WEBVTT - P&L: Could See Mid- to Low-90s for the Euro-Dollar in 2017 0:00:04.760 --> 0:00:08.080 Welcome to the Bloomberg P and L Podcast. I'm pim Fox. 0:00:08.119 --> 0:00:11.200 Along with my co host Lisa Abramowitz. Each day we 0:00:11.280 --> 0:00:14.480 bring you the most important, noteworthy, and useful interviews for 0:00:14.520 --> 0:00:16.880 you and your money, whether at the grocery store or 0:00:16.920 --> 0:00:20.680 the trading floor. Find the Bloomberg P L Podcast on iTunes, 0:00:20.840 --> 0:00:30.160 SoundCloud and at Bloomberg dot com. This is shaping up 0:00:30.200 --> 0:00:34.120 to be one of the most challenging years ever for 0:00:34.159 --> 0:00:38.920 analysts to come to concrete predictions for Doug Ramsey, c 0:00:39.080 --> 0:00:42.000 io of the Lootold Group, just came out with their 0:00:42.040 --> 0:00:44.519 new Green Book of market research and it's It's an 0:00:44.560 --> 0:00:49.520 extensive book of forecasts and expectations for the year ahead. Doug, 0:00:49.600 --> 0:00:53.360 just from the outside, how difficult was it for you 0:00:53.400 --> 0:00:56.560 and your team to come up with a base case 0:00:56.640 --> 0:01:01.360 scenario for next year? Uh? Well, the the issue, at 0:01:01.400 --> 0:01:04.560 least I guess with coming up with a forecast at 0:01:04.640 --> 0:01:06.680 this point in the cycle is that it is a 0:01:06.800 --> 0:01:11.559 very mature economic and stock market cycle, and valuations are 0:01:12.040 --> 0:01:17.000 are very high. I mean, forecasting is dangerous I think 0:01:17.040 --> 0:01:19.080 at any point in the cycle. But you know, the 0:01:19.560 --> 0:01:22.000 one phase where you might have a higher degree of 0:01:22.080 --> 0:01:25.600 confidence would be early Bowl market. You know, we're unemployment 0:01:25.680 --> 0:01:29.039 rates are still high, but coming down, valuations are still reasonable, 0:01:29.720 --> 0:01:33.520 FED liquidity is still plentyable. We've got really none of 0:01:33.520 --> 0:01:36.600 that today. We have a very low unemployment rate. Someone 0:01:36.720 --> 0:01:42.120 say we're at full employment. Valuations are historically very high. 0:01:42.319 --> 0:01:46.840 We think second only to the tech bubble years, uh 0:01:46.880 --> 0:01:51.760 in terms of peak valuations. And UH so we're we're 0:01:51.800 --> 0:01:55.559 reticent to make a let's say, a full year forecast, 0:01:56.120 --> 0:01:59.400 but we do have a fairly high degree of confidence 0:01:59.440 --> 0:02:01.720 that we will see higher highs at least during the 0:02:01.760 --> 0:02:04.040 first half of the year. And it really just has 0:02:04.080 --> 0:02:07.960 to do with the internal strength of the market. And 0:02:08.000 --> 0:02:11.640 I think, you know, animal spirits are a sort of 0:02:11.680 --> 0:02:16.760 becoming rekindled here with more pro business talk coming from 0:02:17.440 --> 0:02:20.680 the incoming administration. I think you know, that combination of 0:02:21.360 --> 0:02:27.000 uh confidence being rehabilitated coming up from from pretty uh 0:02:27.200 --> 0:02:30.960 skeptical levels and uh and just the action in the 0:02:31.000 --> 0:02:34.840 market itself had us bullish for you know, at least 0:02:34.880 --> 0:02:37.840 the first half of the year. Doug Ramsey, can you 0:02:37.960 --> 0:02:40.920 just broaden the conversation a little bit by telling us 0:02:40.960 --> 0:02:44.680 about market breadth and what that's showing you Sure, what 0:02:44.840 --> 0:02:49.440 we developed a pretty simple indicator, just that we tally 0:02:49.520 --> 0:02:53.440 each time the SMP makes a new bull market high. 0:02:53.560 --> 0:02:57.359 So the latest was Tuesday, And we look at UH 0:02:57.440 --> 0:03:00.760 the spirit indices and indicators like the New York Stock 0:03:00.800 --> 0:03:05.639 Exchange Daily Advanced Decline line, new high within the last week, UH, 0:03:05.800 --> 0:03:11.080 Dow transports, UH small cap stocks, financials, various cyclical indices. 