Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Always
Speaker 1: with Michael McKee daily we bring you insight from the
Speaker 1: best in economics, finance, investment, and international relations. Find Bloomberg
Speaker 1: Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course
Speaker 1: on the Bloomberg. You look at the markets, and you
Speaker 1: look at what is happening in the face of reported
Speaker 1: slow down across the world, the Brexit situation in the
Speaker 1: United States, and many have argued all this is going
Speaker 1: to end badly and over stimulated global economy running on
Speaker 1: central bank fumes. One of those who has argued most
Speaker 1: vociferously that we are headed for trouble is Camal Sri
Speaker 1: Kumar of Sri Kumar Global Strategies, and Camal, You've got
Speaker 1: to be shaking your head at the fact that we
Speaker 1: keep making new eyes on the stock markets and we're
Speaker 1: starting to see barnes get a little weaker and yields
Speaker 1: go up, and yet everybody's talking about cuts, cuts, cuts
Speaker 1: from the central banks. Yeah, Mike, I think what is
Speaker 1: happening today is the steepening of the yield curve. But
Speaker 1: we have seen the yield curve in the United states
Speaker 1: flattened before today, and I think we will return to
Speaker 1: the flattening yield curve. And specifically, you may remember that
Speaker 1: when I was on the radio program with you a
Speaker 1: couple of months ago, there was a caller who was
Speaker 1: going who called wrote to you to say that he
Speaker 1: would take the other side of my one percent ten
Speaker 1: year yield. Bet. I would really like to take that
Speaker 1: person on. I think we are headed to one percent,
Speaker 1: and I think we have still think so ninety basis points.
Speaker 1: I feel a lot stronger today than even when I
Speaker 1: was with you the last time. There is no growth
Speaker 1: in the economy, Mike, and inflation is non existent, and
Speaker 1: the central banks have nothing to do but to go
Speaker 1: on with more and more easing. I think the Federal
Speaker 1: Reserve is going to not only cut interest rates, but
Speaker 1: I wouldn't be surprised if we have negative federal funds
Speaker 1: rates sometime before the end of twenties seventeen. So why else,
Speaker 1: what else should equities do? They keep going up until
Speaker 1: some point in time you have a crash. I'm SUREE
Speaker 1: did I hear you just say negative rates? What do
Speaker 1: you mean by that? You mean like a negative two
Speaker 1: year yield? The effective federal funds rate, Tom, is about
Speaker 1: forty basis points. So, in other words, instead of the
Speaker 1: zero to twenty five basis points which we had before,
Speaker 1: we have gone to twenty five to fifty currently pass
Speaker 1: of December sixteen, and effectively we had at about forty.
Speaker 1: And I'm saying that forty goes to zero and goes
Speaker 1: below zero. That's what I think, Okay. I wanted to
Speaker 1: make that clear. The way that came out, I was like,
Speaker 1: whoa negative interest rates in the United States? Street comar.
Speaker 1: It's a big country, it's a diversified country. We are
Speaker 1: the United States of America. We're not the United States
Speaker 1: of Europe. Explain how Washington policy affects the West where
Speaker 1: Michael McKee is right now. It's not New York City,
Speaker 1: it's not Boston, San Francisco. It's a rural, mining, agriculture west.
Speaker 1: How do the free lunch affect those people? A very
Speaker 1: good question, Tom. The difference here is that if you
Speaker 1: were to look at an Italian, the French, and the German,
Speaker 1: even though they have a common currency, you don't have
Speaker 1: similar interest rates because the country risks are still present
Speaker 1: and they are very different. What you don't have between
Speaker 1: Wyoming and California and New York is the kind of
Speaker 1: divergence that you see in Europe. That's the first part. Second,
Speaker 1: if you live in whether you live in Wyoming at
Speaker 1: or whether you live in New York, you are still
Speaker 1: going to suffer the impact of the federal reserves essentially
Speaker 1: zero interest rate policy. I if you're a retiree in
Speaker 1: Wyoming enjoying the situation there, you still don't have a
Speaker 1: good retirement income coming. So that's a second way in
Speaker 1: which you are affected. The third is again if you
Speaker 1: go back and look at what happened with Hurricane Katrina
Speaker 1: in two thousand five, the whole country came to the
Speaker 1: defense of Louisiana as a result of it, and you
Speaker 1: will what you have today is Wyoming as also the
Speaker 1: other states of the United States work as one in
Speaker 1: case there is a situation of difficulty anywhere, which is
Speaker 1: I think a very commendable task for the single United
Speaker 1: States as opposed to the Disunited Europe. We have well
Speaker 1: in the United States, we have one monetary policy, but
Speaker 1: is it working as it should for the entire country
Speaker 1: or are we seeing the real gains go to the
Speaker 1: folks who live in New York and work in Manhattan.
