>> looking at the market reaction, the higher inflation is a game changer. >> a great deal of inflation we have experienced doesn't have a life of its own. >> we are going to bounce around

until we get validation that inflation is coming down. >> it is not a matter of if there is a recession, it is when and how much. announcer: this is "bloomberg surveillance" with jonathan ferro, tom keene and lisa abramowicz. a most unusual tuesday, the market on the move that it is a tuesday of international relations. in two hours plus, the speaker of the house is scheduled to land in taiwan. people looking at flight radar of the trip from singapore through the philippines to taiwan. jonathan: local reports indicating touchdown, something about 10:20. we are all trying to work out how china is going to respond to this. we talked about how china had 35 food exporters. you're going to see more of that and something more direct, specific cap united states.

tom: and maybe even something like canceled plans of a biden-xi meeting? maybe even september. you really wonder of the upset and the ramifications of this for global finance and wall street. jonathan: we've been talking about tariffs moments ago. let's be fair, that is taking a backseat. the other issue for me, back in spring, speaker pelosi was do to go to taiwan. yes, we got some pushback, but i don't remember this type of rhetoric, i really don't. what experts are telling us is that some of this is linked back to what has been happening with ukraine and have china has come close to russia and increased chance of whether or not this will happen. and again, the economy, bigger and bigger. tom: michael wilson of morgan stanley scheduled to be with us.

the taiwan president website under attack from 5:15 p.m. that is an official, just one of the distractions here. i want to dovetail fixed income into the cautious view and we begin with spread compression this morning that is extraordinary. jonathan: equities lower, yield lower. i think it is important to frame it this way. lower yields and support from lower yields, and then you start to work out why yields are lower. yields are lower because the perceptions have froze in this economy. at some point, that is going to affect the lower earnings. tom: you saw it in your space, yesterday the ig of ig was apple, and the 40 year piece was ruined, 150 basis points over

treasury, and they got much, much more attractive terms on that, down to 118 basis points. what does it say about quality and the fixed income space? lisa: some people have said this could be a peak if they are trying to get in and borrow money at this point. what i will say is that you are starting to see the market revived in force. companies borrowing after the rallies we saw in july. how much is it trying to get in while the getting is good? tom: listed data and then i want you to bring in mark wilson. jonathan: equities down 6/10 on the s&p and nasdaq. you see it in the bond market, yields lower by a couple of basis points. a stronger japanese yen. joining us now is mike wilson, the chief u.s. equity strategist

over at morgan stanley. over the weekend, you used the word dream. why is that dream misplaced? >> i don't know exactly if it is dreaming, but the phrase we used was really just trying to imply that we have this window of opportunity for equity investors, where rates are coming down and you can interpret that couple different ways. as if the fed is close to being done, and they are going to be able to pick up the for the next recession arrives, and that window is always positive for stocks. i think it is premature to say the least. i also believe that when they do. or pause, that is on the growth side, and we don't get dogmatic

with these, but then we get back to the framework which suggests it is pretty full given everyone growth. tom: when you have been leaning on is a divide between service sector equities and goods kind of equities. how sharp is the divide between caterpillar and apple computer. >> well, you make a point that there are potential goods, that some are more extendable than others. this is the exact same way we skewed ourselves more defensively. we like companies that have things that you need for everyday life, the kinds of stocks that have been doing well. the volatility in the growth is not that volatile and they can deliver on the earnings when uncertainty is going to be higher and for all of these things that we over-consumed, it

is pretty obvious that that is playing out. lisa: you have gotten the playbook so write this year and you deserve a real congratulations for pinpointing where we are and how we see rallies. where do you see the trade when it comes to energy, given that it was one of the big calls in the first half of the year, the inflation protection at a time when now, it is really raining spring. >> those are nice comments, but energy is one area we completely botched. i think that energy now is vulnerable from an equity standpoint if you take the view that a recession is commodity complex technically is telling us it is nonfood.