0:03:11.280 --> 0:03:13.959 I mean, all of these are also poking out to 0:03:14.080 --> 0:03:17.600 new all time highs. And just I mean, the history 0:03:17.720 --> 0:03:20.840 of bullmarket tops going all the way back to the 0:03:20.919 --> 0:03:25.079 nine is that the final peak in the Dow and 0:03:25.160 --> 0:03:29.080 the spinal peak and the Blue chips is actually a 0:03:29.120 --> 0:03:32.280 pretty lonely event where it's really just those two indices 0:03:32.440 --> 0:03:36.000 and very little else standing at a new high. So 0:03:36.040 --> 0:03:39.160 I've just got to believe in a bullmarket that's lasted 0:03:39.640 --> 0:03:42.240 almost eight years, that we're going to have a topping 0:03:42.280 --> 0:03:45.240 process that is going to be you know, spread out 0:03:45.640 --> 0:03:48.520 at a minimum over you know, let's say, four to 0:03:48.600 --> 0:03:53.040 six months. So one thing that I noticed in your 0:03:53.160 --> 0:03:57.080 green book was that you said that rising rates aren't 0:03:57.080 --> 0:04:00.880 always a death now and this is of very interesting point. 0:04:00.960 --> 0:04:04.240 It flies in the face of some commentary that we've 0:04:04.240 --> 0:04:07.280 heard recently, including double lines Jeff Gunlack coming out and 0:04:07.320 --> 0:04:10.760 saying that, uh, if if treasure yields keep rising to 0:04:10.880 --> 0:04:13.560 the degree that they have been for a bit longer, 0:04:13.800 --> 0:04:15.840 that's going to put pressure on the SMP five hundred. 0:04:15.840 --> 0:04:19.920 Why do you disagree, Well, I think there's an offset. 0:04:19.960 --> 0:04:23.000 I mean the fact that we're getting back to numbers 0:04:23.000 --> 0:04:25.240 and we're not there yet, but you know, if we 0:04:25.760 --> 0:04:28.360 if we break above the three handle on the tenure 0:04:28.600 --> 0:04:31.559 bond yield, I think there's going to be of course, 0:04:31.680 --> 0:04:35.240 you know, that's increased competition for the stock market, but 0:04:35.560 --> 0:04:39.680 there's sort of a countervailing confidence effect that hey, that's 0:04:39.680 --> 0:04:42.720 that's a bond yield figure that sounds normal to me 0:04:42.920 --> 0:04:45.080 all of a sudden, And even if we get short rates, 0:04:45.160 --> 0:04:49.000 let's say above one per cent, I think, you know, 0:04:49.160 --> 0:04:51.520 they'll just be a sense that, hey, you know, the 0:04:51.600 --> 0:04:55.400 rate environment, the policy environment is being normalized, and I 0:04:55.440 --> 0:04:58.320 think there's confidence that goes along with that. And even 0:04:58.360 --> 0:05:01.640 with the in the cycle, I might and we've already 0:05:01.680 --> 0:05:05.600 had a pretty impressive It was an eighteen month stretch 0:05:05.800 --> 0:05:09.480 of rising bond yields and rising stock prices from the 0:05:09.520 --> 0:05:12.359 middle of twelve to the end of thirteen. The tenure 0:05:12.360 --> 0:05:14.960 bond yield went up a hundred and fifty five basis points. 0:05:15.880 --> 0:05:21.160 In the face of that, the Spuh. Since this bond 0:05:21.240 --> 0:05:24.040 yield rally started in the summer, the SMP is only 0:05:24.120 --> 0:05:27.359 up six or seven percent, so there could be a 0:05:27.440 --> 0:05:30.279 ways to go. I'm sort of reticent to put a 0:05:30.400 --> 0:05:33.440 number on it. You know, where does uh what's a 0:05:33.520 --> 0:05:35.919 high enough yield level to inflict some pain on the 0:05:35.920 --> 0:05:37.960 stock market. But I think it may be as much 0:05:38.160 --> 0:05:41.040 as a point higher from here, I mean three fifty 0:05:41.040 --> 0:05:46.000 three sixty um could could be a challenge. So I 0:05:46.040 --> 0:05:49.960 think it's always away. Well, Doug Gramsey, as you speak, 0:05:50.200 --> 0:05:53.960 the tenure yield topping a two point six percent, The 0:05:54.120 --> 0:05:57.320 dollar continues its strength against the euro one oh three 0:05:57.400 --> 0:06:00.320 seventy six, also strength against the pound sterling at a 0:06:00.400 --> 0:06:05.560 one four. What does that tell you about the appetite 0:06:05.720 --> 0:06:12.520 for US assets? Uh? Well, it's it's strong. Uh, there's 0:06:12.560 --> 0:06:15.960 no question about that. I mean, the dollar strength at 0:06:16.040 --> 0:06:19.080 some point, I mean sometimes