Speaker 1: Good question, Mike. I think it is there. I wouldn't
Speaker 1: say that it's a re difference between Wyoming and New York.
Speaker 1: I think the differences between the rich and the poor.
Speaker 1: And consistently the policy followed by the Fed since September
Speaker 1: two eight has helped you. If you are an equity investor,
Speaker 1: which means you are typically higher income, you're able to
Speaker 1: take that risk and has hurt you badly. If you
Speaker 1: are a wage earner or you're at a lower income
Speaker 1: level in terms of looking for a job, You're working
Speaker 1: hours have been cut back, but from two thousand seven
Speaker 1: you have not had a decent salary increase in real terms.
Speaker 1: So the difference has been countrywide. Everybody suffers from it.
Speaker 1: But the difference is more based on income stratification, which
Speaker 1: is why you see that becoming such an important point
Speaker 1: in the elections this November. We are not fighting based
Speaker 1: on regional differences. We are competing based upon how people
Speaker 1: in different income groups have been differentially rewarded by the
Speaker 1: Federal Reserve, which shows no sign of changing its policy.
Speaker 1: Is this some more unequal America than it was before?
Speaker 1: Roubini's q E one q E two QUE three is
Speaker 1: QE forced our Genie coefficient to a more unequal point.
Speaker 1: The Genie coefficient, the measure of the inequality of income
Speaker 1: TOM I think has been worsening shift two thousands. It
Speaker 1: has shifted, It has worsened, and there's no sign it
Speaker 1: is going to change anytime soon. Again. You can see
Speaker 1: that in terms of the number of billionaires you had
Speaker 1: in two thousand eight compared with today. You can also
Speaker 1: look at it in terms of the labor force participation rate,
Speaker 1: which has steadily gone down, which means that people at
Speaker 1: the working level who would like to get a job
Speaker 1: are not getting it. Michael McKee and I are having
Speaker 1: fun the other day on Facebook Live. We sit down
Speaker 1: at eleven am New York time, and we should chat
Speaker 1: over four charts, and one of them was the tailor rule.
Speaker 1: There are two plug ins to the tailor rule, the
Speaker 1: neutral real rate and then the gues estimate of the
Speaker 1: best unemployment rate. Do we have a clue what the
Speaker 1: two plug ins are to the tailor rule? I think
Speaker 1: people have had plug in storm. But if you if
Speaker 1: you put in both of those, what we do know
Speaker 1: is you can disagree on what exactly the tailor rule
Speaker 1: suggested into a federal funds rate should be. But it
Speaker 1: is not twenty five to fifty basis points. It's the
Speaker 1: generally agreed figure is about one point five percent or
Speaker 1: so for the for the tailor rule, A prescribed interest
Speaker 1: rate perhaps higher, but we are not going to go
Speaker 1: there any time soon, not with this FED, which I
Speaker 1: don't think has much trust in the tailor rule, and
Speaker 1: they're not going to do it. Well, if you've got
Speaker 1: to do a tailor rule, you've got to have some
Speaker 1: sort of estimate for what the neutral rate is. Everybody
Speaker 1: basically seems to agree that it's come down a whole lot,
Speaker 1: and kind of the question at this point is where
Speaker 1: would you see it? Do you think it's negative? So
Speaker 1: a lot of people think it's it's gone negative. Well,
Speaker 1: the the neutral rate in the sustainable rate is probably
Speaker 1: somewhere at least one percent, Mike, I'm not going to
Speaker 1: say that it has gone negative. So I think the
Speaker 1: neutral rate is positive. It is clearly suggestive of of
Speaker 1: a move up. And if you're looking at also the unemployment,
Speaker 1: the unemployment figure is four point nine percent, but if
Speaker 1: you combine that with the labor force participation rate, the
Speaker 1: unemployment situation is actually worse than the rate alone would suggest,
Speaker 1: So I would go, I think, putting both together to
Speaker 1: somewhere between one and one and a half percent, if
Speaker 1: not higher. I look at where we are and translate
Speaker 1: this then into the American political process. Secretary Clinton today
Speaker 1: is going to get support from Sandra Sanders. Mr Trump
Speaker 1: is going to go to Cleveland, and they're looking at
Speaker 1: an economy which both of them suggest is unacceptable. You've
Speaker 1: been one of the great voices of this nation and saying, yes,
Speaker 1: g d P is unaccepted the boar, but is your
Speaker 1: unacceptable the new normal that the politicians are coming to
Speaker 1: grips with. I think both of them are coming to
Speaker 1: grips with that. And I think both of them are
Speaker 1: also coming together on one part. Tom not only that
Speaker 1: the growth rate is not high enough, it should be
Speaker 1: much better, which, as you know, you and Mike and
Speaker 1: I have been talking about this for the last six
Speaker 1: or seven years. It just hasn't changed after the financial crisis.
