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>> Bloomberg Audio Studios. Podcasts,

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>> Welcome to the Daybreak [music] Asia

podcast. I'm Dan Krizner. In the US

session, crude oil prices spiked after

the US and Iran exchanged strikes over

the weekend for the first time in about

a month. In New York trading, we had WTI

gaining 2.8% and oil prices are rising

even higher in the electronic session.

And with higher oil, we had long-term

Treasury yields spiking a bit as well

with the 10-year adding about three

basis points in New York, picking up

another two basis points now in the

Tokyo session to around 4.77%.

For a closer look at what's happening in

markets, I'm joined by Adam Koons. Adam

is the chief investment officer at

Winthrop Capital Management. Adam, thank

you so much for being here. I want to

begin with a macro and the idea that

elevated oil prices are actually

signaling to the market that when it

comes to the notion of Fed rate hikes,

maybe we're in for some relatively soon.

Is that a safe bet?

>> Uh you know, I don't know that it's a

safe bet that we'll get uh rate

increases. I think it's a absolute

growing probability.

Uh but I think that this Fed is going to

try to to wait as long as they can

before they have to take that measure.

Now, things are definitely working uh

out of their favor when it comes to

uh policy of of you know,

keeping rates constant. Uh obviously,

the conflict uh in the Middle East

picking up steam again

uh adds to that narrative. So,

uh

you know, the Fed uh has quite a

difficult road ahead of them.

>> It's interesting. Today, we learned that

Fed Chair Kevin Warsh told the meeting

of G20 finance ministers that

US economic growth appears to have

strengthened and obviously last Friday

when he was speaking at Jackson Hole,

he said that broad financial conditions

were not restrictive. He seems to be

laying the groundwork for a rate hike,

at the very least.

>> Yeah, I would agree with that. I think

um

we're in a scenario where you want to

avoid you would avoid stagflation,

obviously.

Um the good part is yeah, the the US

economy has remained very resilient uh

for much longer than pretty much every

economist has called for.

And you know,

coming hand-in-hand with

um just the fact [laughter] that

interest rates have remained high,

uh relatively high at least, um for the

last 5 years, uh

it's quite a bit to say that the US

economy has has remained um so strong.

So, uh you're right, I think that there

is some groundwork to to raise interest

rates if they have to go that route, uh

but I'll still stand by the fact that

you know, uh laying the pipes for that

potential is much different than

actually having to to act on it.

>> So, the big story last week was the

steps undertaken by best and at least

rhetorically

to try to get long-term interest rates

down, talking about maybe using some

short-term funding to buy longer-term

Treasuries as a way of bringing yields

in a bit. We've got a 10-year at 4.75.

If you were in the administration, I'm

I'm imagining you'd be a little bit

nervous about that level. Do you expect

rates to creep higher still, or are we

going to see lower rates at the long end

of the curve soon?

>> I think we'll see higher rates before we

see lower rates. Uh the reality is that,

you know, uh

10 years ago,

when the Fed spoke, markets listened and

uh were somewhat fearful of

the Fed and and what they were going to

do. And you could kind of see a point

where the Fed could just speak, and it

would move markets rather than actually

having to act. And now we've seen a

dramatic shift where markets are really

not believing and shrugging off

these different measures. And I think in

large part it's because

we've seen this before, and we know it's

only a short-term fix.

Whether you look at the policy spoken on

or the intervention in the yen several

weeks back, is that the market knows

that this is just, like I said, a

short-term fix unless there's some

more holistic approach to this, then

it's going to fade quickly, which it

already has.

>> I'm glad you mentioned the yen. It

strengthened a bit today against the

dollar in New York trading, and that

came after Besson said that he is

expecting the BOJ to take steps that

will in turn produce a stronger yen. And

then I'm reading on the Bloomberg

terminal a report from NHK indicating

that Besson had conversations at the G20

with Japanese Finance Minister Katayama

and BOJ Governor Ueda.

