Hello, and welcome to What Goes Up, a weekly markets podcast. My name is Mike Reagan. I'm a senior editor at Bloomberg, and I'm Danna High Across asset reporter with Bloomberg. This week on the show, Well, even before Russia invaded Ukraine early this year, the world had already hit peak globalization. That's according to this week's guest, who is the head of institutional portfolio strategy in the asset management unit of a major bank, and he says, well, we better get used to it that there's more d globalization ahead. So what does that mean for markets as we look ahead to and beyond. We'll get into it with our guests this week. But first of all, Donna, I've got to talk to you about one thing. It's your football should Why what's wrong with them? They're the best? No, well, your fans, the fans of the Buffalo what did they do? You know? Fifty some years ago, Philadelphia Eagles fans through like one or two snowballs at Santa Claus that not even the real Santa Claus, I will point out, and we've been hearing about it every day since. What awful fans we are here? Your fans. We're throwing the snowballs at the actual players that the other team at the Dolphins. Yeah. I loved it, Yeah you would. It was so funny you would. I think this ends the debate over who the worst fans are in this because these two teams could face off in the Super Bowl this year. Well, fingers crossed, okay, but the referees came out and they said, if you continue these shenanigans, Buffalo is gonna We're gonna give a penalty to Buffalo. But then don't you think if you're a Miami Dolphins fan they're in the stadium, that you would purposefully throw snowballs so that Buffalo can get the penalty. Seriously, there's like to Miami Dolphins fans, Yeah, they don't even know how to throw snowballs. They would someone from Miami doesn't even know how to make a snowball. You kid mean, yeah, we can learn fast snowballs. I'm just saying that the thinking was very flawed. You better not throwing the snowballs at this week's guest. Oh yeah, our guest. He's waiting for us. I want to bring him in. It's Jared gross Managing director and head of institutional portfolio Strategy at JP Morgan Asset Management. Jared, thank you so much for coming on the show. Thank you Old Donna, and thank you Michael. And as a longtime Philadelphia Eagles fan, I have to say that I am more than happy to see the mantle past to Buffalo for sort of trucking the fan behavior. And I'm a secret Eagles fan and Mike actually is an Eagles fan, trying to pass the blame to the one or two Miami fans who might have made the trip in Sextmber to see a game in Buffalo, a very thin reed to to rest on. So I think, thank you, thank you, Jared already my favorite new guests. Oh my god, come on, we all talk about this offline. But Jared, I'm so happy you're joining us on the podcast. I was actually hoping you can just start out telling us about your role at JP Morgan, because it sounds very interesting to meet sort of a little bit different from like, um the usual like institutional portfolio strategist. Yeah, I'm happy too. So, you know a lot of firms JP Morgan included have uh, you know, a very strong macroeconomic team who you know, grinds through a lot of the data in both you know, kind of real time as the economic statistics are released, but also formulates kind of longer term expectations around the economy and the markets. And so I I participate along with a lot of our other professionals in that process. UM. But where I tend to specialize is in providing advice around asset allocation to institutional investors. You know, so sort of starting from the strategic asset allocation where they you know, allocate their capital across stocks, bonds, and various alternative asset classes and trying to be you know, maybe a little bit more tactical than just sort of a ten year outlook and and think a little bit about what's going on in the world and how that can shape their investment outlooks. So that's that's what I spend most of my time doing. And uh, you know, most of my career, I've been around a lot of the the pension community, the endowment foundation community, and sort of other large institutional investors. UM. So that's that's more or less what I do. And Jared your team had this really fascinating report out on sort of that idea of globalization. Has it peaked. What's it mean for for the markets going forward? Well, you just walk us through some of the metrics that make it look to you guys like globalization at peak even before the Russia Ukraine War, and and maybe just bring it home with what what does it mean for asset allocation in the near future. First, you have to recognize that, you know, we have been in an era of increasing globalization for some period of time, and that has and enormously powerful in terms of driving market returns. You know, we saw declining inflation on a global level, and and a lot of that declining inflation was the result of the globalization of the economy and the trading system. So you had lower wages, you had greater access to you know, commodities and other inputs, free flow of technology and data and and all of those things made the inflationary impulse sort of diminished across time, and that then allowed central banks globally to reduce interest rates. You know, and we've been in a long term disinflationary cycle going all the way back to the era of Paul Vulker. And while that doesn't perfectly coincide with the sort of globalization era, um, they did overlap for a number of years, and so that created a very powerful tail winds to financial markets. You had, you know, companies that enjoyed lower cost of funding with lower interest rates, they you know, were able to reduce their operating costs, particularly on the on the labor side, and so that led to higher profits and higher financial asset values. And so you know, we've been enjoying this for a long time. And one of the things we note in our paper was that although you know, you really don't see much of a decline in globalization until more recently, a number of the underlying trends had kind of lost their steam a little bit. Um you can, you can actually break down globalization. It's kind of a fascinating subject into sort of different components. So in our paper we highlight three. There's economic globalization, which is i think what most people think about its trade flows and things like that. There's also political globalization, you know, the willingness of companies to sort of countries to join treaty organizations, the role of non governmental organizations. And then you have social globalization. Um, you know, migration, both for you know, kind of relocation or refugee reasons, but also for educational reasons and for economic reasons, data, traffic, travel, you know, all of these things coincide and sort of this very broad definition of globalization. And and what's interesting is that across all three of those major categories, economic, political, and social, you can see very clearly a plateau ng starting about five five seven years ago, and much more recently a decline. And so it's that decline that we really zeroed in on and to try and figure out what caused it. And you know, I think what is often the case in sort of very high level discussions of the global macroeconomy is that you have these equilibrium points where you know, various trends become self reinforcing. And the and the trend towards globalization for many years was self reinforcing. I mean put simply, the incentives for countries and firms to participate in that process, to become more open, to become more global, to have longer supply chains in order to take advantage of labor costs. That was a very self reinforcing process. What it appears to us is happening now is that we may have been sort of kicked out of that virtuous eical and into a different equilibrium point where the incentives have changed, and we're going to see a reversal to some extent of those trends. Shorter supply chains, um, you know, less willingness to participate in the global economy, more focus on sort of national or sort of spheres of influence across the global economy. You hear all these terms today about you know, on shoring and near shoring and friends shoring, etcetera, etcetera, UM, And they all kind of point in the same direction, which is that you know, this imperative to become as global as possible has to a very material degree faded. Now we don't know for sure how long this will last, and you know, will it be permanent or or more of a a period that we live through and then we resume that that sort of upward march towards a more globalized economy. But from where we stand right now, you can certainly see very visible signs that globalization has receded somewhat. And that, and to the question you asked, that has some very profound impacts on the markets. And we'll come back to this later, but I think one of the more profound ones is on inflation. You know, as the FED wrestles with inflation right now and the market tries to figure out how persistent inflation will be and how they should react to that, this deglobalizing impulse is inherently inflationary, and so you know, that may raise the baseline level of inflation across the global economy, and that has very profound implications for monetary policy, bond markets, and other markets more broadly. And and is the reason simply if you're no longer shopping for materials and labor in the cheapest possible country that you know, it's just naturally going to cause higher inflation, and I would guess sort of dent corporate profit margins at the same time, it should have an impact on profit margins. I think, you know, the more profound implication, and there may be several, but one that I certainly like to talk about is we've become very accustomed to looking past headline inflation, which is typically driven by you know, food and or energy prices, because historically it has been relatively mean reverting over a short horizon. Now why is that, Why is you know, headline inflation meeting reverting because the individual commodities or or sort of resources behind that tend to be both substitute herbal and they are part of a global market where supply and demand can equalize fairly quickly. Um. If