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How China and Evergrande Are Trying to Avoid Disaster · Stephanomics

• 0:05
  Speaker 1: Hello, and welcome to Stephanomics, the podcast that brings the
• 0:08
  Speaker 1: global economy to you. My name is Tom Orlick. I'm
• 0:11
  Speaker 1: the chief economist for Bloomberg and this Halloween Week with
• 0:15
  Speaker 1: regular hosts Stephanie Flanders, busy putting the finishing touches to
• 0:19
  Speaker 1: her modern monetary theory costume, I'm stepping in as master
• 0:22
  Speaker 1: of Ceremonies. In keeping with the spirit of the season,
• 0:26
  Speaker 1: we have a Frankenstein's Monster of a show for you,
• 0:29
  Speaker 1: stitching together some of the scariest risks in the global economy.
• 0:33
  Speaker 1: In a bit, we'll hear from Logan Rights of Rhodium
• 0:36
  Speaker 1: Group and Bloomberg's own David Chu on why the ghost
• 0:39
  Speaker 1: time problem that has long haunted China's economy is coming
• 0:43
  Speaker 1: to a head. To start, though, Bloomberg's own Tom Hancock
• 0:47
  Speaker 1: has gone trick or treating at the Hong Kong headquarters
• 0:50
  Speaker 1: of ever Grandy, one of the developers that built all
• 0:53
  Speaker 1: that empty property. Let's see what candy he collected. Yeah,
• 1:08
  Speaker 1: I've come to the headquarters of China Evergrand Group in
• 1:11
  Speaker 1: Hong Kong, the epicenter of a burgeoning debt crisis that
• 1:15
  Speaker 1: the sharply slowed growth in the Chinese economy. The sides
• 1:19
  Speaker 1: of the twenty six story building are plastered with advertisements
• 1:23
  Speaker 1: for Evergrands luxury property developments, but it's the headquarters itself
• 1:28
  Speaker 1: which has been up for sale this year. Evergrand tried
• 1:31
  Speaker 1: to raise two billion dollars by selling it off to
• 1:34
  Speaker 1: pay debt, but the deal hasn't progressed. Evergrand staff who
• 1:39
  Speaker 1: walked the lobby's marble floor and take elevators to their
• 1:42
  Speaker 1: offices face an uncertain future. In a cafe next to
• 1:46
  Speaker 1: the building's lobby, Evergrand staff meet over covees or soft
• 1:50
  Speaker 1: piano music plays. More than a month after entering its
• 2:01
  Speaker 1: acute phase, the financial drama at the company that had
• 2:05
  Speaker 1: been China's largest property developer until recently is far from over.
• 2:10
  Speaker 1: After waiting about a month for an interest payment, some
• 2:13
  Speaker 1: of Evergrand's dollar bond holders received their money over the weekend,
• 2:17
  Speaker 1: allowing the company to avoid a default for now, but
• 2:21
  Speaker 1: investors have little insight into how long Evergrand can continue
• 2:25
  Speaker 1: to pay its bills. The bonds initially had a bit
• 2:29
  Speaker 1: of a pop and then sort of very quickly came
• 2:32
  Speaker 1: back down to almost unchanged. On the day. That's Monica
• 2:35
  Speaker 1: saw of Triatic Capital an asset manager UM. I think
• 2:40
  Speaker 1: that UM it made made sense for them to pay
• 2:44
  Speaker 1: this just pretty much about a day before the end
• 2:47
  Speaker 1: of the grace period in order to kick the can
• 2:49
  Speaker 1: down the road while they figure out a comprehensive resolution
• 2:53
  Speaker 1: to this. This whole Osaka, like many in the market south,
• 2:58
  Speaker 1: sees the hand of China's government behind the scenes. Evergrand
• 3:02
  Speaker 1: status as China's biggest dollar bond issue means whether it
• 3:06
  Speaker 1: pays its bills will help determine how easy it is
• 3:09
  Speaker 1: for other Chinese companies to access overseas lending in the future.