And Besson essentially said the next

step should be to raise interest rates.

I don't think the market doubts that.

Will it happen as soon as the September

meeting, though?

>> Probably not. You know, I think

the BOJ is is definitely slow to act.

They went quite a while,

couple decades, with without certain

actions, and so, you know, I think

they're going to kind of wait this out,

and that probably is going to pressure

interest rates here in the US. If

they're not acting, and we do start to

see follow-through with them having to

sell US Treasuries in order to support

their currency. And I think that's a

growing likelihood. Like I said, as you

see that these short-term measures are

not going to fix the problem, they're

not going to work.

The reality is that the BOJ is probably

going to have to sell US Treasuries,

convert those US dollars into yen in

order to support support their currency.

>> So, when we talk about higher inflation,

it's very easy to just focus on what's

going on in the energy complex, crude

oil, I get that.

Crop prices though had their biggest

monthly jump in more than a decade in

the month of August. The Bloomberg

Agriculture Spot Index was up more than

13%.

So, we know that the problem may have

started when the war in Ukraine broke

out. There was a lot of disruption to

grain shipments at that time. War with

Iran has interrupted the flow of

fertilizer, we know that.

So, the question to you is to what

extent are higher food prices kind of

the potential for a disruption when it

comes to the macro outlook?

>> Well, I think that is a story and and

we were kind of speaking of this

a few months ago when you kind of get to

this point where energy prices are

higher, there's a lot of focus like you

said, simply on energy prices, but there

is a trickle-down effect in the

transport of the goods and a lot of the

ways that the

different agricultural products are

developed. The fertilizer takes oil. So,

you know,

eventually, the longer this conflict

goes on, the more it moves through the

overall economy and producers can't pass

on or can't absorb

the cost and now they're having to pass

it along. And so, I do think this is a

real problem that eventually

will really impact the consumer. Like I

said, up until this point,

some of these different inflationary

impacts

producers have been able to to absorb it

and and try to wait, but now they can no

longer do that. So, the consumers are

going to feel it and I think that is

really going to be the pressure point on

the overall global economy, on central

banks and the policy they're going to

take.

This is just, you know, that that first

ember in the in the fire

before it possibly could erupt.

>> Adam, we've talked about a number of

things here. Why don't you see if you

can tie everything together neatly and

give me a strategy that you think would

be most productive between now and the

end of the year, say?

>> Well, I'd have to say that defense

is the best offense right now.

It doesn't mean you want to dramatically

shift asset allocation.

You don't want to move to cash per se,

but I think you know, the reality is

we've had

tremendous run in equity markets over

the last several years. And so taking

some chips off the table,

I could say moving to more defensive

stocks,

moving to the short end of the curve

in order to play defense against higher

rates. And really moving up in quality

generically across asset asset

allocation, whether it's in corporate

bonds or in your equities,

I think it's the prudent thing to do.

There's just a growing number of quote

unquote potential black swans out there.

And it's hard to say which one it will

be that will be the one that tips us

over. It could be a number of them all

at the same time. But I think right now

there are more headwinds than tailwinds.

So I think you want to be careful.

I could say play defense.

Be defensive in your stock selection.

Look for income when it comes to

dividends or or bonds

on the short end.

And just kind of ride this out a little

bit and then we might be back to the

races if we can get this under control

because the overall I could say the US

economy at least does still look strong.

So I think we just kind of got to

weather this storm probably through the

rest of this year and then look at what

2027 will bring us.

>> All right, Adam. Thank you so very much.

We'll leave it there. Adam Coons is

chief investment officer at Winthrop

Capital Management joining us here on

the Daybreak Asia podcast.

>> [music]

>> Welcome back [music] to the Daybreak

Asia podcast. I'm Doug Krizner. In Hong

Kong today, Goldman Sachs is holding its

Asia Leaders Conference. And at the

event, Bloomberg's David Ingles caught

up with former Dallas Fed Bank president

and current Goldman Sachs vice chairman

Rob Kaplan. David asked Kaplan what he

would do at the upcoming Fed meeting,

which takes place in about 2 weeks.