we are moving to a world where resources are more constrained, people are more defensive around, you know, sort of husbanding their national resources. Um, and the ability to substitute across sort of the global supply is more limited. Then you know, the the ability to look past headline inflation may diminish as well. And so you know, central banks may be forced to reckon with a greater level of volatility in their monetary policy, not just a higher level of inflation overall. And that, of course, you know that that is essentially the risk free rate that we apply to most asset classes, and that you know that has some very profound implications. So first, um, the title of of the report we're talking about is the Lifeboat Economy. So I wanted to ask you to sort of describe to us what the what do you mean by lifeboat? And then the second part is just to ask you to add on a bit more on this idea that the globalizations trend started before we had COVID, or before Russia invaded Ukraine and what some of those uh factors were or how you were able to see that. So the title, you know, is a sort of a metaphor for security. You know, in that you are, you know, in a lifeboat. You are sort of first concerned about protecting yourself, you know, the and and I think the idea that you have sort of sailed off from this larger ship that was carrying everyone. You are now in a smaller space thinking more about self preservation. To the second part of your question, you know, what were some of these trends? So when we think about the nature of deglobalization, you know, trade had been to some extent in decline for a while, and and you know, a lot of this data is to some extent anecdotal, but when you look at the whole sort of tapestry that it creates, it's very clear that there's a trend here. And so you think about, you know, the United States tariffs with China, you know, which obviously were accelerated by the Trump administration but certainly have not been reversed by the Biden administration. If anything, the Biden administration is to some extent doubling down. And you know that suggests that this is going to be a more permanent part of our sort of trade politics around the world. Another element would be, um, the Committee on the Foreign Investment of Asset SIPHIUS, which you know kind of governs, uh, you know, sort of capital market flows around the world, UM, and sort of various elements of the trade and the competition in the Federal Trade Commission and how they look at mergers both you know, kind of within the United States, but also globally. You can look at the reaction to you know, Huawei and the technology and the chips and sort of how they've been effectively sort of banned from the global uh, you know, sort of telecommunication system, at least outside of China. So a lot of this stuff was happening well before COVID and well before the Ukraine War, and and certainly you could apply a similar description to some of the Chen's and immigration you know, which which we're trailing off, you know, well prior to UM some of the more recent events. What is interesting though, is how you know, both COVID, which you know, in theory should have been a more temporary response to a pandemic, but had much longer lived sort of echoes not just from a medical and a sort of social standpoint, but you think about the supply chain, the impact on trade, and how long that's lasted. It's really only now that we're getting out from under some of those supply chain disruptions UM, and we're starting to get back to something more like a normal balance of trade across major you know, or trading partner relationships UM. And then you know, with with the Ukraine War, what was interesting is most geopolitical events historically have really been more of a blip in the markets. You know, they tend to create a spike in volatility, and within a few months you're really back to where you were and you can look at, you know, most of the major you know, either sort of conflicts or or other sort of geopolitical fire storms that have occurred to the last several decades, and they tend to be fleeting in their impacts. What we went back to in the paper, which is interesting is the nineteen seventy three Arab Israeli War, which not so much the war itself, which was relatively contained to Israel, Egypt and a few of Israel's near neighbors, UM, but really impacted the oil supply chain, you know, through the Saudi embargo and and ultimately opex embargo on the United States and other European countries, and and that led to some more prof ound sort of reordering of the system. So um, you know, I think what we saw was again the sort of pattern of behavior leading into the sort of joint COVID and Ukraine crises, um, which was only sort of accelerated by what took place there. And so you know that may ultimately be the impetus for this move to kind of a new equilibrium where trade and globalization are you know, just less significant a driver of behavior, both at the national and not the corporate lane. You mentioned sort of the three categories of globalization economic, social, and political, and I can't help but think that that political spear is really what drives it all right. You know, if if I think of what, who are some of the main influential figures in driving a deglobalization over recent years. While we had President Trump with his America First policies and the tariffs, as you pointed out, then you have in Russia you have Vladimir Putin uh with the invasion of Ukraine, and Shijung Ping in China although maybe not as actively engaged in the globalization, certainly hit some of his choices COVID zero and everything, perhaps compounding uh the the issue or you know, you know, at least someone who has some control over the whole topic. So I in a way, I wonder and and you mentioned CIPHIUS, the Community for Foreign Investment in the US. I'm fascinated that they're actually looking at at TikTok. Did you realize that Aldana Siphius is looking at TikTok and there's a big sort of a ground swell to ban TikTok in the US. But my point chart is that in a way to do these could these influences be sort of self correcting in that, if you know, factories start closing in low wage countries like China, if inflation you know, becomes embedded in the West because of the globalization UM, Vladimir Putin's popularity in the country dwindles. You know, is there a way that politics could sort of make this be a self correcting phenomenon where the backlash against these global leaders who are sort of pushing the issue um actually causes them either to be voted out hous Did you know and that you know, that gravity of globalization reasserts itself, if you know what I mean. You know, look, there were many winners and losers in globalization, and there will be the same impact as it, you know, fades or or diminishes, you know, to whatever extent that it does. In the United States. You know, I think politically, deglobalization is a relatively popular concept. I mean, I don't think you have to be a particularly astute analyst of politics to know that, you know, supporting kind of domestic manufacturing um, you know, even if it's to some extent grandstanding, is a very popular stance to take, and it and it crosses party lines relatively easily. So I don't see that you know that there would be a significant move against that, you know. And one of the manifestations of that that that really brings the politics into the real world is one of the things we cite in the paper as well, is an increase in industrial policy, you know, and you think about the chip expansion, not just in Arizona, which is geared towards Taiwan semiconductor UM, but also in upstate New York. Micron is just building a huge plant with massive subsidies now they were obviously already a US company, or at least a US based company, But you know, that use of industrial policy, and and it's not just chips. It's on you know, solar technology, it's on energy, transportation and delivery systems. There's a whole range of these things, um, which are really designed to bring capital back and and invested here. Um. It may not be you know, the most economically productive place to invest capital if you you know, if you leave and sort of the agnostic view of free trade, UM, but I think it's politically popular. Now. Other countries I think will clearly wind up on the losing end of this. Now, I mean China, which has benefited enormously from trade and globalization, UM, you know, certainly stands to be at least, you know, be a little more a little bit more vulnerable as a result. I mean, I don't think it's a coincidence that in the same week that Apple announced that it was looking to move some of its manufacturing base out of China, they had a very rapid sort of one eighty on the COVID policies and started to loosen up. Now, you know, again, I don't know that you can draw a direct line of sight between the COVID policy and the you know, Apple factory floor. But um, you know, it doesn't seem to be totally coincidental. So you know, I think there will be some give and take, you know, to sort of the point of your question. And you know, countries that have benefited and stand now to lose perhaps or at least to become, you know, kind of more balanced in terms of the benefits and costs that they face, UM, are going to be in a tougher spot. You know. I think I think the countries like the United States, where you know, globalization has been great for corporate profitability, but you know, more or less terrible for workers. Um, you know, we're seeing a little bit of the reversal of that. You know, we're seeing higher wages, We're seeing companies bring jobs back on shore. Now that to the point you raised earlier about margins, it may not be a terrific thing for corporate profitability, at least in the near term. If we're thinking about this less globalized world, like what what happens in this less globalized world? Like what are some of the trends that you expect will be seeing. There's there's a couple phases to how this works. So in the very short term you're going to have a scramble to secure sort of national supplies of key resources. Now, the most obvious example of that is Europe and natural gas. You know, they have