I wonder if that might 0:06:19.200 --> 0:06:24.440 be uh a negative stock market trigger. Prior to the 0:06:24.560 --> 0:06:28.880 rising rates. I mean, it's become very strong. Uh. I 0:06:28.920 --> 0:06:33.320 wouldn't be surprised to see the euro dropping into the nineties, 0:06:33.920 --> 0:06:36.279 I mean mid to low nineties over the next year, 0:06:36.839 --> 0:06:41.160 mid to low nineties for the euro dollar. I just 0:06:41.200 --> 0:06:43.919 think when you look at uh the strength of the 0:06:44.040 --> 0:06:48.080 US economy, and again it's all relative. It hasn't been 0:06:48.080 --> 0:06:50.960 a great recovery, but it's certainly been far superior to 0:06:51.440 --> 0:06:55.760 what's been seen anywhere in Europe. So a simple way 0:06:55.760 --> 0:07:03.039 to get Europe competitive shy of the EU in the 0:07:03.120 --> 0:07:07.839 euro itself um coming undone may just to be to 0:07:07.920 --> 0:07:10.720 get that currency rate a lot lower, and and they're 0:07:10.760 --> 0:07:13.840 benefiting already. You can see it in the performance of 0:07:13.880 --> 0:07:16.920 the European multinational stocks. We've got to leave it there, 0:07:16.960 --> 0:07:20.040 but thanks very much. Doug Ramsey, chief investment officer the 0:07:20.080 --> 0:07:24.840 Loothold Group based in Minneapolis, uh I think that's a 0:07:24.880 --> 0:07:28.680 good headline, isn't it. That the euro dollar might trade 0:07:28.920 --> 0:07:31.240 in the nineties, maybe even in the low nineties over 0:07:31.240 --> 0:07:33.520 the next six to twelve months. That would be a 0:07:33.600 --> 0:07:37.800 huge game changer. Already Europe has seen some advantages from 0:07:37.840 --> 0:07:42.120 the weaker euro with respect to more trade and more exports. 0:07:42.120 --> 0:07:43.880 So this will be a very interesting dynamic in the 0:07:43.960 --> 0:07:57.800 year ahead. But we're trying to imagine what the effects 0:07:57.960 --> 0:08:01.880 of the United Kingdom's brecks vote will have on wages. 0:08:01.920 --> 0:08:04.360 And here to tell us more, as Mark Gilbert Bloomberg 0:08:04.520 --> 0:08:07.960 View columnists joining us from our London bureau, Mark Gilbert, 0:08:08.000 --> 0:08:10.679 thank you very much for being with us. I note 0:08:10.720 --> 0:08:14.200 that the pound right now trading at one against the 0:08:14.280 --> 0:08:17.679 US dollar, and there have been treasury papers i believe 0:08:17.720 --> 0:08:20.800 from the Chancellor of the Exchequer and the Bank of 0:08:20.840 --> 0:08:24.520 England showing that Britain could lose up the sixties six 0:08:24.640 --> 0:08:28.880 billion pounds a year if it pursues the hard Brexit option. 0:08:29.200 --> 0:08:31.800 Tell us what's going on, Well, we had the vote 0:08:31.800 --> 0:08:35.120 in June, the referendum, Brits decided they wanted to leave 0:08:35.160 --> 0:08:37.920 the European Union, and you can some of the situations 0:08:37.920 --> 0:08:40.520 since then. In one word, it's uncertainty. If you look 0:08:40.559 --> 0:08:42.760 at the pounds on a trade weighted basis this year, 0:08:43.040 --> 0:08:46.600 it's down about fifteen in total. It's rallied seven percent 0:08:46.640 --> 0:08:49.040 from the October below. But when you've got a weaker 0:08:49.160 --> 0:08:51.880 currency like that, what you end up with is important inflation. 0:08:52.240 --> 0:08:53.920 And if you look at all of the forecast for 0:08:53.960 --> 0:08:56.480 what consumer prices are going to do next year, we 0:08:56.559 --> 0:08:58.679 are looking at a faster inflation rate. So you've got 0:08:58.720 --> 0:09:01.320 the Office for Budget responsibilit to an independent body here 0:09:01.600 --> 0:09:04.320 that kind of marks the government's homework. It says that 0:09:04.360 --> 0:09:07.040 the Bank of Englaan's two percent inflation target will get met, 0:09:07.320 --> 0:09:09.120 probably in the first quarter of next year, and then 0:09:09.120 --> 0:09:12.280 inflation will continue to rise, studying out at about two 0:09:12.320 --> 0:09:15.520 and a half percent. So that's a direct consequence of 0:09:15.600 --> 0:09:18.280 the weaker pound, which in turn