WEBVTT - Surveillance: Feldstein Foresees Capital Inflows if Tax Bill Passes 0:00:00.080 --> 0:00:13.040 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 0:00:13.480 --> 0:00:17.560 Jai Ley. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:31.080 Bloomberg dot Com, and of course, on the Bloomberg. Why 0:00:31.080 --> 0:00:33.680 don't you bring in Professor Feldstone, let's do that, professor 0:00:33.720 --> 0:00:36.440 of economics at Harvard University, of course, the former chairman 0:00:36.720 --> 0:00:40.320 of the Council of Economic Advisors and the chief economic 0:00:40.320 --> 0:00:43.520 advisor to President Ronald Reagan. Professor Fauldstein joining us around 0:00:43.520 --> 0:00:46.120 a table, Professor, Good to catch up with you. It's 0:00:46.120 --> 0:00:49.320 been a while. Why is deficit spending a good idea 0:00:49.479 --> 0:00:51.800 when we're going to get payrolls on Friday and unemployment 0:00:51.800 --> 0:00:55.720 around four Deficit spending is not a good idea, It's 0:00:55.800 --> 0:01:01.080 never a good idea. But the impact of the corporate 0:01:01.120 --> 0:01:05.120 tax reform outweighs the adverse effects this time around of 0:01:05.200 --> 0:01:08.560 the increase in the deficit, So I think as a package, 0:01:09.000 --> 0:01:12.080 it's a deal worth having. There's a lot of doubts 0:01:12.120 --> 0:01:14.600 around this tax bill, Professor, and a lot of people 0:01:14.600 --> 0:01:18.160 stand one thing that's guaranteed his debt. What isn't guaranteed. 0:01:18.600 --> 0:01:23.920 Is a return from capital spending to capex and improved 0:01:24.040 --> 0:01:26.640 M and A Why do you see that happening? I 0:01:26.720 --> 0:01:29.480 see that happening because if the bill goes through with 0:01:29.600 --> 0:01:33.840 a US corporate rate, that is going to make investing 0:01:33.840 --> 0:01:38.280 in the US so much more attractive than investing elsewhere. 0:01:38.560 --> 0:01:43.000 So we're gonna see American firms bringing back capital from 0:01:43.040 --> 0:01:47.520 the rest of the world, making fewer investments outside the US. 0:01:47.600 --> 0:01:51.240 And we're gonna see foreign companies wanting to expand in 0:01:51.280 --> 0:01:54.120 the United States to take advantage of a tax rate 0:01:54.160 --> 0:01:56.080 which is much lower than it is in their own 0:01:56.120 --> 0:01:59.320 home countries. So, Professor White, is now the right time. 0:01:59.640 --> 0:02:03.320 I got back to the previous point. Unemployment near four percent, 0:02:03.560 --> 0:02:08.079 GDP near three percent. We're quite afar along in the 0:02:08.080 --> 0:02:13.040 cycle as it is. We don't needed for a fiscal stimulus. Uh. 0:02:13.480 --> 0:02:16.400 It is certainly true that the economy may turn down 0:02:16.520 --> 0:02:19.239 sometime in the next few years, and we'll be glad 0:02:19.280 --> 0:02:22.480 to have that fiscal stimulus in place. But you wouldn't 0:02:22.480 --> 0:02:25.320 do it now for the fiscal stimulus. You do it 0:02:25.360 --> 0:02:28.560 now because the politics is right, because now is a 0:02:28.639 --> 0:02:32.400 time when we can get through with the Republicans controlling 0:02:32.440 --> 0:02:35.359 both Houses and the White House, we can get a 0:02:35.440 --> 0:02:38.560 major tax reform done. But let's talk about the politics. 0:02:38.560 --> 0:02:42.079 The politics was politics of wealth inequality. That's what got 0:02:42.080 --> 0:02:44.080 President Trump into the White House. Do you see a 0:02:44.160 --> 0:02:48.120 tax bill that addresses that. I think in the short run, 0:02:48.360 --> 0:02:51.839 we're gonna see people's withholding fall. That is to say, 0:02:51.880 --> 0:02:54.800 their paychecks are gonna go up, so they're gonna be 0:02:54.840 --> 0:02:57.680 happy about that. And in the long run, we're gonna 0:02:57.720 --> 0:03:02.360 see this increased capital flow to the United States leading 0:03:02.440 --> 0:03:06.200 to higher productivity and higher real wages, a real female. 