How will rate hikes from the Federal Reserve play out in emerging markets? We get the view from Bloomberg Opinion columnist John Authers. Plus, Garfield Reynolds tells us why fighting the Bank of Japan could be a losing bet. And Justin Fox weighs in on the post-pandemic drinking binge that just won't end. Listen to the latest Bloomberg Opinion podcast for fresh takes on these and other stories in the news this week.
Welcome to Bloomberg Opinion. I'm Vonnie Quinn. This week has brought perhaps not won, but a couple Garfield Reynolds on the Bank of Japan's surprise to the markets later. Had January six not happened, January eight would probably not have happened either. Eduard op Porter on the similarities and differences between January eighth and Brazil and January six in the United States. Will also hear from Justin Fox on the ongoing propensity to drink alcohol post pandemic. First though, to John Authors and the resurgence of emerging markets to start three. So, John, a few things happened in Q four of two. China obviously abroptly started to reopen. US markets were extraordinarily volatile, the FED was ramping on Parkish language. It was all to be a little bit expected. But it has given rise to a spectacular performance by emerging markets. Does it continue? It certainly can, and I think on balance it probably does. There's no such thing as a freelancer or certainty in these things, but I think the case for staying overweight in emerging markets is pretty strong. These days. Emerging markets have been cheap relative to develop for a very long time now, for over a decade, they've just persistently underperformed further and they've looked ever cheaper. So there have always been those reasons which give room for a lot of out performance once they finally begin to recover. The two critical catalysts are you've mentioned China, obviously, and a week dollar, which would happen with the US slowdown or a relatively early easing in rates. If the dollar does weaken on cue and China does seriously stimulate, it's pretty hard to see how emerging markets don't be developed for the next year or two, right, And there's a lot of questions in there, because we don't know how much China can stimulate, or how much China is willing to stimulate or blow out its deficit, for example. But you have to wonder why it's all happening now, given that many of the same conditions that we were dealing with last year is still in place, including chip wars, the actual war on Ukraine, shortages of certain materials, and even China's poor performance. Yes, but if you try to discount future performance, which is what you're trying to do, you don't buy a stock or a bond's passed. You buy its future, and you buy it. The arguments that emerging markets can move ahead do look stronger than they did. I mean, one of the other critical points here is that synchronization is less than it was. We had a moment of extreme synchronization obviously with the pandemic, but what we have had since then, Countries like Brazil had to start hiking rates pretty aggressively in one as we know, the FED didn't for another year after that, the ECB waited longer. That means that you've got differentials in emerging markets favors if you're looking for carry trades, if you're looking to make money from yields or whatever, there's that much greater of an appeal. It also means that some of them are already at the other end of the cycle and beginning to pick up growth again. Obviously China, with the extreme change in its COVID policy, is a very big part of that, but it's not just China. Yes, the conditions are generally not so different from twelve months ago, but we have moved on twelve months. The US has hiked a lot, and the emerging markets have already earned some of the advantages of having hiked earlier. Now, Goldman Sachs, as you point out, is suggesting a three percentage point differential and growth between e M and d M. How does Goldman explain that, Again, it's primarily about China is just very very important, very big, and the likelihood is that they will be able to drive growth, not just in China and everywhere else if if China starts demanding more and this is one of the more interesting questions, whether that will help commodity producers as much as it's used to, or whether it will help people might be wanted to export consumer goods to China, but it does help everybody if China is beginning to grow again. Most importantly, though, you are at a different point in the cycle. The central banks in the developed world are waiting for growth to slow down and wanting that to happen, and in emerging markets they are at the point of emerging from those precise conditions. We don't have the synchronization we did. Another point is back in the big emerging market boom that came before the global financial crisis, one of the great buzzwords was decoupling. That the emerging markets now got to the point where their middle classes were growing. They were trying to mature their economies, become consumer led all the rest of it, and as they did that, they would decouple from the different world. That turned out be wrong, as we discovered in two thousand and eight. However, it's conceivable now in for less healthy reasons, there might be more truth to it. Deglobalization has happened to a fairly significant extent, and there is somewhat more need for emerging markets to create their own growth. I don't want to take this too far. Obviously, the dollar is still extremely important emerging markets, but the world has moved on in a way that does make some