• 3:13
  Speaker 1: So the payment of this coupon, I would assume does
• 3:18
  Speaker 1: involve the government, including the p POC, in order to
• 3:22
  Speaker 1: maintain stability of the whole financial system. I think that
• 3:26
  Speaker 1: much is sort of clear to the market. The heart
• 3:29
  Speaker 1: of evergrands troubles are its high debt burden. It counts
• 3:33
  Speaker 1: more than three hundred billion dollars in liabilities and a
• 3:37
  Speaker 1: slowdown in sales attributable to the Chinese state itself. According
• 3:43
  Speaker 1: to Juning, a former advisor to China's Central Bank, the
• 3:47
  Speaker 1: Chinese government is trying to reduce the economy's dependence on
• 3:51
  Speaker 1: real estate. He argues that a constant expectation of rising
• 3:55
  Speaker 1: prices among households has created a bubble that threatens financial stability.
• 4:00
  Speaker 1: Team but in the process of trying to deflate the
• 4:03
  Speaker 1: bubble by slowing housing sales, officials are undermining the finances
• 4:07
  Speaker 1: of huge companies like ever Ground, that in turn creates
• 4:11
  Speaker 1: a threat to financial stability. If you crack down the bubble,
• 4:15
  Speaker 1: you would create a financial brisks on its own. But
• 4:19
  Speaker 1: if you don't, you wouldn't be able to convince the
• 4:22
  Speaker 1: market that you really minute. I think that's the here
• 4:25
  Speaker 1: in challenge Chinese regulate or Chinese comment phase. Evergrund sales
• 4:30
  Speaker 1: fell by a whopping nine percent during China's October holidays,
• 4:35
  Speaker 1: usually a peak period for home buying, as the government
• 4:38
  Speaker 1: told banks to limit mortgage lending and buyers also worried
• 4:42
  Speaker 1: about ever grounds ability to complete its construction projects. Juning
• 4:48
  Speaker 1: believes that Beijing will continue to try to slow housing
• 4:51
  Speaker 1: sales until households lads their expectations that the government will
• 4:55
  Speaker 1: always step in to support house prices. I think the
• 4:59
  Speaker 1: end of it is to have the market, have the
• 5:02
  Speaker 1: household to have been fairly study explanation of the housing part,
• 5:08
  Speaker 1: but I don't think we're reaching that point yet, Evergrand
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  Speaker 1: needs to focus more on selling off its considerable assets
• 5:15
  Speaker 1: to keep servicing its huge debt pile, since it has
• 5:18
  Speaker 1: less money coming in the door from home bias. The
• 5:21
  Speaker 1: trouble is it's having difficulties finding any bias for those
• 5:25
  Speaker 1: as well. Evergrand has also tried to sell its property
• 5:29
  Speaker 1: management arm, which charges homeowners fees for organizing services like
• 5:33
  Speaker 1: security and cleaning. It hoped that that would bring in
• 5:36
  Speaker 1: two point six billion dollars, but talks about that also
• 5:40
  Speaker 1: ended without a deal. Evergrand's founder and chairman, Wakayan, has
• 5:46
  Speaker 1: always been a risk taker. He was born into grinding
• 5:50
  Speaker 1: poverty in the central province of her Nan in the
• 5:52
  Speaker 1: nineties fifties and founded his property company just as China
• 5:56
  Speaker 1: began to create a commercial housing market in the late
• 5:59
  Speaker 1: night nineties. Two decades later, in seventeen, he was China's
• 6:04
  Speaker 1: second richest man. So far, Way has been low key
• 6:08
  Speaker 1: about the details of Everground's finances, avoiding media engagements. However,
• 6:14
  Speaker 1: local press accounts suggest he is sticking with the kind
• 6:17
  Speaker 1: of big, bold bets that have defined his career. The
• 6:21
  Speaker 1: Securities Times reported that Way plans to scale down real
• 6:24
  Speaker 1: estate operations and won't buy much land for another ten years.
• 6:29
  Speaker 1: The new focus designing and manufacturing electric vehicles. The company
• 6:34
  Speaker 1: got into the new energy vehicle's business a couple of
• 6:37
  Speaker 1: years ago, but as yet to manufacture a single car.
• 6:41
  Speaker 1: Everground faces more tests in the coming weeks as the
• 6:44
  Speaker 1: grace periods on more bonds expire. The fate of one
• 6:48
  Speaker 1: of the world's largest real estate firms and the world's
• 6:51
  Speaker 1: biggest real estate market still hangs in the balance. For
• 6:55
  Speaker 1: Bloomberg News, I'm Tom Hancock in Hong Kong. Scary stuff
• 7:09
  Speaker 1: forever grandy bond holders and with ever grandy emblematic broader
• 7:14
  Speaker 1: problems in an overbuilt, an over leverage property sector. Scary
• 7:18
  Speaker 1: stuff also for China's economy and financial system as a whole.