we are seeing demand across the board. but the charts don't lie and they are telling me that when we see the fees and commodities, they would be neutral on energy and quite frankly, a little bit too long at this point. lisa: how much do you take a pushback that earnings have been better than expected? yeah, there are potholes here and there but for the most part, companies are adjusting and adapting and moving forward. >> some of these are really good at managing, but what they are not good at doing is forecasting earnings over the worst of 12 months. in our experience, particularly a major turning point. the bar gets lower, they jump over the lower bar. we do a pretty good job of

forecasting macro. if this drip, drip is going to continue, it will probably be more of a drop as a recession. don't get mesmerized by the very near term data on the earnings. that is maybe better relative to the managed numbers. you have to take their own view at these point. you can't rely necessarily on what companies are saying or communities are saying. our view is very clear, the earnings are going to be much more negative than what we have seen the last two years. jonathan: what do you say by people midst -- mesmerized by the bond market movie scene. -- move we have seen. >> the market has been infatuated with inflation when

it became obvious in the fed, and that was really the story in a q1 up until about may, june. that was a time to give it away from that and start thinking about what is growth going to look like. we think it is a great hedge against the equity portfolio right now. jonathan: also dictate you want to show this morning, thank you now. bonds over equities over at morgan stanley right now. >> there's a lot of people that got that right. the dynamics when you look at the bloomberg screen, it is amazing to see some of these statues and particularly, the general statement curve flattening. over at citibank on caterpillar, he said the earnings were there, but they were light. i think that is what mike relative morgan stanley -- mike

wilson of morgan stanley alluded to. it is the quality for the conviction of belief of the earnings will be, and there is one important stock with earnings. jonathan: lisa, can we see more of that in the second half of this year? lisa: he thinks probably people are too long because the charts don't lie and he sees a peak and commodities and a rolling in this. this really goes to the heart of the issue right now, which is the only way for the fed to combat supply had been driven in vision is to curb demand in tandem with how much supplies are down, and we don't know what that is going to do, but it is going to be bearish for a whole host of industries. jonathan: this market needs to focus on the damage done to growth in the meantime. futures down 6/10 of 1% on the s&p. yields lower by a couple of basis points.

the focus on potentially landing in taipei with speaker pelosi on board. that landing could take place in around about two hours from now. from a beautiful new york city, this is bloomberg. >> keeping you up-to-date with news from around the world, nancy pelosi is set to become the highest ranking american politician to visit taiwan in 25 years. she is doing so in defined the chinese threats. china regards taiwan as part of its own territory and the government has vowed there will be an unspecified military response to a pelosi visit. president biden called a u.s. drone strike that killed one of the members of the 9/11 attacks. he was the leader of al qaeda according to a senior ministration official.

three u.s. states with monkeypox outbreak. california joined new york and illinois in announcing its the rising infections. roughly 6000 infections here in the u.s. second quarter revenue more than doubled, beating estimates. and a leisure travel boom. second-quarter quarter earnings beat estimates. global news 24 hours a day on air and on bloomberg quicktake. powered by more than 2700 journalists and analysts in more than 120 countries.

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>> what i expect is just more ongoing in the weeks and months to come, this increasing pressure on taiwan, the exposure of economic pressure, and we will see some of that in terms of the u.s. as well, which is

actually remained strong up to this point. jonathan: speaker pelosi reportedly heading to taiwan and touching down in the next two hours. that was the codirector of the ucl center on u.s. politics. from new york city this morning, good morning, here is your equity market. some risk aversion out there, futures down six tense or 7/10 of 1%. no major moves here. yields are lower by a couple of basis points, a continuation of what you've seen over the last four days or so area yields down five straight sessions. tom: this is what 300,000 plus people are doing now, looking at slight radar on their phones and looking at the plane that speaker pelosi is possibly on going around the south china sea. jonathan: this is going to go from malaysia, over the philippines and then it is going

up to taiwan. you can't see it, but seriously, that is what 300,000 people are doing now, looking at an air force plane. jonathan: i was doing the same thing this morning. tom: with the gulf stream i have to have it. because with the gulfstream, you got to know where you are. i've been looking forward to this all morning. i am absolutely fascinated by what the newt gingrich republicans do with this trip. uni sat on the couch in 1994 in absolute shock at what gingrich and the gop did. we come forward this many years and the republicans have to respond to this moment with the democrats are from san francisco. how will they respond?