form of decoupling much more plausible than it was fifteen years ago. It's going to be difficult for emerging markets to carry that off, right, I mean, you can't materialize materials literally or demand or GDP growth. Risks of politics and governance would be high on the list. People are concerned about whether Lula is going to be a much more left wing prime minister president this time around compared to his first dint in office. Lopezador in Mexico, who's coming towards the end of his term, has has been moving in a generally rather disquiet ing authoritarian and anti market direction, those being two of the most obvious countries to do well. Otherwise, Yes, there are there are plainly political risks, but there always are. Um Lula has been president for ten years. In the past, Lopez Obrador was mayor of Mexico City, which is effectively the second biggest job in Mexican politics. Before. These aren't complete political novices shouting to burn everything down in charge. They are people whose politics are to the left of where many investors feel comfortable. But I don't myself see those dangerous as particularly serious. We've seen that you rally in the equities, obviously, but there are fascinating opportunities in the m debt and obviously Mama Area and Rob Kunnigsberger Grammercy Fonds have been pointing this out as well. They're very excited about it, not just in the very immediate term but over the next almost twenty four months. Perhaps, Yes, I think the point that they made, which I was fascinated to see because I hadn't noticed it before. In terms of draw downs, emerging market debt last year on a total return basis had its worst draw down since the Russian default in, which is crazy, right, yes, because there wasn't actually an emerging market crisis last year, but there's not a large part of these. There was no vintage emerging markets in trouble. There was no worry about sudden, massive devaluation anywhere in the emerging world or default. The only bigger draw down since the MB benchmark has been in place since the beginning of ninety four were around the Tequila crisis in Mexico ninety four, which was an epic crisis at a point, you know, when the emerging world was in a very different place, and then only a few years later when Russia folded down to yeltin. I mean, obviously not the first to point out that last year was a very unusually synchronized year and absolutely everything fell. It's a bit hard to see that there's a good reason for emerging markets to have done as badly as they did. If you believe in a continuing week dollar, then you benefit just from the weakening of the dollar. If you're holding onto emerging market assets, the yields, both because of the sell off and because with higher rates anyway they're offering more, the yields are very much more appealing than they've been for a very long time. A lot of these arguments do seem to be contingent on a continuing weakening dollar, though I guess it looks like we may have a continuing weakening dollar anyway. Um, what about some of the other currencies though, I mean, are they stable enough that they can hold their own? The other huge wild cards in the financial world at the moment is the end, which obviously matters quite a lot to some the key emerging markets on the Age Pacific. I think it's close to certain that the Bank of Japan will have to be considerably tighter in its monetary policy by the end of this year than it is now because the kind of intervention it's having to do at presence is truly unsustainable. There will be new leadership in the first week of April, and something will happen there, and I could throw a real spanner in the works. Right We're gonna be speaking with Garfield Reynolds in a few minutes about the Bank of Japan and how it did nothing this time around on yield curve control, which was a surprise to markets, and the end reacted. But the end has been really a sort of a wild card, as you say. What was interesting to me about that reaction Garfield knows more about this than I do, but the the speed with which the yen weakened again in the immediate aftermath decision to show that a lot of people really did think that Corona, who's been in charge for more than a decade, hugely important figure, was going to basically give up on his signature policy right before leaving, which was always unlikely, but it was obvious from the market reaction that people really had thought this was going to happen. But the end came all the way back within ten hours. I think it was I think because you still reverted to the fact that this is only a matter of time. You still don't really want to be too far short the end for much longer this year, because it's very likely to appreciate and yes, depending on how it's handled, and obviously making sure that there isn't some big disruption caused by a major surprise to the market, and the end would be one of the other wild cards that could mess up the pitch we're looking at. And we're not even going to talk about oil, not this time. Bloomberg Opinions, John authors stay tuned. Chief Asia Rates correspondent Garfield Reynolds next on the Bank of Japan's surprise to the markets. This is Bloomberg Opinion. You're listening to Bloomberg Opinion. I'm Vonnie Quinn. This week, the Bank of Japan surprised markets. Not economists necessarily, just markets which were expecting another tweak to the Bank of Japan's yield curve control mechanism. Well, markets didn't get that. I spoke with Chief Asia Rates correspondent Garfield Reynalds, there's no economic reason to expect the tenure