• 7:23
  Speaker 1: To get into those broader issues, I'm joined now by
• 7:25
  Speaker 1: Lugan Right, a director at Radium Group and veteran analyst
• 7:29
  Speaker 1: of China's financial system, and Bloomberg's David Chew, both of
• 7:33
  Speaker 1: them dialing in from Hong Kong. Logan, let me start
• 7:36
  Speaker 1: with you. Why is a downturn in real estate potentially
• 7:39
  Speaker 1: such a big problem for China. I think it's a
• 7:43
  Speaker 1: it's a big problem largely because just of the size
• 7:47
  Speaker 1: of the property sector within China's economy, which most analysts
• 7:52
  Speaker 1: estimate between twenty of GDP. Overall property sales in China
• 7:58
  Speaker 1: in terms of just the pre construction sales are as
• 8:02
  Speaker 1: high as fifteen point seven trillion u N over the
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  Speaker 1: last um year, of the last twelve months. And so
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  Speaker 1: if you hypothetically look in the future and if property
• 8:15
  Speaker 1: sales decline by let's say over the next year and
• 8:19
  Speaker 1: prices are down by say ten percent um, that's a
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  Speaker 1: huge gap that it's very difficult for developers to make up.
• 8:27
  Speaker 1: It's a gap as high as three point five percent
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  Speaker 1: of g d P. It is not a an imbalance
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  Speaker 1: that is easily remedied by policy. So this is one
• 8:36
  Speaker 1: reason that the you know, the potential costs of such
• 8:39
  Speaker 1: a property downturn that exemplified by ever grands difficulties are
• 8:45
  Speaker 1: so significant. And it's not just a growth risk we're
• 8:47
  Speaker 1: talking about here, is it a slump in the property
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  Speaker 1: sector could mean defaults on loans and end up in
• 8:53
  Speaker 1: a financial crisis, a Lehman movement for China, if you
• 8:57
  Speaker 1: will lugan, how could that plan? The more likely scenario
• 9:02
  Speaker 1: that we would be concerned about in terms of financial
• 9:05
  Speaker 1: distress in China stems through local governments and the difficulties
• 9:10
  Speaker 1: of property developers continuing to um slow down their purchases
• 9:16
  Speaker 1: of land, which would add to financial stress among China's
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  Speaker 1: local governments which depend heavily upon land sales for revenue
• 9:24
  Speaker 1: and repaying their own significant debt burdens. So what you
• 9:28
  Speaker 1: could see is if you have a continued slow down
• 9:30
  Speaker 1: in land purchases, you could have a rise in financial
• 9:34
  Speaker 1: distress at smaller banks that lend to these local government
• 9:38
  Speaker 1: financing vehicles, which have really lad the expansion in China's
• 9:43
  Speaker 1: debt over the past decade, which were also essential to
• 9:46
  Speaker 1: the funding um the investment that has taken place. David Chew,
• 9:52
  Speaker 1: You've worked inside the People's Bank of China, and not
• 9:55
  Speaker 1: just inside the People's Bank of China, but inside the
• 9:58
  Speaker 1: financial stability vision of China's Central Bank, the group which
• 10:02
  Speaker 1: cares most and focuses most on this kind of problems.
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  Speaker 1: How do you think China's policymakers are thinking about what's
• 10:10
  Speaker 1: going on with ever Grandy and some of the broader
• 10:13
  Speaker 1: risks that Logan has described for China's financial sector. The
• 10:18
  Speaker 1: banking sector is the key, particularly the big banks are
• 10:22
  Speaker 1: the key. They are the natural firewall for the financial
• 10:27
  Speaker 1: crisis or financial risks because they have the guarantee from
• 10:32
  Speaker 1: the government. So for example, if you're deposit the money
• 10:36
  Speaker 1: into i CBC, that means you are you are depositing
• 10:40
  Speaker 1: it with with the with the government, so that is
• 10:43
  Speaker 1: the SEBC. Under the big banks, they are steign credit
• 10:47
  Speaker 1: so that this makes them a natural firewall during a
• 10:52
  Speaker 1: credit crisis or credit risk. Remember what happened thirty years
• 10:58
  Speaker 1: ago in ninety nineties, hialized banks used that to have
• 11:02
  Speaker 1: at pent on the Rachel but the banks was still surviving.
