Bloomberg Surveillance: Gauging a Growth Slowdown

Thomas Kennedy, JP Morgan Private Bank Chief Investment Strategist, expects a growth slowdown in the US amid a decline in excess savings . Christian Scherer, Airbus Chief Commercial Officer, says the company is in an undersupplied situation coming out of the pandemic with high numbers of aircraft orders . Claudia Sahm, Sahm Consulting Founder, says the US is now closer to a recession than earlier this year. Toto Wolff, Mercedes AMG Petronas CEO, previews this weekend's first-ever Las Vegas Grand Prix . Jon Lieber, Eurasia Group United States Managing Director, says that both political parties are aligned on avoiding a government shutdown. Get the Bloomberg Surveillance newsletter, delivered every weekday. Sign up now: https://www.bloomberg.com/account/newsletters/surveillance Full transcript: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on a Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. What we do here is we have smart guests like Will Kennedy, just joining us at Queen Victoria Street in London on oil and now joining us his compatriot in Irish crime. Thomas Kennedy joins his chief investment strategist at JP Morgan. One Kennedy to another, and you linked it when you sat down and you looked at Will Kennedy's world and says, when the price of oil moves, you see in chases, charge card juggernaut reaction, what do you observes oil comes down? Yeah, we saw change in the way the consumer was reacting to higher oil prices around August September area in our Chase credit card day. To remember, we're banking about twenty percent of America, and what we saw there was a nice plug nailed deck when gasoline prices rose. You actually saw a discretionary spending go down. Now, Tommy might be saying, well, of course you're going to see that. Right, prior to August and September, in the post COVID era, we did not see that relationship. It suggests the excess savings in America might actually be depleting after how many quarters of negotiating on it, right, and then when we really dig into the accounts of these folks, and we do it in anymous anonymous fashion, about half of America looks like they're out of excess. If you're missing words up, it's okay. You're sitting on the side of the table where we do that routinely. You know, I'm looking Time Kennedy at the polarity between Morgan Stanley and Golden Sachs today. You need the leadership or Bruce chast and Michael Faroli to give you an economic backdrop. What's your economic backdrop that forms your outlook call this year? Yeah, we're expecting a growth slow down pretty much like the less rest of Wall Street at this point, and it is relatively simple and intuitive. You have the cost of capital above expected revenue in this economy, and if you think about America as one big business, it's very odd to see the cost of capital to be above expected GDP. It should force investors to say, maybe I'll just save instead of borrow money and invest in my business. We've seen this four or five times in the last forty years, just about every time you see a growth slowdown, tom So we should expect that to happen. The question becomes what's the scenarios where it doesn't happen? And in those scenarios you have one where either the consumer is much more resilient and they have access to borrowing, and you're going to see growth come higher or something breaks in the meantime. Those are pretty dynamic and polarizing outcomes in the future. Everything you set up until then, though said, by the ten year go along the curve. Look in some of this yield. Is that right? Yeah? I think it has to be. John. You have at this point a municipal bond that is giving you equity like yields, and for the first time in twenty years, it is actually competing with the earning yield on the s and P five hundred. For my clients that are gathering wealth for generations, I can show them something that has near zero default risk and you can get equity like yields. Is their risk to that, of course there is, But that's a dynamic that they haven't seen in two decades. And now I can start to reposition some of their portfolio and they say, Thomas, I'm nervous. I'm seeing yields all over the place. Are they reluctant to buy even at these rates? Even after you tell that story, it's a reluctant still to buy it. In our data for the last twelve months, this has been the trade that people have been excited about and can get invested in. That doesn't mean it's not without angst. When we saw a five year tax free yields show up two weeks ago, that dynamic changed five percent tax free for people in New York City, where we're sitting. Guys got to buy a taxable bond above ten percent to get an equal return, So the behavioral experience for them did change there. I think as a market prognosticator makes you say, well, how high can rates really go before we're going to see that crowding out effect of high yields. One of the mysteries of this year has been what the main driving force in yields has been. Is it the economy? Is it inflation? Is it the politics or the fiscal backdrop? This is going to be a really interesting test. What do you think is going to be most important with respect to market volatility? Of all the things that are going to happen this week, the FED expected out look for the FED. You can explain more than three quarters of all the movement and rates just from those two things. Where the FED is and