>> i can't really think of a time when there has been quite this much the vergence. -- this much divergence. >> i think we have been impatient. they are coming. they are here. >> i would be very concerned about a deflation scenario in the u.s. for services. >> this is bloomberg "surveillance" with tom keene, jonathan ferro, and lisa abramowicz. jonathan: good morning for our audience worldwide. alongside tom keene i am

jonathan ferro. taking over for the next two hours with the wonderful, the beautiful, the mohamed el-erian. tom: bonds, currencies, commodities, after what happened practice to right now, delayed, the fans cannot show up for practice, it is almost as big of a mess as the shorts call on the market. jonathan: we have been talking about this all year. sacrificing the integrity of the sport for commercial gain chasing this market in america. tom: it is the netflix effect. they got drowned by it. now to get to the serious stuff at hand, they are going to do this practice, truncated no one in the stands, ridiculous. you open the roads for the las

vegas commute, and then they have the qualities where they figure out who sits where in the race at 3:00 in the morning. it is a big success. let's move on to what dr. el-erian cares about. jonathan: we could talk about this or soft landing hopes and dreams. mohamed: let's talk about soft landing. there is bigger news, the oakland a's are moving to los angeles. tom: it is the changing of america. the democratic skew. the basic idea is the attainment of the south and the west. you look at the demographic studies, literally to the important economic demographics, the names that keep coming up are nashville, austin, las vegas, and others. jonathan: i don't get how you can take a sporting franchise out of one city and take it to

another. in english football that is not a thing. mohamed: money. stadiums and money. tom: the owner of the san diego padres dying of cancer, tragically, his father started it. walter o'malley one day packed up the brooklyn dodgers and moved them to l.a. and that is when it started. let's embrace it. jonathan: let's try to move on in case people get confused and think that we turned into espn. the yields are little bit lower, down four basis points. we have to sit on crude. the idea that crude has essentially collapsed into a bear market, down 20% for the september highs, we have spent this week talking about soft landing hopes and dreams. do we have to think about an economic downturn in the not so distant future? mohamed: some people are talking about this. to see oil prices down more than 20% from the highs at a time there is a conflict in the middle east is quite astounding. that is feeding into a soft

landing. we are going to talk a lot about this. the market has fully embraced not just that the fed has finished its hiking cycle, which i think is correct, but that we will see deeper and deeper cuts next year without a recession. that is the critical assumption that is not built-in across markets. tom: as ceo of a major 2 million employee company in america, walmart, brought up deflation. seared in the fabric of cambridge and the london school of economics, there is the study of the british deflation in the 1930's and 1940's. america has never faced it? mohamed: japan had it recently. deflation discourages people from buying today. food being the primary example. that is why we recycle it. we don't have general deflation and i doubt we will have general deflation.

tom: the general deflation question is a vector of disinflation in place. clearly, we see that. what is your optimism of getting back to john williams 2.0% or richard clarida's two-point x percent? mohamed: i think we will be stuck in the high two's and the fed will have to decide if it lives with inflation higher than target because the target is too low, or does it acknowledge that 2% is the right target and crashes the economy? jonathan: what is your best guess? mohamed: i think it will go for the former. the fed will understand that pressing 2% inflation in a world where there is insufficient structural supplies in the right thing to do. jonathan: where do you think it leaves this bond market? a two-year at 480, 10 year at 440. think about where we've been in the last month or so.

10-year through 5%, high of the cycle. how do you think we will come back down to bearing in mind we'll will be pricing for rate cuts next year? mohamed: i think we have come down too far. i understand why some think we are going further but if you look at the inflation dynamics that's harder to get unless we go into a recession. if we go into the recession the stock market will spike. you can't have both at the same time. jonathan: has something changed posttest -- post-pandemic? where do you come down on it? mohamed: i think that the pre-pandemic world was exceptional, a world of qe and insufficient aggregate demand. when you have insufficient aggregate demand you can push into the economy as much liquidity as you want because you won't have inflation. we are now in a world of inflexible supply, and that is a very different world. tom: growth economics.

i have been telling people to remind themselves of a guy at m.i.t. in 1956 and the near religious experience of trusting and growth. can you state that we have a new american growth economics awful foot some people are indicating is improved productivity and efficiency? mohamed: i listen carefully to our friend mike spence, the nobel prize winner. tom: studying with john hicks. the majesty of that alone. mohamed: he is incredible. his insights are invaluable. his bottom line is most countries have to evolve to a new growth model in the u.s. is the most advanced in that evolution. three important pieces of legislation were critical. if you look around the world, the u.s., europe, or china, all three have the challenge of evolving their growth model and only the u.s. is doing it seriously right now. tom: are we too gloomy?

mohamed: no, we are not too gloomy. i think that we recognize that the world is evolving. this is a different global and domestic economy and policies have to evolve accordingly. jonathan: what worries man concerns a lot of people is you have to go back 48 hours and we are talking about disinflation, soft landing hopes and dreams. 48 hours later you look to burberry, a collapse in luxury. walmart, a warning about the u.s. consumer. crude entering a bear market. all of a sudden we are talking about a slowdown and even recession. the bond market is stuck between this with double-digit moves day after day in either direction. you have written about this extensively in the last few months about a bond market that has lost its anchors. is an economic slowdown sufficient to regain in treasury specifically? mohamed: no. yesterday i was watching you when you said, guess what, we are at the same level of the 10

year as a week ago. my reaction is, how can that be? you were right. most people feel that this week is very different from last week. because of the inflation print that we've had. we still lack one of the three anchors. you either need an economic anchor or a policy anchor or a technical anchor to the bond market. we have lost all three. these moves are going to continue. the thing that's really impressed me is that nothing is broken. if you had told me a year ago that we would see this incredible volatility in the most important market in the world, the benchmark for so much else and nothing would break, i would tell you that's impossible. the resilience of the functioning of the market has impressed me. tom: the financial market, and the shock and the united kingdom off derivative structure and pension plans, but the leader in standard deviations, which is how fancy people like al arian think, we have six standard deviation end of the great moderation.

there is a hope and prayer that we get back to the trendline in years. how many years out do think that we heal this great bonded debacle? mohamed: i think it will take time. we had 10 exceptional years where the bond market was distorted. tom: almost back to volker where we had 30 exceptional years. mohamed: the shift to an artificially low interest rate and predictable injections of liquidity fundamentally changed the bond market. that will take time to recover from. tom: did you and bill gross get a free ride because you were in the great moderation? was that such a structural -- mohamed: i'm not sure that it felt like a free ride at the time. tom: pimco, when you invented it with bill, was it easier because you had the great moderation? mohamed: investors care about three things. returns, volatility, and correlations. we went through a time that

because liquidity was being injected into the economy over and over, we got high returns, virtually no volatility, and the correlations broke down in your favor. you made money on your risky and risk-free assets at the same time. it was a great time and we took it to be normal, but it was exceptional. we are going back to a world that was more like what we had before the global financial crisis. jonathan: it will be hard to shake this because we have had a couple of generations conditioned by two major shocks. the financial crisis and pandemic. we know how the fed response to major shocks. what we have forgotten is how it responds to normal economic downturns and upsides on inflation. mohamed: jon, it is striking that the market is willing to take on the fed on a price that the fed controls. the fed totally controls the policy rate, and yet the market doesn't believe what the fed is telling us.

it's really striking, because we've got to, restore fed credibility otherwise we are going to continue with this enormous volatility. tom: your thoughts percolating into the end of the year into q1 2020 four, are there shadows in private equity? are there shadows in the new nontraditional finance? mohamed: one thing that i don't think his priced and enough is when you move from the banking system to the nonbanks, you change the lags in the system. we see this with commercial real estate. everyone recognizes that the refinancing of one trillion plus assets is going to be tricky. because it is over time, we don't worry about it. everyone recognizes it, but because it's over time we don't worry about it. if it were all within the banking system we would have worried quickly. the move from banks to nonbanks has extended -- tom: this is a michael spence

issue? the regulatory lag? jonathan: this maturity wall is out there in 2025 and there is the feeling we will have to think about it. at some point we have to start thinking about it? mohamed: you enjoy the journey before you get to the destination. tom: are you going to give us good news, bad news? mohamed: momentum is important and you want to be exposed to this market. more people have a tactical mindset than a strategic or structural mindset. investment has become very technical. jonathan: it is great to have you with us. for the next two hours, a fantastic lineup of guests. we will check up with a federated or. tons of fed speak. what do you expect to learn today going into the weekend? tom: to speak less would be helpful. austan goolsbee i think is

fascinating because he comes from the chicago social science behavior nexis and is tuned to the ramifications of policy more than others. jonathan: in the financial times, "it's too early to declare victory." tom: her life story makes her a good fed president. jonathan: trying to get you towards the weekend, towards a third week of gains on the s&p. yields lower by four or five basis points. it is a break of 4.40 on the 10 year. yield this morning, 4.38. from new york, good morning. ♪

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that the degree of uncertainty and risk is less today than 18 months ago, but there is still a lot of uncertainty about whether the fed is done. jonathan: bill dudley on the situation in the market. fixed income, hopes and dreams of a soft landing and without the pain of high unemployment. everyone saying the same thing, it is too premature to make that call now, that declaration of victory over inflation. tom: the transitory thing is tentative and other things are tentative. there is a new kind of data-dependent. i can't emphasize enough the nature. i am focused on japan, the euro-yen, but the answers are slaves to data dependency. after the week that we've had, the new attention to data

dependency has increased. jonathan: good morning. equity futures on the s&p are positive again. three days on the s&p 500. another lift up by 0.2%, potentially a third week of gains into the weekend. the euro is stronger again, 108. 71 against the dollar. this has been the surprise since october. we started talking about triple digit crude, bank in a bear market on crude. it is a shocker over the last six to eight weeks. tom: edward morris of citigroup, absolutely nailed it. it was as lonely a call as dudley and ellen arian -- as dudley and mohamed el-erian. jonathan: your good friend on the energy desk, we could see opec plus two sizable cuts from here.