has been sparked by 0:09:18.360 --> 0:09:20.680 this decision to leave the EU by Brexit. You know, 0:09:20.760 --> 0:09:23.000 one thing that I'm struck by is that, you know, 0:09:23.600 --> 0:09:26.640 inflation has been the holy grail of central banks for years, 0:09:26.679 --> 0:09:29.440 all of a sudden, now the UK is getting it. 0:09:29.520 --> 0:09:33.559 But this seems to be bad inflation. It doesn't necessarily 0:09:33.679 --> 0:09:37.959 translate to higher wages. What are we seeing in terms 0:09:38.040 --> 0:09:42.160 of UK wages and the ability for consumers to buy 0:09:42.200 --> 0:09:45.720 goods that are increasingly becoming more expensive. Well, so far 0:09:45.800 --> 0:09:49.080 this decade, inflation has been banged on, averaging two percent, 0:09:49.280 --> 0:09:52.280 exactly at the Bank of Elian's inflation target, but in 0:09:52.320 --> 0:09:54.360 recent years it's fallen off. If you look at what 0:09:54.400 --> 0:09:56.720 wages have done this decade, they've only been one point 0:09:56.800 --> 0:10:00.559 eight percent, So Britains have effectively had a pay cut 0:10:01.040 --> 0:10:04.520 for the past decade. That arguably is one of the 0:10:04.559 --> 0:10:06.880 sparks for for Brexit. You know, this argument that all 0:10:06.880 --> 0:10:09.560 of the benefits of economic growth have gone to capital 0:10:09.679 --> 0:10:11.840 rather than to labor. They lead into a bit of 0:10:11.840 --> 0:10:14.520 populism in a lot of countries, and so arguably that's 0:10:14.559 --> 0:10:19.240 part of what the motivation was for voting Brexit. Wages though, 0:10:19.559 --> 0:10:24.040 have not tended to move with inflation, and if you 0:10:24.080 --> 0:10:26.319 look at the forecast going forward, as I said, inflation 0:10:26.360 --> 0:10:29.439 expected to accelerate, but wages are respected to stagnate, and 0:10:29.559 --> 0:10:31.800 by the end of next year the Office for Budget 0:10:31.840 --> 0:10:36.000 Responsibility thinks that inflation will once again be faster than 0:10:36.080 --> 0:10:37.800 wage growth and that people will be getting a pay 0:10:37.840 --> 0:10:41.080 cut again. Marcus, there are a debate about different sectors 0:10:41.320 --> 0:10:44.800 of the British economy. For example, those workers in the 0:10:44.880 --> 0:10:49.120 agricultural sector, there's a report that they might actually see 0:10:49.120 --> 0:10:53.640 wage increases. There's certainly places where you're seeing labor shortages, 0:10:53.679 --> 0:10:57.160 and so if we close the door to immigration, which 0:10:57.160 --> 0:10:59.760 is one of the consequences of of Brexit, then you'll 0:11:00.000 --> 0:11:03.040 only see price pressures in the agriculture industry where a 0:11:03.040 --> 0:11:05.359 lot of immigrants work. If you look in the construction 0:11:05.440 --> 0:11:10.079 sense sector workers in their plumbers plasters. They've been enjoying 0:11:10.120 --> 0:11:13.400 really really good pay growth for several years now because 0:11:13.400 --> 0:11:16.960 we still have a construction boom, particularly in the southeast 0:11:16.960 --> 0:11:19.960 of the country. But those sexual gains will help the 0:11:20.040 --> 0:11:22.480 overall picture for wages according to the oh B r 0:11:22.920 --> 0:11:26.480 um And indeed, there's a question as to how fast 0:11:26.520 --> 0:11:29.480 inflation the Bank of England will tolerate. It says it 0:11:29.520 --> 0:11:33.000 will tolerate inflation over target for a while. If it's 0:11:33.040 --> 0:11:36.280 appetite for for for that faster inflation proves greater than 0:11:36.360 --> 0:11:39.400 people expect, then the impact on wages could be even greater. 