0:03:06.240 --> 0:03:09.000 We'll talk about the dollar dynamics. There's well, good morning, 0:03:09.040 --> 0:03:11.080 I've you won. John Farrell and Tom Keen Coast to 0:03:11.120 --> 0:03:14.120 Coast Good Morning Radio London, thrilled you with us. I 0:03:14.160 --> 0:03:17.639 believe John Farrell will join you in the evening hour 0:03:17.880 --> 0:03:23.000 London time. Is that true? John? Sometimes five to six 0:03:23.600 --> 0:03:27.880 I'm always that five to six weeks there Um Bloomberg Surveillance. 0:03:27.880 --> 0:03:31.440 This morning brought you by Investco. Get timely market insight 0:03:31.800 --> 0:03:35.520 delivered straight to your inbox from Investco Global market strategist 0:03:35.600 --> 0:03:40.760 Christina Hooper. Visit investco dot com slash Cooper to subscribe. 0:03:40.880 --> 0:03:45.640 Professor Feldstein, What do the Trump politics and the Trump 0:03:45.760 --> 0:03:50.760 economics and the Trump sort of strong dollar, what will 0:03:50.760 --> 0:03:55.880 it mean for emerging markets? It's a different emerging markets 0:03:56.040 --> 0:03:59.200 than it was twenty years ago or fourty years ago, 0:03:59.360 --> 0:04:02.440 isn't it. Well? For emerging markets, it's going to mean, 0:04:02.920 --> 0:04:06.600 as it does for developed economies, it's going to mean 0:04:07.560 --> 0:04:12.680 less investment coming from the United States companies keeping more 0:04:12.760 --> 0:04:16.080 at home. Now. That's not going to be like a 0:04:16.160 --> 0:04:19.920 complete reversal emerging markets. There are a lot of reasons 0:04:19.960 --> 0:04:25.440 to be investing in emerging markets for American companies, including 0:04:25.839 --> 0:04:30.560 uh access to those markets, to the consumers in those markets, 0:04:30.600 --> 0:04:33.960 and to the workforce in those markets. But I think 0:04:34.560 --> 0:04:38.200 the lower tax rates in the US will mean less 0:04:38.240 --> 0:04:41.919 investing in those markets than would otherwise happen. Do you 0:04:41.960 --> 0:04:46.280 see the jobs coming back? You know, we're essentially at 0:04:46.320 --> 0:04:49.760 full employment, so the impact of all of this on 0:04:49.839 --> 0:04:53.160 the number of jobs is not going to be significant. 0:04:53.400 --> 0:04:57.320 What is going to be significant is the increase in 0:04:57.320 --> 0:05:00.520 in real wages. We're going to see real wages rising 0:05:00.560 --> 0:05:04.080 more rapidly and incomes rising more rapidly over the next 0:05:04.120 --> 0:05:08.760 decade because of the impact of this tax bill. Uncapital 0:05:08.920 --> 0:05:11.440 formation in the United States. Isn't one half of this 0:05:11.520 --> 0:05:14.440 bill the jobs bill, though, Professor, Isn't that what it's 0:05:14.480 --> 0:05:18.920 meant to be. It's sold that way. I think that 0:05:19.000 --> 0:05:23.080 the reality is it's a it's a better jobs rather 0:05:23.120 --> 0:05:25.840 than a more jobs bill. What do you make of 0:05:25.880 --> 0:05:28.000 the crafting of this bill, Professor? When we wake up 0:05:28.080 --> 0:05:30.640 one morning and realized the alternative minimum tax is still 0:05:30.680 --> 0:05:33.120 in the Senate's bill, many people didn't expect it to 0:05:33.160 --> 0:05:36.080 be there, but it was. It feels like this was rushed. 0:05:36.360 --> 0:05:40.400 Was it rushed? Well, in one sense, it's not rushed 0:05:40.400 --> 0:05:42.800 at all. I mean, the House has been working on 0:05:43.279 --> 0:05:46.760 the structure of this tax reform for years and years. 0:05:47.160 --> 0:05:49.559 Paul Ryan, when he was the head of the Ways 0:05:49.600 --> 0:05:53.280 and Means Committee, led the charge, and so this is 0:05:53.320 --> 0:05:57.440 not something that they came up with over over the weekend. 0:05:57.960 --> 0:06:01.920 But then you have to deal with all of the minutia, 0:06:02.160 --> 0:06:06.040 all of the the needs to get this or that 0:06:06.160 --> 0:06:09.720 senator or congressman on board, and and of course, at 0:06:09.720 --> 0:06:12.760 the same time, to stay within the overall ten year 0:06:12.800 --> 0:06:16.240 budget allowance. Professor. I wanted to get to this on 0:06:16.320 --> 0:06:18.760 television and couldn't. So I want to be sure we do. No. 0:06:19.400 --> 0:06:25.480 Stanley Fisher is very big on the percentage change to 0:06:25.600 --> 0:06:29.679 the mathematics of percentage change work at the lower bound. 