where you expect them to be in a year's time. In the last couple of months you have seen I would call it supply of treasuries become a little bit more of a factor, but not dominant at this point, Lisa. So as we look ahead, what's going to matter the slowdown? How big of a slowdown is it? And importantly, what will the Fed's reaction function be. You said that half of America's are half of America is pretty much out of savings based on your data, Yeah, which half, right? I mean? Is this the half that has been spending more aggressively and will continue to if they had the money, or is this a half that is particular in the economy? Right? I mean we're talking about the two Americas. We've got a lot of Americas and they're moving at different speeds. Yeah, the two America's theme really resonates for me. But the folks that are out of excess savings at the bottom half of America, and those are todaytionally the ones that don't have excess savings. So now they have a decision to make. They can either slow consumption or try to turn to their credit card at a time when credit card rates are historically punitive, even when you normalize them for where interest rates are or base rates from the FED. So I think the slow down metrics makes sense when your highest marginal propensity to consume folks are running out of their excess savings. Really sharp article this weekend of the millions of Americans. They don't own Apple, they don't own Nvidio, Microsoft, they missed the boat and they got a two to oh one k. They walk into JP Morgan Chase this morning with a disastrous portfolio. They're miserable. How do you approach the active versus passive retirement debate? I think at this point in the cycle time, active is going to make the most sense in that when you're looking at a passive allocation, even to the equity market, the haves and have nots are there. On the one hand, you have, say Tech in the equity market that has gone through its optimization of its balance sheet. Layoffs in the tech sector have been big in the last twelve months. Capex is now getting turned back on around AI and the monetization phase is not going to be that long. Microsoft, as an example, three percent of their revenues are coming from AI already. Meanwhile, you move to small and midcaps, and these are the most interest rate sensitive sectors and they have debt to EBITDA two to five times. They are going to feel this pain more than big tech. So in the equity market as an example, active management I think makes sense as a headline early cycles when you rotate back two more passive ideas, and that's not where we are right now. So in the minds of money, late cycle is where people think we are right now. I think it's a muddel and I'm really fascinated by the outlooks. I meantime, Kennedy's going to put together thirty four page outlook I have a rule I read the first must this time of the year where it's difficult to sort of get beyond next week to put something out for the next twelve months. How hot is that? I think it's difficult when you're trying to do it at the end of a cycle. The FED has just done the most aggressive rate hiking cycle we've seen. And where are you? Are you in the muddle through? Are you in the late cycle? Are you in the end cycle? That's the hardest part. But to be able to turn to your client and say to them, I can show you equity like yields and fixed income it's a way to buy some time and get some good yield in a portfolio. Pro tip more charts tip David malpassed a Bears Turns years ago. Went in doubt. Saw that from David costin effort goalman. This morning it was gone through his outlook. He's just full of chance and tables. Thomas, this is great. He's going to see it some kind of do that of JP Mulkin prims a bank. Guy Johnson is expert at the development of jets, the crafts that we fly every day, and he knows the Christian Sharer Bleeds Airbus share grew up in to Lose France. He's been part of Airbus Way way Back for many many years and he is now the CCO of the great European airplane builder. Guy Johnson in Dubai, gud good morning, Good morning, Tom King, All good evening. The sun's setting on day one of the Dubai Air Show, and as you say, it has been a big one. We've seen some significant orders, some promise of even more still to come, and as you say, the wide body market feels like it is back. Over the last few years, this has been all about narrowbodies. The recovery out of the pandemic driven by the narrow bodies. Now it's the big workhorses of the sky, their time to shine. Let's talk to Christian Sharer, as you say, the chief commercial officer at Airbus. If you want to know what's happening in this industry, here is the guy to talk to. Christian. Nice to see you, Thanks for making some time for us. Look, the world at the moment feels like we've got a lot of geopolitical tension. We've got a lot of uncertainty. We've got a lot of economic uncertainty as well. Rates have been jacked up, economies are slowing down. Yet it doesn't feel like it at this show, huge orders across the peace in terms of what we're seeing from airlines from around the world. Why the disconnect, I wouldn't say it's a disconnect. You know, an order at an air show is I wouldn't say anecdotal, but it's being very much highlighted because it's an air show. You will will have seen that this year alone, there's been lots of orders in particular with us at Airbus, well before the air show. During