, as you
tighten policy, whenever we have a cycle and remember, this is the most
aggressive tightening cycle we've ever seen already at this stage.
And that raises the question of what else appears of vulnerability points in
the financial markets, in the financial sector.
And as we've seen, LPA in the UK has been one flash point.
And I think the market rightly worries. Will there be others as we proceed on
this on this very aggressive tightening cycle?
When we talk about pain, you've got to take a look at the pain in UK assets.
We're seeing some stability in the killed in the pound is the worst over
for UK assets. I think, you know, the UK story is quite
an idiosyncratic story. The UK has suffered a huge supply shock
in the last couple of years. Just to give you one number, the UK
economy at the time the Brexit referendum was called was about 90
percent of German GDP. Today it's 70 percent of German GDP.
So stimulating demand in an environment like this inevitably raises interest
rates, which is exactly what's happened. They need a growth strategy.
But the growth strategy has to come from the structural side to improve
structural conditions. You can't stimulate demand when you have
that much of a supply shock that the country has been through.
And so I think, you know, with with the new policy orientation, hopefully the
new chancellor can bring stability back into the marketplace.
Then the government can focus on a growth strategy that is focused on the
supply side as opposed to simply stimulating demand.
And how do you look at UK assets? There's a credibility issue now, is
there not? Given the political dog's breakfast that
has been Britain in the last fortnight. Yeah, you know, I would look at the
United Kingdom has strong institutions and we're seeing this at play.
The Treasury is a very credible institution and I think the market is
now going to look at this new budget outlines that are being provided.
Clearly, there's an attempt to re-establish long term fiscal
credibility. This is something the UK has enjoyed in
recent years. The market got unsettled by this demand
focus stimulus policy. But so we can be hopeful that the
credibility of the institutions will in a sense, re-establish themselves.
And this can lead to stability in the marketplace, which is very important
given this is overall global environment, as we've talked a minute
ago, about uncertainty. So it's important that the chancellor
succeeds in re-establishing authority and credibility of the institutions of
the policy apparatus as a whole. As we talk about uncertainty, I want our
pivot to China. There's so much uncertainty there in
terms of growth. It's already delayed its economic
announcement in terms of its data, including the GDP.
How are you assessing the slowdown in China?
Well, it's clearly China is part of the global economy.
Remember, we have a huge trade balance with with Europe, with the United States
or China remains deeply integrated in the global economy.
Can't isolate itself. This is part of the broader story.
I think the big challenge here, nobody has been to China.
Chinese policymakers haven't been to the rest of the world.
I understand there's a delegation coming to Singapore for the first time next
week. That's very important.
So I think the key problem is we don't really know.
We've lost contact in a sense with China, which makes it very difficult to
assess what's going on in terms of economic policy.
We see the politics as we watch these days.
That's clear. But I think the key question the market
will focus on is what is the policy direction?
What are the structural policies going forward?
What are the cyclical policy going forward and what are the pandemic
policies going forward? And hopefully the next couple of weeks
we'll get some clarity in all three dimensions.
That's what the market really is focused on at this stage.
And Philip, as you've write, a Hong Kong guy, you mentioned pandemic measures.
There's a lot of questions in the market about where 0 Covid strategies are going
to go next year.
There's indications that maybe retiring a second, third quarter because he's on
relaxation. Is that going to be the key swing factor
for it, for the economy, the global economy and for markets to really kind
of sink their teeth into for some sort of rebound?
Is that the real catalyst, you think? I think it's all three.
As I mentioned, structural, cyclical and pandemic measures.
We know from from the experience of of all of the other countries in the world
that every country has had its distinct way of dealing with the pandemic.
So that's that's, you know, the reality. We've seen different results, different
approaches, different timing. Certainly China's on the extreme outlier
of this. But but these differences, how countries
have dealt with the pandemic, we've seen that across the world.
It is true that, you know, sort of ending extreme pandemic measures would
be a very big factor and in many ways a
precondition for the rest. But I want to emphasize that these three
dimensions are all going to be important in the years to come.
What happens on the structural side? What happens on the cyclical side and
what happens under pandemics? So I think it's we really need to have
more clarity on all three dimensions going forward to have a full picture
of what we can expect from the Chinese economy in terms of contribution to
global growth in the years to come. Phillip, no shortage of crises,
including at Credit Suisse. It is embarking on a strategic review.
Why is BlackRock still a shareholder in Credit Suisse?
Well, we know, as you know, we have a very large index business.
Credit Suisse is still in most indices. And so therefore, many of our clients
are still invested. I would also say it's you know, I'm sure
many feel this is an attractive level to reenter.
The question comes down to a business model question.
I think this is what we've seen across European banking.
At the end of the day, if you want to attract investors, you need to have the
right business model. And this review, in my mind is all about
clarity on the business model. This is what's been in many ways
haunting the European banking sector for quite some time, with some notable
exceptions. BNP, I think is the one that stands out
is the question of what is the right business model for for the European
banks going forward. And that, I believe, is going to that
the critical question in terms of the review as it gets released.
Okay. With credit and I know a lot of pressure
perhaps to spin off certain businesses. I mean, one thing that's being touted.
Is that they're considering the sale of their US asset management division, who
also got their securitized products group.
Would BlackRock be interested in a purchase here?
You know, we're not going to speculate. I refuse to speculate on this until we
actually have the presentation by the CEO in a couple of days time and then
the market will assess what comes out of it.
And so will we. I think, again, that the focus is not on
on intricate details, but what is the basic business model proposition that
this review will present? I think that's the key question.
And that will be, I believe, the determining factor in terms of how the
market views the potential and have enough capital at this point in time.
Is it a sense you're getting? That all depends on what they did decide
to do, right. This is why I think all the speculation
right now is pointless. We should wait and see what they tell
us, what their business plan is going forward and what the business model is
for Credit Suisse. That's I'm convinced this is the part.
This is the uncertainty around the business model that has really been
dogging the Credit Suisse.
And in many ways, it's been the broader issue in European banking.
So I look forward to this moment when hopefully we'll get clarity on what the
business model is. And then,
you know, we will see the market. We'll see what opportunities present
themselves. Just one final question before we let
you go. And ESG has been a lot of pushback.
What's been the response? Well, BlackRock remain committed to
clean investments. We are committed to our fiduciary duty
where we see risks, whether it's interest rate risks or sustainability
risk, climate risks, transition risks. We take these risks into account.
This has been our principal from the very beginning.
We need to underpin all this with a solid analytical research framework and
then react that where we see risks emanating and risks coming out of these
investment strategies. And that's our duty.
That's our fiduciary duty. That's what we do on behalf of our
clients. And that's what we will always do going
forward. Climate risk clearly is a risk for
investors. And so we'll continue to focus on it.