made an affirmative decision to you know, basically seal off the pipes from Russia UH and move to alternative natural gas supplies. And and that poses a very profound challenge in the near term. I don't think anyone doubts that over a longer horizon they will be able to find substitute supplies, UM, but most certainly at a higher price, and you know that's something that they'll have to pay for. The other very near term impact is defense spending and you know, maybe ancillary areas like cybersecurity and other sort of protective almost you know, sort of insurance like functions UM that the government's sort of step up for UM. So we certainly expect those two things to take place in the near term and they will drive a lot of capital flows and investment as we try to get around some of these issues today. Over the medium term, you're looking more at the supply chains. How do they get rewired, you know, One of the things we're thinking about here in the United States is a little bit of a transition from the coastal ports to what we would call inland ports, you know, basically logistic hubs, logistics hubs inside the United States, areas that are you know, terrific at facilitating trade and which then allow for sort of the congregation of manufacturing, distribution, logistics and a lot of the technology and resources that go along with that. You know, areas like Phoenix, like you know, Columbus, Ohio, Nashville. These are places that are not thought of as you know, sort of principal components in global trade flows. But within the United States or within a more of a North American sort of trade block, should that continue to develop, um, you know, their importance should grow, So there should be some very profound implications there. I bunge in industrial policy and how you know, government is affirmatively putting a thumb on the scale in favor of you know, certain areas for increased capital investment. And you know there's a lot of reason for that. This is this is not just sort of blind um you know, sort of policy. One of the things we learned with the with the decline in the supply chain over the last couple of years was the vulnerability on chips supplies. You know, that's a very real thing manufacturers across the economy have to deal with. And if the only place you can get chips is from Taiwan or South Korea, then you are vulnerable. And you know, even if you bring a portion of that manufacturing back to the United States, it creates a resiliency that has real value. So, you know, I think it's it may not be again the most economically efficient policy in a very abstract sense, but it's a very pragmatic policy that I think will get a lot of support infrastructure spending in a variety of ways, particularly around the energy grid and distribution, you know, things that will allow us to bring together the traditional generation facilities natural gas, nuclear, even coal, although that is fading along with the renewable energies, you know, and and when you look at solar and wind, they're terrific and they're becoming more cost effective, but they have an intermittency problem, and you need traditional you know, sort of typically hydrocarbon based or nuclear based energy sources to make up the gaps. And so how do you how do you solve at least some of that problem. You need better transmission, you need more uh robust grids. You know, the way we built our energy grid in this country is broken down into a lot of individual sectors that don't necessarily transmit across those lines. So you know we're gonna see a lot of changes there. Um And then the very long term it really is, and this is where it gets a little more speculative. Will we continue to see this evolution towards sort of spheres of trade. You can very easily in the wake of the Ukraine War see a China Russia sphere that largely makes Russia almost a you know, I don't want to say subservient, but but a sort of minority partner in transporting energy resources to China where they are turned into manufactured goods and sold elsewhere. You certainly can see the United States, Canada, Mexico, and maybe the western sort of developed economies more broadly, including Europe and Japan and and non China Asia forming a more of a parallel block um that trades more freely within it, but less freely outside of So so those are the real long term trends, um and and I think you know, we do have a lot of conviction that those will continue. UM. You know, the the endpoint is still very unclear. I mean, we write these papers with a bit of a speculative bent because we want to try and get ahead of these trends. And you know, we have to be humble enough to know that we don't have a crystal ball when we think of this idea of deglobalization. Obviously we've talked a lot about the economic side of the trade political you know, tensions growing back and forth. But I wonder if a deglobalization of capital markets is guaranteed UH in this scenario, you know, And the most sort of easiest example I would give is the Chinese companies listed in the US, and there's a sort of cloud hanging over them whether they might be delisted from the US UH if you know, the the agreement on their accounting standards is not um fulfilled and and where the US is not allowed to examine their books every year. UM, is that a risk that you know, in this this environment that that you're expecting of less globalization, that it becomes inherently more risky to invest overseas um, whether it be equities or even sovereign bonds, you know, and I'm thinking of China holding a lot of US treasuries obviously UH as a potential risk as well. But but do the capital markets have to sort of disconnect as well? Do you think that's coming. That's an interesting question. You know, there's there's definitely uh a bit more sort of two way flow there, and that you're you're absolutely correct in citing the example of China bringing many of its companies sort of back from what they would regard as the offshore markets, the U S A d R market, even the Hong Kong market back to Shanghai and Shenzen to trade and what we sort of would generically referred to as the A shares market um. And you know, some of that is a reflection of the fact that the Chinese domestic equity markets have developed to the point where they are much more deeper and more liquid and more robust than they used to be. And so there may be a little bit of a natural evolution that you don't necessarily need to sort of ascribe to deglobalization. It may just be the maturing of some of these formerly emerging markets. And and so that's a good thing. All at all. I mean, I think, um, you know, we're not likely to ever see a single global equity exchange on which all shares trade UM and so absent that you know, you want to basically, as an investor, think about the liquidity that you have UM in any given market, the depths of sort of supply and demand there um. You know, there are ancillary features that really do matter, things like the rule of law, the enforcement of contracts, and you know, I think that is where markets like the United States and Europe tend to have a very very big head start on a lot of these other areas. And I don't think investors, at the end of the day are willing to give up on those benefits lightly. So you know, the Chinese government you know, can sort of impose its will by FIAT on some of these companies, UM, but their authority does not extend beyond companies that are located in China, And so you know, I don't I don't know that ultimately that's going to lead to a particularly good outcome. I think, um, you know, they may sort of by you know, pushing capital back into their home markets. UM. You know, almost signal to investors that that some of those other attributes that they value are sort of less well respected there, So you know, time will tell. Um. You know, market liquidity globally still remains you know, pretty high. Um. You know, I think that there's a lot of features around liquidity that get back to sort of the global bank balance sheets and how much capital stands behind trading desks and and those who sort of provide liquidity, particularly in uh down markets. And there's a lot of sort of market structure questions that really fall kind of outside the scope of this globalization conversation. But um, you know, I think it is you know, if if the governments are going to be playing a more direct role in the allocation of capital um and and by definition that's going to mean in a domestically focused way, because I can't imagine that many governments will be you know, incenting capital to move outside of their their sort of national borders. Um, then yeah, it is going to lead to a more fragmented market across time. And that's not a great thing. Um. You know, obviously, the assumption is it will have other benefits that offset those costs. And just to bring us to what's going on with markets and the economy today, I have these really great point from you. It's about the three things that the FED will never say out loud, but which are clearly true. So I'm wondering if you can talk about this. So one is we made a mistake, Second is we want a recession, and third is is not a real target. And bitcoin fixes this. I doubt all the bitcoin fixes of yeah everything, of course, ye, well yeah, we can certainly, we can certainly take a detour the crypto if you want. I think the doubters have have been vindicated pretty decisively in that space. But no, so you know what we think about FED policy. It's obviously very much front of mind right now. And you know, the market is trying to wrestle with this question tion of you know, inflation versus recession, how hawkish the FED is going to be, And you know right now monetary policy is kind of leading the markets, and so it's critical to kind of think through what that means. Now, you cited these sort of three equips that I that I was making in our in our prep. I think, um, you know, as I said, these are sort of things we know to be true about the FED, or at least I believe to be true, and I'm I believe many people share these views, but I don't want to be presumptuous. Um. The first is that the FED clearly made a mistake. You know, the the period leading up too um, they were clearly behind the