i think that it's more likely they want to stabilize them among their opec peers a collective cut rather than one on their own to get ahead of the economic weakness going into next year. tom: in the next hour, looking for e.m. expansion to boost demand. for whatever reasons, i'm not faulting them, but it hasn't happened. that's the jp morgan readjustment. jonathan: wti is threatening to break into the 60's. tom: mohamed el-erian is with us and it's a great thrill. he is at queens college in cambridge and is interested in the asset allocation of their endowment. steve sharon had multi-asset solutions. steve, this is a lonely bull market. how do you reallocate into the end of the year? steve: you had to get ahead of it a little bit. we were adding over the course of the summer when it was uncomfortable on the idea that markets like fed pauses and they

price in soft landings. even if the soft landing does not materialize. when the fed pauses, invariably, it is on suspicion they've gone too far and not confirmation. the data available to you is a fed that is no longer hiking and an employment -- unemployment w rate that is sti low. with the bond market having broken, we are getting the fed pause rally, and that can be powerful. historically those are nine-month events. you can see the equity market up 15%-20%. interestingly, the equity market has hit an all-time high each of the last five times that the fed has paused. four of those ended in tears, but it happened either way. we think that this rally has legs. the jury on whether or not how soft this landing is next year is very much out, but for the time being we think this rally continues. mohamed: what are you looking at to determine the macro question

of has the fed not just paused but will start cutting? can it do so within a soft landing? what are the key variables we look at? steve: we are calling them the five games of chicken. it is that corporate refinancing law. you will have 60% of corporate debt come due between 24 and 28. what percentage of that will face materially higher rates and what does that due to company earnings? number two, small businesses have already seen their debt repriced. how many quarters of high rates can they survive? on the consumer, real income growth has finally turned positive, but how positive does it get and does it allow the consumer to de-lever and continue to spend? 800 $77 of bank deposit outflow, what does that do to restrict

lending?the federal debt, one third of which becomes due this year, re-prices to a significantly higher rate. those five things, if they were to all go perfectly you would get this immaculate soft landing, but we think it is unlikely. what is more likely is a rocky landing where inflation is stuck at 3%, some rates are high, there is a slow down and it is a single digit equity environment. there is a real risk that something breaks and you get a classic recession. between the rocky landing and classic recession break that we think is most likely to happen, we are in the rocky landing camp for now. mohamed: your five factors, it is all about supply, it is all about who was going to buy all of the supply? steve: i think where i would focus more acutely is on the nexus between banks and small businesses. the banks, if there are 877 billion dollars less in deposits, that is $877 billion less in loans that can be made.

small businesses are not facing the maturity wall. they have already seen it. if something were to break we would look there so we are spending a lot of time focusing there, and also larger cap companies in our asset allocation. jonathan: it came from the walmart ceo, we may be managing through a time of deflation in the months to come. when you heard those words, what was your response? steve: i think that the word deflation is strong, but i think there could be more disinflation than we are expecting. if you look at the areas in the economy where you have seen disinflation so far, it is goods prices, food prices, energy prices. a lot of stuff that can be explained by covid normalization. interest-rate sensitive purchases have not seen the big deflation that you would expect. home prices are still relatively buoyant. try to buy a car, it is not

exactly a value exercise these days. through the economy, there is more disinflation in the pipeline and you could see the fed in some point in 2024 go very quickly from worrying primarily about inflation to worrying very much about growth in the employment markets. that could switch on a dime and it is something that keeps us in a humble position. jonathan: is the same true for investors? you mentioned the federal reserve can make that switch. i wonder how quickly investors start to make that switch and if we can get the virgins between what is happening with bonds and stocks? steve: i think what you do is you pull up charts and you look at them historically. unemployment takes stairs down and elevators up. equity market stairs down and elevators up. if you're headed towards a recession you don't gradually shift your view in the late part of the cycle. it happens very swiftly.

that is why as an investor you have to prepare and you start to lengthen duration and upgrade the quality of your equities. we like companies with strong balance sheets and cash flow generation and low external financing. you move in that direction so that if it moves on a dime, which historically it does come you aren't left out in the cold. jonathan: have a good weekend. one of my favorite notes comes out weekly on friday morning from bank of america, he had this to say. essentially, lower yields are good for risk assets until they are not. 5% to 4% bond yields, bullish risk, easy financial conditions. for percent to 3%, different world. bearish risk, we will be talking about recession. mohamed: i think that that's a really good way. we agree on the effects of lower yields and oil prices. if you see rates come down too rapidly the market is pricing in a major slow down and that is

not good for risk assets. tom: 2009, a chapter on michael at credit suisse. he wrote an essay 20 plus years ago on the concentration of technology, the concentration of return in capitalism. is that where we are? we will come back and talk about this. it is important. are we going to see a continuation of the magnificent seven? jonathan: i think it is a really important question going into next year for the stock market given the surprise we've had this year. they dominated in a way that was unexpected for many. ♪

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jonathan: three days of gains on the s&p 500. futures look like this on the s&p, the nasdaq, the russell, the small caps all over the place up by 1.3% this year the s&p up by 0.2%. a positive week of gains by more than 2% currently through the close on thursday. three weeks of gains on the s&p 500 would be the longest weekly streak since the end of july. you want to talk about big tech and the magnificent seven, goldman sachs, this is what he had to say.

the magnificent performance of the magnificent seven has been a defining feature of the equity market in 2023, the stock should collectively outperform the remainder of the index in 2024 this is something you've talked about a million times. higher margins, greater reinvestment ratio, stronger balance sheets. tom: i can't believe i'm saying this in november, i don't have a concept for next year. i am 99% certain it will be the probabilistic narrowness of the street and the magnificent seven will continue to dominate. many people say it will be this or that, and i'm saying possibly baloney. i am not there yet. i am distracted. jonathan: i am distracted too. the bond market, it looks like this. it is amazing to see the 10-year here, it is not a typo. it is a break of 4.40. mohamed 4.3946, down for basis

points. it feels like a normal snooze day down five basis points. mohamed: it has been incredible. we have had 10 basis points move up and down and it has been this amazing volatility for the most important market in the global system. jonathan: it feels like a penny stock some days. very little information. think about tuesday, the tiniest downsize and we are moving 20 basis points across the curve. tom: the 10 year yield 2.15%, two standard deviations move, the 2.07. the 10 year inflation is just yield break below 2.07%, what quality of disinflation/deflation does that signal and weaker demand?

jonathan: let's turn to our top stories. president biden signing a stopgap bill to expand government funding into early 2024, voiding a government shutdown for now, despite the agreement both sides remain divided on a number of issues, including ukraine, israel aid, and immigration. the message extending two funding deadlines. january 19, february 2. the show down on the horizon, the mother of all arguments, overspending? mohamed: absolutely. the good news is that we find a way to kick the ball, and that's fine. jonathan: kicking the can down the road. tom: short radio answers. mohamed: with the presence of the two of you, people would rather listen to the two of you than to me. i am just a transition. jonathan: i think that t.k. is distracting you. tom: the important stuff here, january, we get through the holidays, do you take the figtree down? jonathan: i take the fake tree

down the first week of january. after my birthday the new year. tom: a fake tree and then another shut down. mohamed: where does the figtree go? jonathan: in the living room. mohamed: once you take it down? jonathan: in storage in the cloak room by the front door in the cupboard. it is the one covered that we have. tom: does it have lights or no lights? jonathan: it has lights. it has lights. tom: red and black? jonathan: clear, built in lights. you are so jealous of my tree, every year. i will share a picture. he has tree envy. tom: the ugly lights like bill gross has. jonathan: that is all i expect from you. go home and the tree sits in the

corner and it doesn't get decorated until christmas eve. let's get to this story and move on. chinese president xi jinping saying that he will take heartwarming steps, an actual quote, to attract foreign capital and create a world-class business environment. in a written speech in california, we will also take more heartwarming measures, such as improving the policies on entry and stay of foreign nationals in china. all of this is designed to make it easier for foreign companies to invest and operate in china. in a minute, the data point in the last couple of weeks, foreign direct investment into china turned negative. are those quotes enough to turn that around? mohamed: words will not be sufficient to turn this around. you will need more than words. when he will need is consistency. people now cannot predict the policy reaction function in china, and that is critical if you are an investor, let alone a

foreign investor. he will need more than words. jonathan: this was what we expected, but somehow it is not sufficient. tom: harkening 2024, 2025, would you suggest that the critical point is to bring some form of capitalistic structure back to hong kong? they trashed hong kong, do they need to bring it back? mohamed: it is beyond that. they need to involve their growth model and stop pulling everything up to the top, pushing it back down. let the bottom up forces act and critically understand the need to transition to a consumer-let economy. -- consumer-led economy. it's hard but without that they will get stuck in the middle income trap. tom: have talked about a consumer-led economy since jonathan spencer was a young man and it hasn't happened. mohamed: part of a consumer-led economy is to give up control and that is the hesitancy.

they are scared about two things. one, losing control. two, that this will come with some kind of corruption. that is why they are going slow talking about high-quality growth but not putting in place what is needed for high-quality growth. jonathan: huge challenges. i want to squeeze in this story. the grand prix, formula one, here is the drama.tempers are flaring after organizers canceled the first practice session after nine minutes when ferrari badly damaged his car driving over a loose manhole cover. saying, we had a very tough fp1 that will cost a fortune. it is unacceptable. toto wolf of mercedes, formula one, are they sacrificing the integrity of the sport chasing commercial objectives in the united states of america? toto wolf, they will seal the drain covers and no one will

talk about it tomorrow morning. we are talking about it and it's completely ridiculous. you're speaking about a drain cover that has been undone and it has happened before. several years ago. ultimately, this is what we feared. you chase this commercial gain and to go to places like las vegas and end up in situations like this. tom: the risk is there. alonzo just missed turn 12 and other people have missed turned 12. this course is brand-new. for the safety of the drivers, that's not good. jonathan: we all wish it the best of luck over the weekend and hope that it is successful in las vegas, but big challenges. tom: we will see and we will continue, bringing all of that together. simon gordon, chief economist, what are you going to write about into the weekend into monday? we have deflation, weaker demand, different dynamics, and

a stock market to the moon. how do you synthesize that together? simon: i was listening to your conversation five minutes ago with the idea that the u.s. 10-year treasuries are trading like a penny stock. the parallels between the magnificent seven and equity markets, how do you pull those together? you have seen huge pro cyclic hal it in pricing in capital markets, bond markets as well. i think it is perhaps not a short-term trading idea or a point of near term direction and polls, but the financial stability point, the health of the capital markets, efficiency, the type of social good that capital markets to do, is it a good idea that you are a cornerstone pricing as set in the treasury market and such a

sinkhole for equity capital is behaving like that? i don't think it is. i wonder if the regulators want to, given all of the other challenges on their plate, get into a debate of decomposing why the big asset classes are trading like that and what it does to financial stability, economic growth, and efficiency? tom: can the capitalists get on the same page as the people in 2024? particularly after what we witnessed in san francisco. they seem to be a bit removed. simon: the social license of capital markets is very important. look, there has been quite a lot of, particularly in the united states economy, post-pandemic encouraging redistribution, reduction in poverty levels, but that has largely been the response of fiscal policy post-pandemic.