0:11:39.880 --> 0:11:42.840 So I'm trying to expect to understand this. Today the 0:11:42.880 --> 0:11:45.960 Bank of England decided to keep its interest rate at 0:11:46.000 --> 0:11:50.840 a record low level. UM. If the BOE decides to 0:11:51.360 --> 0:11:55.680 raise rates more quickly than people are expecting in response 0:11:55.720 --> 0:11:59.640 to some of this higher inflationary pressure, will this caused 0:11:59.679 --> 0:12:02.640 the power and to appreciate significantly? I mean, is that 0:12:03.920 --> 0:12:07.000 is that under the Bank of England's control even well, 0:12:07.000 --> 0:12:11.080 like like most central banks, they say they don't target 0:12:11.120 --> 0:12:14.400 the currency rate. Certainly, the the European Central Bank says 0:12:14.400 --> 0:12:17.040 the same. The Federal Reserve says the same. If you 0:12:17.040 --> 0:12:19.640 look in the futures market, there's about a thirty six 0:12:19.679 --> 0:12:21.839 percent chance of higher interest rates by the end of 0:12:21.920 --> 0:12:25.280 next year, so not even at fifty. So the market 0:12:25.360 --> 0:12:27.840 is definitely expecting the Bank of England to stand pat 0:12:28.000 --> 0:12:30.439 through next year, and that's in line with it's with 0:12:30.559 --> 0:12:32.840 its claim that it will it will allow faster inflation 0:12:32.880 --> 0:12:35.920 for a while to compensate for the slower consumer prices 0:12:35.960 --> 0:12:39.840 that we've seen. Guessing currencies anyone's any you can't make 0:12:39.920 --> 0:12:43.520 money guess and occurrencies. I don't think the pound historically, 0:12:43.520 --> 0:12:45.679 whenever it's had a fall of this kind of magnitude, 0:12:45.920 --> 0:12:48.880 it's tended to stay at that level for quite a 0:12:48.880 --> 0:12:51.640 few years. We had in nine we had a similar 0:12:51.640 --> 0:12:53.960 collapse in the pound after we left the exchange right mechanism. 0:12:54.360 --> 0:12:56.760 Pound weakness is something that I think that the economy 0:12:56.800 --> 0:12:58.720 is just going to have to cope with for the 0:12:58.760 --> 0:13:00.560 rest of the year. You know, we had news this 0:13:00.600 --> 0:13:03.400 week Lego is going to raise the prices of plastic 0:13:03.400 --> 0:13:07.080 bricks by five as a compensation for what they've seen 0:13:07.080 --> 0:13:09.800 in the weakness of the pounds, and most kind of 0:13:09.840 --> 0:13:12.080 increases for imported goods. I think you're going to be 0:13:12.120 --> 0:13:14.080 something that we're going to see more of as the 0:13:14.080 --> 0:13:17.040 months roll by. Mark Gilbert, thank you so much for 0:13:17.120 --> 0:13:20.160 joining us, Mark Gilbert Bloomberg view calumness coming to us 0:13:20.400 --> 0:13:24.199 from London ground zero for Brexit and all of the 0:13:24.240 --> 0:13:27.240 developments that are coming with respect to inflation, wages, and 0:13:27.520 --> 0:13:42.079 price increases. We're going to try to imagine what is 0:13:42.160 --> 0:13:45.000 going to happen next year in the bond market. This 0:13:45.080 --> 0:13:47.520 is the big question, the big mystery. I want to 0:13:47.520 --> 0:13:49.440 bring in Eric Stein, who is going to solve this 0:13:49.520 --> 0:13:52.200 mystery for us? Eric Stein, co director of Global Fixed 0:13:52.240 --> 0:13:56.120 Income at Eaton Vans. Yesterday, the Federal Reserve decided to 0:13:56.200 --> 0:13:58.600 raise interest rates by a quarter of percentage point that 0:13:58.760 --> 0:14:02.000 everybody was expecting. What people were not expecting was that 0:14:02.080 --> 0:14:05.760 the Fed increased the projection from to rate hikes x 0:14:05.800 --> 0:14:08.480 here to three rate hikes six here. So, Eric, do 0:14:08.520 --> 0:14:10.280 you think that we are just going to see three 0:14:10.400 --> 0:14:12.080 rate hikes next year or do you think that there's 0:14:12.080 --> 0:14:15.760 even a possibility of even four. I certainly think there's 0:14:15.760 --> 0:14:17.880 a possibility of four rate hikes. You know. I think 0:14:17.920 --> 0:14:20.520 what's interesting about yesterday is a couple of things. First, off. 0:14:20.520 --> 0:14:24.760 The dot plot almost never goes um up in terms 0:14:24.760 --> 0:14:27.200 of rates. It always goes down. We're actually we're debating this, 0:14:27.600 --> 0:14:30.320 uh in our eating Vance Global Macro Team research meeting today. 