curve with respect to the jobs market, with respect to building inflation pressures. Now, I don't think anyone could have faulted them for not having foreseen the Russian invasion of Ukraine and some of the inflationary impulses that that created. But they also can't, uh, you know, sort of fall back on that defense because inflation was um well out of the bag, you know, before that took place. And so you know, the FED is never going to say, look, we we made a mistake. They they will hem and haw about the meaning of transit story and whether they were sort of gasolighting the markets by constantly referring to supply chains and so forth and not staring the fairly obvious situation in the face, which was that the labor markets were incredibly tight, wages were rising rapidly, and goods prices because of supply chain problems were exacerbating what was a more fundamental problem with core inflation. But be that as it may we are where we are now. The FED, to be fair, has now done a complete one eight and has really gotten religion on fighting inflation. And that brings me to the second point of sort of things the FED won't ever say out loud but are probably true, which is they may, you know, quite literally want to create a recession. And I don't say that to be you know, kind of critical of the FED when you have lost your credibility as a central bank and you try to contemplate how do you regain that credibility? What is it that we point to? Well, for historical reasons, everyone points to Paul Volker. We say, well, you know, the FED went through a period with Arthur Burns in the nineteen seventies where inflation got out of hand. How did we fix that? Well, Paul Volker, you know who from many people is a hero. That may be a strong statement, but you know he did what needed to be done in order to bring inflation back under control, which was raise interest rates until we had a very severe recession. And I don't think that lesson has been lost on jeral Powell and the current you know, sort of structure of the FED now. I don't think they're exactly reprising the vulgar model, which was hike kike and then cut cut, cut, cut, cut, cut cut. You know, they seem to be adopting a slightly different stance, which is, you know, raise rates more quickly, so there's almost sort of a shock and awe factor plateau of them at a level that should be high enough to bring inflation down them and turn real interest rates positive, at which point they will have the flexibility should it be necessary because of declining economic growth and labor markets, to cut rights. But we're still early in that process. We don't know exactly where we stand, um, but I think it's just important to recognize that, you know, from where the FED sits, if their number one objective is restoring their credibility, a recession may really be the only way to be sure that they've done that, and and a soft landing where inflation fades, they may not have really bought back much of their credibility, you know, with that sort of an outcome, And so you know, I wouldn't go so far as to say that they absolutely want one, but I think they're they're probably far more indifferent to that outcome, particularly given where the labor markets are. You know, we are very early in this process, and the economy is still doing quite well, so I think it gives them a lot of air cover to take on a hawkish stance. Um And and and there's very little you can point to, maybe outside of the housing market that has felt the brunt. So that was the That was the second one. The third one is that two percent is not a real target. I I make this point only because you know, two percent is obviously arbitrary. There is no historical, you know, proof that that is the optimal level of inflation. I think we know that zero inflation is too low. You know, it helps the economy to function to have some level of inflation. Um It, it is not clear that two is any better than two and a half or one and a half or three or some other number. You know. Obviously, if inflation starts to spiral out of control, that's when it becomes a problem. But but low single digit numbers are generically fine. And I think, you know, we we also have to just think that not very many years ago, when we were approaching two percent from the bottom and the narrative which was initially two is a hard cap and the Fed will have to hike as soon as we get anywhere near it became two percent was the signal to begin hiking, and then it became forward average inflation targeting, which was much softer. And you know the idea that you know we're going to be on the down slope in a year or two as we approach two percent from the high end, and that somehow, in a recessionary environment, the Fed is going to feel utterly compelled to continue cranking down the level of monetary accommodation just to force the economy into that sort of spot. I don't I just don't think that's all that likely. Now. They're not gonna they're not gonna give up that number too soon. You know, the farther away from it you are, the easier it is to just sort of point to it as a target because you're nowhere near it. But my guess is that as we start to approach inflation from the upside, you know, there's gonna be a lot more constructive and very specific discussion about what that two percent target actually means. Jared gross Managing Director and head of Institutional Portfolio Strategy at JP Morgan Asset Management. So great to hear your thoughts. Can't let you go just yet, though, because it's time for the craziest things we saw this week. I'm gonna start for once. Really, I'm gonna start well, Dota. You know, my favorite asset class is ridiculously overpriced collectibles and artwork auctions. It happened to be the best year ever for auction houses, at least for the big three. Christie's, Southebes, and Phillips just had their best auction year ever as far as total sales of items that were auctioned off. I'm surprised it wasn't last year. Yeah, I know. Well, there's some caveats in this stay South Bees is including real estate, but whatever, We'll let them have their day in this sun. This is courtesy of our own James Tarmy at Bloomberg. So, Jared, uh, it's time to play the prices precise. What do you think the dollar figure was on total sales total uh revenue of auctions? Okay, I'm gonna go with one point five trillion one? Okay? Is that too much? I try to Jared, I try to keep a poker face going. Are we are we doing prices right? Rules like if I'm under but I can just guess a dollar here, and I'll way anything with a T handle feels a little high. I mean, I will say, though, if you're including real estate, I mean, obviously those three don't transact all of the real estate, but they do a fair amount. And that's a that's a big, big chunk. I will say, three hundred and seventy five billion. Wow, I thought you guys are eighteen billion for not not one point five trillions. That cannot be. There's so many stories that are like so and so sold to paintings for a hundred fifty million dollars or something. Yeah, but they're the ones that make the headline. Then they saw a lot for you know, for a few thousand. I guess I don't know, all right, Well, Jared wins to the closest to the I don't consider that much of a win. That's uses and hand grenades right there. You still one, okay. Mine is actually from one of our listeners, Tweggy Sundays Tweggy So Tweggy points out that the market value of coin base trails that of doge coin, which is a joke cryptocurrency. So doge coin is worth more than coin based by market value. So if we're looking at coin base, it has an eight billion market cap and dodge coin has a nine billion dollar that's crazy. Well, Jared, how about you? You You see anything crazy this week? Well, you know, I I if I can, if you'll indulge me and let me go back a little further in time. Um, you know, there was an event that just it got a little pressed but maybe not you know, too much here in the States, which was the near collapse of the British or the UK pension system. Um. And it was it was really a classic sort of derivatives liquidity squeeze, which you know, I guess we we we encounter these every couple of years because people seem intent on having to learn, you know, lessons that should have been learned a long time ago regarding leverage and risk. Um. There's a phrase that I learned early on in my career which I always found very evocative, which is what they call the Texas hedge, which is, you know, it comes from owning cattle and also being long cattle futures, and when your collateral is the same thing as the futures, you can get into a lot of trouble in the derivatives markets, and that is the unfortunate position in which a lot of UK pension investors found themselves and that they were long a lot of guilts and a lot of guilt futures and when the market sold off when they released this you know, so called mini budget um, these trades rapidly on wound and you know, it reminds me of a lesson, which is, you know, if you don't manage your collateral, your collateral will mantage you. And I think you know a lot of these firms found themselves in in a very short lived, thank goodness, but very desperate moment. You know, you have to give a lot of credit to the UK Treasury for stepping up and fixing the problem. But it is a strong reminder that you know, these pensions, you know, and and and the use of derivatives, even by relatively sophisticate institutional investors, you know something you have to be careful about. Great stuff, Jared Gross, head of Institutional Portfolio Strategy at JP Morgan Asset Management. Great to hear your thoughts shared. I hope we can do it again sometime. I'd love to Michael and Bildana, thank you so much. And co Bird's Fly Eagle Fly What Goes Up. We'll be back next week and so then you can find us on the Bloomberg Terminal, website and app or wherever you get your podcasts. We love it if you took the time to rate and review the show on Apple Podcasts, so more listeners can find us. And you can find us on Twitter. Follow me at reak Anonymous. Bildanna Hirach is at Bildona Hirach. You can also follow Bloomberg Podcasts at podcasts. What Goes Up is produced by Stacy Wong. Thanks for listening, See you next time. APT Not Wanting