j g B yields to continue trading above the point five percent band. I don't think the Bank of Japan needs to widen a tenure j g B trading range, as the bank is continuing to manage market adjustments through the nimble use of y C C and fund supplying operations. So the b O J kept the band does is at about zero percent. The market was looking for another tweak. Did the December tweak then failed? Garfield well, similar tweak certainly failed to improve market function, which was supposed to be the aim of it, and said it set off an enormous credit Really pumped for the j and spread turn all around by the bond markets. They now seem to be trying to put the gene back into the bottle, as it were, by insisting they're going to stick with their current policy, they're going to be flexible about the way they pursue bond buying. The several warning shots being fired across the bond bears vowels right now. The message from the yen, which is down more than is very much that this is a doublished surprise. Did the currency move play into this decision? Well, it's interesting the b o J has actually said in its announcement that it is taking currency into account, so that as an extra layer of uncertainty. If the end continues to drop, then will that make it harder for the b o J to move ahead with trying to control the bond market or is it willing to go on spending trulley astonishing amounts of yen every day to contain j g P yields. Yen swamps were trading your one percent versus the y c C bond target of about half a percent, so hedging if he was rife and swaps. Does that now come down or does the market still try to tell the central bank what to do. Well, that's going to be one of the key battlegrounds, especially because the b o J is has announced that it will adjust the rate at which it lends money to banks in order for banks to buy g g vs. And certainly we've seen the ten year swap rate that you were talking about, which at one stage was almost one percent. It came into the meeting at about zero point nine two. It's now down ten basis points from that. So for the moment, that's a sign that the market is pondering how strongly it can act to take on the b because the b o J has signaled a very strong willingness to take the market and that it is looking to potentially expand its arsenal in doing so. When Governor Cruder took office, the o J owned eleven percent of the j g B markets. What is it now, Garfield? And how high can it go? Well, that's that's that's the one quadrillion questions. Think that's how large the Japanese bond markets. It's stood at about of the market at the end of last year. That's based on face BOJ holdings versus the bonds outstanding, not taking tables of account. So far this month they've probably expanded that to about fifty three and doing what's going on. So they can't keep going at this pace because certain they literally will run out of bonds to buy. That's part of why they're perhaps trying to be expanded. Arsenal as I said. It also does raise the potential that they will expand as rapidly for a while until they do convince the market that they're willing to do whatever it takes to contain bondings. It's almost a little bit like the u US market at the moment, with the central Bank here in the US continually trying to convince the market that it's going to stick to its guns. Is that something similar that's playing out in Japan. Yeah, there's definitely something something similar. I mean, there are different dynamics play in something is going. If you think back early last year, we had President pal saying that he was fairly certain inflation would be transitory and so it wouldn't have to raise rights too fast, too fast. But then the market was saying no, no no, no, you're going to have to hike a lot, and ultimately the Fed came around to that thinking it's just now the market thinks it's done enough. We're right at the beginning of that process with the b o J, where the b o J is still effectively saying it thinks inflation is transitory. One of the surprises for traders and investors was that the b o J maintained CPI forecast under two percent, and that two percent level is what the bj has targeted as the aim of the policies. So if they're thinking that CPI is going to come back count they had then that back to the idea that they will not be tightening policy from here. Well. Interestingly, all of the economists and the Bloomberg survey had forecast that the Bank of Japan would stand pat So clearly economists are looking at the inflation data where markets are really looking at maybe momentum or some kind of credibility issue, as you said, but we are getting some wage inflation in Japan at the moment. Is the Bank of Japan correct? One part of what's going on is somewhat thinking that the Lasting of Berg wants to do as soon as it gets a little bit of wage growth is act in a way that could deter that wage growth from really taking off, because after all, if it did do much more along the lines of what some of the market bets were, then that would raise borrowing costs in the economy, that would make it harder to get sustained wage increases. So you sort of nip it in the bud. The other thing, of course, that and going honest that well markets are following the money. If you bet going into the last BAJAM meeting that they were going to do something which could allow yields to rise, you did very well. Indeed, despite the fact that there was a very strong consensus it was unlikely the b o J would do anything like what they actually did. So when you see people make money betting against