>> i think what you had in u.s.-china, u.s.-taiwan policy for many years now, i would go back to kind of the last couple of years of the obama administration, a great deal of bipartisanship moving forward. you will remember that throughout the entire trump administration, the u.s.-china policy, u.s.-taiwan policy was very unified. it continues to be unified. and i expect it to be going forward. this trip and china's belligerence about it also provides an opportunity for the united states, frankly, to continue to update its china policy. the term always has been a strategic ambiguity. recently we had a lot of ambiguity and maybe strategy that just got lost a little bit.

the president unilaterally started talking about defending taiwan, speaker pelosi strip -- pete -- speaker pelosi's trip is done certainly without the public concurrence of the white house and there's a lot of people in congress on a bipartisan basis again who are pushing forward to try to update china and taiwan policy and we will see how biden gets involved in that and whether he does. tom: let's build on that. the areas of agreement or disagreement, where are the areas that you expect to see clarification in the u.s. and china policy, that you think would be significant for companies, for investors and frankly, rank and file who are trying to understand what is going to happen? >> that we start with the end. i think there has been a great benefit in the strategic ambiguity policy in the united states, but there's probably some benefit in additional

clarity here now, too. and what senator menendez, senator graham and others are trying to do, frankly, is to start a debate about exactly how to update china policy with the idea that more clarity for the united states is a good thing. if there is additional clarity, that is probably good for markets. you have some idea of what the guardrails are, some idea of where it will go and where it won't. and china will understand that and the idea is maybe it will respond in kind and there will be more clarity on both sides. that may end up being a good thing. tom: the idea -- lisa: the idea of possibly lifting some of the tariffs on chinese goods, is that basically off the table? >> i think it pretty much is, but whether or not it is, the markets should not look for any kind of major moves on tariffs.

the biden people have been signaling that, firstly. secondly, they've taken a year and a half to get to a position where they may have a decision in the future. that is not something that goes well for markets. certainly, anything other than completely lifting tariffs doesn't provide any inflationary impact. so markets shouldn't look for that either. jonathan: your perspective on the show, this is something we weren't really thinking about back in spring when speaker pelosi was considering a major movement for the change. it is the change in the way china was talking about it, which has changed in a big way. lisa: it is not just talk, it is also the buildup in military, what we've seen in terms of clamping down on certain communications within the mainland of china. how much does china force a change in u.s. policy?

that might be what they are talking about, this need to clarify the strategic ambiguity for something a little more concrete in the u.s. jonathan: it depends on the nature of the response from the chinese government. polices point, it takes an economic form. about an hour ago this ultimately, this is going to her the people of taiwan more than it hurts anyone here in america. tom: the distinction here is the calendar. we all understand the cliche and made the reality that the chinese started the show talking about 2049 as a framework for president xi, but far more than that is the short-term to get to the party of congress in november. this whole idea of saving face, how does president xi reacted this? jonathan: clearly, it is tension abroad.

tom: fragility barely describes it. it is just a housing crisis, a mortgage crisis alone. david fitzpatrick with a superb essay today from bloomberg. jonathan: becoming more controversial by the day. that is the mortgage boycott you talk about, the weakness in the economy. the issues we need to focus on. futures down 6/10 on the s&p. looking forward to that, next. this is bloomberg.

jonathan: futures are negative, down six tens of 1%. about two hours from now, we are all waiting for the same thing, to see if speaker pelosi lands in taiwan and ultimately, how the chinese respond to that. futures are negative on the nasdaq 100, down eight tens of 1%. yields are lower by five basis points now. what a move lower in the middle of june.