the air show, there'll be orders after the air show, So it isn't like an incredible peak all of a sudden, It's part of a phenomenon. The airshow is building for a while though. This is a kind of moment in time when you can take stock. As you say, you're about to sign a very large order with Turkish Airlines, a huge order, a lot of arrow bodies in there, but a lot of wide bodies as well. This feels like a moment in time just to reflect on what is happening, and it feels like demand from the customer is still very strong. Demand within the industry is very strong. They've watched what happens with the narrow bodies and then they've sold out. Now these guys want to make sure that they've got their slots. What is driving this demand, What gives the industry this confidence probably the act guy that we're seemingly in an under a supply situation again, so there's a lot of jockeying for delivery positions. You don't want to miss the train. Just a few years ago, in the midst of the pandemic, remember we manufactures were asked to slash our production by roughly fifty percent, So it takes time. There's a lot of industrial inertia to rebuild an industrial system that's capable of producing large numbers of white body airplanes, and so they don't come in large numbers. So you don't want to miss the train. You study the numbers very carefully. If I look at what's happening with discretionary spend at the moment I listened to LVMH or Reach Moore or the Azure, they're talking about that sort of high end discretionary spend beginning to roll over. And do you think that happens in aviation or do you think the lesson from the pandemic is? Do you know what? I won't have the Cognac, I won't have the Cartier watch, but I will have the airfat I think the letter is true. I think an air trip is no longer a luxury per se. It is part of discretionary consumer spending. It's probably a the top of the list. I would think that the recent behavior that we've seen, beyond the obvious phenomenon of pent up demand coming loose after the pandemic, I believe that the consumer will tend to go enjoy himself, yourself, visit, visit friend's family before they buy an expensive watch in terms of kind of what happens next. Do you see this demand being sustainable? Do you talk about the fact that the esshow shouldn't just be how we perceive what's going on? You see this as big a sustainable story. Now you think white body demand is back. Where in the cycle do you think we are. I'm not sure we can talk about cycles as much as we used to anymore. So I do believe fundamentally it's sustainable. Our studies are telling us that we will see continue growth in air travel, including in wide body air travel, a little bit less perhaps than before the pandemic, or irrespective of the pandemic, because of the inflationary pressures, increases in fuel prices, et cetera, et cetera. You mentioned it, But we do see sustained demand, including on intercontinental travel, and we do see on the large aircraft where fuel burn in particular and technology plays the biggest part, increased demand to replace all the airplanes. So there's more replacement in the years ahead than there was before. You talk about inflation, What are you building into these contracts? You're selling airplanes five ten years down the road. Inflation is running hot right now? How are you building that into your contracts? How much are you building into that contracts? How important when you sign a contract is that escalation tools. That's a really good question, and that is a subject of finding the right balance of how you share that risk of inflation with the customer, the airline that is making a purchase decision many years in advance, typically a guy. What we do is we index our pricing on indices of material costs and labor costs. Those are US industries, those are most mature indices that exists in this industry. So we index that and then if it's a discussion depending on how far out the airplane is being ordered for, that's a discussion of how we share that risk, that inflationary risk with our customer. You're going to be able to build all these airplanes. I spoke to Gail a few days ago CEO. He was talking to me about going from nine to ten on the three point fifty program. If this demand continues, do you have to go ten to eleven, eleven to twelve, twelve to thirteen and how hard is that? Well, one step at a time. Remember we're coming from we were at a rate ten before the pandemic. We slashed it down. Now we're ramping back up to ten. It's not a trivial thing. Airbus is not necessarily the limiting factor here. It's a huge supply chain that we're pulling with us, and that's the pacing item. Is it conceptually possible that we go further? Yes, In fact, the ever optimistic commercial man and me will say yes, most probably we will, but that is not for today. We have objective ten per month in our site. That's what we're going to do, and our programs are running very much on time. One final quick question, and it's come up a lot today in the conversation that I've been having, the Rolls Royce new CEO two fan appears to be running the business in a slightly different way. He can clearly add up. He clearly wants to make some money, and that is resetting the relationships within the industry. They are sole supply on the A three fifty. How as that relationship changes, How does the relationship between Airbus and Rolls Royce change, Airbus