• 11:07
  Speaker 1: And that tells us how confident that people are to
• 11:10
  Speaker 1: the banking sector. So the principle for us is even
• 11:14
  Speaker 1: the banking sector remains good and this do have the
• 11:17
  Speaker 1: credibility things will be good. So data is the the
• 11:21
  Speaker 1: most ultimate backdop or backstorm for for the all the argument, logan,
• 11:36
  Speaker 1: help me out with one crucial question before we get
• 11:39
  Speaker 1: back to the substance of this ever grand or ever grandy.
• 11:46
  Speaker 1: I've heard both the translations I've been What I hear
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  Speaker 1: most often is ever grant, But you know, technically it's
• 11:52
  Speaker 1: a you know, it's und do so it's a question
• 11:55
  Speaker 1: of whatever English and translation prefer, the Chinese will still
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  Speaker 1: operate historic. I went with ever Grand, but ever Grandy
• 12:02
  Speaker 1: seems to have much more of a dramatic flourish to it,
• 12:05
  Speaker 1: So I think I'm going to put the accent on
• 12:07
  Speaker 1: the going forwards fair fair enough, So so Logan and
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  Speaker 1: David makes an important point, doesn't he There is a
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  Speaker 1: powerful firewall in the financial system in China, which is
• 12:19
  Speaker 1: the credibility of the big banks. And as long as
• 12:22
  Speaker 1: the I C, B c s and the China construction
• 12:25
  Speaker 1: banks of the world a solid it's difficult to imagine
• 12:30
  Speaker 1: a systemic crisis in China. Do you agree with that point?
• 12:34
  Speaker 1: And what could happen in your view to start eroding
• 12:38
  Speaker 1: confidence not just in a property developer or a local bank,
• 12:43
  Speaker 1: but in the giant state banks which dominate the system.
• 12:48
  Speaker 1: I mean, I think it's very improbable that giant state
• 12:51
  Speaker 1: banks would suddenly lose confidence among the local population. But
• 12:56
  Speaker 1: the concern I would have is in state guarantees being
• 13:00
  Speaker 1: eroded over time. The issue in China's financial system has
• 13:05
  Speaker 1: been that the system expanded when there was a high
• 13:09
  Speaker 1: degree of moral hazard um that was pervasive throughout a
• 13:13
  Speaker 1: number of different asset markets. So the idea was that
• 13:17
  Speaker 1: even when there was financial stress that occurred, investors didn't
• 13:21
  Speaker 1: need to protect themselves because they could always count on
• 13:25
  Speaker 1: Beijing to step in in the case of any financial stress.
• 13:29
  Speaker 1: We saw this during even the stock market meltdown in
• 13:33
  Speaker 1: we saw this during the inner bank market turmoil. And
• 13:38
  Speaker 1: so that assumption, that track record of interventions over time
• 13:43
  Speaker 1: created the impression that there would always be um some
• 13:47
  Speaker 1: sort of government support. But that is changing and it
• 13:50
  Speaker 1: had to change. In fact, it was natural that that
• 13:54
  Speaker 1: guarantee would change because Beijing really had no interest in
• 13:58
  Speaker 1: defending these very risky and peri ferral parts of the
• 14:01
  Speaker 1: financial system when the shadow banking system, when peer to
• 14:04
  Speaker 1: peer lending network started expanding, and as those guarantees have
• 14:09
  Speaker 1: been eroded, it causes investors to start questioning where those
• 14:14
  Speaker 1: Beijing's guarantees will truly extend, where they will stop looking
• 14:18
  Speaker 1: longer term logan, China has to transition away from property
• 14:23
  Speaker 1: as a driver of growth. You mentioned that contribution of
• 14:28
  Speaker 1: property to GDP that has to come down. That's going
• 14:32
  Speaker 1: to be a painful process, isn't it. I would think.
• 14:35
  Speaker 1: So the issue is just that when an industry is
• 14:38
  Speaker 1: that large, there's no obvious replacement. When something that goes
• 14:42
  Speaker 1: from powering the economy becomes a meaningful drag on the economy.