a little bit later, we hear the fed speak. tom: this is all coming up at -32 basis points. jonathan: just all driven by this drop-off in the 10 year yield over the last weeks. tom: we've got a lineup of things to talk about. >> uninspired performance, nothing had been nothing. tom: there is so much going on. i want you to talk right now about the phillips curve, this ancient thing from another time, and it has to do with the time of the economist at lse. i want you to link in the

phillips curve myth with the raging debate over the beverage curve and the efficiency of our labor economy. >> first of all, i was born in the same year that professor phillips penned his article, so if that makes me an ancient thing from another time as well. that curve was really a description of the labor market over a period of 100 years or so and it was hijacked by people like paul samuels and someone in the u.s. to make it a fear of inflation. and in 1968, elton friedman said it is not going to be stable. that was a very pressing article. what he said was workers will factor in the higher prices, and the phillips curve a breakdown. that is exactly what it did in

the 1970's. now, we are back in and environment where for the last 20 years or so, and patient was so low that nobody took into account, and so the phillips curve reemerged. and now the question is how much unemployment do policymakers think they are going to have to engineer -- tom: do they engineer it? that is the heart of the matter. whether any central bank engineers a labor economy. >> well, here is the problem -- they want to create some slack in the thinking is very clear at the fed right now. they want to create some slack in the economy without causing a recession which means growth has to be between potential growth surrounding 1.8%, 1.9% per year, and zero, otherwise the economy is in recession. and let's be clear, the economy is not in recession.

we have another jobs report on friday, but it is a very narrow path. the fed is going to make a mistake. given that it has let inflation out for the first time in three decades, it is going to make a mistake by raising rates too much. and that inevitably is going to result at some point in recession. not imminently, but as the three-month curve flattens, that recession signal starts to emerge when we close to zero. i think engineering a soft landing braces a bit the beverage curve the relationship between unemployment. we get the job earnings data later today which gives us a new reading on job openings. there are almost two jobs per unemployed person. the debate going on right now is can the fed deflate the demand for labor in the economy without pushing up unemployment a lot because there's a lot of job

openings and quite a raging debate going on between governor warner and larry summers, trading blows. tom: lisa, jump in here on this huge debate. lisa: basically saying that the soft landing paper had errors after they came out and tried to slap down the previous piece. basically a tit-for-tat of academic journalists. the other big debate is how far the fed will have to go to engineer some sort of softening in the labor market, what it will take. you have some people saying we are close to the terminal rate, perhaps, even hinting at that. and then you have the likes of credit suisse saying more likely we have to get the 5%-6% because of how entrenched some of these inflationary aspects are. where you stand? >> all through last year i was

warning you that inflation was going to be present. when we discussed the fed making a mistake, we discussed the fed doing too little in 2021, not too much in 2022. what the fed has to do now is a consequence of the mistake they made last year by continuing to ease, continuing to buy assets all through last year as inflation picks up. i don't think powell is signaling what the market is reading right now which is that that is not going to raise rates. he is signaling very much the best guidance we can give to the extent we can give you guidance the forecast we gave you in june, which was 3.4% at the end of this year. 3.8% at the end of next year. now, it is a long way away from that guidance. in june, with markets priced in at an interest rate above inflation of about three quarters of a point on average for the next 10 years, it has

just about taken out that so-called positive real interest rate and that tightening in the economy. and yet i think that is too easy a choice. either the fed is going to have to hike rates to get policy restrictions higher than the market, or we are going to have a more contracted inflation. i don't think the markets are lined up in a sensible manner, and a relatively low terminal rate, given not only in the u.s., but a global scope of this inflation problem. lisa: throw into the mix what we are seeing right now with nancy pelosi expected to land in taiwan in about two hours this question of whether the safety bid is to go into short-term treasuries or even treasuries at all the potential increase inflation and if the fed is still going to try to fight what the market is assuming in terms of a pivot. how do you see the response going forward?