Hello, and welcome to What Goes Up, a weekly markets podcast. My name is Mike Reagan. I'm a senior editor at Bloomberg, and I'm Danna High Across asset reporter with Bloomberg. This week on the show, Well, even before Russia invaded Ukraine early this year, the world had already hit peak globalization. That's according to this week's guest, who is the head of institutional portfolio strategy in the asset management unit of a major bank, and he says, well, we better get used to it that there's more d globalization ahead. So what does that mean for markets as we look ahead to and beyond. We'll get into it with our guests this week. But first of all, Donna, I've got to talk to you about one thing. It's your football should Why what's wrong with them? They're the best? No, well, your fans, the fans of the Buffalo what did they do? You know? Fifty some years ago, Philadelphia Eagles fans through like one or two snowballs at Santa Claus that not even the real Santa Claus, I will point out, and we've been hearing about it every day since. What awful fans we are here? Your fans. We're throwing the snowballs at the actual players that the other team at the Dolphins. Yeah. I loved it, Yeah you would. It was so funny you would. I think this ends the debate over who the worst fans are in this because these two teams could face off in the Super Bowl this year. Well, fingers crossed, okay, but the referees came out and they said, if you continue these shenanigans, Buffalo is gonna We're gonna give a penalty to Buffalo. But then don't you think if you're a Miami Dolphins fan they're in the stadium, that you would purposefully throw snowballs so that Buffalo can get the penalty. Seriously, there's like to Miami Dolphins fans, Yeah, they don't even know how to throw snowballs. They would someone from Miami doesn't even know how to make a snowball. You kid mean, yeah, we can learn fast snowballs. I'm just saying that the thinking was very flawed. You better not throwing the snowballs at this week's guest. Oh yeah, our guest. He's waiting for us. I want to bring him in. It's Jared gross Managing director and head of institutional portfolio Strategy at JP Morgan Asset Management. Jared, thank you so much for coming on the show. Thank you Old Donna, and thank you Michael. And as a longtime Philadelphia Eagles fan, I have to say that I am more than happy to see the mantle past to Buffalo for sort of trucking the fan behavior. And I'm a secret Eagles fan and Mike actually is an Eagles fan, trying to pass the blame to the one or two Miami fans who might have made the trip in Sextmber to see a game in Buffalo, a very thin reed to to rest on. So I think, thank you, thank you, Jared already my favorite new guests. Oh my god, come on, we all talk about this offline. But Jared, I'm so happy you're joining us on the podcast. I was actually hoping you can just start out telling us about your role at JP Morgan, because it sounds very interesting to meet sort of a little bit different from like, um the usual like institutional portfolio strategist. Yeah, I'm happy too. So, you know a lot of firms JP Morgan included have uh, you know, a very strong macroeconomic team who you know, grinds through a lot of the data in both you know, kind of real time as the economic statistics are released, but also formulates kind of longer term expectations around the economy and the markets. And so I I participate along with a lot of our other professionals in that process. UM. But where I tend to specialize is in providing advice around asset allocation to institutional investors. You know, so sort of starting from the strategic asset allocation where they you know, allocate their capital across stocks, bonds, and various alternative asset classes and trying to be you know, maybe a little bit more tactical than just sort of a ten year outlook and and think a little bit about what's going on in the world and how that can shape their investment outlooks. So that's that's what I spend most of my time doing. And uh, you know, most of my career, I've been around a lot of the the pension community, the endowment foundation community, and sort of other large institutional investors. UM. So that's that's more or less what I do. And Jared your team had this really fascinating report out on sort of that idea of globalization. Has it peaked. What's it mean for for the markets going forward? Well, you just walk us through some of the metrics that make it look to you guys like globalization at peak even before the Russia Ukraine War, and and maybe just bring it home with what what does it mean for asset allocation in the near future. First, you have to recognize that, you know, we have been in an era of increasing globalization for some period of time, and that has and enormously powerful in terms of driving market returns. You know, we saw declining inflation on a global level, and and a lot of that declining inflation was the result of the globalization of the economy and the trading system. So you had lower wages, you had greater access to you know, commodities and other inputs, free flow of technology and data and and all of those things made the inflationary impulse sort of diminished across time, and that then allowed central banks globally to reduce interest rates. You know, and we've been in a long term disinflationary cycle going all the way back to the era of Paul Vulker. And while that doesn't perfectly coincide with the sort of globalization era, um, they did overlap for a number of years, and so that created a very powerful tail winds to financial markets. You had, you know, companies that enjoyed lower cost of funding with lower interest rates, they you know, were able to reduce their operating costs, particularly on the on the labor side, and so that led to higher profits and higher financial asset values. And so you know, we've been enjoying this for a long time. And one of the things we note in our paper was that although you know, you really don't see much of a decline in globalization until more recently, a number of the underlying trends had kind of lost their steam a little bit. Um you can, you can actually break down globalization. It's kind of a fascinating subject into sort of different components. So in our paper we highlight three. There's economic globalization, which is i think what most people think about its trade flows and things like that. There's also political globalization, you know, the willingness of companies to sort of countries to join treaty organizations, the role of non governmental organizations. And then you have social globalization. Um, you know, migration, both for you know, kind of relocation or refugee reasons, but also for educational reasons and for economic reasons, data, traffic, travel, you know, all of these things coincide and sort of this very broad definition of globalization. And and what's interesting is that across all three of those major categories, economic, political, and social, you can see very clearly a plateau ng starting about five five seven years ago, and much more recently a decline. And so it's that decline that we really zeroed in on and to try and figure out what caused it. And you know, I think what is often the case in sort of very high level discussions of the global macroeconomy is that you have these equilibrium points where you know, various trends become self reinforcing. And the and the trend towards globalization for many years was self reinforcing. I mean put simply, the incentives for countries and firms to participate in that process, to become more open, to become more global, to have longer supply chains in order to take advantage of labor costs. That was a very self reinforcing process. What it appears to us is happening now is that we may have been sort of kicked out of that virtuous eical and into a different equilibrium point where the incentives have changed, and we're going to see a reversal to some extent of those trends. Shorter supply chains, um, you know, less willingness to participate in the global economy, more focus on sort of national or sort of spheres of influence across the global economy. You hear all these terms today about you know, on shoring and near shoring and friends shoring, etcetera, etcetera, UM, And they all kind of point in the same direction, which is that you know, this imperative to become as global as possible has to a very material degree faded. Now we don't know for sure how long this will last, and you know, will it be permanent or or more of a a period that we live through and then we resume that that sort of upward march towards a more globalized economy. But from where we stand right now, you can certainly see very visible signs that globalization has receded somewhat. And that, and to the question you asked, that has some very profound impacts on the markets. And we'll come back to this later, but I think one of the more profound ones is on inflation. You know, as the FED wrestles with inflation right now and the market tries to figure out how persistent inflation will be and how they should react to that, this deglobalizing impulse is inherently inflationary, and so you know, that may raise the baseline level of inflation across the global economy, and that has very profound implications for monetary policy, bond markets, and other markets more broadly. And and is the reason simply if you're no longer shopping for materials and labor in the cheapest possible country that you know, it's just naturally going to cause higher inflation, and I would guess sort of dent corporate profit margins at the same time, it should have an impact on profit margins. I think, you know, the more profound implication, and there may be several, but one that I certainly like to talk about is we've become very accustomed to looking past headline inflation, which is typically driven by you know, food and or energy prices, because historically it has been relatively mean reverting over a short horizon. Now why is that, Why is you know, headline inflation meeting reverting because the individual commodities or or sort of resources behind that tend to be both substitute herbal and they are part of a global market where supply and demand can equalize fairly quickly. Um. If