and Emirates change, How does it change the nature of the relationship between between supply customer and ultimate customer. Well, I'd say two things. The first one, the most important is we're really really happy with the Rolls Royce engine on the A three to fifty program and on the A three thirty as well, but on the A three to fifty program in particular, the XWB engine, I will dare say is by far the best engine in the sky today in reliability, in fuel burn, endurability. It's a wonderful engine. So that's point one. Point two. Yes, there is a resetting of pricing in the engine business, the fuel burn. The engine guys have developed fabulous machines to lower the fuel burn. That comes at the expense, at some expense on the maintenance side, because these engines consume paths quicker, consume less fuel, more parts, And that reset is what's happening in the industry, in the engine industry at large, and Rolls Royce is no exception to be glad to see you. Thank you very much, Dean Christian, thanks for taking us, taking the time and here at us Tom Kine from the Dubai show, the sun is setting here back to you, guy Johnson, thank you so much. Always interesting. She has become acclaimed. Claudia Sam was someone out of Michigan in the fed A number of years ago with a really really dry, smart academic paper on government assistance and how to decide wrapped around recession economics. She's literally become a household name. Doctor Sam joins us now former Fed economist, founder of some consulting. I guess, congratulations. The only one Claudia had a bigger year than you was Taylor Swift. I expect we'll see you at a Kansas City football game anytime soon, Claudia, Sam, I got to get it out of the way just because of the notoriety. How closer we to recession. We're closer than we were say the middle of this year. We are not in a recession. And that's not just this Sam rule. Look around. The economy is still growing now. That's no guaranteed that we will be in that place, you know, in the coming months. And yet we are not in a danger zone with the labor market. And there's a lot of reasons why we may have seen the unemployment rate come up. There could be good reasons like workers coming back. What's important here and you have it in your research note to us and Bramo I think has really been out front on this is almost the behavioral impact. I think Faylor at Chicago. The behavioral impact of feedback loops tell us about what you're working on. The new I'm selling this, folks, for Claudia. She needs something to do. The new acclaimed some feedback loop. What's it looked like? Well, this is the logic. I mean, this Sam rule is about the unemployment rate rising a relatively small amount that happens early in recent It's been very accurate. The idea behind it comes well before me in that once the unemployment rate starts rising, it keeps going because on the demand side, there's this feedback loop. Some people lose their jobs, then they buy less, then those workers lose their jobs, and so on and so forth, and that's where it really gets going. What we see right now is not just a demand side, which would be a typical path into a recession. We see this. You know, workers have really come back. We've gone from labor shortages to now some workers that are looking for jobs. Right. It's going to take the jobs longer to catch up. That's a good thing. We needed those workers. It's just as with everything else in this economy, it's been messy to line up supply and demand. So now it's in the labor market. How uncomfortable does it make you to say this time is different? Very uncomfortable, and yet we could have said many times since the pandemic, this time is different, and very legitimately, you know, I talk about the quote unquote some rule breaking, which is it would trigger and then we would not go into a recession. Last year we saw two quarters of declines in GDP growth. That has only happened inside of recession since World War Two. It happened and we were not in a recession. So the SAM rule could be next in line to break. And I mean I prefer it didn't. I prefer unemployments stay low. But if it did, my base case is we don't go on a recession. Does this mean that right now you see sort of the immaculate disinflation or you see just year over year inflation come down to the Fed's target by later next year without necessarily the FED doing anything more and even potentially cutting rates, like so many Wall Street firms seem to believe. I take issue with the idea or the term of immaculate disinflation. I mean, this is coming out of a pandemic. We know where this is coming from. It's not just like it appeared. And yet to your point, we've already seen it right, and there are not all the disruptions worked out in the economy. The labor market's a place where we've seen some of like the kind of last momentum. There is more to give in terms of inflation coming down. It's going to be messy. I expect roma not to be a fun day in core inflation, and there is some of the demand to come out. And we've seen that wage growth has slowed back to something more normal. So everything is rowing in the right direction on inflation, it's just going to be slow and bumpy. Can you draw distinction, Claudia, between people coming back into the market and the participation rate which hasn't actually gone up so dramatically. Even as we do talk about people coming back into the labor force, when we