the Bank of Japan, it makes sense for people to follow in and to keep betting. There are plenty of people who weren't paying against the last time they've been telling us they're still been against the Bank of Japan. They think the current setup is unsustainable, and so many of them are realistic enough to acknowledge that they might up get what they want this time, but they still see bonds that's being vulnerable to further the clients going forward, because that global inflation backdrop isn't going away. Haruhiko Kuroda is going away to April one, So change is in the air. There's your or confirmation that this is being taken as very debblish. The BOJ has brought perhaps not one berz but a couple. So while this round may go to the b o J, it's also going to be fascinating looking forward to what exactly the b o J means when it says it will be nimble in its bond purchases going forward. Does this narrow the field as to his successor now not necessarily. You could actually argue that if he manages to stave off the damage that had been done to the BOJS credibility the last meeting and provides flexibility that in fact opens the field back up. It gives the government more opportunities to uh, you sit back and decide, okay, what kind of policy do they want, rather than being a situation where they feel they might need to plump for one candidate or the other as being the one who could best resolve this pawnee situation. Finally, Garfield Equities seem to take this news in their st ride. Most of the indices in Japan were higher. Yeah. Well, I mean that's a couple of things they have. One is, you know, there are some companies that actually benefit from a week again and not two weeks of again. So that's welcome. And I think just the idea that the bj is going to seek to store literally and isn't going to drive up interest rates earlier than most had expected, that's being welcomed by equity trailers Nuomeberg's chief Asia Rates correspondent, Garfield Reynolds. There, stay tuned. We move continent to Brazil next and speak with Bloomberg Opinions Eduardo Porter. Because the January six insurrection in the United States was so clearly identified with a political party, I can see that creating, you know, frictions and and and and forces and and disruptive forces within that party. The case in Brazil, the forces that have drawn the in the rebels together are not quite as coherent. This is Bloomberg opinion. You're listening to Bloomberg Opinion. I'm Vonnie Quinn now to Brazil, where election denile continues to fester following the January eighth storming of empty Brazilian institutions. I spoke to Bloomberg opinions. Eduardo Porter Edward a lots of commarisons between January eighth and Brazilia and January six, obviously in the United States, but moving beyond that, January six did seem to be the event that splintered the Republican Party. It was already pretty fractious. Now I think it's even more so. Is that what happens with these populist uprisings. Do we see Brazil's election denier startist splinter or is it more likely that they could be galvanized by these events. That's a very good question, and I don't have an easy answer. Because the the January six insurrection in the United States was so clearly identified with a political party, the Republican Party, I can see that creating you know, frictions and forces and disruptive forces within that party. The case in Brazil, the forces that have drawn the rebels together are not quite as coherent, not quite as cohesive. It's not like a political party where all this belongs. I would say that there are groups, so, for instance, the agribusiness sector of the Brazilian economy, the ranchers that are in you know, and in the amazon A lot of the hostility towards the Lula regime come from those sectors, but I don't see them as coherently grouped up. So I don't see a party that would fragment Brazil's politics are already extremely fragmented. There's a huge number of parties represented in the Congress, and so it's not clear that this would actually have an effect in the legislature. On the other hand, you of people like Steve Bannon, who probably would like to take some credit for this. How much influence did somebody like that have down there? I would say that had January six not happened, January eight would probably not have happened either. I do think that there was a clear force of example, the biggest democracy in the in the Hemisphere can do this, why can't we? It looks like a good idea might be fun. I mean, if you put video side to side, they'd look pretty much identical, except for in Brazil everybody was wearing a yellow T shirt. But to the more specific point that people close to Trump, particular Mr bann and had their hand in this, they certainly did. Also. Naosnlado was here even before the Brazilian election talking about how all the electoral technology in Brazil was susceptible to being manipulated and how the election could be stole. They were preparing the ground to make an argument very similar to the one that was made in the United States, and then they made it once also not lost the election. We heard all about how this was fraudulent. In fact, Wilson NADOs group tried to make their case before the electoral tribunal and it was shot down. And so the parallels with what happened here go beyond the day. You know, there was these efforts through Brazilian institutions to to to make them call the election fraudulent, and when they lost, they just unleashed the people onto the Congress. So then Lula should also learn from the response to