0:06:30.279 --> 0:06:33.480 If we say the two year yield in normal times 0:06:33.720 --> 0:06:37.880 moved a certain percent, it's a lot different now at 0:06:37.920 --> 0:06:41.640 these low yields, isn't it. Do you care about percentage change? 0:06:41.920 --> 0:06:44.440 I don't think of it in terms of percentage change, 0:06:44.560 --> 0:06:47.920 because if you're starting at zero, everything looks like a 0:06:48.080 --> 0:06:52.359 very big percentage change, and we're almost at zero on 0:06:52.440 --> 0:06:55.480 a lot of these short rates. So I don't think 0:06:55.480 --> 0:06:59.400 of that. I think of what's happening to absolute levels 0:06:59.400 --> 0:07:02.000 of rates, and what's happening to real rates and those 0:07:02.080 --> 0:07:04.480 who are all super low now and they're going to 0:07:04.600 --> 0:07:08.280 be heading higher uh in the next few years. The 0:07:08.320 --> 0:07:27.320 optimism of Martin Feldstine. The other day I showed an 0:07:27.320 --> 0:07:31.120 offspring a black and white video of a guy out 0:07:31.160 --> 0:07:34.840 in l A doing twenty meal team borax ads for 0:07:34.960 --> 0:07:39.160 Death Valley Days. It became religion. No one knew that 0:07:39.280 --> 0:07:45.840 Ronald Reagan would change American conservative thought. Henry Olson is 0:07:45.960 --> 0:07:51.120 written a fabulously controversial book on the Conservatives of Them 0:07:51.160 --> 0:07:54.720 and the Conservatives of Now. George Will Cause of the 0:07:54.840 --> 0:08:00.000 nuanced portrait. Jd Vance of a Great and Immediate Claim 0:08:00.520 --> 0:08:03.480 calls it simply an excellent book. Henry thrilled to have 0:08:03.600 --> 0:08:08.320 you on. There are eight shades of conservatisms right now. 0:08:08.600 --> 0:08:11.960 Do any of them have anything to do with President Reagan? 0:08:13.120 --> 0:08:15.720 They all have. Uh, It's kind of like the people 0:08:15.800 --> 0:08:19.160 walking around in elephant blind and saying that the tail 0:08:19.320 --> 0:08:22.160 means that the snake, and the leg means that the tree. 0:08:22.240 --> 0:08:25.160 They all have some roots in Reaganism, but none of 0:08:25.200 --> 0:08:29.560 them represent the beauty of them. The arch fact is 0:08:29.640 --> 0:08:31.680 in some of us of a certain village to know 0:08:31.800 --> 0:08:35.160 that he came off the planes of the Midwest a Democrat. 0:08:35.360 --> 0:08:40.520 He had an internal humility around his fierce, combatitive spirit. 0:08:41.240 --> 0:08:46.880 Where's the internal humility and the conservative Republican movement today? 0:08:47.520 --> 0:08:49.839 It's pretty lacking when you take a look at it, 0:08:49.880 --> 0:08:54.480 that there's a conceit of ideology, that ideas can change 0:08:54.520 --> 0:08:56.880 the world in a way that you know, Reagan always 0:08:56.880 --> 0:08:59.839 thought that ideas served the realities of everyday life and 0:09:00.200 --> 0:09:04.160 the love of the average person. That really animated Reagan's 0:09:04.200 --> 0:09:08.480 politics all too often seems absent from modern conservatism. How 0:09:08.480 --> 0:09:10.560 has this been taken? Have you talking to any of 0:09:10.559 --> 0:09:15.640 our modern conservative leaders about working class Republicans. I mean, 0:09:16.000 --> 0:09:18.320 does Paul Ryan actually I mean we talk about a 0:09:18.400 --> 0:09:21.720 tax legislation done for a donor class, is any of 0:09:21.720 --> 0:09:26.000 this done for the working class Republican. I think people 0:09:26.080 --> 0:09:29.480 like Paul Ryan would say that cutting taxes for the 0:09:29.520 --> 0:09:32.680 corporations and the well to do is the way to 0:09:32.760 --> 0:09:36.480 help the working class person in the long term. But 0:09:36.720 --> 0:09:42.440 as far as direct um compassion for today's working class person, 0:09:43.480 --> 0:09:46.640 all too often that seems pretty absent in the leadership. 