look at the years a whole participation has moved up. That's a very slow moving creature. Just in terms of the measurement, we've absolutely seen a burst of workers. Women's employment is at an all time high. We have seen a big surge of immigrants. In terms of the workfieces finally getting processed, so we've had people coming back in. It is there in the data in the labor force participation, and some of these factors are more temporary, and that's part of the jobs being able to catch up. Like we're still adding jobs at a good clip, just not like last year. Clot. I don't mean to interrupt, but I think it's really important into the CPI data tomorrow and retail sales the next day. The Boston Fed as a cottage industry of trying to this is Michelle Barnes years ago. Folks trying to figure out guessing consumption? Can we actually guess consumption? How do you respond to people talking about, well, this is the credit card data or that. What are the academics like you actually say about gaming? Seventy percent of the American economy? Right, So I was one of the lead forecasters on consumer spending at the Federal Reserve for about a decade. So I spent a lot of time trying to forecast consumer spending. The big piece, and I've talked about this recently, it's the income. Like if we lose the labor market, we lose consumers, as many people spend their paychecks. If we lose consumers, we're done for in a recession. So to me, it's like all eyes on the labor market that it keeps in the place it is, and household balance sheets are in a place that they have not been in for a very long time, particularly at the bottom. Like that's really encouraging, Claudia, Thank you so much. Claudia, so former feeder reserve economist. There's a lot to talk about here, John, as we get to Toto Wolf Team principal CEO of Mercedes. But John, the real issue here to me, and I'm gonna do a little bit more Spanner and cispar I was reading about the SISPEC cake folks, the side impact bar is very very important for all these different cars. This, thank you, This is more of an engineering discussion you're looking at it. Maybe what we've got SITI is not running away from the camera. Joined us now, Toto Wolf Team principle and CEO of Mercedes AMG ptronis formula onetside. Fantastic catch with you, sir. Let's just start with this new racetrack. We've spoken to a couple of people about it already. What kind of feedback how are you getting from the drivers on the simulars Again, it's a race weekend. First of all, good morning, Good morning to New York. We can also talk side impic structures if you wish, but you're gonna lose some of your some of your audiences. Yeah, I'm skilled with that. Yeah, we can jump on a separate call. I'll tell you. So. The drivers have been in the simulator, and I spoke to Lewis last week when we had a meeting in the factory and he said, the strait is so long and impressive, but we don't really know what to expect because, as you mentioned before, we're racing between ten and twelve local time. Nevada nights, i've heard can be pretty pretty cold, and the only night racing experience that we have is Singapore and a little bit of the Middle East, but obviously never on a new track close to five degree cent degree with careally tires that have never experienced these kind of temperatures. It just raised some questions as to why it's being hosted at this time of the year, at this time of night. Toto, how did that come about and would you push for a change next season? Well, obviously, Las Vegas stands for entertainment and show and liberty came up with the plan, which is great. To be honest, we've not raised in Las Vegas for a long time, certainly not in modern Formula one, and going there with this new format in the night. It's going to be spectacular. I think it's been said before. The track is brand new. That means the surface can be quite greasy or oily, because that's what asphal do does when it's new. We haven't raised in those temperatures, as I said before, But in any case, it's going to be a big spectacle. I don't know whether we will be sliding around or whether the track is going to be really grippy, but we shall find out in a few days. We've been talking about qualifying and the prospect of maybe needing to two three laps to get tires up to what's more temperature to put in that quick slab, so twenty thoughts on that at this point. Yeah, we've headed in the past that sometimes you just needed to slowly warm up the tires because if you push them too hard at the beginning they're green, you know, then you slide over the surface. The grip is never going to come. So bringing them in, driving them carefully, getting them up to temperature and that could last a few laps, depending and we're getting a little bit technical here, depending on how much you heat your rims and your breaks beforehand. And teams have various concepts. They don't want to have the front tires pretty cool and long lasting, or you heat them a lot, which gives you a grip for a single lab for qualifying, but obviously harms them for the risks. It could be chaos or it could be really exciting one or the other. It goes to a conversation we've been having all season on this program total just how you balance pursuing commercial gains without compromising race quality. What do you make in the current balance the Formula one. I think we had that balance to cope with that balance for a long time. And