again, taking it back from the near-term call to what we've learned about a response to a big economic contraction and the nature of fiscal transfers and what that does to growth and redistribution. i think that there's a big divergence in the experience of the european economies and the u.s. economy that i think will frame responses to financial contractions, economic contractions, for years to come. mohamed: imagine a regulator calling after this interview saying, i totally agree with you. the volatility in the bond market risks financial stability. why has it happened and what can we do about it? what would you say? simon: i think regulators for a long time, and this is a bipartisan comment, not aimed at any particular regulator, have taken quite a consumer-centric approach to how the ultimate

investor allocates capital. a reduction in fees, passive allocation, which generates in my view more procyclical pricing and heightens financial responsibility. my response to the regulator said, this isn't a free lunch. yes, you are undoubtably generating more consumer surplus for the end savor, but are you introducing more financial stability risk? yes, you are. are you happy with that trade? if not, you need to vocalize what you will do with it if not the redistribution of the consumer surplus is the way to lean into it. mohamed: they continue saying, you are a worrier. look at the amount of volatility and nothing has broken, the system is resilient. what would you say? simon: i would say -- to say that nothing is broken given some of the turbulence we've seen in terms of money market funds earlier in the year, the

banking system, being really stressed in the u.s. economy, there are signs aplenty that this isn't a healthy backdrop. the fact that we have averted through the relatively rapid response from the corporate sector and regulators doesn't mean that the risks have gone away. maybe we have been lucky, but how long do you want to stay lucky? i think we need to be ahead of these debates rather than being constantly reactive to these events. jonathan: simon french out of london. he is right, surely things did break. big banks went under. we moved away from that pretty quickly. spring feels like a lifetime ago, but things broke, didn't they? mohamed: they broke in a very contained fashion. the big issue we don't talk about is we changed the system. we have the extended deposit insurance to all banks, to all

deposits. tom: let me give a lecture from queens college in cambridge. this was nothing more than a bail out of fancy people. the banks that went under were no more than marketing concepts for the rich people, the rich guys, and we use the institutional insurance. i would love spencer on this. the institutional structure to bail out the rich guys. mohamed: if you bailout the rich guys, you have to bail out everyone. that is deposit insurance. jonathan: 4.40 on the 10-year. surprises in commodities with crude at 73.93. from new york city, good morning. ♪

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get help reaching your goals with j.p. morgan wealth plan, a digital money coach in the chase mobile® app. use it to set and track your goals, big and small... and see how changes you make today... could help put them within reach. from your first big move to retiring poolside - and the other goals along the way. wealth plan can help get you there. ♪ j.p. morgan wealth management. >> a lot of the inflation and polls on the way up was from higher oil prices, oil prices have come back down and

commodity prices are under pressure. if we imagine china gradually coming back to strong growth, the u.s. stays resilient, i think we will have to be a little bit higher for a little bit longer. mohamed: higher for longer -- jonathan: higher for longer. speaking at the singapore fintech festival. welcome to the future. equity futures looking a little something like this, posited by close to 0.2%. three days of gains could help us get to three weeks of gains on the s&p 500. yields lower. on the 10-year we had a brief break of 4.40, back above it now at 4.4082. let's get one name in the premarket. shares of manchester united. a report from sky news in the last hour, finally, i feel like i've been talking about this for ages, a deal to buy 25% of the club for $33 a share early next

week. tom: i look at it as an amateur. you are pros at this. the answer is he looks awful lonely out there. jonathan: the team? tom: they need a rebuild with their new owners. mohamed: he was on the bench for the last game. jonathan: he wasn't playing well. tom: who does he have to play with? jonathan: they have taken criticism for how they have run the club, and i understand, but they have spent a lot of money on players who haven't gotten it done. the club looks rotten on the pitch and off the pitch. mohamed: why by 30%? you don't have control. jonathan: it sounds like they want to sell the club to the qatari's but the glazer's want to retain a big steak. i wonder if you has a big say? maybe the side of the business that the glaziers haven't? tom: bloomberg worldwide picked

up like no interview we've ever done, jon ferro, that was really fascinating. jonathan: daniel leavy. tom: i have to get this in. alonzo, at turn 12, for already doing well in p2. qualities in rome as well. the uproar in rome is north macedonians are not showing up as tourists this time. jonathan: qualifier for the euros in italy again. it is the group stage. they have two games left. tom: if north macedonia -- it would never happen -- if they were to defeat italy it would be one and done? jonathan: we would be three points behind ukraine, i believe. mohamed: remind the audience why this is so painful. jonathan: i appreciate this between friends. north macedonia kicked us out of world cup qualifying not too long ago. do you want me to carry on

working here? i am walking away. tom: oil disinflation. stephen, how does the new york harbor adjust to oil deflation? jet fuel, diesel, how do they adjust as collapse in oil? stephen: it is an interesting question we are trying to figure out as we speak. when we look at the spread action between gasoline and inventories, seemingly there is enough oil, gasoline, in new york harbor. new york harbor is important because that is the delivery hub for the mercantiles diesel and gasoline contracts. when we look at supply relative to demand, we are looking at 24 days worth of a supply of

gasoline.that is normal. spot on to the five-year average, slightly above. the problem now is that traders are skeptical. they are pricing in a premium on the front end of the curve, which is a clear signal that someone is concerned about the supplies, regardless of the fact that we have all of the days worth of supply. the other issue is jet fuel. now, we don't have enough. jet fuel stocks are extremely low. as we look forward to next week, we expect this, or aaa expects it to be one of the busiest travel seasons on thanksgiving in the last 20-odd years.you look at the rise in demand and spread action, something is afoot. it doesn't line up that the spreads are saying one thing, there is not enough supply, regardless of what we are seeing an weekly inventory reports. jonathan: the saudi's are frustrated with the price action. i wonder if they are frustrated enough to change policy again?

stephen: it is interesting. it is a conundrum. to be honest, i am perplexed that the market never really priced in any risk premium with regards to what is happening in the middle east. let's be clear, this is a war not between israel and hamas but between israel and iran given that we are fighting -- israel is fighting hamas, hezbollah, backed by iran. that is a scary proposition, iran's ability to stop the flow of oil from the straight of hormuz. it is ahead scratcher that we have this huge risk on supply but the market refuses to price that in. we arefocusing on the demand picture . if you are in texas and you are trying to produce, and you are looking at this price action, you are frustrated at this

point. i want to say, based on our modeling, we are likely at the bottom of the market right now given the situation around the globe and the imbalance between supply and demand. mohamed: do you think that the saudis will wait this out or they will be on to the russians or any opec-plus member that is willing to participate in another cut in production? stephen: i do think that there is a concern that we will see further cuts. already the saudis and russia have extended their voluntary cuts to the end of the year. what we have seen in oil prices, unlike the product prices, we have seen an absolute collapse in the front end of the curve. we have moved into a situation meaning that prices in near-term delivery are below prices for longer-term delivery.

this is a clear takeaway that from an loyal standpoint the fundamentals are extremely weak. i would suspect that we will see, chances are going into the quarter, opec-plus either extending the cuts or pushing those cuts into the new year. tom: in the ark of bloomberg surveillance's 20 years, a great shock has been america's success with hydrocarbons. into the new year, r.o.e. energy and -- entered -- into the new year, are we energy independent? stephen: no. energy independence does not mean you don't have to impor t. we were the dominant crude oil producer in the world and we were the swing producer.for all intent s and purposes we were energy independent when it comes to hydrocarbons, and that is a

shout out to how well and efficient the industry has grown over the past 15 to 20 years. given the current policy now, we are not energy independent and the big risk is that we are playing a zero-sum game. that's to say that we are taking off dispatchable btu faster than we can replace them with renewables. that's fact. regulators are telling the government, yet the government is still going ahead and forcing these retirements where we don't have enough power. everyone out there, get used to this and get ready. there will be a huge jump in volatility, a huge jump in pricing for electricity and alternative btu's because we are not quite ready for the transition the government is forcing upon the industry. jonathan: a big warning. the shore group. we will catch up before year

end. amazing to have this conversation about energy independence. tom: it will be interesting to see. sheffield wednesday. keeping the rangers out of the bottom of said league. a job opening, jon. jonathan: i have said a million times that we should put together a consortium. tom: can we make this a job interview? what are the values of resurgence of qpr? mohamed: huge. they have the best grounds in london, the most infamous grounds. i am with you. you go in the lead. tom: jon ferro leading us. jonathan: if anyone is listening, perhaps in saudi arabia that might have some money --

mohamed el-erian will stick with us for the next 60 minutes. from new york, this is bloomberg. ♪

>> i cannot think of a time there is been quite this much divergence. >> pushing back on price and that is why prices are coming down. >> high interest costs are coming, they are here. >> i would be concerned about a deflation scenario in the u.s. >>'s growth going to slow down? i think so. >> this is bloomberg

surveillance with tom keene, jonathan ferro, lisa abramowicz. jonathan: for our audience worldwide, this is bloomberg surveillance on tv and radio. together for the next 60 minutes with the brilliant mohamed el-erian. your equity market positive .2% on the s&p. at the start of the week we were talking about disinflation come at the end of the week we are talking about deflation and may be an economic downturn. tom: fractured markets in a fractured world. we will talk about mohamed el-erian's book in a moment. we've been doing aside chat on sports, formula one and soccer. huge turmoil in the market. this will be eventful to the fed meeting. jonathan: i remember james of aberdeen said narrative table tennis.

that is what it has felt like week after week and sometimes day after day switching between very different views on the next 12 months. mohamed: think about it. for the last 15 months consensus for the biggest and most mature economy has gone from soft landing to hard landing to no landing to crash landing back a hard landing, soft landing, now we talk about deflation. it is hard to explain why we cannot have stability in the most fundamental narrative. tom: here is the book cover, the movie coming to netflix, we are thinking three years out. you spoke to gordon brown. mohamed el-erian. michael spence on this. how in god's name did we get to where we are? that is a loaded question. jonathan: the view of this book is not all doom and gloom.

there are constructive recommendations about how we get out of this and it does feel like a perm a crisis. how do we get out of this? mohamed: by understanding the three common causes to the crisis. low growth that is insufficiently inclusive and does not take into account the planet. two is repeated policy mistakes and three is inadequate global policy coordination. all three can be addressed and it is a hopeful book because we believe we are on the verge of a productivity search led by technology and degenerative ai, sciences, and the climate transition. this will be an exciting time if we get policies aligned. tom: out of the pandemic prime minister brown has lived budget deficits, the united kingdom austerity. now we have the interest expense and a real rate regime that is normal.

how do you handle the fiscal challenges? mohamed: there are four ways to do it. you have growth, austerity, financial engineering, or debt rescheduling. growth is the best response. the other three are problematic so we focus on economic growth. tom: the headline is mohamed el-erian says america is like greece. mohamed: i said america is the most advanced in the growth transition because they understood you have to evolve your growth model. the u.s. is way ahead of europe and china is lagging. tom: are they diminished by austerity. it is an old world issue. are they too austere? mohamed: nobody is austere right now but what we have learned is you cannot shrink growth if you have to shrink consistently. you would be amazed how many

countries get stuck on this austerity track. jonathan: this will be awake -- this will be a big fight in washington, d.c. positive .2% on the s&p. yields are lower. earlier this morning a break of 4.40%. joining us is jay pelosky, founder of dpw advisory. in your notes this line jumps out. current conditions are almost tailor-made for a year end rally. walk us through it. jay: we are in the early stages of a classic internet rally. all of the factors are lining up. you have seasonality november and december. you have sentiment until the past week has been very bearish. you have positioning where hedge funds are the largest net short position in five years.