>> I would strive to keep an open mind

between now and the meeting. We've got

one jobs report later this week and one

CPI report. Assuming there isn't a

surprise soft surprise on either, I

would be going into the September

meeting leaning into the thought of

raising interest rates in the meeting.

>> Okay. The

We tend to over obsess over a timing and

not so much look at magnitude over sort

of the let's call it the tightening

cycle.

>> If they don't move this time, they could

move the next time. How many rates do

you think the Fed Fed hikes do you think

the Fed has?

>> So let me just give one background

point. Sure. Um

This economy is a

US economy is capex driven, AI

infrastructure.

Uh if the if you're related to AI or AI

adoption or defense,

the economy is very strong. If you're

related to housing, autos, and the low

moderate income consumer, it's very

sluggish. And that's why they've been

more patient. Uh my own view is

if uh

the new

natural neutral rate, the real neutral

rate is approximately 3/4 to 1%. It's

not less than that. Might be a little

more. You add the inflation rate and

that means nominal neutral is in the

neighborhood right now. If inflation's

running three-ish, nominal neutral is

probably 3 and three quarters to four.

So, the Fed I would argue is is not way

off, but they're probably

50 plus or minus basis points

from neutral. I think they're right now

either neutral or slightly

accommodative. And so, [snorts]

if you're going to take action, I'd move

once in September, see how the economy

evolves, and then I would guess they

won't act in October try it before the

election, and then revisit this again in

December.

>> Now, markets are grappling with that and

a US Treasury that is looking to perhaps

cap the long end of the curve. Might on

the optic side of things look

contradictory to each other.

How do how how do the how do markets

interpret what what seemingly look like

opposite policies?

>> So, I think the market recognize that

the Fed has enormous influence on the

front end of the curve. The back end, I

think is much more driven

uh by deficits,

uh expected deficits, uh

and and what what I mean by that is I

think

with uh

solid but not uh great GDP growth,

uh nominal income a little higher, a war

in Iran, I think the market would have

hoped that the deficit was going to come

a little bit this year. Instead, ex-

expectations from the Congressional

Budget

>> Office, the deficit's going to be

higher.

>> Right. Uh it could be the war is costing

more. Uh and so, I I think the market is

pricing in questions about whether the

US can manage fundamentally

uh and uh the fiscal deficit and bend it

down. And because of the skepticism,

it's requiring more compensation.

>> Yeah.

>> I think that's a little bit unrelated to

the Fed. It It might get on the margin

helped by bond repurchases, but it

really is an issue that needs to be

addressed with fundamentals.

>> That doesn't sound like a quick fix.

>> It's not. This and it's not just a US

issue.

It's uh the the robot just collapsed.

>> Okay, yeah. There we go.

>> It's a it's a global issue. Japan has

got a significant leverage issue. Uh

Europe does, China does. And the thing

that compounds it is labor force growth

is very sluggish and uh in the United

States. And so you need productivity

growth

uh and higher GDP from productivity to

help bend this this curve and you need

to control spending. And I think yes,

that could take a number of years.

>> Looks like we're caught in this higher

Should we call it higher for longer?

Should we get used to the long at 5 and

1/2% 5 5 and 1/2%? Is that it?

>> Uh a feature?

>> So um I don't know is the answer. I but

I I think that uh we need to we need to

understand that the markets are now

uh

taking away a little bit of the cyclical

element of Treasuries. Used to be

economy weakened, there's a geopolitical

event, you went flight to quality. This

level of leverage is meaning people are

uh

not jumping into Treasuries when growth

weakens or there's a geopolitical event.

And so I think the market would respond

well to fundamental reforms, whether

it's entitlement reform, better labor

force growth, evidence of better

productivity growth, evidence of

spending discipline. Uh

and so I think the back end is going to

is going to be sticky because of that. I

still believe that Chinese overcapacity

and over the horizon AI adoption

the infrastructure push is probably

inflationary.