we are moving to a world where resources are more constrained, people are more defensive around, you know, sort of husbanding their national resources. Um, and the ability to substitute across sort of the global supply is more limited. Then you know, the the ability to look past headline inflation may diminish as well. And so you know, central banks may be forced to reckon with a greater level of volatility in their monetary policy, not just a higher level of inflation overall. And that, of course, you know that that is essentially the risk free rate that we apply to most asset classes, and that you know that has some very profound implications. So first, um, the title of of the report we're talking about is the Lifeboat Economy. So I wanted to ask you to sort of describe to us what the what do you mean by lifeboat? And then the second part is just to ask you to add on a bit more on this idea that the globalizations trend started before we had COVID, or before Russia invaded Ukraine and what some of those uh factors were or how you were able to see that. So the title, you know, is a sort of a metaphor for security. You know, in that you are, you know, in a lifeboat. You are sort of first concerned about protecting yourself, you know, the and and I think the idea that you have sort of sailed off from this larger ship that was carrying everyone. You are now in a smaller space thinking more about self preservation. To the second part of your question, you know, what were some of these trends? So when we think about the nature of deglobalization, you know, trade had been to some extent in decline for a while, and and you know, a lot of this data is to some extent anecdotal, but when you look at the whole sort of tapestry that it creates, it's very clear that there's a trend here. And so you think about, you know, the United States tariffs with China, you know, which obviously were accelerated by the Trump administration but certainly have not been reversed by the Biden administration. If anything, the Biden administration is to some extent doubling down. And you know that suggests that this is going to be a more permanent part of our sort of trade politics around the world. Another element would be, um, the Committee on the Foreign Investment of Asset SIPHIUS, which you know kind of governs, uh, you know, sort of capital market flows around the world, UM, and sort of various elements of the trade and the competition in the Federal Trade Commission and how they look at mergers both you know, kind of within the United States, but also globally. You can look at the reaction to you know, Huawei and the technology and the chips and sort of how they've been effectively sort of banned from the global uh, you know, sort of telecommunication system, at least outside of China. So a lot of this stuff was happening well before COVID and well before the Ukraine War, and and certainly you could apply a similar description to some of the Chen's and immigration you know, which which we're trailing off, you know, well prior to UM some of the more recent events. What is interesting though, is how you know, both COVID, which you know, in theory should have been a more temporary response to a pandemic, but had much longer lived sort of echoes not just from a medical and a sort of social standpoint, but you think about the supply chain, the impact on trade, and how long that's lasted. It's really only now that we're getting out from under some of those supply chain disruptions UM, and we're starting to get back to something more like a normal balance of trade across major you know, or trading partner relationships UM. And then you know, with with the Ukraine War, what was interesting is most geopolitical events historically have really been more of a blip in the markets. You know, they tend to create a spike in volatility, and within a few months you're really back to where you were and you can look at, you know, most of the major you know, either sort of conflicts or or other sort of geopolitical fire storms that have occurred to the last several decades, and they tend to be fleeting in their impacts. What we went back to in the paper, which is interesting is the nineteen seventy three Arab Israeli War, which not so much the war itself, which was relatively contained to Israel, Egypt and a few of Israel's near neighbors, UM, but really impacted the oil supply chain, you know, through the Saudi embargo and and ultimately opex embargo on the United States and other European countries, and and that led to some more prof ound sort of reordering of the system. So um, you know, I think what we saw was again the sort of pattern of behavior leading into the sort of joint COVID and Ukraine crises, um, which was only sort of accelerated by what took place there. And so you know that may ultimately be the impetus for this move to kind of a new equilibrium where trade and globalization are you know, just less significant a driver of behavior, both at the national and not the corporate lane. You mentioned sort of the three categories of globalization economic, social, and political, and I can't help but think that that political spear is really what drives it all right. You know, if if I think of what, who are some of the main influential figures in driving a deglobalization over recent years. While we had President Trump with his America First policies and the tariffs, as you pointed out, then you have in Russia you have Vladimir Putin uh with the invasion of Ukraine, and Shijung Ping in China although maybe not as actively engaged in the globalization, certainly hit some of his choices COVID zero and everything, perhaps compounding uh the the issue or you know, you know, at least someone who has some control over the whole topic. So I in a way, I wonder and and you mentioned CIPHIUS, the Community for Foreign Investment in the US. I'm fascinated that they're actually looking at at TikTok. Did you realize that Aldana Siphius is looking at TikTok and there's a big sort of a ground swell to ban TikTok in the US. But my point chart is that in a way to do these could these influences be sort of self correcting in that, if you know, factories start closing in low wage countries like China, if inflation you know, becomes embedded in the West because of the globalization UM, Vladimir Putin's popularity in the country dwindles. You know, is there a way that politics could sort of make this be a self correcting phenomenon where the backlash against these global leaders who are sort of pushing the issue um actually causes them either to be voted out hous Did you know and that you know, that gravity of globalization reasserts itself, if you know what I mean. You know, look, there were many winners and losers in globalization, and there will be the same impact as it, you know, fades or or diminishes, you know, to whatever extent that it does. In the United States. You know, I think politically, deglobalization is a relatively popular concept. I mean, I don't think you have to be a particularly astute analyst of politics to know that, you know, supporting kind of domestic manufacturing um, you know, even if it's to some extent grandstanding, is a very popular stance to take, and it and it crosses party lines relatively easily. So I don't see that you know that there would be a significant move against that, you know. And one of the manifestations of that that that really brings the politics into the real world is one of the things we cite in the paper as well, is an increase in industrial policy, you know, and you think about the chip expansion, not just in Arizona, which is geared towards Taiwan semiconductor UM, but also in upstate New York. Micron is just building a huge plant with massive subsidies now they were obviously already a US company, or at least a US based company, But you know, that use of industrial policy, and and it's not just chips. It's on you know, solar technology, it's on energy, transportation and delivery systems. There's a whole range of these things, um, which are really designed to bring capital back and and invested here. Um. It may not be you know, the most economically productive place to invest capital if you you know, if you leave and sort of the agnostic view of free trade, UM, but I think it's politically popular. Now. Other countries I think will clearly wind up on the losing end of this. Now, I mean China, which has benefited enormously from trade and globalization, UM, you know, certainly stands to be at least, you know, be a little more a little bit more vulnerable as a result. I mean, I don't think it's a coincidence that in the same week that Apple announced that it was looking to move some of its manufacturing base out of China, they had a very rapid sort of one eighty on the COVID policies and started to loosen up. Now, you know, again, I don't know that you can draw a direct line of sight between the COVID policy and the you know, Apple factory floor. But um, you know, it doesn't seem to be totally coincidental. So you know, I think there will be some give and take, you know, to sort of the point of your question. And you know, countries that have benefited and stand now to lose perhaps or at least to become, you know, kind of more balanced in terms of the benefits and costs that they face, UM, are going to be in a tougher spot. You know. I think I think the countries like the United States, where you know, globalization has been great for corporate profitability, but you know, more or less terrible for workers. Um, you know, we're seeing a little bit of the reversal of that. You know, we're seeing higher wages, We're seeing companies bring jobs back on shore. Now that to the point you raised earlier about margins, it may not be a terrific thing for corporate profitability, at least in the near term. If we're thinking about this less globalized world, like what what happens in this less globalized world? Like what are some of the trends that you expect will be seeing. There's there's a couple phases to how this works. So in the very short term you're going to have a scramble to secure sort of national supplies of key resources. Now, the most obvious example of that is Europe and natural gas. You know, they have