ctas are offsides. institutions are underperforming and retail sold the most stock last month of any month in the last two years. imagine the technical situation where we had a tremendous surge in the market, and they are typically very positive. in addition you have a number of sectors and markets and regions now recapturing their 200 day moving average and you have some like the semiconductor cycle that are breaking out new all-time highs. very powerful and we know how the process goes. hedge funds first recover and then they go along, and then the ctas flip, and then the institutions panic, they are underperforming. they start to chase.

retail joins the show. very constructive between now and the end of the year. tom: do we do that with a renewed breath or do we do it with a continuation on the magnificent 20 set? mohamed: it is definitely -- jay: it is definitely the leader and the semi's are breaking out. one of the debates is our relate cycle about to go into a recession or are we early cycle, about to go into a new growth cycle. i am in the later camp. the fact that semi's are breaking out all-time highs is constructive. tech leads but you have other segments like emerging markets where we are quite keen on. emerging markets just recaptured their 200 day moving average. homebuilders doing well. parts of the market starting to sniff out the fact that interest

rates are coming down, the fed is done, all of that is constructive for the broader market that has been laboring under the idea that rates are higher for longer. mohamed: i suspect a lot of people watching you would totally agree with your technical analysis, the handoff from one segment of investors to the other. where they may push back is the even more bullish call that you will handoff on positive technicals to positive fundamentals. what makes you so sure the economy will respond to the lower interest rate environment? jay: one thing, what really drives stocks are earnings. we just came through q3. q3 was better-than-expected for year-over-year earnings growth. more importantly to us, because we believe you have to focus forward in today's markets, particular with the narrative

ping-pong you were talking about a few minutes ago. you have to have a vision and a process. the fact that earnings for next year, 2024, are double-digit, they have held in. people did not mark down 24. that is very constructive. we just put out our 2024 outlook several weeks ago in october called surprise, surprise and we laid out four macro surprises. i will mention two. what is inflation comes down sooner than expected and faster than expected and lower-than-expected. in the second place, directly to what you folks were just talking about in terms of stability, we believe we are on the cusp of macro stability. we would point out that notwithstanding the narrative

ping-pong, the vix is under 50. there is a lot going on we think is very positive and the market is starting to sniff out and it makes us constructive into 2024. jonathan: typically when you're constructive you are thinking about the rest of the world. in my hearing tech in the united states? jay: i have converted. we did go directly to u.s. tech in our latest portfolio update. we have been long semis for the whole year so that space has been one we have participated in. we are believers that big tech -- the idea was that higher rates would hurt big tech because of the way people value long-term cash flows. the reality of today is big tech are moneymaking machines and they are printing money on top of the money they already printed in terms of interest

rates at this level. tech is a leader in sustaining that leadership but the rest of the world offers a lot of opportunity because they have valuation in earnings growth. the u.s. is capped by its valuation. the rest of the world, valuation and earnings growth. we continue to favor the rest of the world, particularly emerging markets. tom: what you just heard from jay pelosky i will suggest is a minority opinion. into this weekend, the holiday season, people cannot fathom the technical extent. jonathan: they can be constructive going into year end but here is a big call. i know you wanted to squeeze in a question for tom keene. jay: our two schools will meet on the field of football tomorrow. as a duke guy, i've wondered

about this. what the heck is a wahoo? tom: i look at the wahoo and i say i have to talk to sonali basak. she is the buck now wonder. she is an encyclopedia on this. she is a bucknell grad. buck now -- the bucknell bisons taking on the duke blue devils. jonathan: where did these names come from? tom: it is tradition. the whole college football thing to john -- jonathan: college football to me is alabama, lsu. tom: i am thinking about cambridge cricket. jonathan: that is a real sport. it is relaxing in the summer. have a couple of beers,

chillout. mohamed: beer at a cricket game? jonathan: in the stands. not when you are playing. jay pelosky of dpw advisory. equities positive .2%. yields lower. 4.4063 on the 10 year. tom: the 10 year is the thermometer. mohamed el-erian, which maturity should our audience focus on? do you go out to 30 or my 97 year austrian? mohamed: it depends for what. jonathan: hamed has not had to do the pimco alarm in a long time. setting the alarm to 3:00 a.m. to go on this show. you forget who people are. mohamed: you said it 10 times before hand because you are worried you will not wake up at

3:00. jonathan: i never wake up by the alarm, i always wake up before by 30 or 40 minutes. i just sort of lie there and roll around and start reading the news and often tom will message me at about 1:00 or 2:00 a.m. just get the texts lighting up the phone. tom: in the world we are in, people think ferro works of four hour day. i work a 4.5 hour day. mohamed: they are very wrong. jonathan: mohamed is sticking around. david led to which joining us in the next hour. live from new york city this beautiful friday morning, good morning. ♪ (sfx: stone wheel crafting) ♪

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pres. biden: we gather this week at an inflection point of history. we can harness the power of the pacific to grow our economies and uplift our workers and connect our people to one another. so much of the history of the world will be written in the asia-pacific in the coming years. we must never forget that is a history that belongs to all of us. jonathan: quite a lovefest in the last 48 hours in california. president biden hosting a dinner capping off meetings with china's xi jinping. the president leaving san francisco today to spend time in delaware over the weekend. some of the time -- some of the language that came from president xi pledging heartwarming steps to attract foreign capital. we mentioned it would likely we would get this charm offensive from the leader of china. that is what we have had this week. tom: watch where people sit in a gathering. to the right of the president,

folks on tv, was mr. lee of singapore after his meeting with our john micklethwait. this is about china and the u.s. , but in a broad sense the pacific rim as well. our military, our treaty obligations on the approach of washington to a pacific rim of a new century. jonathan: they are all with a big interest in this. there are two countries i can think of that have benefited from this tension. vietnam, and singapore, given what has happened with hong kong. singapore, if you wanted to put in it -- if you wanted to put a headquarters in asia and were thinking about doing it. 15 years ago most people in finance would say hong kong. now they are saying singapore. tom: what is really important. the bramo is picking up mohamed

el-erian who wants to jump in. to see mr. lee sitting to the right of the president of the united states? mohamed: we have to understand most countries have a dual option approach. they rely on the u.s. for national security and they rely on china for economic prosperity. the last thing they want is to make a choice. they are happy to see a rapprochement between the u.s. and china. we have to remember that is in the interest of both leaders. both leaders needed to be seen domestically as doing something that is consistent with their leadership. president xi needed it desperately. i am encouraged by what we saw but i would not get carried away. jonathan: can i name a fence sitter? germany. his germany happy with this? mohamed: germany is happy with this.

nobody wants to make the choice between aligning with china or the u.s. australia has discovered that talk of not getting involved. jonathan: enel low weighing in on the meeting, saying the u.s. will continue to push for decoupling or de-risking with china to protect its national interest and china will continue to push to develop a multipolar world against interests. tom: joining us from strategas is jeanette lowe. what is the next step. should we look for president biden to visit china? jeanette: that is probably unlikely. if we look at last year we had a meeting between biden and xi in november 2022 and not much occurred out of that.

a couple months later we had the spy balloon flying over montana which ruptured relations. i do not think there'll be a lot more steps moving forward. it is also interesting to have the defense secretary in the philippines talking about continued coordination while this aipac and the biden-xi summit was happening in san francisco. this will be about trying to lower the temperature, make sure we have continued communications. xi is having domestic issues. this is a good opportunity for him to have a reset. ultimately i think the two sides will continue on their trajectories and this will not change the overall path. it will make things easier in the short term. we have an election in the u.s.. we do not want to tensions with china. at the same time if biden was to be too conciliatory against china, we have hawks within

congress who will pounce on that. mohamed: i very much agree with your analysis. how is it -- how easy is it to de-risk without decoupling? jeanette: and this is part of the issue. the u.s. has been trying to make strides to de-risk from china but it will take some time. we are quite reliant on china for supply chains and critical minerals so it will be very difficult to move those pieces away. i think that trend is in place. you will see it continue over the next couple of years but that also means to some extent you almost need a to taunt at the highest level so you can build these pieces out from the bottom and ultimately get to that de-risking. i do not think decoupling is where the ultimate goal is but it is about trying to protect u.s. national security interests and making sure there is reduced pendency on china. you are seeing that regardless of the fact that you have to make choices how you align with

the u.s. and china, there is a realization across the globe that having too much dependency on china is not a good thing. mohamed: from china's perspective de-risking involves building little pipes around the u.s. at the core of the system. how far can they go into building an alternative global system? jeanette: this is something they've been working on and would like to continue to accelerate. the one thing that is important is the fact that the u.s. is not doing this alone, it is important they will be more successful in trying to move supply chains. china will be involved and try to work with partners in asia to get around some of those pieces. the other thing is if you look at china trying to build this multi-polar world, they have been doing that over the course of a couple of years. they are trying to move away from u.s. dollar and get other countries to do the same. if you are looking at china

being in a place of economic weakness, that is not necessarily conducive to them being the leader of that movement. there are a lot of things that have to be worked out on both sides to reach their ultimate goal and that is why we will see a model through scenario where they continue down a path. there is some need to be conciliatory in the interim. tom: quickly, and i've been guilty of this all week. i have taken my eye off ukraine. ukraine in this cold december. what will that study look like? jeanette: the u.s. does not have a lot of military aid left to provide to ukraine at the moment unless congress appropriates more funding. the spring offensive has not produced the results both sides were looking for. we are going into winter, which makes it more difficult for

there to be progress on the battlefield. i think you will see an effort in congress to try to come back from the thanksgiving holiday and pass biden's national security supplemental which would provide aid for ukraine as well as israel and taiwan, but that is something they are trying to find a solution on. they need to figure out if they can find border policy changes to get republican support for that bill. if we don't get aid to ukraine over the next couple of weeks there is going to be a strong hole put into ukraine's defenses because they do need more money. you have europe also supporting them but europe has been struggling to get aid packages past. it has been put on the back burner but you might start to see more discussion over the next month in congress. jonathan: this is the fight we will see going into the new year. we talked about the nationstates that were sitting on the fence

trying to maintain a relationship in both spheres, china and the u.s.. can we talk about corporate america. please progressive consumer bases in the united states and at the same time appease foreign dictatorships. how will that go? mohamed: it is easier for a country to be a political swing state as jared cohen call it that a corporation. if i was sitting a board i would caution against investing too much into china. jonathan: and that is what we have seen over the last year which is why you see it in the data. tom: no question about it. jonathan: will turn around with happy talk in san francisco, california. maybe that is the start but it is not the end. this is bloomberg. ♪