>> i think the fed has made it clear that beating inflation is job one and probably job two and then other things come after that the present time. in the luxury of a fed has had in the path to respond to geopolitical events like brexit and to respond to market events and to respond to the unemployment rate and someone was because inflation was so low. now we have inflation that is 9.1%. while the july number will probably show a bit of relief, it is by no means assured that we've even seen a peek at inflation yet. tom: what is so important, we've got people doing political economics and at the same time, we are talking about engineering the economy as if there is any evidence we could engineer and economy. i find that insane.

jonathan: goes a step further, there is clearly some little tobias year which is shaping some of the analysis in place at the moment. the simple way to frame this is soft landing versus hard landing. which came are you in ultimately? >> ultimately, it has to be a hard landing. the runway is just too short to carry on with the airplane analogy on a soft landing. given how narrow the gap is between a potential recession and growth at the economy economic potential. and it is not that the fed tightening causes the inflation and such. what it is is when the public expectations of inflation are built in sufficiently, those expectations are inconsistent with the policy tightening. the one good piece of news that the fed has is that the

inflation expectations from u.s. households, it is at 2.8%. we don't know how good that is, it is only 500 people and it was at 3.3% in june, and i don't believe long-term expectations bounce around as much as they do, but that is the key thing. if the public believe the inflation increases going to be transitory, then i think the debate should be between a mild recession between late 23-24. is it going to be a mild recession or a deeper recession? we have to watch inflation expectations because the more entrenched inflation expectations are, the deeper the recession. this is the public beliefs about how the economy is going to unfold in the fed intention of what it is going to do about patient rates. jonathan: i would love to listen in real-time and see what people say on the phone calls. can you imagine?

tonk: i have never understood it. have they ever called you? jonathan: they have never called me. tom: they call lisa about every three months. lisa: i have never been. tom: how much time? jonathan: 30 seconds. tom: who looks gooder then premier league? jonathan: community shield. liverpool fans have thought well, it is going to be with the upgrade. down to the last weekend. tom: we begin this season premier league coverage with john and i. -- jon and i. jonathan: the dow, 7/10 of 1%.

we wait to see if speaker pelosi touches down in taiwan. >> keeping up-to-date with news from around the world, china determined have nancy pelosi is expected to become the highest ranking u.s. politician in 25 years to visit taiwan. china has about unspecified military response, claiming taiwan is part of its own territory. the u.s. calls and -- -- calls in a strike on a leader of the 9/11 attacks. brittney griner back in court after her trial for cannabis possession. closing arguments are set for thursday.

if convicted, she could face 10 years in prison. russia has made a bad faith response in the exchange for a russian arms dealer. toronto dominion is moving up its presence in the american capital market just months after agreeing to expand retail operations in the u.s. canada's second largest bank has agreed to $1.3 million in cash. soaring fuel costs in the second quarter, 89%. a new cost reduction program with $50 million per year by 2024. global news 24 hours a day on air and on bloomberg quicktake. powered by more than 2700 journalists and analysts in more than 120 countries.

>> you cannot priced in the same fed that we had in 2018. you can't priced the same reaction function. at the first sign of weakness, and we are already seeing that, the fed is not going to be able to come into the rescue of rate hikes with the same flexibility that they would have when we had inflation -- tom: i enjoyed that discussion immensely, the swill that is out there, roughly an hour and a half from perhaps a pelosi historic moment in taiwan. right now, a preview. lisa: the financial implication of this trip to taiwan specifically. looking at a little bit of a wonky chart, shipping and

transportation index. basically, the index measures the return of the transportation sector specifically in the taiwan strait. for those of the audience unfamiliar, it is of course between the united states and china. 80% of the world's largest shipping go through here. it is a supply channel but never recovered. we are looking at a chart that goes back about two years, and you kind of see the stagnation. one looks very similar, but starting about a month ago, this index drops, and it really comes from all these heightened taiwan tensions, the idea being that if you start to see military action, there is a very real financial cost. tom: is a pretty normal chart. thank you so much, greatly appreciate that. right now, this wonderful podcast and of course, this

writing as well. i want to talk you about the enthusiasm of the nasdaq pop of 16% off the bottom and we can annualize it with so much talk that we do constantly, 242% annual return off this list. how do you behaviorally manage ownership of equities when you get a -- like that, but you've got to invest for long-term? >> i hate the annualize approach because it lacks calmness. up 15%, just assume out a little bit and say down 33% so maybe we have made up almost half of the losses. now annualize where we are year to date. it is not great. you have to recognize that the flipside of reward is risk and that markets go up and down.