Speaker 1: But something more important is taking place. Both candidates are
Speaker 1: saying that the inequality has weakened, the inequality has increased.
Speaker 1: Excuse me, So from that viewpoint, the equality situation has worsened,
Speaker 1: and I think both Bernie Sanders and Hillary Clinton on
Speaker 1: the Democratic side, donald Trump on the Republican side, all
Speaker 1: would like to do something about it. They are that
Speaker 1: prescriptions are all very different. But it's interesting to me
Speaker 1: that the income inequality is playing such an important role,
Speaker 1: lot more important role than even the pace of growth
Speaker 1: of GDP. You mentioned the presidential candidates, so we've talked
Speaker 1: a lot about the FED bottom line tree. What would
Speaker 1: you do about it? And at the same time give
Speaker 1: us your advice to your clients, what should they do
Speaker 1: while they're waiting for these people to act? Well as
Speaker 1: you wait for the people to act, And you said,
Speaker 1: what would I say to my clients? What would I
Speaker 1: say to the investors? I would say, one, the bubble
Speaker 1: is going to become bigger in the equity side, perhaps
Speaker 1: for a few more months. But on that side, stay defensive,
Speaker 1: look at utilities, look at telecom, look at healthcare. Be
Speaker 1: more on the risk of equity rather than risk. On second,
Speaker 1: I would say high yield bonds have once again got
Speaker 1: a renewed pace of life because of all the monetary easing.
Speaker 1: No expectation of a FED tightening anytime soon. So if
Speaker 1: you are a very nimble investor, enjoy some high bond
Speaker 1: returns for the short period of time, be prepared to
Speaker 1: pout quickly before the market happens. Third, there is a
Speaker 1: lot more juice in the highest grade fixed income US treasuries,
Speaker 1: German buns, UK guilt. I have been one of those
Speaker 1: saying despite Brexit, the UK guilt yields will go down,
Speaker 1: and they'll go down further. The pound will go down,
Speaker 1: but so will the UK guilty yield Street Commar with
Speaker 1: us thank you so much, greatly appreciate it. With three
Speaker 1: Commar Global advisors, one d gartment has given us great
Speaker 1: assistance in the linkage of economics in the financial investment
Speaker 1: and we talked to him about being in cash, not
Speaker 1: being in cash and being whips Dennis, good morning, Good morning, Tom,
Speaker 1: Thanks for having me on all my my deepest sympathies
Speaker 1: to you. Somebody said to me the other day what
Speaker 1: would you do? When I said, well, I run a
Speaker 1: sovereign wealth fund, so I don't have to worry about
Speaker 1: being whipsode in this market. I know. The cheap question
Speaker 1: is have you ever seen anything like this? And the
Speaker 1: answer is no, we haven't. How do you work day
Speaker 1: today trying to here's the key phrase, folks, not lose money.
Speaker 1: How are you doing that? Uh? With with a great
Speaker 1: deal of non confidence. To be quite honest, the only
Speaker 1: thing that one can do too to keep the dangers
Speaker 1: aside is to make sure that one either has derivatives
Speaker 1: in place, or stop orders in place, or options in place,
Speaker 1: and simply does what I think. After forty years of
Speaker 1: being in the business, I've found the only rule of
Speaker 1: thumb to follow is doing more of that which is working,
Speaker 1: unless of that which is not. I've looked askance at
Speaker 1: the at the the temerity of the strength of this
Speaker 1: bull market, but it's still a bull market. Nonetheless, I've
Speaker 1: found myself always wanting to sell it short, and sometimes
Speaker 1: that's that's just been the wrong course of action to
Speaker 1: have taken. Stocks seem to be breaking up to the
Speaker 1: we are as overbought as I've ever seen. But it
Speaker 1: has been foolish to even attempt to be on the
Speaker 1: short side, and many of my I and many of
Speaker 1: my friends have tried that, and it's just proven to
Speaker 1: be wrong. Within the short call, let's extend that timeline
Speaker 1: out to most of our listeners is being in cash
Speaker 1: a bad thing in the gartment world. No, not at all.
Speaker 1: Being in cash is sometimes a very wise thing in
Speaker 1: anybody's world. My good friend Dougie Cass says, it's not
Speaker 1: a game of Tina. There there is no other alternative,
Speaker 1: but it's sena that cash is the only alternative, and
Speaker 1: sometimes cash is absolutely the proper place to be. One
Speaker 1: doesn't have to be fully invested at all times. In fact,
Speaker 1: I think there are rare times when one is fully invested.
Speaker 1: Cash is not a bad place to be a lot
Speaker 1: of times, and this might well be one of those times.