0:14:30.320 --> 0:14:32.680 There's actually been one time that one dot went up 0:14:32.720 --> 0:14:34.800 if you go back to two thousand fourteen, but generally 0:14:35.000 --> 0:14:37.440 dots come down. So now we saw the first dot 0:14:38.120 --> 0:14:40.880 just just just just backing up. The FED dots are 0:14:41.160 --> 0:14:46.080 the individual FED member projections for where benchmark rates will 0:14:46.080 --> 0:14:49.040 be over time. So when people talk about the dot plot, 0:14:49.080 --> 0:14:51.840 they're talking about sort of, uh, that projection, and it 0:14:51.920 --> 0:14:54.840 moved upwards. It moved from to rate hikes applying to 0:14:54.960 --> 0:14:58.080 rate hikes at three right hicks last yesterday, Yes, exactly, 0:14:58.120 --> 0:15:00.520 and so it moved up from two to three. What 0:15:00.640 --> 0:15:02.680 I was expecting was that it was gonna that was 0:15:02.680 --> 0:15:04.960 gonna happen, but at the March meeting, not here at 0:15:05.000 --> 0:15:07.320 the December meetings. So to me, that's very symbolic. And 0:15:07.360 --> 0:15:09.840 what Chairwoman Janet Yellen said when she was asked at 0:15:09.840 --> 0:15:12.560 her press conference was that some maybe a few members 0:15:12.880 --> 0:15:15.960 had incorporated the potential fiscal stimulus from the incoming Trump 0:15:15.960 --> 0:15:19.320 administration and other regulatory and tax policy changes that could 0:15:19.360 --> 0:15:21.360 be pro growth as well as some things that could 0:15:21.400 --> 0:15:24.840 potentially be inflationary, but everyone hasn't incorporated that yet. So 0:15:24.880 --> 0:15:27.480 they FED also raised their growth projection from two to 0:15:27.520 --> 0:15:30.640 two point one. They lowered the unemployment projection from four 0:15:30.640 --> 0:15:33.640 point six to four point five. Marginal changes. But if 0:15:33.640 --> 0:15:35.880 the growth in inflation out look picks up, as I 0:15:35.920 --> 0:15:38.200 think it will and the markets they're telling us that 0:15:38.280 --> 0:15:40.280 it will, I think the dots could also go up. 0:15:40.320 --> 0:15:42.800 So I think three three rate hikes is certainly likely. 0:15:42.960 --> 0:15:45.720 Four as possible. Look, maybe the market can't take it. 0:15:45.760 --> 0:15:48.640 There's no guarantee that happens, but I think four hikes 0:15:48.680 --> 0:15:51.920 is certainly on the table in two thousand seventeen. Eric, 0:15:52.000 --> 0:15:54.960 some of those thoughts might disappear in twenty seventeen because 0:15:55.000 --> 0:15:57.120 they're not going to have the same members of the 0:15:57.560 --> 0:16:00.560 f O m C. And indeed, Janet Yellen's and I believe, 0:16:00.600 --> 0:16:04.440 expires in February of eighteen. So what do you see 0:16:04.480 --> 0:16:06.880 in terms of any change in the disposition of the FED? 0:16:07.120 --> 0:16:08.720 So I I you know there. I do think it's 0:16:08.720 --> 0:16:11.560 gonna be very interesting to see how the Trump administration 0:16:11.600 --> 0:16:13.760 fills those vacancies that are there's a couple. I think 0:16:13.760 --> 0:16:15.920 on the governor's side that are currently open more will 0:16:15.960 --> 0:16:19.160 be open. As you mentioned, Chair Yelling's term as Chair 0:16:19.280 --> 0:16:21.920 ends in February of eighteen. Actually her term as governor 0:16:22.000 --> 0:16:24.880 goes farther, but typically I don't think it's ever happened 0:16:24.920 --> 0:16:28.720 that someone stayed Honors chair when they're UM, when they've 0:16:28.960 --> 0:16:31.000 when they stayed on his governor, I should say, when 0:16:31.000 --> 0:16:34.400 they lost their their chairship. So I do think Trump 0:16:34.440 --> 0:16:37.640 will a point at the margin, maybe more hawkish members 0:16:38.080 --> 0:16:40.080 UM than you would have seen, let's say, under Hillary 0:16:40.080 --> 0:16:42.840 Clinton administration, that being said as much as Trump in 0:16:42.880 --> 0:16:46.440 the past is criticized yelling for keeping rates low to 0:16:46.440 --> 0:16:48.920 boost the stock market. You know, if we're gonna spend 0:16:48.920 --> 0:16:51.560 more money and we're gonna have more debt, lower rates 0:16:51.600 --> 0:16:54.200 are are are make that easier. So I wouldn't expect 0:16:54.680 --> 0:16:57.680 super hawkish members, but I would expect maybe more hawkish, 0:16:57.720 --> 0:17:02.080 more