made an affirmative decision to you know, basically seal off the pipes from Russia UH and move to alternative natural gas supplies. And and that poses a very profound challenge in the near term. I don't think anyone doubts that over a longer horizon they will be able to find substitute supplies, UM, but most certainly at a higher price, and you know that's something that they'll have to pay for. The other very near term impact is defense spending and you know, maybe ancillary areas like cybersecurity and other sort of protective almost you know, sort of insurance like functions UM that the government's sort of step up for UM. So we certainly expect those two things to take place in the near term and they will drive a lot of capital flows and investment as we try to get around some of these issues today. Over the medium term, you're looking more at the supply chains. How do they get rewired, you know, One of the things we're thinking about here in the United States is a little bit of a transition from the coastal ports to what we would call inland ports, you know, basically logistic hubs, logistics hubs inside the United States, areas that are you know, terrific at facilitating trade and which then allow for sort of the congregation of manufacturing, distribution, logistics and a lot of the technology and resources that go along with that. You know, areas like Phoenix, like you know, Columbus, Ohio, Nashville. These are places that are not thought of as you know, sort of principal components in global trade flows. But within the United States or within a more of a North American sort of trade block, should that continue to develop, um, you know, their importance should grow, So there should be some very profound implications there. I bunge in industrial policy and how you know, government is affirmatively putting a thumb on the scale in favor of you know, certain areas for increased capital investment. And you know there's a lot of reason for that. This is this is not just sort of blind um you know, sort of policy. One of the things we learned with the with the decline in the supply chain over the last couple of years was the vulnerability on chips supplies. You know, that's a very real thing manufacturers across the economy have to deal with. And if the only place you can get chips is from Taiwan or South Korea, then you are vulnerable. And you know, even if you bring a portion of that manufacturing back to the United States, it creates a resiliency that has real value. So, you know, I think it's it may not be again the most economically efficient policy in a very abstract sense, but it's a very pragmatic policy that I think will get a lot of support infrastructure spending in a variety of ways, particularly around the energy grid and distribution, you know, things that will allow us to bring together the traditional generation facilities natural gas, nuclear, even coal, although that is fading along with the renewable energies, you know, and and when you look at solar and wind, they're terrific and they're becoming more cost effective, but they have an intermittency problem, and you need traditional you know, sort of typically hydrocarbon based or nuclear based energy sources to make up the gaps. And so how do you how do you solve at least some of that problem. You need better transmission, you need more uh robust grids. You know, the way we built our energy grid in this country is broken down into a lot of individual sectors that don't necessarily transmit across those lines. So you know we're gonna see a lot of changes there. Um And then the very long term it really is, and this is where it gets a little more speculative. Will we continue to see this evolution towards sort of spheres of trade. You can very easily in the wake of the Ukraine War see a China Russia sphere that largely makes Russia almost a you know, I don't want to say subservient, but but a sort of minority partner in transporting energy resources to China where they are turned into manufactured goods and sold elsewhere. You certainly can see the United States, Canada, Mexico, and maybe the western sort of developed economies more broadly, including Europe and Japan and and non China Asia forming a more of a parallel block um that trades more freely within it, but less freely outside of So so those are the real long term trends, um and and I think you know, we do have a lot of conviction that those will continue. UM. You know, the the endpoint is still very unclear. I mean, we write these papers with a bit of a speculative bent because we want to try and get ahead of these trends. And you know, we have to be humble enough to know that we don't have a crystal ball when we think of this idea of deglobalization. Obviously we've talked a lot about the economic side of the trade political you know, tensions growing back and forth. But I wonder if a deglobalization of capital markets is guaranteed UH in this scenario, you know, And the most sort of easiest example I would give is the Chinese companies listed in the US, and there's a sort of cloud hanging over them whether they might be delisted from the US UH if you know, the the agreement on their accounting standards is not um fulfilled and and where the US is not allowed to examine their books every year. UM, is that a risk that you know, in this this environment that that you're expecting of less globalization, that it becomes inherently more risky to invest overseas um, whether it be equities or even sovereign bonds, you know, and I'm thinking of China holding a lot of US treasuries obviously UH as a potential risk as well. But but do the capital markets have to sort of disconnect as well? Do you think that's coming. That's an interesting question. You know, there's there's definitely uh a bit more sort of two way flow there, and that you're you're absolutely correct in citing the example of China bringing many of its companies sort of back from what they would regard as the offshore markets, the U S A d R market, even the Hong Kong market back to Shanghai and Shenzen to trade and what we sort of would generically referred to as the A shares market um. And you know, some of that is a reflection of the fact that the Chinese domestic equity markets have developed to the point where they are much more deeper and more liquid and more robust than they used to be. And so there may be a little bit of a natural evolution that you don't necessarily need to sort of ascribe to deglobalization. It may just be the maturing of some of these formerly emerging markets. And and so that's a good thing. All at all. I mean, I think, um, you know, we're not likely to ever see a single global equity exchange on which all shares trade UM and so absent that you know, you want to basically, as an investor, think about the liquidity that you have UM in any given market, the depths of sort of supply and demand there um. You know, there are ancillary features that really do matter, things like the rule of law, the enforcement of contracts, and you know, I think that is where markets like the United States and Europe tend to have a very very big head start on a lot of these other areas. And I don't think investors, at the end of the day are willing to give up on those benefits lightly. So you know, the Chinese government you know, can sort of impose its will by FIAT on some of these companies, UM, but their authority does not extend beyond companies that are located in China, And so you know, I don't I don't know that ultimately that's going to lead to a particularly good outcome. I think, um, you know, they may sort of by you know, pushing capital back into their home markets. UM. You know, almost signal to investors that that some of those other attributes that they value are sort of less well respected there, So you know, time will tell. Um. You know, market liquidity globally still remains you know, pretty high. Um. You know, I think that there's a lot of features around liquidity that get back to sort of the global bank balance sheets and how much capital stands behind trading desks and and those who sort of provide liquidity, particularly in uh down markets. And there's a lot of sort of market structure questions that really fall kind of outside the scope of this globalization conversation. But um, you know, I think it is you know, if if the governments are going to be playing a more direct role in the allocation of capital um and and by definition that's going to mean in a domestically focused way, because I can't imagine that many governments will be you know, incenting capital to move outside of their their sort of national borders. Um, then yeah, it is going to lead to a more fragmented market across time. And that's not a great thing. Um. You know, obviously, the assumption is it will have other benefits that offset those costs. And just to bring us to what's going on with markets and the economy today, I have these really great point from you. It's about the three things that the FED will never say out loud, but which are clearly true. So I'm wondering if you can talk about this. So one is we made a mistake, Second is we want a recession, and third is is not a real target. And bitcoin fixes this. I doubt all the bitcoin fixes of yeah everything, of course, ye, well yeah, we can certainly, we can certainly take a detour the crypto if you want. I think the doubters have have been vindicated pretty decisively in that space. But no, so you know what we think about FED policy. It's obviously very much front of mind right now. And you know, the market is trying to wrestle with this question tion of you know, inflation versus recession, how hawkish the FED is going to be, And you know right now monetary policy is kind of leading the markets, and so it's critical to kind of think through what that means. Now, you cited these sort of three equips that I that I was making in our in our prep. I think, um, you know, as I said, these are sort of things we know to be true about the FED, or at least I believe to be true, and I'm I believe many people share these views, but I don't want to be presumptuous. Um. The first is that the FED clearly made a mistake. You know, the the period leading up too um, they were clearly behind the