Speaker 1: If you distrust the breakout to the upside. What's wrong
Speaker 1: with cash? Cash doesn't wilt, cash doesn't lose value. Cash
Speaker 1: is cash. Tom, I'm gonna do something that will probably
Speaker 1: stun you. I'm going to ask about gold. Everybody knows
Speaker 1: my feelings about that, but we also know your feelings, Dennis,
Speaker 1: and you you like to buy it in other currencies,
Speaker 1: and you've made money on it. But I'm looking at
Speaker 1: the volatility in the gold market over the last couple
Speaker 1: of weeks, reflecting the ups and downs of the psychology
Speaker 1: of the markets, and the question I want to put
Speaker 1: to you is I know you buy it and end.
Speaker 1: But how do you buy it? Do you buy it
Speaker 1: as an E T F? Do you buy the physical gold?
Speaker 1: Do you buy forward contracts? What's the best way to
Speaker 1: avoid getting completely whipsawed by this kind of volatility when
Speaker 1: it really is a volatility play at the moment? Well,
Speaker 1: quite honestly, make the only the only way that one
Speaker 1: can reduce the volatility of the gold market is to
Speaker 1: you is to buy gold in non US dollar terms,
Speaker 1: because on balance, most people price gold in dollar terms.
Speaker 1: If the dollar gets strong, gold gets weak. If the
Speaker 1: dollar gets weak, gold gets stronger. If you want to
Speaker 1: ameliorate some of that risk, perhaps owning it in terms
Speaker 1: of the end or euro is the better place to
Speaker 1: do it. I've always viewed gold as being nothing more
Speaker 1: than another currency, and as a as an old foreign
Speaker 1: currency trader, we were always taught from from the outset
Speaker 1: to be a buyer of one currency as seller of another.
Speaker 1: So I tend to be a buyer of gold in
Speaker 1: in euro terms. I tend to be a buyer of
Speaker 1: gold in the end terms. And honestly, over the course
Speaker 1: the past several actually over the course the past several years,
Speaker 1: it's been a far better trade to have been involved in,
Speaker 1: and it reduces the daily volatility, it reduces the the
Speaker 1: abject movements of gold. Now, what's really important to understand
Speaker 1: if stocks move far more volatively individually than does gold.
Speaker 1: A one percent move in gold is, by normal standards,
Speaker 1: a very large move. A one percent move in almost
Speaker 1: any stock is relatively minor. So gold really, although it
Speaker 1: looks like it moves a lot in relationship to stock prices,
Speaker 1: it really doesn't move that much at all. But even
Speaker 1: in other currencies, it's been volatile the last couple of
Speaker 1: weeks because there's you know, certainly the euro in the end,
Speaker 1: I know we're here where they were at the end
Speaker 1: of June. Yes, no question. In the past several weeks
Speaker 1: because of the British referendum, all currencies have become far
Speaker 1: more volatile. In the foreign currency world, if gold movement
Speaker 1: is of one percent is large compared to a one
Speaker 1: or two or three percent movement in stock prices. In
Speaker 1: the foreign currency world, a movement of a core one
Speaker 1: currency to another is very large, and lately we've seen
Speaker 1: one and two percent movements, especially in the British pound
Speaker 1: sterling relative to almost anything else. So yes, there there's
Speaker 1: been any a particularly volatile period of time. I want
Speaker 1: to talk about Britain in the next section, Dennis Garment,
Speaker 1: but right now I think all of our audience would
Speaker 1: like you to explain the knock on effects to American
Speaker 1: banking of negative interest rates. Negative interest rates clearly are
Speaker 1: affecting European banking, I would say quietly, Japanese banking. The
Speaker 1: idea that we are removed from them is comedy. How
Speaker 1: will negative rates affect our banks? Well, first of all,
Speaker 1: I don't think that we're going to go to negative rates.
Speaker 1: I hope that we do not go to negative rates,
Speaker 1: because if you go to negative rates, as we've seen
Speaker 1: in Japan and as we're seeing in Europe, the banking
Speaker 1: system simply almost freezes up. It's, as I like to explain,
Speaker 1: negative rates have have the same effect upon banking and
Speaker 1: lending as absolute zero temperatures have upon physics. All the
Speaker 1: rules seem to change when you go to negative interest rates.
Speaker 1: Loans are not made. You think they would be, but
Speaker 1: they're not because deposits are not made. And when that happens,
Speaker 1: the reserve currents or the reserve bank lending circumstances loses
Speaker 1: its capabilities. You end up getting deflationary circumstances, not inflationary circumstances.