monitorius, less Kinsian members appointed to the Fed under 0:17:02.080 --> 0:17:05.840 our Trump administration. You know, how dangerous is the possibility 0:17:06.000 --> 0:17:09.160 that right now the consensus and markets is completely wrong, 0:17:09.840 --> 0:17:14.000 that U that rates will potentially even not not benchmark rates, 0:17:14.040 --> 0:17:17.080 but but treasury yields, particularly the ten year, yield comes 0:17:17.200 --> 0:17:20.080 down in the first quarter of next year. If you 0:17:20.119 --> 0:17:23.840 know President elect Trump's team doesn't necessarily come forward with 0:17:23.920 --> 0:17:27.840 specific plans or runs into some issues convincing Republican leadership 0:17:27.920 --> 0:17:30.680 in the House and send it to come on board 0:17:30.680 --> 0:17:33.240 with him, what is the risk uh for for a 0:17:33.359 --> 0:17:36.600 very serious uh rally that could also spur a pretty 0:17:36.600 --> 0:17:39.679 serious sell off in other markets. So so that's certainly 0:17:39.720 --> 0:17:42.000 a risk. Look when when Trump got elected, which is 0:17:42.040 --> 0:17:44.280 now what five weeks ago, I said, Look, the distribution 0:17:44.320 --> 0:17:47.560 of economic outcomes has widened. I think the modal outcome 0:17:47.600 --> 0:17:50.520 has gone up, but the distribution has widen. That's still 0:17:50.880 --> 0:17:53.200 that still remains. Let's say he can't get those things past. 0:17:53.240 --> 0:17:54.959 Let's say then we get a bunch of tweets and 0:17:55.200 --> 0:17:57.639 trade protectionism will definitely get a bunch of treats. We'll 0:17:57.640 --> 0:17:59.280 definitely get a bunch of tweets, but we'll get if 0:17:59.280 --> 0:18:00.920 we get trade protec action, is um and some other 0:18:00.960 --> 0:18:02.919 of his policies that I don't think are so strong 0:18:03.280 --> 0:18:05.280 that I think the baseline for the markets and myself 0:18:05.359 --> 0:18:07.720 is that those will be somewhat muted. Then you could 0:18:07.720 --> 0:18:10.240 have worst economic outcomes. You could see a rally in 0:18:10.280 --> 0:18:12.359 the bondom market. I do think many of these policies, 0:18:12.400 --> 0:18:15.080 though even some of the bad ones like trade protectionism, 0:18:15.160 --> 0:18:17.840 are inflationary, some of the good ones that are pro 0:18:17.920 --> 0:18:20.000 growth also might be inflationary. So I think we will 0:18:20.040 --> 0:18:22.680 get somewhat of an inflationary impulse. And I think that's 0:18:22.680 --> 0:18:25.199 why the Fed moved from two to three hikes in 0:18:25.240 --> 0:18:29.040 their so called dot plot. Eric Stein, thank you, portfolio 0:18:29.080 --> 0:18:32.440 manager co director of Global fixed Income for Eaton Advance, 0:18:32.720 --> 0:18:36.120 helping to manage three hundred billion dollars of customer assets. 0:18:36.119 --> 0:18:39.240 He is based in Boston, home to Bloomberg. Thank you 0:18:39.320 --> 0:18:41.040 very much for coming in and spending time with us. 0:18:52.920 --> 0:18:55.239 All Right, we are a FED day plus one, and 0:18:55.359 --> 0:18:57.480 here to tell us more is Joe Davis. He is 0:18:57.560 --> 0:19:00.760 the chief global economist for the Van Card Group. Joe, 0:19:00.760 --> 0:19:03.120 thanks for coming into the studio. Thanks for having um. 0:19:03.480 --> 0:19:06.880 So maybe you can just explain a little bit about 0:19:07.080 --> 0:19:10.480 the vanguard response to the rate decision and then maybe 0:19:10.720 --> 0:19:14.600 connect that with what you see happening in and then 0:19:14.680 --> 0:19:17.200 markets as well. You know, so what what we noted 0:19:17.240 --> 0:19:21.240 the clients, we we we we applauded the decision. Um 0:19:21.320 --> 0:19:23.720 we were anticipating this year, phim that actually the federal 0:19:23.760 --> 0:19:27.439 reserve UM through the course of seventeen was actually going 0:19:27.480 --> 0:19:30.720 to be at least about one UM. And so what 0:19:30.840 --> 0:19:32.960 I think we saw yesterday was a little bit of 0:19:33.280 --> 0:19:36.520 building confidence in in the outlook, something I think that 0:19:36.640 --> 0:19:39.919 quite frankly