0:09:46.679 --> 0:09:49.360 I have talked to a number of senators and representatives 0:09:49.360 --> 0:09:52.160 who share my views, but they're not in leadership. Let 0:09:52.160 --> 0:09:53.760 me ask one more question. I'm going to bring in 0:09:53.760 --> 0:09:58.320 a distinguished gentleman from London. There there's an idea of 0:09:58.400 --> 0:10:01.520 conservatism and out of World War Two, and it was 0:10:01.640 --> 0:10:05.000 McArthur Republicans of the Midwest and there were the East 0:10:05.040 --> 0:10:08.840 Coast Conservatives in that. Is it now more amorphous? Is 0:10:08.840 --> 0:10:12.880 it now just one conservative blob versus the nuances of 0:10:12.920 --> 0:10:18.760 two generations ago. Yeah, there's different strains of conservatism, so 0:10:18.840 --> 0:10:21.840 it's not quite that way. But you know, there's social 0:10:21.880 --> 0:10:25.240 conservatism that puts the questions of religious liberty first. And 0:10:25.280 --> 0:10:29.280 there's liberty conservatism that's still all the old time small 0:10:29.320 --> 0:10:33.280 government religion. Um, but they're not divided at at war 0:10:33.360 --> 0:10:36.800 with each other quite the way the old times warm. 0:10:36.880 --> 0:10:39.679 If you're joining us now, a really an entertaining read. 0:10:39.720 --> 0:10:43.160 The working Class Republican Ronald Reagan and the Return of 0:10:43.160 --> 0:10:47.160 blue collar Conservatism. John Farrell, Thank you, Tom. I'm looking 0:10:47.160 --> 0:10:50.120 around for that distinguished gentleman from from London where you 0:10:50.160 --> 0:10:53.160 sing you're it? I met, I met. What an honor. 0:10:53.240 --> 0:10:56.840 Thank you, Henry, Hello, Jonathan farrellhead for me. For the 0:10:56.840 --> 0:11:00.360 working class Republicans. If there's nothing in it in terms 0:11:00.360 --> 0:11:03.720 of the economic policy to address their woes right now, 0:11:04.280 --> 0:11:06.800 have they done enough in terms of the cultural issues 0:11:07.040 --> 0:11:11.920 that they're attached to in the last year, Yes and no. Um. 0:11:11.920 --> 0:11:16.840 Certainly talking about patriotism, which is an undercurrent of the 0:11:16.880 --> 0:11:21.720 President's message a lot. Certainly talking about the immigration. Uh. 0:11:21.840 --> 0:11:25.160 Those are things that working class voters tend to care about, 0:11:25.559 --> 0:11:32.599 But they haven't spoken as much to the the broader 0:11:32.720 --> 0:11:36.520 longing for being part of America. And I think that's 0:11:36.520 --> 0:11:39.920 something that Trump touched on with Make America great Again, 0:11:40.040 --> 0:11:43.679 but it's been not quite as Rather obviously part of 0:11:43.720 --> 0:11:46.559 the governing policy. Well, Henry asked the question, because as 0:11:46.600 --> 0:11:49.079 far as populism is concerned and the plant of the 0:11:49.120 --> 0:11:51.080 working class right now, whether it's in the United States 0:11:51.200 --> 0:11:53.800 or elsewhere, do you find that is more underpinned by 0:11:54.080 --> 0:11:59.080 cultural issues, identity issues, political identity, or is it underpinned 0:11:59.080 --> 0:12:02.800 by economics. I think there are two streams of the same. Uh. 0:12:03.160 --> 0:12:06.760 Thing is that people who are economically stressed and to 0:12:07.559 --> 0:12:11.959 turn to other issues at the same time. But people 0:12:12.000 --> 0:12:15.400 who are of working class are finding themselves on the margins, 0:12:15.400 --> 0:12:20.439 both economically and culturally, and I think issues like immigration 0:12:20.480 --> 0:12:24.800 to kind of combine the two are particularly important to them. 0:12:24.960 --> 0:12:28.120 Henry Olson with us the working Class Republican. My important page, 0:12:28.120 --> 0:12:31.200 Henry is page two O nine, where you folding Ronald 0:12:31.240 --> 0:12:35.360 Reagan with the mainstream of Democrat politics as the grenade 0:12:35.440 --> 0:12:39.000 invasion and all that, and you mentioned Scoop Jackson. How 0:12:39.040 --> 0:12:44.320 do the Democrats respond after the last election to their 0:12:44.360 --> 0:12:48.600 search for the working class democrat or the disaffected democrat 0:12:48.679 --> 0:12:52.000 that Ronald Reagan took. What does the Democratic Party need 0:12:52.080 --> 0:12:55.760 to do after they read your book? Well, I think 0:12:55.760 --> 0:12:58.280 the Democratic Party needs to come and communion with center. 