In Conversation With Luigi Buttiglione

So when you, when you, when you take this framework and you start applying it to today's context, what have been the themes that really stand out to you when you're scanning across the global macroeconomy over the last year or so?

Well, [clears throat] well, before the, the crisis, uh, started, and I'll go into that, the main theme was, which by the way, a theme which is still very present, is that, I mean, just to use a more journalistic jargon, U.S. exceptionalism.

Uh, we think, uh, we thought and we think this is not just a slogan, it's for true.

Um, so the U.S. is really probably now more than ever forgetting about the political dimension, Trump, non-Trump, because to some extent it's a distraction.

But if you look at productivity trends, uh, the U.S. is on, on an upward trend, way more dynamic than the rest of the world, definitely more dynamic than Europe.

And it has been along this trend for, I would say, a good twenty years.

And there are no indications that this trend is slowing down.

If anything, is accelerating, not only the surge in U.S. productivity, but also the divergence with the s- the rest of the world and especially with Europe.

And this, of course, means a lot, brings a lot of consideration, not only for foreign exchange, which again, if one sees through the disturbance provided by Trump, tells you that the currency of that country, i.e., the U.S., has to appreciate.

For the time being, again, there is no sign that this, if, that this productivity surge is abating, so this is a signal that the currency of that country has to go up.

Another indication is, now to use a more technical jargon, the indication is that the neutral rate, so the rate of interest rates which equate savings and investments, is growing in that country, and is growing to levels which probably are the highest, uh, in, uh, if, if not ever, for a very long time.

And this was, uh, these two considerations were not fully priced by the market.

Again, as I was telling you, we were expecting, we're forecasting the Federal Reserve to hike rates even before, uh, the energy crisis occurred because we think, and we thought that at that time the market and the Federal Reserve, by the way, itself, were, were not pricing in accurately the fact that the neutral rate was going up, so that in the end, interest rates would have had to catch up with this level of, of neutral rates.

So this was, uh, I would say the, the, probably the main theme before the energy crisis occurred.

When the war started, then if you want the demand shock in the U.S., the neutral rate shock in the U.S. was joined by a supply shock in energy market, in the energy market, and this affected especially Europe.

So if you want, uh, uh, when we look at trends, um, in different areas, uh, inflation in Europe is solely, if not mainly, uh, affected by a supply consideration, by the supply of energy, so the energy shock from the Middle East.

In the U.S., it's a combination of the supply shock, but also the fact that demand in the U.S. is high, still high, and if anything, rising.

And so again, another reason why interest rates in the U.S. should not only be hiked, but also be hiked to higher levels and by more than in Europe.

So I would say these themes are still very much present.

Last but not least, in this environment of still growth satisfactory at, uh, at world level, and especially in the U.S., with interest rates which come from below, it's a very good environment for, for stocks.

It's an environment with equities should definitely perform well.

These things can change.

This kind of, uh, indication can change if and when interest rates, especially in the U.S., will have reached levels which has to some extent restricted, so at or above the level of neutral rate.

Now we come from below, so it's still very promising.

But if Warsh, so the, the chairman of the Federal Reserve, keeps his word and he wants to control inflation, this means that it is quite likely we'll have to bring the level of interest rates to above neutrality.