Speaker 1: You get money seeking other avenues. It's one of the
Speaker 1: reasons why the dollar has been stronger. I pray that
Speaker 1: we don't go to negative interstates here in the United States,
Speaker 1: because I think it would end up causing untold disturbances
Speaker 1: within the banking system, given that we are still the
Speaker 1: world's reserve currency. Mica Love talking to Dennis Gartment. Where
Speaker 1: else can you mix in vestment in thermodynamics. I don't
Speaker 1: know where else you could do that, like maybe out
Speaker 1: in Wyoming, Dennis. The markets are up. It seems on
Speaker 1: you know, this risk on feel about additional central bank stimulus,
Speaker 1: particularly in Japan. We have seen that over and over
Speaker 1: and over again. Why you know, when do people stop
Speaker 1: doing the same thing expecting a different result. To sort
Speaker 1: of paraphrase Einstein here, write this down. They'll stop when
Speaker 1: they stop, and not a minute before at least at
Speaker 1: this point, Mr Abe, who had had found himself in
Speaker 1: a very uncomfortable political position, finds himself in a much
Speaker 1: more comfortable political position and says, let's move forward with
Speaker 1: the three arrows policies that we put forth. They they're
Speaker 1: going to go ahead and to spend more money. They're
Speaker 1: going to go ahead and build more bridges to nowhere.
Speaker 1: They're probably going to build more railroads to nowhere. They'll
Speaker 1: put people to work. Will it work over time, probably not.
Speaker 1: Will it work in a short period yes, Will more
Speaker 1: money move being into the system before it finds its
Speaker 1: way into their projects, find its way into the capital markets,
Speaker 1: find its way into stock prices, absolutely so no reason
Speaker 1: to standards. Way then Nick wants to go higher right now.
Speaker 1: I want to digress here, Dennis, because yesterday I was
Speaker 1: in a conversation and I mentioned this most interesting thing
Speaker 1: of the kind of conservative that the new Prime Minister
Speaker 1: of the United Kingdom will be. This goes back to
Speaker 1: the middle nineteenth century in a one nation conservatism. I'm
Speaker 1: going to call it a more liberal conservatism of Mr Disraeli,
Speaker 1: and it's beautifully written up in Wikipedia. I was channeling you,
Speaker 1: you were channeling me. You wrote it up as well.
Speaker 1: Can Donald Trump be a one nation conservative? I'm not sure.
Speaker 1: I'm not a great fan of Mr Trump, and I'm
Speaker 1: not sure he can be a one nation conservative. I
Speaker 1: do actually like what I have read and what I
Speaker 1: have listened to, and heard of mismay. She seems to
Speaker 1: be um at least as she seems closer to Jack
Speaker 1: kempion like uh economics than did Mr Cameron. I'm actually
Speaker 1: I'm hoping that this will be a very good prime minister.
Speaker 1: She's she was not in favor of separation, she was
Speaker 1: not in favor of the referendum, and and perhaps that's
Speaker 1: that's a little in a little difficult position for her
Speaker 1: to be in. But she says she's going to push through.
Speaker 1: As she said, Brexit is Brexit. But from what I've
Speaker 1: readden what I understand, she's going to be a very
Speaker 1: interesting and I think a reasonably conservative for a European politician,
Speaker 1: and somebody that we can deal with, somebody more free
Speaker 1: market than we have grown accustomed to. But as I said,
Speaker 1: she's not Jack Kemp, she's not Ronald Reagan, and she's
Speaker 1: certainly not magg Thatcher. Well do you invest on the
Speaker 1: belief that Britain will actually go through with the exit? Oh?
Speaker 1: I think you have to. I I think that that
Speaker 1: is absolutely a given. I can't imagine that they're going
Speaker 1: to put themselves through the same trauma and have another referendum.
Speaker 1: That would seem to me anathema. It's it's possible, but
Speaker 1: I would put the of it at less than ten
Speaker 1: percent out of a ten percent. It can't be that high.
Speaker 1: So what do you see that through with the process
Speaker 1: of investing thinking that this is done? Where do you
Speaker 1: see that in the global economy going as this proceeds along,
Speaker 1: the general feeling seems to be either bad or muddling.
Speaker 1: But there's no good out of this. Oh. I think
Speaker 1: in the end, uh Mike, I think that there's going
Speaker 1: to be a great, good deal of good coming out
Speaker 1: of it. I think that this was a vote for independence,
Speaker 1: a vote for for a self assurance, a vote for
Speaker 1: freeer markets. They vote for smaller government. And I think
Speaker 1: in the end, two years, three years, four years down
Speaker 1: the road, that has to be good. If it's not good,
Speaker 1: then my whole ideas of free free market economics have
Speaker 1: to be thrown into the basket case. So I have
Speaker 1: to believe it's good in the next two weeks, in
Speaker 1: the next two months, is it? Can it be somewhat confusing?