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jonathan: so far so good. equities up .2 percent. third week of gains on the s&p. longest run since the summer. small caps on the russell 2000 up a little bit. before entering recession this is what he had to say, "their share of companies in the

russell 2000 with no earnings is at 40%." that is torsten slok over at apollo. tom: it drives me nuts when they say this is about apple, i am dressed like dan ives so i have to be careful. you run a company for growth at the top line or a company for growth down the income statement? jonathan: it is difficult going into next year, that is for sure. if we get an economic downturn what to the numbers look like in 12 months? tom: i think by the middle of january i will be able to announce that my theme for 2024 is the sustaining of the magnificent seven. i think that is where we are heading. jonathan: let's turn to the bond market. two year, 10 year, 30 year. yields lower in a big way from where we were last month. we have gone from just above 4.40 on the 10 year, down two or

three basis points. tons of feedback about the consortium we are putting together by mohamed el-erian's queen park rangers as they support the idea of us putting forward a consortium. tom: thanksgiving, norwich's route like where the pilgrims came from, they are playing at norwich, we could go and feel the pilgrim experience. jonathan: oprah pimco, norwich is his side. mohamed: he goes to every game. jonathan: used to be chairman. tom: you go and start a rumor. henry winter will pick it up. jonathan: eurozone inflation, final read for october came out with a two handle. 108.65. let's get you company stories. disney ceo bob iger planning to

address employees in a companywide wide town hall after thanksgiving. a number of senior executives including the heads of film, tv, and part divisions are expected to join the discussion. the media giant has been battling activist investors and struggling to adapt to a change in viewing habits of consumers cut the cable cords in favor of streaming. it is messy at disney. it feels like things are for sale. abc, espn. tom: every out of duke and quite skilled at value. he will not yell and scream and get up on the table. it will be a governance mission by these activists shareholders stirring the part. i would suggest they are getting them forward in a topology that is not identified profit -- in a technology that is not identified profit yet with the exception of netflix.

gm approving an oral -- approving a new 4.5 year contract ending a months long bargaining process. the historic deal will see base wages increased 25% over the life of the contract, the return of cost-of-living adjustments, and the ability to strike over planned closures. at chrysler and stellantis workers support the agreement by wider margins than general motors. 25%. we have been talking about this for weeks. you look at the situation as the dying embers of a hot labor market or is this a sign as to what might be in store for us around the corner? mohamed: i think it is the latter. we are finally seeing labor getting more power relative to capital and that reverses decades of capital dominating. i think this is an important shift and does change the structure of the labor market and you will see other

agreements follow this one. tom: can wage gains on a real basis move outside the union debate? mohamed: i think they are already doing that. tom: you called me john again. see how he does that? jonathan: he will never come back. tom: bill, continue. mohamed: i am speechless. i would love to be called john. it would be the biggest compliment. jonathan: thank you so much. tom: honda will lift wages 9% off of the uaw. mohamed: i have never seen you blush before, tom. tom: it is the makeup. jonathan: let's turn to another story. ibm announcing it is suspending its advertising on x, the platform formerly called twitter come after their ads were spotted next to pro nazi posts

on the site, day after elon musk endorsed an anti-semitic post targeting the anti-defamation league. the incident prompting outrage from an investor at tesla. the electric car company following 4%. where to begin with this? tom: is a really delicate question. with immense respect to the career of mohamed el-erian who has prospered in business. two people start thinking differently when they have a lot of money? elon musk has a ton of money. richest guy in the world, one of. to they think differently than we do? mohamed: i think they believe they can control any narrative and they are surrounded by people who reinforce that. tom: on a second by second basis. jonathan: the business damage it could do to x, imb taking a step

back, and then you have the brand damage you do to tesla, never mind the investors, what about being associated with that brand given you know that brand is so closely associated with elon musk. those kind of comments, i do not know where that is. tom: the chief executive officer, how does she respond to this professionally and personally? jonathan: do you get the feeling linda is running that company? tom: i do not think anybody is running elon musk at elon musk. i do not think i am editorializing. jonathan: i am right there with you. tom: it is fascinating and it speaks to davos, the fancy and the great and worthy are not running around making elon musk comments. jonathan: dabo's needs to get real. this establishment nonsense. they talk about diversity. they deals -- they need some real diversity of thought. tom: we can do an hour there on

formula one racing. jonathan: toto is just a business guy. did you see his reaction to the mess in las vegas? tom: is also an academic. he lectures at harvard. he has a real care about the academics. mohamed: he really does. tom: joining us is the chief investment officer of fixed income at franklin templeton, she has survived 2023. will you clip the coupon like bill gross did or can you find total return and fixed income next year? >> i think next year will be more difficult. you are getting the income. i do not buy the rate cuts that the market is pricing in. right now market surprised beyond the perfect landing, right? jonathan: given that, what is your call on the bond market?

we have had the correction down to 4.30 right now. what is the call now? >> it has been too fast. i do not think it is underpinned by fundamentals. i think closer to five is closer to where the bond market needs to be. does it happen in next week or two weeks? maybe not. the reality is the fed talked about financial conditions and has stopped, because at every level, including what we are hearing in terms of wage agreements, at every level, i think there are remaining risks to inflation and while i think the fed will certainly has a lot of data supporting the fed remaining on pause, there is data supporting the pace of rate cuts next year that the market is pricing in right now. that is the part which is unlikely to materialize. mohamed: let's get your view on

flows. a lot of people are waiting for the extension trade. people going from the front end to locking in higher yields for longer. have yields moved down too quickly for the extension trade or is the move down accelerating the extension trade? >> right now we continue to see -- i think the speed has been too much. i think -- i do not think this is the real extension trade yet. i think it was too fast. we will see movement to the team. it is much more of a fear of missing out. you are seeing high-yield rally to 3.75. yesterday it was the 30% chance of rate cuts beginning in march.

if you needed that kind of narrative to support these rates, i do not think that is realistic. as those rates cuts start getting priced out i expect yields to start moving up. there is a last piece on flows which is the fiscal deficit, the fact that the next three months or six months that starts moving and we will see additional support leave the long end of the yield curve so there are many reasons not to feel that this is the beginning of that serious rally. mohamed: when you said this is well beyond a soft landing was your phrase, tell us, what is the catalyst for changing the dynamics the way you think they will change? what are you waiting for? what will be the catalyst? >> not having a soft landing or

seeing a soft landing? mohamed: foreseeing reality get back into the bond market? >> i think the data, the fed is trying to do what it can do in terms of saying rate hikes are not off the table. certainly the s&p might play a role but it is not clear they will continue to call for low rate cuts. the quantity of rate cuts the market is pricing, i think those start getting priced out and i do not think we are seeing good data point. we are not getting a sustained -- the move does not come as quickly and as smoothly as market sentiment is anticipating , particularly in light of these wage increases. policy remains quite expansionary. most of the inflation reduction act employment has not even

happened. we will continue to see support from that into next year. jonathan: appreciate the update. on this bond market may be getting too happy with itself on the prospects of a soft landing. equities look like this. positive .3%. yields lower three basis points. the turnaround has been amazing. i want to go back to something we have talked about earlier. we have been conditioned by having big sharks seek out the fed response to big sharks. what is missing of some of the cuts of 2019. the fed is capable of moving 75 basis points under chair powell without going all the way back down. mohamed: go back to mary daly's ftp we talked about earlier today. they are worried about repeating the mistake of the 1970's. they do not want this stop go process. i think the hurdle for rate cuts

is much higher than what the market thinks it is. jonathan: given the communication we have had, the biggest risk, is it that they do not go far enough where they go too far? is it they go too far? mohamed: i think that is the biggest risk right now. jonathan: that is what it feels like. tom: i talked about this at length. is there an operative theory right now in the new measured approach? mohamed: no. if there was they would not repeat data dependency. this is a fed with very little strategic vision. jonathan: hold that thought. we will talk about that in the next segment. final segment with mohamed el-erian in new york city. this was fun. equity futures on the s&p positive. from new york, this is bloomberg. ♪ (sfx: stone wheel crafting) ♪

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>> what is more likely is a rocky landing where inflation

stays stuck at three and rates stay high. there is some slow down and it is a malaise, a single-digit equity environment with a real risk that something breaks. it is between that rocky landing and a classic recession break we think is most likely to happen. jonathan: that is a new one. rocky landing. rocky landing, classic recession. steve chevron earlier on today. final thoughts with mohamed el-erian coming right up. let me get you a thought from citi. "the reality is less pleasant. rising initial and continuing jobless claims may be assigned activity is slowing and underlying inflation stuck above 3% will constrain the fed from acting preemptively to avoid of growth slowdown."

that is how they are thinking about 2024. tom: mohamed el-erian of the university of cambridge in writing so much to help us with our clear thinking on these matters. the next strategic theory and what it looks like. i suggest the analogs we have of the past are hugely faulted including the analog of jerome powell in comparison to paul volcker. how do we get rid of our ancient analogs to get to our next strategic theory? mohamed: the one thing we need to do more of his listen to the corporate earnings calls. the reason why they missed the inflation call and got stuck on this notion it will go away quickly is because they were not listening to company after company saying costs are going up and they believe they can pass it on because demand is strong. today most companies are telling you demand is softening quickly. we have heard this at the high

end and at the low end. you have to be more forward-looking and stop relying on data numbers. this excessive data dependency will get us into a another problem. tom: the great stephanie kelton will join us later on today. have we conflated monetary and fiscal policy? alan greenspan fought that day after day. his jerome powell prosecuting fiscal theory? mohamed: when the fed was pursuing qe they enable larger and larger deficits and they enabled excessive risk-taking, they enabled all sorts of things but they did not want to do that. that is just an unpleasant consequence of something they had to do.

i don't think so. i do not buy the fiscal dominance argument. i do think if you look at the fiscal side you could have a situation where yields stay higher in inflation stays higher despite the fact the economy is weakening faster than people anticipated. tom: -- jonathan: you have been critical of this federal reserve and you mentioned the lack of a strategic theory. for those who have not read the pieces, what do you mean, how would the federal reserve change in the leadership of it if they developed a strategic theory? mohamed: look what happened in the last month. chair powell came out and said something encouraging, he said we are seeing more supply coming into the economy. the market loved that because that is a solution to a solution to a lot of our problems. if we can enhance the supply side you get more growth and reduce inflation. the very next speech, he steps

away from that. the very next speech. it confuses people. are we looking in a world in which supply-side is getting more flexible or are we not looking in a world in which supply-side is more flexible? the fed has to be more consistent and how it believes the economy will evolve. that is what central bankers do. that is what greenspan did. they did not just repeat we are data-dependent. jonathan: they were consistently wrong coming out of the pandemic. they had a strategic theory but it was the wrong one or took longer to play out than they thought they would. haven't they been burned by that? mohamed: it may be. i cannot get into their heads. it may well be that is the case. when you are wrong, the answer is to step back and try to figure out. we have had failures of communication, analysis, action,

supervision, and accountability. tom: i go to alan meltzer on this. i have mentioned this many times before. you have to aggregate statistics. that is what we did in 1947. can we have an aggregate a strategic vision for a fed or do we have john edwards two americas or three america's where we cannot have an aggregate economic vision? mohamed: the mandate is such that they have to have an aggregate view. when it comes to distribution issues, which are really important, the amount of inequality in the u.s. today is excessive. that is the fiscal side. the fed can have a view that it needs to be an aggregate of view. jonathan: i look at -- tom: i look at the wonderful book out now on inequality and the heart of the matter is the inequality jerome powell has to prosecute is extraordinary.