• 14:46
  Speaker 1: You can talk about transitioning growth models, but that becomes
• 14:49
  Speaker 1: a longer term process, and it requires the costs of
• 14:53
  Speaker 1: the previous investment to be to be paid and new
• 14:56
  Speaker 1: investment decisions to be made, which which take time to
• 14:59
  Speaker 1: be productive. So it does mean that, you know, whatever
• 15:03
  Speaker 1: you're thinking about China's long term growth trajectory becoming um
• 15:07
  Speaker 1: it probably involves that being a couple of percentage points
• 15:10
  Speaker 1: lower in the immediate future. David, the last word to you,
• 15:16
  Speaker 1: We've already seen China's economy really screeched to a halt
• 15:20
  Speaker 1: in the third quarter. If you look at the quarter
• 15:22
  Speaker 1: on court at growth rate just no point two, way
• 15:27
  Speaker 1: down from numbers we used to see in the pre
• 15:29
  Speaker 1: COVID era. Do you share Logan's view that working through
• 15:35
  Speaker 1: these deep problems is going to require a period of
• 15:38
  Speaker 1: lower growth. Before answering this question, we should think of
• 15:42
  Speaker 1: one thing. It is why the authorities are so tough.
• 15:46
  Speaker 1: Could real actate a sector for the past of a
• 15:50
  Speaker 1: couple of years. So I think we can we need
• 15:54
  Speaker 1: to think of it in the bigger picture, and in
• 15:58
  Speaker 1: my mind, I think that the UH, the top leaders,
• 16:02
  Speaker 1: they realized that China needs the transition and they are
• 16:06
  Speaker 1: willing to UH to endure a period of slower growth
• 16:12
  Speaker 1: UH in the next couple of years. That is the
• 16:14
  Speaker 1: price for transition. I think that is what in their minds.
• 16:18
  Speaker 1: So this can explain what happened in the past several
• 16:21
  Speaker 1: quarters after China recovered from the COVID nineteen that they
• 16:25
  Speaker 1: accelerated the reform and the transition and many of the
• 16:29
  Speaker 1: Titan issue Titan policies issued. I think the view it
• 16:34
  Speaker 1: a time window for the transition and they are willing
• 16:38
  Speaker 1: to pay some price for that. But on the other hand,
• 16:41
  Speaker 1: I think they won't allow the growth to to to
• 16:46
  Speaker 1: break the bottom line. I think one of the bottom
• 16:49
  Speaker 1: line is the employment. So if we see the rise
• 16:53
  Speaker 1: of the unemployment, we will see some policies to be
• 16:58
  Speaker 1: made to relate to the the economy. Well, if we
• 17:03
  Speaker 1: have to sum up such a complex discussion, I guess
• 17:06
  Speaker 1: we can say that, Ever, Grandy is probably not going
• 17:08
  Speaker 1: to be China's Lehman moment. A financial crisis is not
• 17:12
  Speaker 1: an immediate prospect, but a period of lower growth as
• 17:15
  Speaker 1: the economy works through the problems of overbuilding and over
• 17:18
  Speaker 1: capacity is a very real prospect. David, you logan, right,
• 17:23
  Speaker 1: thanks very much, thank you. Well, It's Halloween this Sunday,
• 17:44
  Speaker 1: and so in the spirit of the season, we've invited
• 17:47
  Speaker 1: Bloomberg Economics best vampire hunters and monster slayers to tell
• 17:52
  Speaker 1: us about the biggest risks, the scariest risks facing the
• 17:56
  Speaker 1: global economy and markets. Very pleased to be joy by
• 18:01
  Speaker 1: chief US economist and a Wall dialing in from Washington,
• 18:04
  Speaker 1: d C. Senior UK economist Dan Hansen joining us from London,
• 18:08
  Speaker 1: and Chief Emerging Markets economist z Dowd dialing in from Dubai. Zad.
• 18:15
  Speaker 1: Let's start with you tell us about the beastly problem
• 18:18
  Speaker 1: facing the emerging markets. So we know do things from history.
• 18:22
  Speaker 1: We know the first thing is that rising US rates
• 18:25
  Speaker 1: have a negative spill over to emerging markets, and the
• 18:29
  Speaker 1: second thing is that weaker economies in the developing world
• 18:32
  Speaker 1: gets hit harder. We saw that repeatedly in recent years,
• 18:36
  Speaker 1: including the two thousand and thirteen Taper tantrum. We saw
• 18:39
  Speaker 1: it also in the twenty eighteen emergent market crisis. Now
• 18:43
  Speaker 1: US rates are rising, and some emerging markets are vulnerable
• 18:46
  Speaker 1: this time around. So who is the most exposed was
• 18:50
  Speaker 1: the group of countries that we group under the acronym BEAST.