0:12:58.320 --> 0:13:02.320 They need to stop talking about the working class people's 0:13:02.360 --> 0:13:06.000 occupations as things of the path that are going to 0:13:06.040 --> 0:13:10.760 be cast aside, like manufacturing, or mining, or or trucking. 0:13:11.320 --> 0:13:14.720 And I think they need to take cultural respect for 0:13:14.760 --> 0:13:17.680 people that when there was a place for pro life, 0:13:17.720 --> 0:13:20.760 pro gun people in the Democratic Party was just a 0:13:20.800 --> 0:13:23.840 decade ago, and they swept to victory throughout these areas. 0:13:24.160 --> 0:13:27.839 They need to stop representing the elites of San Francisco 0:13:27.960 --> 0:13:31.120 and Manhattan and start trying to represent the people who 0:13:31.200 --> 0:13:33.240 actually have been the base of the Democratic Party for 0:13:33.280 --> 0:13:35.560 most of its history, the average person. Henry, how do 0:13:35.559 --> 0:13:38.080 you characterize the group of individuals that last year when 0:13:38.120 --> 0:13:40.200 they went into the election, they didn't face a choice 0:13:40.200 --> 0:13:44.040 between Republican and Democrat. They faced the choice between Bernie 0:13:44.040 --> 0:13:48.000 Sanders in the primaries and say President Trump. For them, 0:13:48.080 --> 0:13:50.320 it was really binary. They didn't look at this as 0:13:50.360 --> 0:13:54.040 Republican and Democrat. They were looking at right and left 0:13:54.160 --> 0:13:56.800 and they could swing to either. All. Yeah. I mean, 0:13:56.840 --> 0:13:59.439 one of the things that's interesting is that when they 0:13:59.480 --> 0:14:02.400 had a ways and a lot of the primaries in America, 0:14:02.760 --> 0:14:04.680 you don't have to be a registered Republican, so you 0:14:04.720 --> 0:14:08.240 really can choose. Uh. They overwhelmingly chose Trump. Is that 0:14:08.320 --> 0:14:11.360 the white working class person in Michigan who could have 0:14:11.400 --> 0:14:15.200 voted for Sanders but instead tended to vote in large 0:14:15.280 --> 0:14:18.000 numbers for Trump. And I think it's because they don't 0:14:18.080 --> 0:14:21.400 want the top down social democracy that Sanders was selling. 0:14:22.040 --> 0:14:25.320 What do they need to do around the president? I mean, 0:14:25.320 --> 0:14:31.480 you're a beast of Washington, and our last question, that's 0:14:31.520 --> 0:14:34.520 you can put that on the back of the He's 0:14:34.520 --> 0:14:36.400 gonna put that on the back of the paperback a 0:14:36.480 --> 0:14:39.240 beast of Washington. What do they need? What does the 0:14:39.280 --> 0:14:42.520 Republican Party need to do to advise the president forward 0:14:42.880 --> 0:14:46.400 to the mid term elections? What would you change directly 0:14:46.760 --> 0:14:50.240 with President Trump right now? You know? I think President 0:14:50.280 --> 0:14:53.400 Trump needs to recover his populist mojo. Is that what 0:14:53.520 --> 0:14:57.480 he's kind of become as a classical Republican in what 0:14:57.560 --> 0:14:59.840 he's doing is not very much on the economic side. 0:14:59.840 --> 0:15:02.360 That wouldn't be coming straight from a Pence or a 0:15:02.360 --> 0:15:06.440 Cruise or a Bush administration. And his populism has reduced 0:15:06.440 --> 0:15:08.360 to angry tweets and that's kind of like the worst 0:15:08.400 --> 0:15:12.040 of both worlds. I would tell President Trump he should 0:15:12.040 --> 0:15:14.440 not go with what they want next, which is a 0:15:14.520 --> 0:15:17.040 re make of entitlement programs. But he should go with 0:15:17.080 --> 0:15:20.520 the bold infrastructure program. He should start doing more like 0:15:20.560 --> 0:15:23.040 what he was talking about before he was inaugurated, about 0:15:23.040 --> 0:15:27.440 bringing American manufacturing back, and he should, uh, you know, 0:15:28.280 --> 0:15:31.280 be more like what he campaigned on the person who's 0:15:31.320 --> 0:15:36.400 not gonna help his friends in uh, in the boardroom, 0:15:36.440 --> 0:15:38.600 but help the person on main Street. We're out of time. 0:15:38.600 --> 0:15:42.120 We need to see you in Washington Studios, Henry. At 0:15:42.160 --> 0:15:45.600 some point, John Farrowe and Tom King Mr Olsen has 0:15:45.640 --> 0:15:49.360 written a terrific and controversial book with a great cover 0:15:49.520 --> 0:15:52.960 photo of middle Reagan. It's not the Reagan of the 0:15:53.040 --> 0:15:56.080 final years. It was the vitality of an actor from 0:15:56.120 --> 0:15:59.200 California at that time. The book is a working class 0:15:59.320 --> 0:16:03.560 Republican Henry Olson, Ronald Reagan and the return of blue 0:16:03.560 --> 0:16:07.960 collar Conservatism as well. How foreign it was that discussion, John, 0:16:08.000 --> 0:16:10.800 to me, it's like everybody knows what we're talking about now. 0:16:10.800 --> 0:16:12.280 I don't think it's far and I think we've experienced 0:16:12.280 --> 0:16:14.320 it in the United Kingdom as well. And what you 0:16:14.360 --> 0:16:16.240 saw that in the Brexit vote, I think there was 0:16:16.280 --> 0:16:20.760 a disillusioned group of individuals outside the metropolitan elite of 0:16:20.960 --> 0:16:24.680 London and within London they just did not understand what 0:16:24.760 --> 0:16:26.920 was handing in the rest of the country. Absolutely fabulous 0:16:26.920 --> 0:16:29.080 the working class Republican. I put it on in social 0:16:29.120 --> 0:16:46.480 media here today as well, John Ferrell, why don't you 0:16:46.480 --> 0:16:50.200 bring an esteemed guest from Mr Gorman's I'm really pleased 0:16:50.200 --> 0:16:51.640 to say that we've got one of the smartest minds 0:16:51.680 --> 0:16:53.920 on the street um for a global fixed income it's 0:16:53.920 --> 0:16:57.240 Matt Hornback of Morecan Stanley and Matt. For me, the 0:16:57.320 --> 0:16:59.760 headline in the session of the last twenty four hours 0:17:00.120 --> 0:17:04.560 fives thirties on treasuries south of sixty basis points. There 0:17:04.600 --> 0:17:06.800 has got to be a message, some signal in south 0:17:06.840 --> 0:17:09.639 of sixty basis points on five thirties. Well, I think 0:17:09.720 --> 0:17:13.000 one of the things that we've seen is investors take 0:17:13.040 --> 0:17:15.879 a little bit of a more confidence stands towards the 0:17:15.920 --> 0:17:19.920 path for FED policy. Over the coming quarters, particularly after 0:17:19.960 --> 0:17:24.320 the announcement of Governor Powell as the next FED chair, 0:17:24.720 --> 0:17:28.120 we saw investors really grow um in their confidence towards 0:17:28.240 --> 0:17:31.439 the path for FED policy. So we've got uh the 0:17:31.600 --> 0:17:35.320 December rate hike fully priced into the marketplace. People are 0:17:35.359 --> 0:17:37.960 now pretty pretty sure that we're going to get another 0:17:38.040 --> 0:17:41.960 rate hike in March beyond that, so uh people are 0:17:42.119 --> 0:17:44.840 expressing those views by selling bonds in the front end 0:17:44.840 --> 0:17:46.600 of the ILD curve. If I thought this was going 0:17:46.640 --> 0:17:49.080 to be sustained, if I thought that the FED could 0:17:49.080 --> 0:17:51.400 carry on hiking and the economy would continue to improve, 0:17:51.880 --> 0:17:54.879 I wouldn't expect to see two fives down at thirty 0:17:54.880 --> 0:17:57.600 basis points. That doesn't make sense because if you think 0:17:57.640 --> 0:18:00.160 this can last and the FED won't be cutting it's 0:18:00.160 --> 0:18:03.119 aggressively in a couple of years time, you're not going 0:18:03.160 --> 0:18:05.600 to see two fives at thirty basis points, You're gonna 0:18:05.640 --> 0:18:08.439 see two fives steeper. I don't see that, I see thirty. 0:18:08.720 --> 0:18:10.520 I see a market that send actually in a couple 0:18:10.560 --> 0:18:13.200 of years time that's going to have to cut. Well. Well, 0:18:13.240 --> 0:18:15.560 that that's the magic of of how markets work. You know, 0:18:15.560 --> 0:18:17.679 when we're sitting here going through our two thousand and 0:18:17.680 --> 0:18:20.880 eighteen year ahead outlooks, typically by the time you come 0:18:20.880 --> 0:18:23.359 to the end of the process, a consensus is developed 0:18:23.400 --> 0:18:28.120 amongst Wall Street economists and strategists like myself, and typically 0:18:28.160 --> 0:18:30.960 by the time that consensus develops, it's in the price. 