Speaker 1: Can it be somewhat disconcerting? Of course it can, It
Speaker 1: probably shall be. Confusion is always a little disconcerting. But
Speaker 1: in the end, I think it's obviously a step in
Speaker 1: the right direction. Dennis. If you and I were doing
Speaker 1: one of hers aminars are I was talking to you
Speaker 1: for an hour, you know, a bunch of bunch of
Speaker 1: people late in the suminary, I'd say something like, what
Speaker 1: will our pension plans do? I can ask a smart
Speaker 1: alec question about Johnson and Johnson are other blue chips
Speaker 1: price to perfection? We all know bonds are priced absurdly
Speaker 1: right now. Everybody can agree on that. But what's the
Speaker 1: opposite of your trading regime? What do are actually assumed
Speaker 1: serious money? What do those people do right now? Well,
Speaker 1: I've given that. I said on two endowment committees for
Speaker 1: two universities were involved in exactly that idea for everybody.
Speaker 1: Every pension fund, every endowment has predicated it's it's spending
Speaker 1: capabilities on eight percent returns on equity. And I'm sorry
Speaker 1: those those days are gone. As the Beatles said, those
Speaker 1: days are gone, and I'm not so self assured. You
Speaker 1: have to ratchet those down to four and five, which
Speaker 1: I'm sorry is going to make for great good deals
Speaker 1: of difficulty, especially for pension funds. People are going to
Speaker 1: have to get used to the fact that one. If
Speaker 1: they think they have a pension fund that's going to
Speaker 1: pay out x per cent, that's going to be ratcheted
Speaker 1: down dramatically over the course of the next several years,
Speaker 1: expectations for return have to take a markedly lower. There
Speaker 1: could be no question then that means to be the
Speaker 1: only outro for executives incentivized by compensation is transactions in combinations.
Speaker 1: The M and A business has just got to go wild. Yes,
Speaker 1: alternatives business is probably going to continue to be quite strong.
Speaker 1: And whether you like it or not, money I guess
Speaker 1: it's going to make its way continuously into equities. That's
Speaker 1: the only real bet, whether we like it or not. Clearly,
Speaker 1: five years from now or certainly ten years from now,
Speaker 1: interest rates are going to be demonstrably higher than where
Speaker 1: they are at the long end of the curve, and
Speaker 1: the value of an OH one, the the diminishing value
Speaker 1: of bond portfolios over the course the next five or
Speaker 1: ten years, I think will be relative will be shockingly bad.
Speaker 1: Dennis Gartman, thank you so much, and again we thank
Speaker 1: you for very clear trade recommendations good and bad, always
Speaker 1: published by de Gartment at the back end of his report.
Speaker 1: Very few people do that as clearly as Dennis. We
Speaker 1: do have some FED speak today, with Daniel Trulo from
Speaker 1: the Board of Governor speaking in Washington and Jim Bullard
Speaker 1: of the St. Louis FED speaking in his hometown. We've
Speaker 1: heard from Bullard lately. Trullo hasn't spoken much, but when
Speaker 1: he does, he usually talks about regulation. We'll see today
Speaker 1: if he is going to be bringing us any different
Speaker 1: information on his view of the economy and FED policy.
Speaker 1: Joining us now to offer his view on those subjects.
Speaker 1: Stean McKie of Point Sivity two Asset Management, he's the
Speaker 1: chief economist there, and Dean Um. At this point, everybody's
Speaker 1: parsing every FED speech, but nobody seems to think that
Speaker 1: anything is going to change anytime soon. We were talking
Speaker 1: at this Rocky Mountain Economic summit yesterday with a bullet
Speaker 1: FED officials who say they shake their heads. They marvel
Speaker 1: at the idea that people think there will be nothing
Speaker 1: until two thousand eighteen or two thousand nine. Yes, it
Speaker 1: is a it is a strange occurrence that the market
Speaker 1: has completely disregarded FED tightening offer for the next year
Speaker 1: and a half or so. UM. But I think part
Speaker 1: of the issue is that the FED really hasn't at
Speaker 1: this point tried to combat that to that move. Um
Speaker 1: they you know, they, And I think the FED was
Speaker 1: burned in the second quarter when they tried to talk
Speaker 1: up a rate hike in June and then and then
Speaker 1: backed off because of brexfit theorism and the weak employment reports.
Speaker 1: So I think they're loath to to try to do
Speaker 1: that again, and we get into this cycle where the
Speaker 1: market just keeps pricing out the FED tightening. Is this
Speaker 1: something though that he is easily reversible. Another strong month
Speaker 1: of job creation or strong retail sales something like that
Speaker 1: start to put it back into the markets, or does
Speaker 1: Brexit too much overwhelming? I think it really comes down
Speaker 1: to the FED, because you know, I think it's hard
Speaker 1: to look at the last employer and report. I think
Speaker 1: the GDP report will get for Q two is going
Speaker 1: to look fine and and get very worried about things.