I think why we love the sport so much is because it's honest. Entertainment follows sport. We're not designing regulations or content because we want to create scripted content with a certain outcome, with a certain degree of non variability. We're doing this, we're launching ourselves. There's technical regulations, they're sporting regulations, and then off you go with a certain within a certain framework of cost cap which is similar to the salary cap in some of the US leagues. Everybody has the same starting point and then we launch ourselves into this. So it's honest, the stop watch never lies, and therefore the entertainment's follow suit. And yet we go through these periods of dominance. We saw it with Ferrari late nineties, early two thousands, we saw it with you Mercedes for a long time as well, and now with Red Bull. So Lewis has said recently in the last couple of days, the Red Bull is so far away. I think they're probably going to be very clear for the next couple of years. From your standpoint as team principle, is that a realistic assessment of the future, the next couple of seasons where we're giving it all to break a cycle. Like you said, we had five years of dominance of Ferrari, and we had a drug spell of Red bulland then it was us eight times in a row. And now it's the second Constructor Championship for a Bull or the third Drivate Championship with an indeed very good driver. So we are, you know, with all we have back in effect, and at the racetrake we're trying to come up with a car and with an execution that is as good as it can be, and we have a next cycle of regulatory engine twenty twenty six. But we got to turn this around the well for this race, and I think Total Wolf it's very clear. There's three late races left Las Vegas and then back over the Middle East cutter in Abu Dhabi. Are you racing right now for next year? Yes, we have done for quite some while. We're still fighting for the second championship in the constructor championship. We are second at the moment and Ferrari behind us, so that's an interesting one. But you know, deep down, second or third, third place doesn't matter. We've got to with old humility fight for the front. And that's why many months ago already we've switched and the transitioned to a new corner totally. There's a phenomenal photo of three Austrians, Nikki Lauda, Total Wolf and a guy named Schwarzeneger. It's a really really cool photo. And to take what Arnold Schwarzenegger did, and all of our American audience remove from F one understands the tale in here. When you look at the showbiz a Formula one, the Netflix success of which you're a star his Formula one Gone two Showbiz in twenty twenty three. Obviously, you know there's a few Austrians of us that have gone beyond beyond the country and schwartzeneg are probably the biggest. And I was lucky enough to be very close friends with Niki. We traveled the world around in its function as chairman of the team and there were very valuable lessons that I that I could learn. Did we go beyond the sports too much entertainment? No, I don't think so. We have. We're trying different formats with the sprint race weekends and all Las Vegas racing in the night, and if it needs calibration to provide a better show whilst staying true to our values of the honest spot, I think we've got to try it. But the core product the Grand Korea on Sunday, within the regulations financial technical in sporting is always what Formula one has been all about. Let's finish on the prospective expansion at Toto. I believe you've been against the expansion of the grid. Do you think it's now ultimately inevitable? I think the ten teams that have been in the sport, have been so for a long long time. The smaller teams or midfield teams have gone through a lot of hardship a few years ago when COVID struck, but in any case, they fault for survival. And here we are with the cost cap kicking in. The teams have most of the teams have done into profitability and finally are in a sustainable way and continuing. But that is not a given. You know. We we are on high at the moment, and therefore we've got to respect what the FA and the commercial rights holder are going to decide whether they want to have an additional team joining. And obviously, if we are being asked to saying, as long as it's a crazy for the show, as long as we provide a better, better entertainment, more income, why would any team be against it. But fundamentally it's it's somebody else that decides. And so it's wonderful to catch up with you, sir going into race weekend. Good luck to you with a team. I'm looking forward to watching the race over the weekend. Thank you for being with us. Total wolfare team principle and CEO of Mercedes AMG patronas f one. We've got clocks for any number of things. Four days, seventeen hours, forty one minutes, fifty three seconds to shut down. John Lieber knows the shutdown clock well over the many decades he is at your Raise your group, John, thanks so much for joining from London this morning. We're riveted to the shutdown clock. What's the likelihood that the nation's going to turn into a pumpkin at midnight on Saturday. Well, it's always exciting in US fiscal policy, and the shutdown clock's fun to watch. But I think fundamentally both parties are basically aligned around not shutting down the government. So I think that kind of this situation looks like I did a couple of months ago, where