there is no other way to put it. mohamed: it is not just a social and political issue, it is also an economic and financial issue. tom: how did the haves get the trust back of the have-nots? mohamed: by showing they care about inequality. you cannot be a consistently good house and a weakening neighborhood. jonathan: trust is shattered of the establishment. what you are really asking is how can the people trust the establishment given what happened with the pandemic, coming out of the pandemic? we have an ministration that claims they care about these things and yet when you go through the polling the trust is not there, the trust in their ability to deliver is not there. mohamed: when we look back we will look at this administration as having delivered an amazing number of jobs and having helped pivot the economy to a new growth model, but it is being judged on inflation. inflation is problematic.

when we talk about inflation coming down, the public believes inflation coming down means prices coming down. they do not understand that inflation coming down means prices are going up at a slower rate and why do they not understand that? they are getting poorer. the irony is the fed slippage on inflation has significantly undermined the trust people have in the administration, even though the administration has largely delivered on what it said it would do. jonathan: don't you think we need to change how we talk about the economy? the electorate feels what israel is prices are higher than they were pre-pandemic versus now and we talk about this month over month staff, this real over reels -- this year-over-year stuff and it does not register for a lot of people because that is not how it works. when we sit here and strip out food and energy, a lot of people think wait a second, where will i live, how will i feed myself?

mohamed: a few days ago i tweeted -- i put on my social media platforms of graft from the wall street journal that showed the absolute level of prices of certain things. food, gasoline, and housing. that is reality. tom: that is the cumulative. our audience is thinking he live inflation and the bowties are saying month over month. jonathan: that is what they are living. mohamed el-erian, this was great. a pleasure. two hours gone just like that. tom: a tough schedule. mohamed: the fact that we are 4-5 and the patriots are 2-8 is all we have to worry about. jonathan: at the start of the season mohamed el-erian did not

want this trait. he will come back at the end of the season. mohamed: i think he is trying but most people are telling him to not rush it. tom: if the hess family sells out to chevron, is this another opportunity? you could be some premier league tighten. jonathan: i know for a fact that woody johnson watches this program. tom: ambassador johnson? mohamed: ambassador johnson really cares about the jets. tom: we did not have time today. i want to talk to about egypt, which in robert kaplan's the loom of time is the pivot. mohamed: i look forward to that. thank you for having me. jonathan: coming up we'll catch up with david of ubs global wealth management. heading towards the third week

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>> the fed is done raising rates. that part of the process is

complete. >> is the fed done? the markets have drawn that conclusion. >> this is the softest in the labor market we needed it it takes pressure off the fed to raise rates. >> the fed is hesitant. it's hard to imagine cuts are forthcoming. >> the fed will be patient but i don't think this is a victory. >> this is bloomberg surveillance with tom keene, jonathan ferro and you so bravo it's. tom: good morning. abramowitz refrigerator shopping. looking at equities and the yield space. the 10 year real yield breaks down to 2.1%. can you imagine a one point 99% inflation-adjusted yield? jon: it's been amazing. let's go to nominal yields. through 5% higher. higher yields in the last month,

then lower. this morning, 441. citi's quote. going on to say the reality is less pleasant. initial claims, continuing claims may be an early sign activity is slowing and goes on to say, and this is the important line, inflation stuck about 3% will constrain the fed from acting predictably to avoid a growth slowdown. that there i think is the counterpoint to the happy talk around the soft landing, disinflationary story. jon: we will see that in the coming data. what i find important here is, for example, on this weekend of perfect home viewing, leaves falling, the leaves of new

england, think of what central park looks like. jon: we can take a stroll. tom: eight point oh 3% down to seven .69%. if we get the presumed disinflation, what do you do with the mortgage? you say let's go. jon: a lot of equity bowls want to declare victory over inflation. the federal reserve does not want to go there. officials don't want to prematurely declare victory over inflation. can you imagine what would happen to markets if they did? german pal with a speech tomorrow. tom: he has to be exposed. jon: he says we are done. what do you think happens monday? tom: we saw that this week with the report. to describe that ratio, the bloomberg financial conditions index, and it screams accommodative at 0.26%, exactly

what chairman powell does not want. he needs a data check. jon: a data check. tom: we should do one now. jon: equity futures on the s&p. i will keep it vanilla. equities at the moment positive by .26%. i have talked about this three day winning streak. could be three weeks of gains on the s&p. up a little more than 2% over the last three days. three weeks of gains, longest weekly street potentially going back to july. look at the bond market. down to basis points on the tenure. we have to talk about crude. entering bear market territory. down 20% from where we were in september. i was looking at crude earlier this morning like you were. a percent, 9% on the month this month. close to 11% last month. we had a conversation at the start of october. we went to london together. triple digit crude by halloween. here we are talking about the

70's, maybe even a break of them. tom: gasoline is an emotional topic. obscure on a friday. we like obscure on a friday and we do this because italy is taking on northern macedonia. looking at the italy-german spread showing some quiescence, where if you break down to new construction for italy, again, that same idea of a good feeling. jon: they need that now because there are questions about maloney's plans for the -- mell oni's plans for the deficit and there may be a dispute on the horizon. we don't want to have to play that game again on the periphery, particularly in italy. tom: the head of u.s. equities at ubs global wealth management joins us. i have a 72 page ubs phonebook with scenarios linking gdp and

yield into standard & poor's 500. which scenario do you believe in which mark -- believe in? >> that's an easy question. our base case, tom, is that we will see moderate games in the equity market -- moderate gains in the equity market in the coming 12 month. we are also going to see some nice gains in the bond market with yields falling, so our main message is we think there's a good chance that we can have a soft landing. that's really the core of our base case. economic growth in the u.s. will likely slow down. the student loan repayments have restarted. excess savings are becoming less pronounced. but we think the soft landing makes sense. tom: this is so important. i am trying to buy my first share this weekend. if i look at factor analysis, which of those factors will

benefit next year? international versus u.s., value versus growth, and the other 14 factors. which matters to you? >> are factor that we like the most across stocks and bonds is quality. we are in a late cycle environment. we have a low unemployment rate, an inverted yield curve, and inflation is coming down but it's still higher than the fed's target. that's a late cycle environment. for stocks, that suggests you want to own quality companies. these are companies that have high returns on capital, strong balance sheets, generate consistent and less volatile earnings growth. i think the same is true in the bond market. you can go into investment grade corporates, get a pretty nice absolute return. there's other parts of the bond market that also look pretty interesting. in the u.s., we like high yields. so i think there's a host of opportunities but we would

clearly focus on quality across the spectrum. jon: can we get your rate cut call? what are you looking for next year? >> we think the fed is going to be slower in terms of cutting rates than what the market is pricing. we are penciling in two, maybe three, but i think this fed, especially with the unemployment rate as low as it is, i think this fed is going to be fairly cautious in terms of getting to aggressive, and to what you were talking about earlier, the last thing powell wants to see is a huge increase in -- a substantial loosening and financial conditions just as they are beginning to get their arms around inflation and have more to go to get it back to target. jon: this is what tom has been leading into. that keeps real rates quite elevated. how much of a challenge to valuations will that be as people get bold up -- get bulled up on the idea that it's alledge

for equities -- that it is bullish for equities? >> we are not expecting big gains in the s&p for the coming 12 months. our expectation is we will see roughly 5% gains. we had a very strong rally just in the last two or three week. so i think rates on the real side will remain fairly high. i think what's going to be the more important driver year is going to be the fact that earnings growth should improve a little bit. that should support the market, but again, a lot of the soft market at this point -- soft landing at this point is priced in. tom: what do you do in cash in the next 12 months? >> i think there's a lot of opportunities out there in fixed income. you can go out the risk spectrum without taking too much risk. you can get an ice pick up yield, investment grade -- get a nice pickup in yield, investment grade. you get a nice total return. we have the 10 year going to

3.5% by the end of next year. cash is going to have a hard time competing with that. tom: abramowitz is not here but i have to ask western she would -- ask a question she would. in my right? >> yeah. we also like mortgages as well. mbs. we have been tiptoeing out on the duration curve. i think that would make a lot of sense. tom: did i do ok? jon: beautiful. did you see the headline across to the bloomberg on the dollar index? raising the gains for 2023. the dollar index wiping out gains for 2023. tom: yeah. currency is the ultimate litmus paper and i would suggest within the broader spectrum you cannot have an international pop without a weak dollar. i subscribe to that. jon: can we finish that?

one thing a lot of people got wrong, this market has been so punishing and this economy has surprised in different ways. the u.s. economy has been so much better than people thought it would be and china specifically has been much worse. given how we have reset those bars going into 2024, what's the international call for next year for you and the team? >> clearly, china has been disappointing in terms of economic performance. the u.s. has been better, as you said, but i also think at this point that's largely reflected in their shares. you have pretty full valuations in the u.s., very depressed sentiment in certain countries, the emerging-market complex, so we actually think that's an opportunity. we think chinese growth is going to stabilize and given how poor the sentiment is in some of these emerging markets, especially china, that's an opportunity to us. very different scenario with the u.s. we think it can do ok but we

have to recognize and be cognizant of the high valuations. jon: are you convinced by the charm offensive that came from xi in san francisco this week? does that even matter? is that relevant to your call? >> no. that's not a big part of the call. it's more about the mystic policy pressures -- measures they are putting -- about the domestic policy measures they are putting in place and what they are doing on the interest rate side as well. it's more about domestic politics. i think a lot of western companies are really just fundamentally rethinking their supply chains and things like that. i'm not sure when meeting between two presidents is going to change how they think about diversifying and having some resiliency in their supply chains. that is i think a different story. jon: we have heard that already. good to get your perspective. david of ubs global wealth management. if you are just joining us, welcome. equities are positive, up nicely.

positive 0.33%. we talk about this charm offensive from xi jinping, pledging heartwarming steps to attract foreign capital, looking to create a world-class business environment. tom: the phrases were, you know, managed to say the least. i get the dictator thing and all that, but to me -- jon: they shook that off. tom: what is the signal he sends with the defense secretary in the philippines looking at a base build out? forget about trade agreements and all that. what's really important here is what is the signal the chinese send that they get the message that the pendulum went too far? i circle back to hong kong. maybe i'm wrong. i have not a lot -- i have not had a lot of people agree with me. jon: you can signal with words but ultimately you need policy to get people to buy it.