Speaker 1: So I think what what really has has led the
Speaker 1: market to price things out is, for example, FMC minutes
Speaker 1: showed a lot of different worries about many different things,
Speaker 1: so epithet and so a good employment report or a
Speaker 1: strong retail sales report is not going to fix all
Speaker 1: of those worries. So it really comes down to when
Speaker 1: the fad becomes less worried. Dana is a remarkable time,
Speaker 1: and part of that Hallmark and Mike and I have
Speaker 1: talked this up is your outrageous call of an unemployment
Speaker 1: rate below four percent. Even some of our Steam guests
Speaker 1: pushed back against it. Reaffirm how we get to a
Speaker 1: sub four percent unemployment rate and try to game Chair
Speaker 1: Yellin's reaction to the Mackey thesis. Yeah, I mean the
Speaker 1: way we get there is by continuing the two percent
Speaker 1: growth that we've had in the recovery. To date, the
Speaker 1: unemployment rate has been falling steadily between half and one
Speaker 1: percent per year, depending on which month we're looking at
Speaker 1: the year over year rate, and job growth is running
Speaker 1: close to tw hundred thousand on average. If we say
Speaker 1: anywhere in that range, the unemployment rates can keep falling
Speaker 1: steadily and we will be below four percent next year.
Speaker 1: So really, to get the unemployment rate to stabilize, we
Speaker 1: need job growth to sold very sharply soon, and and
Speaker 1: there's no sign that that's really happening. Well, do you
Speaker 1: think that it's going to slow soon? We see mixed signals,
Speaker 1: we see you know, some employers reporting jobs hard to get.
Speaker 1: We were talking with Bill Dunkelberg. The number for small
Speaker 1: businesses significantly higher this month. But others seem to think
Speaker 1: that it's it's not a question of that at this point,
Speaker 1: it's it's a question of whether or not the investment
Speaker 1: continues by consumers and businesses. Yeah. I think that we're
Speaker 1: not yet at the point where there's no workers to hire,
Speaker 1: you know it. It is somewhat harder than it was
Speaker 1: early in the recovery, for example, and the unemployment rate
Speaker 1: was at ten percent, But there's all our workers that
Speaker 1: that are willing to work, and I think that that's
Speaker 1: why we're seeing, for example, in the second quarter, we
Speaker 1: saw hundred and fifty thousand jobs per month on average.
Speaker 1: So there's no sign that that there aren't workers out there.
Speaker 1: I think that we are seeing wage games have to
Speaker 1: pick up to attract those workers. But but that's that
Speaker 1: is happening. That is happening, which tells me Dr Maggie
Speaker 1: that we are more ultra accommodative. When Vice Chairman Fisher
Speaker 1: was ultra accommodative eight nine months ago, are we we're
Speaker 1: certainly more accommodative than we were then. Uh, definitely. The
Speaker 1: the inflation rate. Core inflation is rising, wage rates are rising.
Speaker 1: So you know in the FED funds rate has gone
Speaker 1: up only a quarter of a present since since then.
Speaker 1: So I think that we certainly are more accommodative now
Speaker 1: than we were a year ago, for example. I mean,
Speaker 1: I just look at this date and I say to myself,
Speaker 1: it is a theory without theory. What is the reigning
Speaker 1: theory at the Fed? Is there something in your Stanford
Speaker 1: textbooks that describes what we're seeing? I think the main
Speaker 1: theory right now is worried about various things, and that
Speaker 1: seems to be the worried shifts from meeting to meeting,
Speaker 1: what keeps them on hold. But I think it's it's
Speaker 1: a they're a very risk converse group right now. So
Speaker 1: it's whether it's China slowing, Brexit fear, is one week
Speaker 1: employment report, you know, any of those things will will
Speaker 1: keep the set on hold. And because you know we
Speaker 1: have short term cycles and economic data and do happen overseas,
Speaker 1: you know, it seems like there's always something to keep
Speaker 1: the fet on hold. Dean. This goes to the resilient
Speaker 1: optimism that's been part of your economics which is almost
Speaker 1: to a Kines quote. When the facts change, I change
Speaker 1: the idea of institutions deciding to get done what needs
Speaker 1: to be done is an underpinning to economic resilience. How
Speaker 1: will we see that to get back to better than
Speaker 1: good g D in the United States? Well, I don't
Speaker 1: think that there's any anything policymakers can do quickly to
Speaker 1: get to boost our two percent growth rate. The the
Speaker 1: you know, we've talked in the past about the demographic
Speaker 1: forces that are that are weighing on labor force growth.