The adoption push, which we're early in,

should be disinflationary.

So, I do think that uh there's still a

good prospect over the next few years

for inflation to trend down toward 2%

and so you'll either get a steeper curve

or some of that trending down will also

mean that people realize they're being

well compensated at these levels

in the long end of the Treasury curve.

>> So, talk a little bit more about China

because you were you were there when the

economy was opening up and

it's it's a completely different economy

now. Let's call it 35 40 years after the

'90s.

You mentioned before we started that

China is ahead when it comes to AI and

that could be that could explain why

rates are low. AI adoption.

Does the world look at China as

something that of a version of its

future self in terms of lower rates

ahead?

>> So, I think the US has got enormous

advantages in semiconductors,

a lot of the infrastructure capability,

memory that powers AI. But, China is a

couple innings ahead in adopting AI. I

would say the US is in the first or

second inning. Typical company has 15

use cases and we will we will continue

to develop and learn and you'll see

broad implementation of AI in the United

States and better productivity. China's

a few innings ahead of that and I think

there's a lot to be learned from

companies in China with how they're

using AI and I think US companies and

including

Goldman Sachs we're studying some of the

things we're seeing in McDonald's China,

Starbucks China, other businesses that

are further along.

>> And is it clear to you that AI adoption

is in fact a deflationary force?

>> It should be disinflationary but right

now

where

where you're seeing AI the

infrastructure as well as the adoption

is corporate margins, corporate

earnings, and our expectations, and my

expectations, are you're going to see a

multi-year improvement in, for example,

S&P 500 earnings.

>> Mhm.

>> The issue will be can we translate that

S&P margin improvement and earnings

improvement into the economy, and why

why might we not? The key to AI in the

economy is where's the worker go? If in

a company a worker loses his or her job,

maybe a driver, the company's more

productive, their earnings will improve.

For the economy, that worker needs to

get redeployed in another productive

job. And so, we've got to get better in

the United States at retraining workers,

getting them redeployed into the

workforce, so we capture the

productivity benefit in GDP. I'm

confident that we can do it, but it

probably means a real hard look at

improving early childhood literacy,

secondary education, skills training,

and having a real national focus on

redeploying workers that are displaced

from AI.

>> Final question for you.

You used to head the Jap- Japanese

business

for Goldman. Do you remember the

exchange rate when you were

>> I I was saying to you I don't

but I think it was probably in the

neighborhood of if we're 160 now, we

might have been, I'm guessing, 100, but

I have to go back and look. The point is

things are

things have changed radically

>> Right.

>> and are much more affordable in Japan on

a dollar terms than anything I remember.

>> Is it an economy that's booming that

merits higher interest rates?

>> So, that so Japan's got a number of very

positive developments.

They're redeploying savings into in more

risk assets. There are governance

reforms.

There there've been a number of other

changes to try to help. The challenge

they have, same they're highly leveraged

at the government level and their

workforce is not just decelerating, it's

shrinking and that's still big the big

challenge for Japan in in terms of

improving their growth.

>> That was former Dallas Fed Bank

President and current Goldman Sachs Vice

Chairman Rob Kaplan speaking with

Bloomberg TV host David Inglese at the

Goldman Sachs Asia Leaders Conference,

bringing you their conversation [music]

here on the Daybreak Asia podcast.

Thanks for listening to today's episode

of the Bloomberg Daybreak Asia edition

podcast. Each weekday we look [music] at

the stories shaping markets, finance,

and geopolitics in the Asia Pacific. You

can find us on Apple, Spotify, the

Bloomberg Podcast [music] YouTube

channel, or anywhere else you listen.

Join us again tomorrow for insight on

the market moves from Hong Kong to

Singapore and Australia. I'm Doug

Crisoner and this is Bloomberg.