January six. What should he do is a crackdown on his part. Advisable should get to the criminal justice system. Absolutely, I mean, I think it's critically important that he established that this is not okay, and I think that it might be easier for him than it was for the Democrats, because you know, the Democrats meant acting against Republicans and many of which were sitting legislators in Brazil. You'll have less of that. So, I mean, I think you'll have less of that because we don't we don't really know where the chain of culpability leads. But I do think that the Lula government must go very very forcefully against the people who instigated It's the people who financed this. It's still not clear who these boul are. So. A former central banker in Brazil, Tony Volpon told Exante Data that this Embolden's President Lula to push ahead with expansionary fiscal plans now that could help economic growth expenditure, though might also set off investor concerns. What say you, is that a little bit of an outlier argument? Yeah, I'm not convinced that this gives Lula that much, you know, additional power to enact an aggressive policy strategy. The country is still very, very divided, and I don't think that this is going to change that. I mean, maybe, you know, the right looks a little bit crazier, but remember that Bolsonnado had already celebrated strategies that involving the death of his political rivals and the torture of his political rivals. I mean, Brazilians already knew the craziness on that side of the political spectrum. So I don't really think that this opens great new space for Lula the government. In terms of Bolson Arrow, is he planning some kind of comeback. I mean, he's in Florida, apparently was hospitalized for a time for abdominal issues. There is a little bit of diplomatic pressure on the US government. We'll talk about that on a second. But is he planning some kind of comeback, a triumphant comeback to politics in Brazil. I mean, I do think that that is off the cards now. I wouldn't be surprised if the administration goes after him criminally, if they can prove some more direct responsibility. I do think that this does at the very least end his political career and those of his proxies that I'm not sure that it ends a political career of everybody that are associated and associated with this kind of of this movement, but of him personally. Yes, I mean, now he says he's going to go back to Brazil, and I think that he is legally vulnerable. There are fans of Bolsonarow on Wall Street. There are obviously investors who are less concerned about the human and the social aspects of these types of things, and more about what happens to assets, basset prices and so on. Do they get placated enough that they find Brazil investable again. I think they're going to eventually find Brazilian investable. I mean, I think it's less that they love bol Tonado and more that they fear Lula. They fear of the notion of a leftist government that's going to go in, you know, do a lot of redistribution and engage in deficit spending on a large scale. But I think that ultimately Lula has already been the president. He's already proven that he can be a pragmatic, pretty reasonable steward of the Brazilian economy, and I wouldn't be surprised if he does that again. That ultimately Wall Street and investors, like they did when he governed last time around, will ultimately come to terms with a Lula government and not flee Brazil at all. I mean, in fact, if you look at the performance of the Brazilian stock market, it did way better under Lula than it did under This is true. And also we should point out that the latest Atlas Pool has President Lula's pool rating at one percent is disapprovals at forty one point six. That's not a terrible performance, but I mean for Lula, it's not great, you know. I mean it does show a country that's pretty split. Lula, when he was president, he was extremely popular. He left the presidency with popularly rating substantially higher than so for him, it's a low And I do think that that underscores how divided Brazil is. I mean, in the American context that looks great, but I you know, but I it looks to me that one of Brazilian still reject him and probably are still enamored of Bolsao strikes me as maybe the main obstacle that he will have to govern. This notion that there is such a large share of the population that really rejects him. So I want to be diplomatic about this. The US has a mixed record at being involved in Latin America at best. I think that's the best word you can use for it. What's the U supposed to do here? I mean, it's all right involved. It can't ignore the situation. Bill Sceonnaro is here, this pressure on President Biden to revoke his visa in some way. Yeah, but I think the US can do things. I think so far so good. President Biden invited Lula over and called him up and told him that, you know, insurrection was unacceptable and he stood behind Brazilian democracy and so forth. I think that was good. I think there's other things that could happen, kind of like in a less public way. So, for instance, there are very close military to military ties between the Brazilian military and the US military. I mean, a lot of the Brazilian top brass comes to the US to train and so so that could be a channel where because that's the most worrisome institution right now in Brazil, the military. Do we know how much support Lula has in the military, because we do know the Jaira Bolscenaro had a huge amount of support at least among the police, if not the wider security abroad US. The