Speaker 1: Productivity growth is extremely weak as well. There's really nothing
Speaker 1: that can be done quickly to make that better. There
Speaker 1: there are some longer term things that that may help,
Speaker 1: but my baseline view is that we we stay in
Speaker 1: this to two to two and a half percent growth
Speaker 1: rate team definitely from here. I mean, I look at
Speaker 1: where we are in the lower growth rate, but on
Speaker 1: a relative basis, can we state it's never been wider
Speaker 1: with Europe and maybe with a troubled United Kingdom? Well
Speaker 1: there certainly there have been times when Europe has been
Speaker 1: in recession in the US has been growing fine. So
Speaker 1: so I don't think that's quite true, but but it
Speaker 1: is a significant gap that you're pointing out, um, and
Speaker 1: part of it is the demographics are are much worse
Speaker 1: in Europe than in the US. Now. Brexit, of course,
Speaker 1: is likely to weigh on UK growth at least for
Speaker 1: some time until it becomes more clear what exactly is
Speaker 1: going to be worked out there. Well, speaking of demographics,
Speaker 1: one of the arguments that's being made one of the
Speaker 1: criticisms of central banks and particularly the FED, is that
Speaker 1: we are an aging society and as the baby boomers retire,
Speaker 1: they're gonna be living off their savings and they get
Speaker 1: no money because interest rates are so low, so they
Speaker 1: don't have additional money to spend, and that retards the economy.
Speaker 1: So the argument goes the FED would be better off
Speaker 1: at this point raising rates because keeping rates low to
Speaker 1: stimulate spending isn't working. Try the other way. I'm not
Speaker 1: a believer that raising rates is going to boost growth
Speaker 1: because of that effect that that the retirees have more
Speaker 1: money to spend, you know, I think it's it's worth
Speaker 1: highlighting that even the many of the retirees do hold
Speaker 1: some equities, so they are benefiting from the coast to
Speaker 1: record highs in the stock market. So I don't. I
Speaker 1: don't believe in that reverse causation. There certainly are some
Speaker 1: some effected negatively by the low rates, but on average,
Speaker 1: I do think low rates are a boost to growth,
Speaker 1: aren't they? At this point, it's pretty much running out
Speaker 1: of gas because the Fed is keeping rates extraordinarily low,
Speaker 1: and they have for seven years, and we can't get
Speaker 1: above two percent and we can't get inflation. Well, I
Speaker 1: don't pick that's quite fair. Inflation has gone from below
Speaker 1: one percent on the core basis to one point six percent,
Speaker 1: so it is gradually rising. A wage inflation is picking up,
Speaker 1: So it's not as though the easy policy isn't doing anything.
Speaker 1: It's just said it takes some time in an economy
Speaker 1: like this to to raise inflation. I'm quite comfortable saying
Speaker 1: the core inflation will be at two percent over the
Speaker 1: next year. So so what does it do to nominal GDP?
Speaker 1: I just did the one year moving average of nominal
Speaker 1: GDP and it's gone from four point one percent down
Speaker 1: to three points some percent, which for everybody, all of
Speaker 1: our candidates and even Dan Mackie is subbar Do we
Speaker 1: get nominal backup of four percent? I think if the
Speaker 1: Fed succeeds in getting inflation back to two percent. On
Speaker 1: we should see nominal GDP and the Ford four and
Speaker 1: a half percent range, but it probably doesn't go much
Speaker 1: above that, at least for the next few years. The
Speaker 1: money question, Dean is can an institution manage inflation? Do
Speaker 1: you have a confidence that they can actually drive inflation higher?
Speaker 1: I think they can and they We have seen it
Speaker 1: as as the labor markets tightened, as as the economy
Speaker 1: has grown, as Flack has been reduced, we have seen
Speaker 1: inflation rising. So I think that process will continue. It
Speaker 1: doesn't doesn't happen rapidly, but as as Flack gets removed,
Speaker 1: inflation does tend to rise. Well. We are seeing wages
Speaker 1: rise a little bit, We're seeing some evidence of prices rising.
Speaker 1: But when you say we're going to see inflation start
Speaker 1: to move higher and get to two percent, does it
Speaker 1: keep going? In other words, is the FED going to
Speaker 1: be behind the curve? I think that they're very willing
Speaker 1: to have an overshoot up the two percent target. And
Speaker 1: you know, different members express this in different way. Is
Speaker 1: um You know, some of them say it's fine to
Speaker 1: overshoot for somewhat because we've been under target for a while,
Speaker 1: so we can be over target for a while. I
Speaker 1: think they will do that. So I think they will
Speaker 1: see inflation get up to two and a half percent
Speaker 1: before before this cycle has done. Once it gets above
Speaker 1: two and a half percentthing, I think they start getting
Speaker 1: more nervous. Maybe that's the overshoot. Dean Mackie, thank you
Speaker 1: so much with point seven two. Thanks for listening to
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud,
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