0:18:31.000 --> 0:18:33.159 And so what that means is that the outlook for 0:18:33.200 --> 0:18:37.000 two thousand and eighteen, stronger growth, higher inflation that's already 0:18:37.000 --> 0:18:39.920 in the price today. What ultimately ends up moving markets 0:18:39.920 --> 0:18:43.800 in eighteen itself is any surprises to those to those 0:18:43.840 --> 0:18:47.240 consensus views, and then how the outlook for twenty nineteen develops. 0:18:47.240 --> 0:18:49.840 And on that front, our economists are are not as 0:18:49.840 --> 0:18:53.040 optimistic on twenty nineteen as they are. You came out 0:18:53.040 --> 0:18:57.200 of that acclaimed quantitative house vass right, and indeed I did, 0:18:58.000 --> 0:19:00.600 How and hell did you get from fixed income um 0:19:00.640 --> 0:19:05.000 out of Vassar College? That's like almost original to American education. 0:19:05.440 --> 0:19:09.800 So interestingly, my my start in finance was in our 0:19:09.840 --> 0:19:14.159 Tokyo office, Morgan Stanley's Tokyo office. I was an intern 0:19:14.200 --> 0:19:18.360 there for some time and then moved into the trading business. 0:19:18.760 --> 0:19:20.960 Think did folks, this is like a huge deal to 0:19:21.000 --> 0:19:23.320 go come out of the liberal arts bashion of Vassar 0:19:23.720 --> 0:19:26.000 and to achieve as you have, Matt, I think is 0:19:26.320 --> 0:19:30.240 just killer. What I'm seeing mathematically is everything's log convex. 0:19:30.280 --> 0:19:33.240 Everything's got an accelerated force to it. There's way too 0:19:33.240 --> 0:19:36.760 many curves within the log rhythmic spaces. John Farrell nicely 0:19:37.160 --> 0:19:41.000 laid out in the spread market is John mentioned I'm sorry, 0:19:41.040 --> 0:19:44.600 there's a message there. What's the message of the second 0:19:44.600 --> 0:19:48.560 derivatives right now? The message is that as we move 0:19:48.640 --> 0:19:52.120 deeper into the balance sheet normalization cycle, that's another tool 0:19:52.200 --> 0:19:55.199 the FED is using to tighten policy. There's going to 0:19:55.280 --> 0:19:58.199 be a tightening in financial conditions, which is something by 0:19:58.200 --> 0:20:00.800 the way that New York Fed President Ugly has been 0:20:00.800 --> 0:20:04.800 looking for, has been wanting to engender tighter financial conditions 0:20:04.800 --> 0:20:08.600 that will eventually impinge on the growth trajectory of the condom. 0:20:08.680 --> 0:20:11.240 Does the impitch come with a smooth curve and smooth 0:20:11.320 --> 0:20:15.000 vectors or are are we up for instability and jump conditions? Well, 0:20:15.119 --> 0:20:18.000 things never move in a straight line forever. My guess 0:20:18.040 --> 0:20:20.080 is that over the course of next year there will 0:20:20.080 --> 0:20:23.639 be bouts of volatility, unforeseen of course and uh and 0:20:23.680 --> 0:20:26.119 that will eventually lead to the FED to stop hiking 0:20:26.200 --> 0:20:28.480 rates in the fourth quarter of the year. Many FED 0:20:28.520 --> 0:20:31.480 officials are on the record of saying they're worried about 0:20:31.560 --> 0:20:33.760 the curve flattening, and they'd be worried if it's really 0:20:33.760 --> 0:20:36.840 started to invert. When is the bike point really start 0:20:36.880 --> 0:20:39.080 to kick in? If we've got two tens and around 0:20:39.080 --> 0:20:42.919 sixty basis points, did they get concerned at forty thirty twenty, 0:20:43.080 --> 0:20:46.240 I think I think for some participants, UM, the answer 0:20:46.280 --> 0:20:49.800 will be invariably yes, it depends. I mean, we've already 0:20:49.840 --> 0:20:53.280 heard from three FMC participants suggesting that they would not 0:20:53.320 --> 0:20:56.360 feel comfortable hiking with the yield curve completely flat. We're 0:20:56.359 --> 0:20:58.879 not there yet, of course, but I expect that we 0:20:58.920 --> 0:21:01.160 will be there by the or a quarter of next year, 0:21:01.560 --> 0:21:03.679 and then you'll start to hear a growing chorus of 0:21:03.720 --> 0:21:06.640 concern being expressed by f FORMC participant. Can we get 0:21:06.680 --> 0:21:09.320 to my chart of the day, Tom Traceries. It works 0:21:09.320 --> 0:21:12.720 on radio versus two year buns for anyone on radio. 