some people might argue that the train has left the station. these companies are already thinking about moving and they are doing that. they are reengineering supply chains, bringing them closer to home. we have seen much of that from different companies. but i'm with you. you have to prove it to attract foreign investment again. words will not do it. tom: it is action. one of the essays of the year was in foreign affairs. does xi have control over the cities and the lords of the chinese cities? that is a domestic issue that did not come up in san francisco. jon: we need to catch up with anne-marie over in san francisco. she will catch up with us next. from new york, this is bloomberg. ♪

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>> what was interesting in the meeting was after the meeting president xi decided to have

dinner with a bunch of american ceos. he is desperate for american investment because he's made a series of economic and political decisions, resting people where capital is fleeing. jon: capital has been fleeing. the outspoken rahm emanuel, ambassador to japan, speaking to annmarie hordern in san francisco. there were two stories in san francisco. one, you have the meeting on the sidelines, as they like to say, between president biden and president xi. and then you had this gathering of corporate america and the chinese leader. we said repeatedly because of that one data point and other reasons as well foreign direct investment in china turning negative, we would see a charm investment from china's xi jinping this week, and that is what we have been. we have to separate the words from action because so far it is just words. let's see if we get a change in policy. pledging heartwarming steps, creating a world-class business

environment. to rahm emanuel's point, ambassador emmanuel's point, a standing ovation from corporate america. tom: ian marlowe writing up the and reorder an interview with the former mayor of chicago. annmarie was busy planning her trip to the calistoga food and wine festival. there's like 30 wineries up in napa valley. jon: have you been to sonoma? tom: i have never been. jon: beautiful part of the country. tom: i have it on my apple computer, sonoma software. that's is -- that is as close as i get. annmarie hordern joins us, bloomberg washington correspondent. rahm emanuel really can cut to the chase. that's why republicans and democrats love him. and the ambassador from japan in your conversation cut to the chase. the guy from beijing was courting corporate officers of

capitalist america standing up at the same time. discussed that. annmarie: rahm emanuel, the u.s. ambassador to japan, also chief of staff to former president obama, he is saying that china is desperate for this capital inflow to come back into china. that is the word he used with me. and he talked about this two screen approach where president biden left to sit down with xi jinping and went and met with other aipac leaders while xi jinping met with chief executive officers who paid money, big bucks to sit at his table and try and woo and dine them. what we saw the next day was a written speech. xi jinping did not give the speech. he did not attend this over event -- this other event but he gave a written speech where he talks about foreign ties and making it easier for foreign nationals and businesses to do business in china. the proof will be and whether or

not there is any action, but, and this is to rahm emanuel's point, he wants to see that action and whether or not he thinks it's a safe place where businesses should go and operate, but xi jinping really did try to put on that charm offensive while in san francisco. jon: the mindset -- jon: the mindset is the capitalists of the west will move their labor jobs into china and the pacific rim. that is not good. does this event that you have been at move the bipartisan distrust in washington? annmarie: i think the bipartisan distrust remains the same when it comes to china and this was really the last moment biden could sit down with xi jinping as we head into an election year. we are when you're away from the 2024 election -- we are one year away from the 2024 election. the rhetoric will get much hotter. that is why i think biden did not shy away from standing by

his previous thoughts that xi jinping is a dictator and i imagine you are going to hear that rhetoric start to amp up. so as the heat was taken out of the relationship this week, we have seen these detentes before and we have seen them derailed, so i think this is really about managing expectations and putting a floor in the relationship so it could not get worse, not necessarily so it does not get much better, but so it does not get worse. tom: you said it, i said it, tom said it. are we about to see the president going tiktok? is that what i read in axios this morning? annmarie: axios is reporting the campaign is weighing this idea, that the campaign should be on tiktok talking about president biden because the fact of the matter is that is a really lucrative and easy way to reach young voters. that is where they are getting their news. the big issue this campaign is going to have if they decide to go on tiktok is the republicans

are going to go after them incredibly hard. i mean, we saw vivek ramaswamy, who called it social fentanyl, joining for this reason. he says i want to make sure i am reaching out to young americans. but at the same time, you have seen a number of these republican candidates say that it should be banned immediate. it should not be allowed to be downloaded in the united states. tom: we may speak down to the youth of america on this and in a purple state like wisconsin, the people's republic of madison will show up with the youth vote. is there any indication they will show up and vote for biden versus their progressive series --progressive theories? annmarie: what we are seeing in the polling now, and we just had a poll of these swing states, including wisconsin, is that this recent conflict between israel and hamas, you see overwhelmingly bipartisan, many

people, these swing state voters, like what president biden is doing, standing up for israel, but when you ask gen z should he be doing more for gaza, overwhelmingly they say yes. they think more needs to be done for the palestinian cause and a lot of that has been trending on tiktok. this is probably it part of the reason why the campaign is starting to way that idea of whether or not they should go on tiktok. they have in the past. the administration has in the past used influencers, sat down with them for interviews, because they knew that that content would end up on tiktok, kind of a backdoor way into getting their message through tiktok. now this is potentially them actually, you know, signing up, having an account, something i know i don't have. i know tom and john don't have it. but actually making an account to reach these voters. jon: thank you for your hard work over the last few days. can you describe san francisco for us? because we have joked about it, had serious conversations about

the cleanup that took place under governor gavin newsom. what's it been like there? what's it been like for you? annmarie: it's been an incredibly difficult trip logistic lies because as you can see there's all these fences around us -- logistic wise because you can see there's all these fences around us. i described it as pac-man because you are stuck in a security zone and every which way you have to turn to get around, so it feels like a security state in central san francisco because xi jinping and a number of world leaders are here. a lot of the streets have been cleaned but i've also seen a lot of messy streets as well so i don't know. i'm going to go for a walk today. jon: the question is can annmarie get the gumps? you should see the fake christmas trees. it's a fabulous department store in san francisco. they have been challenged with the challenges in san francisco but i can just see amh picking out a tree there except it has

that wesco field to. jon: when i call you this weekend, like i always do, sometimes facetime, and i will have a beautiful tree in the background. you will hear the christmas music going, see those festive candles lit in the background. i'm looking to make you feel warm and fuzzy. tom: i will look out the window at the truck coming up from the carolinas. can i say this? gen z, i have no idea. gen z, john, is 1996 to 2010. i didn't know that. we are informing every day here. i would not call it gen z. i would call it gen tuition. jon: annmarie, thank you. much appreciate your time. always do. great work. next hour on bloomberg tv, the excellent lisa shannon of morgan

stanley. stellar lineup going into the opening bell. this was wonderful. love being with you. jon: great -- tom: great. qpr are in london. jon: west london. tom: on the way to heathrow. jon: yes. tom: chiswick. jon: sort of merit. tom: ok. jon: we have been there before. one of those close, warm, old-school stadiums. tom: like richmond. jon: just like richmond. from new york city this morning, thank you for choosing bloomberg. good morning. ♪ j.p. morgan wealth management knows it's easy to get lost in investment research. get help with j.p morgan personal advisors. hey, david! ready to get started? work with advisors who create a plan with you,

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tom: "bloomberg surveillance" on a quiet friday. not important economic data. a real treat for all of you. coming up, professor kelton on the state of our physical morass. interesting to say the least. the bond market moving. 4.40% on the 10-year yield. moving off economic data. michael on of booming housing economy. michael: good news this morning

if you want to see some housing work, picked up at least. housing starts up one point 9% during the month of october. building permits rise as well 1.1% to 1,187,000 rate. significant a higher than the prior month. the building permits number was -4.4% last month. it shows there was some work being done in private construction, housing construction and despite interest rates builders are putting homes in the ground. tom: are they rich men and rich women statistics? is it only the province of the have's? michael: not exactly. the market is for first time homebuyers. a lot of builders are making the houses smaller so they can bring down the cost.

it is still very expensive for people to buy homes. obviously, home sales have not been extraordinary. new home sales have been better than existing home sales because there is some inventory. what we have been seeing his prices sort of flatten out for new home sales as prices -- as builders try to hold the line. tom: what is the mortgage rate in a nonlinear fashion coming from 8.03% into now? down nicely to 7.69%. what's morgan right -- mortgage rate in your head is the animal spirit of housing rekindle? michael: they don't really know. it's a unique situation. they are hoping to get to something like 3.5%, 4%, which will take a lot of fed funds cutting to get to that point. it might spur people to go back into the markets. they will be pent up demand for housing. people who have to move because

they're getting transferred or whatever. some of the shelter-in-place psychology will go away. it depends on at what point you can afford it. tom: one more question before we get to our esteemed guest with stephanie kelton. next week we get the mission data around this mumbo-jumbo we have talked about this morning. there is hope we are not anchored or unanchored. the michigan confidence data and the expectation inflation data from there, can you detect if we are unanchored? michael: we don't seem to be yet but the one-your notes have gone up significantly over the past two months, which is a little odd. michigan is usually correlated with gas prices. gas prices have been going down. there is a theory that perhaps what people are doing is expressing their unhappiness with the overall level of prices. it is not affecting what they are doing when they go to the grocery store. they will have extra money that

did not go into the tank. they can buy more groceries or more christmas presents or whatever. tom: this is an important conversation. it is without question through the pandemic and literally in the last five years she has had a greater influence on the debate of our american economics than anyone out there. out of sacramento, cambridge and a tour of duty at the liberal new school of social research. stephanie kelton joins us now from stony brook university. the book is "a deficit myth." honored to have you on bloomberg surveillance. are we unraveled? the worry of the annual interest expense, the return of the real interest rate. are we unraveling as we roll into 2024? stephanie: no. we are -- the fed is effectively putting fiscal policy, a big part of the federal government's

budget on autopilot. it is tantamount to running a pretty regressive fiscal stimulus. that is what the rate hikes are actually doing. we don't like it, tom. there's a pretty wheezy -- easy way out of it to say the rate hikes are pushing up the amount of money the federal government is spending to service the debt. interesting spinach are of 500s of billions, trillions of dollars over time. remittances from the fed to the treasury have collapsed. follow this is adding to the deficit which triggers more issuance of treasuries, which puts you in what is essentially a cycle now of higher rates, higher deficits, higher debt. it will continue for as long as the federal reserve holds in this position. tom: the debt and the deficit, from the new school, they classically talked about years ago. the arch mmt criticism as her

handing monetary decision-making from the acuity and date driven data dependency of a fed over to the legislative branch. can we trust the legislative branch to prosecute mmt given where we are right now? stephanie: i'm glad you mentioned how brenner. he was a professor of mine when i was there and a terrifically bright person. mmt is a description of the monetary system that we have today. it is a floating exchange rate fiat currency. love it or hate it, it's what we have. mmt describes the monetary system that we have and the mechanics of government finance. it is not a policy proposal. it does not propose changing anything. it is describing how things already work. think about what congress did with the onset of the pandemic. drafting first the cares act, that 2.2 trillion dollars, than the omnibus bill at $900

billion, that the democrats came into their $1.9 trillion american rescue plan act. all of that was deficit spending. we did not give congress any new provision to do anything. we just described how it works. it helps to understand why congress was able to muster that kind of fiscal firepower when so many economists had previously said when the next crisis came we would be unable to act. people like larry summers said because of the republican tax cuts in 2017 that we would be living on a shoestring for decades to come. those were his words. we would not have the ability to spend money because of the deficits and the debt. that was wrong. congress has the power of the purse. mmt recognizes that and mmt says this is an extra in every they have. they need to use it responsibly. that means thinking before you move forward with bold spending

programs about the inflation risk associated with the spending proposals. that is the piece that was missing. one think you did not missing in my tour of my education was the time i spent in the u.s. senate as the chief economist for the democrats. i will say quickly and i will stop that when i was in the senate migrate frustration was being surrounded by members of the senate on both the republican and democratic side who were drafting bills, trillion dollars of infrastructure, talking about medicare for all and these things without ever mentioning inflation risk. i could not believe it. mmt would have us do things very differently when it comes to the way we approach the federal budgeting process. it is inflation you have to watch out for. michael: it is mike mckee. if wishes were horses, beggars would ride. the idea that congress would think about anything before they start passing bills is probably not going to happen.