i think 2021 made a lot of people, especially some of the robinhood trader think the reddit wall street group think that it is easy, just buy a stock that is going up, will rogers told you if it doesn't go up, don't buy it. lisa: -- tom: lisa, jump in here. the different opinions that we've gotten here on the equity market, it is a jungle. lisa: i was just thinking it is easy, just by when it is hot and sell it when it is hot. in all honesty, we are looking at a real washout in some capacities. i am wondering how much that is going to factor into what happens next, especially through the less liquid aspects of the market. i'm thinking with private equity that has not yet been written down, and then the likes of juul, 88 percent due to an investigation, what it really

reflects some of the antics that haven't been tracked in markets that are less visible. >> that is the appeal of alternatives. this includes venture capital, private equity, even farmland. you don't get a print every microsecond, you get a quarterly audit for some percentage over the course of the year. everything is updated, but that lack of daily price range, is the same thing with the house you live in. you don't get a price every morning, every hour, every day, and so you don't really pay attention to prices that are not relevant until you are selling. there is a well-understood concept of a premium. since you don't need daily liquidity, you get a better return for some of these alternatives, and the good news is you don't see these all the time. the bad news is when they actually mark them to market,

and a typical firm will do about 25% of their holdings each quarter, so every year you get a once a year print and sometimes in a year like this year, you see a big markdown. i don't know about 88%. lisa: that was having to do with the investigation, but the point, and i just want to highlight this, when somebody is trying to arrange a portfolio, a year ago, two years ago, liquid was better. go into private equity, go into alternatives. that is what everyone was saying. is that changing? are people saying index fund with liquidity is better at perhaps less liquid asset classes because of the lack of visibility and the lack of the easy exit? >> so i am reminded of the words of the great investor groucho

marx who said i don't want to be a member of any club that would have me. and to some degree, when we look at alternatives and intervention as well to private equity, they tend not to be top-performing funds. if you have $1 billion in your well-connected, i can get you into the top pile, but most investors don't have access to that, and so you end up in a circumstance where you can treat the universe like you can the market for stocks or bonds. you end up with a very fathead, long tail of a handful of alpha generators and a whole lot of expensive underperformers. tom: i got to leave it there, thank you so much. the equity market, quickly on the market, to see two spreads

printing a -32 basis points, that is a stunning 150 eight. lisa: and it is led by the long end. people piling into longer-term treasuries. a faith in the fed, at the state in the fed will be good for balance, but not so much for stocks going forward. a hint of that slow down that a lot of people are certain to talk about. tom: i thought at the end of the day in although we have covered here, centinela out of taipei, our wonderful bureau chief, eight forms of mandarin, exceptionally knowledgeable, and i don't know what to make of this comment. speaker pelosi is coming, great. i don't know what to make of it. lisa:lisa: they didn't ask for it and they don't seem that

concerned in terms of china's potential retaliation but at the same time, the threat of the economic ramifications is significant for an island that does depend on china and their economic exports. tom: we will see, we are monitoring the plane and we will have coverage of this on bloomberg television and bloomberg radio. please stay with us. teachers, -28. this is bloomberg, good morning. --futures, -28.

jonathan: headline risk in taiwan. good morning, good morning. some risk aversion, equities lower. the countdown to the open starts right now. >> everything you need to get rid -- ready for the start of u.s. trading. this is bloomberg markets: the open with jonathan ferro. jonathan: live from new york city, we begin with the big issues. looking for speaker pelosi to touchdown in taiwan in the next hour, escalating tensions with china and prompting a swift response from the china's foreign minister