• 18:53
  Speaker 1: These are Brazil, Egypt, Argentina, South Africa and Turkey. These
• 18:59
  Speaker 1: economies have law foreign exchange reserves, have high external debt
• 19:03
  Speaker 1: and sizeable current account deficits, and the particularly exposed if
• 19:07
  Speaker 1: you get any surprises in terms of interest rates in
• 19:11
  Speaker 1: the US now, fans of the horror genre will know
• 19:15
  Speaker 1: that often the sequel is gorrier than the original. In
• 19:18
  Speaker 1: the UK, we had strikes, shortages, garbage, even corpses piling
• 19:26
  Speaker 1: up in the street. The crisis was so bad it
• 19:29
  Speaker 1: became known as the Winter of Discontent, Dan Hansen, does
• 19:32
  Speaker 1: the UK now face winter of discontent? The return? We've
• 19:36
  Speaker 1: had a year of two halves in the UK. We've
• 19:39
  Speaker 1: had a blistering recovery following the end of the lockdown
• 19:41
  Speaker 1: earlier in the year, but since then the economy has
• 19:44
  Speaker 1: slowed and much of that has been due to, as
• 19:47
  Speaker 1: you mentioned, supply constraints both global and domestic as well,
• 19:52
  Speaker 1: and they've really hindered the ability of the economy to
• 19:54
  Speaker 1: make meaningful further progress. And we've had a look at
• 19:58
  Speaker 1: what recent supply disruptions might cost the economy, and we
• 20:01
  Speaker 1: think it could knock as much as one point three
• 20:03
  Speaker 1: percent off the level of g d P by the
• 20:05
  Speaker 1: end of the year, and it could add as much
• 20:07
  Speaker 1: as point four percentage point to headline inflation, which as
• 20:10
  Speaker 1: we know, is already pretty high in the UK. It's
• 20:12
  Speaker 1: running at about three point one percent at the moment,
• 20:15
  Speaker 1: and I think if we look ahead, it's important to
• 20:18
  Speaker 1: recognize that that loss of growth momentum has occurred at
• 20:20
  Speaker 1: a time when more headwinds are appearing on the horizon.
• 20:24
  Speaker 1: Inflation is likely to go higher still on energy prices
• 20:27
  Speaker 1: this winter, moving above four percent, more than doubling the
• 20:30
  Speaker 1: Bank of England's target, and that will crimp real income growth.
• 20:35
  Speaker 1: And meanwhile you've got fiscal support being tapered, and there's
• 20:39
  Speaker 1: also a risk of a rising unemployment following the end
• 20:41
  Speaker 1: of the furlough scheme, which the government's wage support scheme.
• 20:45
  Speaker 1: So if we bring all of that together, it's it's
• 20:48
  Speaker 1: not hard to see why references to stagflation are on
• 20:50
  Speaker 1: the rise um, though we don't think we're quite there yet.
• 20:54
  Speaker 1: Our baseline view is that the economy will continue to grow,
• 20:58
  Speaker 1: albeit at a significantly lower pace than in earlier in
• 21:01
  Speaker 1: the year, And our baseline also sees GDP passing its
• 21:05
  Speaker 1: pre virus peak in the first quarter of next year,
• 21:07
  Speaker 1: which is a little bit later than we previously envisaged.
• 21:15
  Speaker 1: Sometimes in horror films, the problem gets so bad that
• 21:19
  Speaker 1: the heroes have to adopt a scorched Earth policy to
• 21:23
  Speaker 1: wiping out the villains. Remember Ripley in Aliens promising to
• 21:28
  Speaker 1: take off and nuke the entire site from orbit. It's
• 21:31
  Speaker 1: the only way to be sure, Anna Wong, was inflation
• 21:35
  Speaker 1: in the United States reached that proportion, should we be
• 21:38
  Speaker 1: worried that the Federal Reserve will have to lift off
• 21:41
  Speaker 1: and nuke the economy from orbit to bring price pressure
• 21:44
  Speaker 1: under control. So dud, everybody is worried about inflation here,
• 21:50
  Speaker 1: even my my, my nanny is worried about inflation. And
• 21:54
  Speaker 1: the risks of inflation moving higher than the FED prediction
• 21:59
  Speaker 1: right now seems higher than a couple of weeks ago, indeed.