optimistic take is that the military are so far behaving pretty responsibly. You know, they did allow many of these protesters to encamp in military basis in the capital and another around other cities. I mean, the protesters were really expecting the armed forces to join in and try to overturn the election, but they didn't and they haven't and so I don't think they're super in love with Lula as an institution, but they have proven to be institutionalists defenders of democracy. So far, so good. And I think that the US could kind of like help that cause by, you know, just making sure that Brazilians know that the United States would not be happy if the Brazilian military war to like take a more active role and say undermining the administration numer opinions. Eduardo Porter, Well, if you're not among the dry January clew out there, you've got to listen to this next interview. Justin Fox had a look at the data and found people are spending more on alcohol even post pandemic. So, Justin you wrote a very consoling recent column. Not consoling in the sense that it told us that the pandemic drinking binge just kept on going after the pandemic was ostensibly over, but consoling for those of us who've had a couple of drinks in the last week or two. Tell us what are the data saying, Well, I wrote, I guess a year and a half or so ago about how much alcohol sales and seemingly consumption increased over the course of the pandemic. And I just sort of checked in again with the highest frequency data we can look at, which is just the consumer spending that the Bureau of Economic Analysis puts out. They actually give you in some detail how much is spent on beer, wine, and liquor at stores, and then how much has spent in general on drinks at bars and restaurants. And it's just kept going up, even in inflation adjusted terms. And a little bit of that is maybe people are buying fancier stuff, but I think it's mostly overall Americans are drinking more. How much do we know about the internals of those data in the sense that I feel like many of the large companies put out things like X zero or X double. Oh. I don't want to give any bond names here, but are some of these zero alcohol drinks considered alcohol in this Not that they don't, they don't show they shouldn't show up in any of this day. It is possible to spend a lot of money on non alcoholic liquor, and I now do that weirdly enough, but that should just show up as a non alcoholic beverage. Right. Well, there's been an explosion of those kinds of products within the brands, right and there's been definitely this increase in demand for I forget the term that the Distilled Spirits Council uses hyper super duper premium spirits, and and there's a lot more growth in the high end sales than in the low end sales. So in terms of the actual volume of at least with liquor being consumed, and probably with beer and wine too, it's not completely reflected by those increases in sales. Some of that is just people paying more money, not drinking more volume. But there there are lots of signs that there's more problematic drinking going on, the main one being a big increase in alcohol related deaths. What's going on with alcohol related deaths? Alcohol consumption in the US peaked in that i teen seventies and had been on this long decline, partly because of less beer consumption but also less liquor consumption. Wine consumption kept going up, but not radically. Sometime in the last couple of decades, spirits consumption started rising again. And it's pretty you know, the whole cocktail boom. This's been this explosion in the number of small distilleries all over the US, and it's kind of cool in general, but it means that per capita alcohol consumption has been rising now for more than a decade, and then it seems to have just taken a leap a couple of months into the pandemic. I guess I had thought that would have fallen back, but it hasn't. Really. Another interesting thing is this increased drinking is not young people, oh, for like the eighteen to twenty four set, I think they're probably drinking less, but it's middle aged and older are the ones drinking there well? And also legalization of wheat and having weed dispensaries New York City just sort of pushed it aside for a certain generation. I think also in the survey data, it's mostly women who are drinking more, with men maybe more flat interesting alcohol related deaths, do we know how they're happening? I mean, this is very grim and gruesome, but you know you're good at looking at grusom data, right. I mean, I think the c d C has this database and you can just click alcohol induce deaths, but it's some mix of cirrostis to deliver, And I mean what the CDC says is that that's actually only a portion of deaths that are somehow related to alcohol. Those are ones where it's basically you can very directly lay it down to alcohol use. There are lots of others in terms of accidents violence, that are probably alcohol related but don't show up. So, Justin, is there any hope for those of us who drink and haven't been cutting back. I mean, I'm not a great self help journalist. My own personal situation is it's January and I'm drinking a lot less. But yeah, I just agreed to go meet a friend for drinks. Maybe I'll see if they have good mock tails there. Even the name is just a little too boogie Bloomberg Opinions, Justin Fox, That does it for this week's Bloomberg Opinion. Do send us your thoughts though, Email me at v Quinn at Bloomberg dot net and as always, were produced by Eric mollow Till next time on Bloomberg Opinion