was warned six months ago UM And so 0:19:39.960 --> 0:19:42.400 I think I don't think we're gonna see very hawkish 0:19:42.440 --> 0:19:44.399 activity by the Federal Reserve. But I think we have 0:19:44.520 --> 0:19:47.560 taken out at the margin this this and this deflationary 0:19:47.680 --> 0:19:50.000 tale that we were concerned about. Okay, so we might 0:19:50.040 --> 0:19:53.720 have taken out the disinflationary the deflationary tale, but are 0:19:53.720 --> 0:19:58.280 we setting ourselves up for gangbusters growth, incredible inflation, a 0:19:58.280 --> 0:20:00.480 departure from the new normal? Is this the end of 0:20:00.480 --> 0:20:02.960 the bond bull market in the beginning of you know, 0:20:03.280 --> 0:20:06.119 clear sailing ahead. It's a great point. So paired with 0:20:06.200 --> 0:20:08.480 that with those comments, is I think we have to 0:20:08.480 --> 0:20:11.400 appreciate where where we should be right as you can 0:20:11.400 --> 0:20:14.560 best estimate that and our estimates say where the tenure treasury, 0:20:14.560 --> 0:20:18.000 which is a key benchmark right now, and we were 0:20:18.280 --> 0:20:20.520 we were two point five zero as if you can 0:20:20.560 --> 0:20:23.359 measure that precisely this time last year and we haven't changed. 0:20:23.359 --> 0:20:26.480 So we were skeptical that the world, we believe the 0:20:26.520 --> 0:20:28.440 markets in the world was to the bond market was 0:20:28.480 --> 0:20:31.440 a little too pessimistic by the summer. At the same time, 0:20:32.720 --> 0:20:36.040 you are being too PESSI well, we all have. I 0:20:36.119 --> 0:20:38.639 just like would be careful of not being let animal 0:20:38.680 --> 0:20:40.960 spirits get out of control. I mean the equity market, 0:20:41.000 --> 0:20:42.879 if you, if you do the math, is pricing in 0:20:43.119 --> 0:20:46.200 closer to four percent real GDP grow for twenty seventeen. 0:20:46.240 --> 0:20:48.920 I think that's highlight unlikely. So I think choose somewhere 0:20:48.960 --> 0:20:51.520 in between. I think we're actually closer to fair value 0:20:51.560 --> 0:20:53.080 if you look at say the shape of the Eel 0:20:53.160 --> 0:20:57.000 curve and the treasury markets, credit markets. But but you know, 0:20:57.000 --> 0:20:59.080 so if we would see maturial creator move, I think 0:20:59.080 --> 0:21:01.399 we'd be careful. Okay, you say if we see a 0:21:01.440 --> 0:21:03.760 material greater move, we should be careful. I was actually 0:21:03.760 --> 0:21:07.119 just gonna ask you Jeff Gunlock of Double Line Capital 0:21:07.119 --> 0:21:08.760 that came out and said, if you start to see 0:21:08.880 --> 0:21:12.080 much higher yields on the tenure, even up to three percent, 0:21:12.440 --> 0:21:14.960 that's going to start to pressure some of the riskier assets. 0:21:15.000 --> 0:21:18.080 Do you agree, yes, I mean, I think even before 0:21:18.080 --> 0:21:20.000 to look at the at the three percent on the 0:21:20.040 --> 0:21:22.720 tenure treasure would be looking at the US dollar. I mean, 0:21:22.720 --> 0:21:25.160 we're already a point with which I think we'll we'll 0:21:25.280 --> 0:21:28.480 be hard pressed to see a further acceleration to manufacturing sector, 0:21:28.480 --> 0:21:31.600 which again the global economy was rebounding from its law 0:21:31.960 --> 0:21:34.720 before the election. So I think if you can take 0:21:34.760 --> 0:21:37.120 that into account, if we see another ten percent rise 0:21:37.359 --> 0:21:40.879 in the dollar versus the basket of currencies, we will see, 0:21:41.160 --> 0:21:43.360 you know, further pressure on some of the import prices 0:21:43.440 --> 0:21:44.920 and on some of the growth. So I think there's 0:21:44.920 --> 0:21:47.280 a natural limit to how far we can go, and 0:21:47.320 --> 0:21:49.680 at some point twenty seventeen we could very likely test 0:21:49.720 --> 0:21:52.119 what that limit is. I think would be shocking to 0:21:52.160 --> 0:21:55.160 see a further acceleration across the board in the financial 0:21:55.200 --> 0:21:57.480 assets that we've seen in the past thirty days. We'll 0:21:57.520 --> 0:22:00.840