• 22:03
  Speaker 1: But to me, the scarier scenario is not so much
• 22:07
  Speaker 1: inflation running away to the level we have seen in
• 22:11
  Speaker 1: nineteen seventies, because for that to happen, the FED has
• 22:14
  Speaker 1: to make policy errors for many, many years, and I
• 22:18
  Speaker 1: just don't think that's likely. The Fed will move, will
• 22:20
  Speaker 1: raise rates next year if inflation runs hotter than much
• 22:24
  Speaker 1: hotter than they expected. But the real scary thing is
• 22:29
  Speaker 1: what happens to the economy when the Fed does move
• 22:32
  Speaker 1: under the new policy framework. The FET is only going
• 22:35
  Speaker 1: to move until the labor market is really hot, right,
• 22:39
  Speaker 1: So when they do finally start to move, they have
• 22:41
  Speaker 1: to move faster and quicker, and the path of FED
• 22:45
  Speaker 1: rates will be steeper. And we have had two years
• 22:48
  Speaker 1: of very easy conditions monetary conditions. We have many bubbles now,
• 22:53
  Speaker 1: we have asset record highs in many asset markets. So
• 22:57
  Speaker 1: when the FED brings this party to a halt, it
• 23:01
  Speaker 1: will be very hard. And historically the FED does not
• 23:04
  Speaker 1: have a very good track or record in engineering soft lending. Okay,
• 23:09
  Speaker 1: let's round this section out by talking about perhaps the
• 23:13
  Speaker 1: biggest fear out there for some investors, the fear that
• 23:17
  Speaker 1: record highs for the stock market are the sign of
• 23:20
  Speaker 1: a bubble and that that bubble could burst Z. How
• 23:23
  Speaker 1: should we think about that risk? Right? So, the main
• 23:26
  Speaker 1: question is whether the stock market is in a bubble
• 23:30
  Speaker 1: or not right now, with the SMP hitting record highs.
• 23:34
  Speaker 1: So to answer this question, we use an econometric model
• 23:38
  Speaker 1: that estimates the large notable bubble based on the speed
• 23:41
  Speaker 1: of decoupling of equity prices from their fundamentals, in this
• 23:45
  Speaker 1: case is dividends. The method finds that we are on
• 23:49
  Speaker 1: the cusp of a bubble. We're not in a bubble
• 23:51
  Speaker 1: territory yet, but we are very close now. Economically speaking,
• 23:55
  Speaker 1: the direct effect of a sharp correction in the stock
• 23:58
  Speaker 1: market on the US economy my not be very large,
• 24:01
  Speaker 1: but at a time where we have other risks such
• 24:03
  Speaker 1: as the spreading of the coronavirus variant, the rise of
• 24:07
  Speaker 1: global interest rates, the slow down the Chinese economy, and
• 24:11
  Speaker 1: the disruption and the supply chains. Adding a another risk
• 24:16
  Speaker 1: in the form of an assetprise bubble would compand these
• 24:19
  Speaker 1: risks and add an additional layer of uncertainty to the
• 24:23
  Speaker 1: global economy. Well, Anna, Dan and Zad didn't enter into
• 24:27
  Speaker 1: the Halloween spirit quite as fully as I did, But
• 24:30
  Speaker 1: then I guess on a show like this, it's really
• 24:32
  Speaker 1: economic expertise that counts, and that's about all we have
• 24:48
  Speaker 1: time for on this week's Stephonomics. So it's the door
• 24:50
  Speaker 1: of the crypt Creaks closed, it only remains for me
• 24:54
  Speaker 1: to thank our contributors, Tom Warlock, Logan White and Demon
• 24:58
  Speaker 1: Chew as Yeah Dead, The Ghost of Anime, Wong and
• 25:02
  Speaker 1: Dan Hank, Song producer Magnus the Thing Henrickson, and executive
• 25:07
  Speaker 1: producer Mike the Exorcist Sasso join us next week, when
• 25:12
  Speaker 1: regular host Stephanie Flanders will be back, The guest host
• 25:15
  Speaker 1: Nightmare will be over, and normal standards of economic analysis
• 25:19
  Speaker 1: and editorial judgment will be restored