curve with respect to the jobs market, with respect to building inflation pressures. Now, I don't think anyone could have faulted them for not having foreseen the Russian invasion of Ukraine and some of the inflationary impulses that that created. But they also can't, uh, you know, sort of fall back on that defense because inflation was um well out of the bag, you know, before that took place. And so you know, the FED is never going to say, look, we we made a mistake. They they will hem and haw about the meaning of transit story and whether they were sort of gasolighting the markets by constantly referring to supply chains and so forth and not staring the fairly obvious situation in the face, which was that the labor markets were incredibly tight, wages were rising rapidly, and goods prices because of supply chain problems were exacerbating what was a more fundamental problem with core inflation. But be that as it may we are where we are now. The FED, to be fair, has now done a complete one eight and has really gotten religion on fighting inflation. And that brings me to the second point of sort of things the FED won't ever say out loud but are probably true, which is they may, you know, quite literally want to create a recession. And I don't say that to be you know, kind of critical of the FED when you have lost your credibility as a central bank and you try to contemplate how do you regain that credibility? What is it that we point to? Well, for historical reasons, everyone points to Paul Volker. We say, well, you know, the FED went through a period with Arthur Burns in the nineteen seventies where inflation got out of hand. How did we fix that? Well, Paul Volker, you know who from many people is a hero. That may be a strong statement, but you know he did what needed to be done in order to bring inflation back under control, which was raise interest rates until we had a very severe recession. And I don't think that lesson has been lost on jeral Powell and the current you know, sort of structure of the FED now. I don't think they're exactly reprising the vulgar model, which was hike kike and then cut cut, cut, cut, cut, cut cut. You know, they seem to be adopting a slightly different stance, which is, you know, raise rates more quickly, so there's almost sort of a shock and awe factor plateau of them at a level that should be high enough to bring inflation down them and turn real interest rates positive, at which point they will have the flexibility should it be necessary because of declining economic growth and labor markets, to cut rights. But we're still early in that process. We don't know exactly where we stand, um, but I think it's just important to recognize that, you know, from where the FED sits, if their number one objective is restoring their credibility, a recession may really be the only way to be sure that they've done that, and and a soft landing where inflation fades, they may not have really bought back much of their credibility, you know, with that sort of an outcome, And so you know, I wouldn't go so far as to say that they absolutely want one, but I think they're they're probably far more indifferent to that outcome, particularly given where the labor markets are. You know, we are very early in this process, and the economy is still doing quite well, so I think it gives them a lot of air cover to take on a hawkish stance. Um And and and there's very little you can point to, maybe outside of the housing market that has felt the brunt. So that was the That was the second one. The third one is that two percent is not a real target. I I make this point only because you know, two percent is obviously arbitrary. There is no historical, you know, proof that that is the optimal level of inflation. I think we know that zero inflation is too low. You know, it helps the economy to function to have some level of inflation. Um It, it is not clear that two is any better than two and a half or one and a half or three or some other number. You know. Obviously, if inflation starts to spiral out of control, that's when it becomes a problem. But but low single digit numbers are generically fine. And I think, you know, we we also have to just think that not very many years ago, when we were approaching two percent from the bottom and the narrative which was initially two is a hard cap and the Fed will have to hike as soon as we get anywhere near it became two percent was the signal to begin hiking, and then it became forward average inflation targeting, which was much softer. And you know the idea that you know we're going to be on the down slope in a year or two as we approach two percent from the high end, and that somehow, in a recessionary environment, the Fed is going to feel utterly compelled to continue cranking down the level of monetary accommodation just to force the economy into that sort of spot. I don't I just don't think that's all that likely. Now. They're not gonna they're not gonna give up that number too soon. You know, the farther away from it you are, the easier it is to just sort of point to it as a target because you're nowhere near it. But my guess is that as we start to approach inflation from the upside, you know, there's gonna be a lot more constructive and very specific discussion about what that two percent target actually means. Jared gross Managing Director and head of Institutional Portfolio Strategy at JP Morgan Asset Management. So great to hear your thoughts. Can't let you go just yet, though, because it's time for the craziest things we saw this week. I'm gonna start for once. Really, I'm gonna start well, Dota. You know, my favorite asset class is ridiculously overpriced collectibles and artwork auctions. It happened to be the best year ever for auction houses, at least for the big three. Christie's, Southebes, and Phillips just had their best auction year ever as far as total sales of items that were auctioned off. I'm surprised it wasn't last year. Yeah, I know. Well, there's some caveats in this stay South Bees is including real estate, but whatever, We'll let them have their day in this sun. This is courtesy of our own James Tarmy at Bloomberg. So, Jared, uh, it's time to play the prices precise. What do you think the dollar figure was on total sales total uh revenue of auctions? Okay, I'm gonna go with one point five trillion one? Okay? Is that too much? I try to Jared, I try to keep a poker face going. Are we are we doing prices right? Rules like if I'm under but I can just guess a dollar here, and I'll way anything with a T handle feels a little high. I mean, I will say, though, if you're including real estate, I mean, obviously those three don't transact all of the real estate, but they do a fair amount. And that's a that's a big, big chunk. I will say, three hundred and seventy five billion. Wow, I thought you guys are eighteen billion for not not one point five trillions. That cannot be. There's so many stories that are like so and so sold to paintings for a hundred fifty million dollars or something. Yeah, but they're the ones that make the headline. Then they saw a lot for you know, for a few thousand. I guess I don't know, all right, Well, Jared wins to the closest to the I don't consider that much of a win. That's uses and hand grenades right there. You still one, okay. Mine is actually from one of our listeners, Tweggy Sundays Tweggy So Tweggy points out that the market value of coin base trails that of doge coin, which is a joke cryptocurrency. So doge coin is worth more than coin based by market value. So if we're looking at coin base, it has an eight billion market cap and dodge coin has a nine billion dollar that's crazy. Well, Jared, how about you? You You see anything crazy this week? Well, you know, I I if I can, if you'll indulge me and let me go back a little further in time. Um, you know, there was an event that just it got a little pressed but maybe not you know, too much here in the States, which was the near collapse of the British or the UK pension system. Um. And it was it was really a classic sort of derivatives liquidity squeeze, which you know, I guess we we we encounter these every couple of years because people seem intent on having to learn, you know, lessons that should have been learned a long time ago regarding leverage and risk. Um. There's a phrase that I learned early on in my career which I always found very evocative, which is what they call the Texas hedge, which is, you know, it comes from owning cattle and also being long cattle futures, and when your collateral is the same thing as the futures, you can get into a lot of trouble in the derivatives markets, and that is the unfortunate position in which a lot of UK pension investors found themselves and that they were long a lot of guilts and a lot of guilt futures and when the market sold off when they released this you know, so called mini budget um, these trades rapidly on wound and you know, it reminds me of a lesson, which is, you know, if you don't manage your collateral, your collateral will mantage you. And I think you know a lot of these firms found themselves in in a very short lived, thank goodness, but very desperate moment. You know, you have to give a lot of credit to the UK Treasury for stepping up and fixing the problem. But it is a strong reminder that you know, these pensions, you know, and and and the use of derivatives, even by relatively sophisticate institutional investors, you know something you have to be careful about. Great stuff, Jared Gross, head of Institutional Portfolio Strategy at JP Morgan Asset Management. Great to hear your thoughts shared. I hope we can do it again sometime. I'd love to Michael and Bildana, thank you so much. And co Bird's Fly Eagle Fly What Goes Up. We'll be back next week and so then you can find us on the Bloomberg Terminal, website and app or wherever you get your podcasts. We love it if you took the time to rate and review the show on Apple Podcasts, so more listeners can find us. And you can find us on Twitter. Follow me at reak Anonymous. Bildanna Hirach is at Bildona Hirach. You can also follow Bloomberg Podcasts at podcasts. What Goes Up is produced by Stacy Wong. Thanks for listening, See you next time. APT Not Wanting