after all this, is there a limit in the sense that at some point we are not going to be able to respond fiscally for one reason or another to some sort of crisis because all the money is going into debt payment instead of going into additional spending? the way we are set up now we have to pay those bills. stephanie: two things i will say. i have been hearing this my entire life. chairman volker had interest rates up pretty high. meanwhile, ronald reagan did two massive tax cuts and massively built of the military. if congress has the will to pass legislation, the votes are there and the money is there -- i don't think it is right to say actually we can't trust congress to rain and in. the so-called inflation reduction act was congress's

effort to say we don't want to continue passing legislation given the inflationary environment. we went to get revenues up. we want to control costs. we will negotiate prescription drug prices. that was all congress taking careful steps, i think. tom: would you suggest whether it is republican or democratic houses that we can have budget responsibility? do you see displayed budget responsibility in the modern congress and senate? stephanie: what i'm saying is that if we were doing things the way i would like to see them done, instead of handing proposed spending bills to the congressional budget office and saying give me feedback on this legislation i have drafted, tell me if it will increase the deficit, whether it adds to the debt, i don't thing that is the most important feedback. i think it is much better to have cbo or other agencies

evaluate opposed legislation on the basis of inflation risk. we don't do it that way. i think that would put us much closer to having a congress that operates with fiscal responsibility, i.e. inflation risk, at the heart of what it's doing. tom: john cochran, the great conservative economist. can you get on the same page and say we need to set some goals re -- bulls redux where we demand to get something done? stephanie: no. sorry but no is the answer to the question. you would have to first convince me there is some sort of looming crisis that necessitates the formulation -- the formulation of a commission and i don't believe we are facing that kind of crisis. inflation is coming down. if you approach things the way i do, which is to say are we at

risk? does the budget posing and inflationary problem? let's get at it and figure out what adjustments need to be made to ensure we are putting ourselves at risk -- not putting ourselves at risk of inflation about the fed's target. tom: fascinating and controversial. professor kelton, thank you so much. stephanie kelton, she is at stony brook. you know her from the phrase mmt. futures up 12. vix nicely under 14. 13.89. a stunning statistic. the ten-year yield at 4.3%. standard & poor's up .2%. we welcome all of you here on "bloomberg surveillance." after that controversy i can feel the heat come up in the room. our staff was like, kelton?

what a raging debate. i tried to be collegial and use simpson bulls as a political solution and she said no. michael: i think mmt is controversial. perhaps the most controversial thing she said is congress could do the right thing. to paraphrase -- to turn winston churchill's saying on its head, congress tends to do the wrong thing only after trying all the right things. they end up in the wrong place, which is unfortunate. tom: three tranches of stimulus. we actually got a kelton during the pandemic. we are watching -- in my right? we are watching an experiment in mmt in real time? michael: mmt is hard to pin down, as even stephanie

admitted. we are watching an extremity and how far you can go with fiscal policy in real time -- experiment with how far you can go with fiscal policy in real time. before congress does something they should think about the inflationary impacts. certainly there were people -- larry summers talked about that. in general, people did not understand the inflationary impacts. this was a pandemic situation we had never had before. would that work the next time? tom: michael mckee off stephanie kelton. that is what "bloomberg surveillance" is all about. the yield space is front and center off a magnificent seven bull market. coming up, ira jersey on bonds. good morning. ♪

>> we still lack one of the three anchors. you need an economic anchor or policy anchor or a technical

anchor to the bond market. we have lost all three. these moves are going to continue. the thing that has impressed me is that nothing has broken. if you had told me a year ago we would see this volatility in the most important market in the world, the benchmark of so much else, and did nothing will break, i would have said that was impossible. tom: mohamed el-erian with inflammatory comments. two hours with mohamed el-erian this morning. he's with the university of cambridge and queens college. years and years a student of the market. he gave us a little hint. publishing next week, i'm told. that is one of the things we cannot say. it's on a need to know basis. michael mckee because nobody loves me. grandma is gone. ferrow is gone. thank you for the emails and the hate males. stephanie kelton, always

controversial with more mainline media. this is within the bond market. it is a new school of social research half-hour with professor kelton. joining us is someone else with parchment from the new school. yields stunning. 4.43%. he's out with his view to next year. ira jersey, interest rate strategist for the new school of social research and bloomberg intelligence. ira, does the debt and deficit of how brunner and bernstein, the high point of new school economics, does the debt and deficit intrude or make harder your view for next year in bonds? ira: it does. supply matters. the basics of economics and markets don't stop because you have a theory like mmt. given we are expecting a $1.7 trillion deficit in the current fiscal year that ends next september, the supply-side is

somewhat worrying and making it a challenge as to where yields might go in various states of the interest rate market and the economy. that being said, what the house view that the economy is going to be much lower next year than it has been on both a real and nominal basis, inflation coming down and real growth being anemic over the course of the year, we expect ten-year yields to be 100-ish basis points lower than now. tom: it's a double digit ira jersey. you minced no words about it. it is time to make money. what strategy, what duration allows for a 2024 double-digit return? ira: if you go out five-year notes might even have close to double-digit return. if we are correct and you get a 1% reduction in five-year treasury yields at a duration of five years, that's a 5% return

plus the 4.9 -- 5% return to get on clipping the coupon. you are getting close to 5% even in the belly of the curve. the further out you go you get more bang for your buck. it depends on your risk tolerance. we talk about duration and interest rates all the time. you go to a 30-year bond, if we are wrong, you can lose a lot more money in the 30-year than the five-year. that is the risk-reward profile as opposed to the 30-year or the two-year. tom: it is like a chinese wall, and institutional firm. economics never talks a fixed income. michael mckee here to help out. michael: i talked to ira jersey all the time. we have a different kind of relationship. you mentioned the 30, ira. i'm curious as we go into the week after next, next week being the holiday and nothing will happen but we get another round of coupon sales. do we think we are going to get

the same kind of problem with the 30? i'm reading the treasury department certainly doesn't think there was any icbc issue that caused the weak auction for 30s last week. does it recover? ira: the auctions we get after thanksgiving are the two-euro, five-year and seven-year. i think first there was a lack of demand for that 30-year bond duration. i think some people were distracted by what went on with the hack. i don't think -- people worried about the market structure and the functioning of the market. that really did in that weak 30-year. the 10-year was really good. people are willing to take risk on the 10-year and the 30-euro the time were unwilling to take a risk. two 's, five's and sevens come and

go. it will be right before the fed meeting. number two, before we get some of those auctions we will get the next cpi plus nonfarm payroll, isn data. we have a slew of data. whether or not 10's and 30's get bought or avoided in december really will determine the pace of the data. if the data is weak, it can wind up having reasonably strong auctions. michael: you mentioned the market reaction. i'm curious about what your reaction was to what mohamed el-erian said about the market not having an anchor anymore. we have blown through the economic anchor and the policy anchor and the fundamental technical anchors. is that really the case? is the market kind of drifting without a guide? ira: the idea of having market

anchors, part of this is the uncertainty about the future of monetary policy and growth. when you get a lot of uncertainty you get heightened volatility in the market. i think that is one of the things you saw over the last two months or so, basically since the end of july with the selloff in treasuries. an acknowledgment that if we are going to have an anchor and the anchor is coming unleashed a little bit, which is what you saw when jay powell and the federal reserve decided -- tried to convince the market they were not going to cut rates next year, that is when you saw the selloff. some people talked about being a supply. about 90% of that we estimate really came from the shift in monetary policy expectations. i think the anchors still exist but maybe it needs to find a new catch on the floor of the seabed. tom: with the price of yield

down, not so much what does cash do but this titanic shift we see from deposits to money market funds do? ira: that is one of the reasons why t-bill auctions have gone pretty well. the treasury department has been able to issue a lot of t-bills. we were charting and whatever reports this week -- i don't remember which one we published this week but we have a chart showing the massive increase in the med of t-bills outstanding over the past five months. those have been able to be absorbed because of the shift from deposits and a money market mutual funds. i think that is almost necessary to fund the government. the banking sector and aggregate has enough reserves right now. we have enough money in the reverse rate facility that another $300 billion of t-bonds will probably be absorbed. more than that micah dacey. i think -- might get dicey.

there are reserves. i also think there is a floor for how much money market mutual funds want to hold. it is just easy. you are facing the fed. the chance of default is nothing and it is tailored liquidity that these money market funds need. tom: ira jersey on fixed income and the consensus view. 450 to 350. i will believe it when i see it. michael mckee. a lot of data this week. a seismic changes what i saw. maybe they have never been this far. they have to wait for the data. they are massively exposed. michael: they said we are data dependent for years and years and years. tom: now it is with a vengeance. michael: the models don't work in terms of predicting what will happen in the future. they think they know what's

going on but they need to be sure. they want to make sure they don't make a mistake. tom: what is the path to december 13 look like other than i will not have my christmas shopping started by then? ira: we look at the pce inflation numbers in the spring numbers. we get cpi. tom: just jobs day matter? michael: jobs day will matter but the inflation numbers are what is driving things now. if the fed sees -- unless we get a huge jump or drop in on employment, the inflation numbers, if they go down they will hold off. they don't want to make a mistake and go too far. tom: michael mckee, thank you for joining us on a new school of social research half-hour. green on the screen. nasdaq fractionally south. futures up 8. vix speaks of the week. 13.98.

on the open with jonathan ferro. priya misra. ♪

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