0:21:12.840 --> 0:21:21.360 Just picture this a line just two fifty five basis 0:21:21.359 --> 0:21:24.840 points is the two years spread buns versus Traceries. Is 0:21:24.880 --> 0:21:27.960 there any oxygen left up there at this point? Not 0:21:28.119 --> 0:21:30.320 so much. If you actually look at what markets are 0:21:30.320 --> 0:21:33.679 pricing in for Fed policy in what you find is 0:21:33.720 --> 0:21:37.080 that they're pricing in two bases point rate hikes. Now, 0:21:37.119 --> 0:21:40.120 Morgan Stanley's economist Ellen Zentner thinks the Fed will give 0:21:40.240 --> 0:21:44.439 us three and that's roughly where street consensus is as well. Um, 0:21:44.440 --> 0:21:47.359 But in my analysis of the bond markets, you rarely 0:21:47.440 --> 0:21:49.960 price more than two thirds of what the FED will 0:21:50.040 --> 0:21:52.160 end up delivering. So in fact, if the FED does 0:21:52.240 --> 0:21:55.080 end up delivering three next year, I wouldn't expect the 0:21:55.119 --> 0:21:58.480 market to price anymore than what it already is. Let's John, 0:21:58.520 --> 0:22:00.600 this has been great, all this spread in palysis and 0:22:01.080 --> 0:22:04.199 the mathematics that we're alluding to here, forget about it. 0:22:04.920 --> 0:22:08.159 I'm at home, I'm out on the back deck. I 0:22:08.240 --> 0:22:12.120 got a monthly statement from name the shop, price down, 0:22:12.359 --> 0:22:16.320 yield up, and then there's a second month, and then 0:22:16.320 --> 0:22:19.359 there's a third month. When does the bond bear market 0:22:19.440 --> 0:22:23.400 click in? To be frank, I think we've already seen 0:22:23.480 --> 0:22:26.480 the bond bear market. We um in the wake of 0:22:26.520 --> 0:22:31.280 the um instability in the UK last year, uh, in 0:22:31.359 --> 0:22:36.639 the wake of the presidential election in we saw quite 0:22:36.640 --> 0:22:38.720 a move higher in interest rates and a move lower 0:22:38.760 --> 0:22:42.760 in bond prices. I think we've seen that market play out, 0:22:42.840 --> 0:22:45.560 and now it's time for the next phase. That's the 0:22:45.600 --> 0:22:48.960 phase where FED policy tightens further, and that's the phase 0:22:49.000 --> 0:22:53.720 that eventually leads to higher bond prices, lower bond yields. 0:22:53.840 --> 0:22:57.119 So you're talking about a bull market in bonds. Higher 0:22:57.160 --> 0:23:00.880 bond prices will click in apps lutely. I think that 0:23:00.920 --> 0:23:03.680 the talk that the thirty year bond bull market is 0:23:04.160 --> 0:23:08.760 dead was was way premature, fascinating. We can we can 0:23:08.800 --> 0:23:11.920 you come back on this? Can Well, no, we can't 0:23:11.960 --> 0:23:15.280 keep him. He's gotta go. He's gotta go. Getting a 0:23:15.359 --> 0:23:18.480 cell phone called James Corman. Tell Mr Gorman they're solving 0:23:18.560 --> 0:23:21.920 today at Morgan Stanley. This has been fab Matthew Warrenbuck 0:23:22.119 --> 0:23:25.280 please come back for a more extended conversation. He is 0:23:25.359 --> 0:23:47.359 with Morgan Stanley. Let me talk about our next guest, 0:23:47.560 --> 0:23:50.480 um as I can and set this up correctly. I 0:23:50.800 --> 0:23:52.919 was someone once said to me the only reason I 0:23:52.960 --> 0:23:55.840 talked nice about Mackenzie and so Don Barton will let 0:23:55.840 --> 0:23:58.800 me into their Davos party and full disclosure. I show up, 0:23:58.800 --> 0:24:01.480 I have a drink and I go home, unlike the 0:24:01.600 --> 0:24:05.119 surveillance staff who stays until two b two am. The 0:24:05.200 --> 0:24:08.960 Mackenzie Global Institute is truly one of the jewels of 0:24:09.000 --> 0:24:14.679 American intellectual work on India. They have been absolutely path 0:24:14.800 --> 0:24:18.840 breaking and trying to figure out the mathematics and dynamics 0:24:18.920 --> 0:24:21.480 of poverty. And they do this across a lot of 0:24:21.480 --> 0:24:24.399 other themes. Michael Chewy as a privilege of working with 0:24:24.480 --> 0:24:27.320 Don Barton at the MG I's a partner out of 0:24:27.320 --> 0:24:31.399