you've got Republicans making demands for spending cuts, Democrats saying we don't really want to do that, but neither side really wants to shut down the government, and Republicans are now putting forward as plan to keep funding going through January for part of the government, February or for the rest. I would bet by the end of this week that's passed, because no, unless there's some mistake or something goes wrong, and these two sides inside they just hate each other too much to actually do this. My quick creator of the Moody's announcement was it was sort of a statement on civics in America. Are we going to go through a process now and towards the next shut down six months out a year out where we yearn to go back to the system you knew working for McConnell years ago. Are we going to some new system of legislating and appropriations in America? You know? I mean the system is basically the same as it has been for the last decade, where one party the other is trying to leverage these deadlines to get the fiscal policy they want. And you mentioned with the Moodies downgrade interest rates and basic civics. But there's also demographics and the US demographics aren't changing, and because of that, you've got this massive increase in spending as there's more retirees in this country, while tax revenues remain basically flat as a percentage GDP. And what that means is the combinations you get more debt as a share of GDP. We've seen the stock of debt triple over the last ten years, and that's probably going to happen again in the future. So I think this Moody's rating is yes about the short term, about higher interest rates, and about the dysfunction in Congress, but fundamentally, this country's on a bad path long term fiscally. Neither party has any seriousness about doing anything about it. Even the Democrats, in what they called an Inflation Reduction Act, which was ostensibly designed to yes, invest in green technology but also reduce the deficit, couldn't muster a single thing that's an actual tax increase in there. They had to rely on these things they could spin as loophole closers, and in the end that bill is probably going to end up increasing the deficit too. So there's simply no seriousness in dealing with this problem, and there won't be until there's a crisis, which raises a question of what it will take. And we were talking with Neil Kashkari last week and he said he actually questions how much the fiscal concerns about the US really are affecting benchmark rates in the US, saying that if this really were an international concern, you would see the dollar weekend. From an international negotiation standpoint, is the fiscal backdrop of the US entering into the discussion more, is it putting the US in a more difficult situation with China and other potential trading partners. Yes, yeah, I mean I think this is a factor. For sure. The US has relied both on kind of foreign funding of its debt, but also the Federal Reserve is a marginal buyer of debt for this ten year period of low and dropping interest rates, and that's now shifting fundamentally where foreign strategies around US debt are going to start affecting the interest rate outlook, and it's not going to be such a sure thing that the US can continue to fund these these massive deficits. However, all evidence so far suggests that when there's a flight to safety, US treasuries are still the place to be. The US has the reserve currency, and despite all the issues that we've seen this year, people still think that the US is a pretty safe bet that's got a deep and rich pool of taxable assets that you can get at in an emergency if you need it to. The big question is not whether or not the US can repay or has the money to repay, is if there's the political will to keep this going and what it looks like in a crisis where you might need to see an instant increase in taxes or something. John, just looking ahead to Wednesday, we are going to get that meeting between Jijon paying and President Biden. What are you looking for? You know, I think this is a very low bar to get over. The big celebration is the fact that they're meeting at all. I think a key question is if they resume the military to military communications that were cut off after the Pelosi visit. This would help de risk some of the challenges that you're seeing in the South China. See where China's you know, the China argues the US has been aggressively going approaching on their territory the Philippines as well, and they've been sending these warning signs to the US that they are telling them to back off. Resuming the military to military communications is a step that trying to help de escalate those tensions. That's probably the most we can hope for. I'm really curious to see what hu Jinping says in his speech to the American people, and I'm also watching what is his message going to be to US corporate executives who are very worried about a sudden stop and their ability to do business in China. What messages he give them to reassure them that China is still a safe place for them to do business. I think those three things will be the most interesting to watch coming out of this week. That last point is just absolutely huge and a big one for us or wait, John, Thank you, John Lebade. If you write your group, subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen, and this is Bloomber See omnystudio.com/listener for privacy information.