1 00:00:06,320 --> 00:00:13,040 Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane 2 00:00:13,480 --> 00:00:17,560 Speaker 1: jay Ley. We bring you insight from the best in economics, finance, investment, 3 00:00:18,000 --> 00:00:23,520 Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 4 00:00:23,600 --> 00:00:32,360 Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg Well. 5 00:00:32,640 --> 00:00:35,840 Speaker 1: Tony Crosenzi joins us here in our studio, and Tony, 6 00:00:35,960 --> 00:00:38,760 Speaker 1: great to have you with us. Happy holidays and all 7 00:00:38,840 --> 00:00:40,519 Speaker 1: those great things. You know. One of the things I 8 00:00:40,560 --> 00:00:42,920 Speaker 1: like about your notes, as you say, barring a zombie 9 00:00:42,960 --> 00:00:49,280 Speaker 1: apocalypse or a spontaneous collapse and asset prices, uh, that's 10 00:00:49,280 --> 00:00:51,720 Speaker 1: a lot of you know, if this doesn't happen, this 11 00:00:51,800 --> 00:00:55,200 Speaker 1: won't happen. But I'm wondering what would a zombie apocalypse 12 00:00:55,480 --> 00:00:58,960 Speaker 1: look like to Tony Crosenzi. Well, list note was the 13 00:00:59,000 --> 00:01:02,760 Speaker 1: product of pimco's quarterly cyclical form where we look at 14 00:01:03,200 --> 00:01:05,920 Speaker 1: the global economy a year forward and try to devise 15 00:01:05,959 --> 00:01:09,080 Speaker 1: an investment strategy, and Yolakum Fells was the lead author 16 00:01:09,840 --> 00:01:13,200 Speaker 1: to that um. So the zombie apocalypse, of course, would 17 00:01:13,240 --> 00:01:15,360 Speaker 1: be probably a lot of a few things. One would 18 00:01:15,360 --> 00:01:18,160 Speaker 1: be an inflation breakout, which would cause a federal reserve 19 00:01:18,240 --> 00:01:22,120 Speaker 1: to increase its interest rates substantially and change the climate 20 00:01:22,160 --> 00:01:25,720 Speaker 1: for investors substantially. Think about the stock market, it probably 21 00:01:25,720 --> 00:01:27,720 Speaker 1: would be upset by it, and so would the corporate 22 00:01:27,760 --> 00:01:30,280 Speaker 1: bond market. Another asset class. Can that happen? Is is 23 00:01:30,319 --> 00:01:34,880 Speaker 1: it possible for inflation to accelerate, not gradually, but in 24 00:01:34,920 --> 00:01:37,200 Speaker 1: a kind of alerch higher? Is that? You know? Can 25 00:01:37,200 --> 00:01:39,800 Speaker 1: you wake up one day on a Thursday and find out, 26 00:01:40,080 --> 00:01:43,520 Speaker 1: oh my goodness, oil's gone to seventy five dollars a borrow, 27 00:01:43,560 --> 00:01:46,080 Speaker 1: like the Saudist said, But it's not three, It's still 28 00:01:46,080 --> 00:01:49,920 Speaker 1: only twenty. Let's say eighteen. Well, uh. Jacket Yelling a 29 00:01:49,960 --> 00:01:52,320 Speaker 1: couple of years ago wrote a note on inflation and 30 00:01:52,560 --> 00:01:58,040 Speaker 1: called Inflation Dynamics September, and she did a thorough examination 31 00:01:58,200 --> 00:02:01,880 Speaker 1: of what causes inflation, and what she concluded was that 32 00:02:02,080 --> 00:02:04,360 Speaker 1: the most important driver of inflation is not the month, 33 00:02:04,360 --> 00:02:06,560 Speaker 1: the amount of money that exists and this factor of 34 00:02:06,640 --> 00:02:10,920 Speaker 1: that factor, it's inflation expectations, what people believe. So it 35 00:02:11,040 --> 00:02:13,880 Speaker 1: is a very much a behavioral thing. And since most 36 00:02:13,919 --> 00:02:16,639 Speaker 1: people have the view that inflation will stay low people 37 00:02:16,720 --> 00:02:21,320 Speaker 1: meaning investors, consumers, businesses, it's highly improbable that would break 38 00:02:21,360 --> 00:02:25,600 Speaker 1: out quickly. It would take a major change in the 39 00:02:25,639 --> 00:02:31,360 Speaker 1: central bank sphere for UH investors, consumers, businesses to think 40 00:02:31,400 --> 00:02:35,280 Speaker 1: differently about inflation in the future. So, for example, in eighteen, 41 00:02:35,600 --> 00:02:37,760 Speaker 1: what if inflation picked up as a result of the 42 00:02:37,800 --> 00:02:40,160 Speaker 1: US job was rate falling below four percent, which is 43 00:02:40,200 --> 00:02:42,640 Speaker 1: likely next year since it's currently four point one. What 44 00:02:42,720 --> 00:02:45,880 Speaker 1: if the Fed decided we don't care, we're gonna let 45 00:02:45,960 --> 00:02:49,440 Speaker 1: pick up because it's been so low, then inflation expectations 46 00:02:49,520 --> 00:02:52,840 Speaker 1: would build up, and then who knows, it could go higher. 47 00:02:52,880 --> 00:02:56,639 Speaker 1: But that's improbable. The Federal Reserves learned over multiple decades 48 00:02:57,480 --> 00:03:00,080 Speaker 1: to be cautious about letting inflation pick up, and so 49 00:03:00,120 --> 00:03:03,960 Speaker 1: it's not likely inflation will pick up meaningfully for very long. 50 00:03:04,520 --> 00:03:07,240 Speaker 1: But having said that, in your note, you say there 51 00:03:07,320 --> 00:03:10,040 Speaker 1: is the potential for four rate increases by the Fed 52 00:03:10,120 --> 00:03:13,400 Speaker 1: next year. A little bit more aggressive for sure. So 53 00:03:13,440 --> 00:03:16,919 Speaker 1: we saw the Federal Reserve deliver three interest rate hikes 54 00:03:16,919 --> 00:03:20,760 Speaker 1: in t seventeen. Three seems probable next year, and that's 55 00:03:20,760 --> 00:03:23,959 Speaker 1: what the Federal Reserve itself expects. There were inconsistency, so 56 00:03:24,080 --> 00:03:26,840 Speaker 1: and we were discussing this at PIMCO with or an advisor, 57 00:03:27,240 --> 00:03:31,160 Speaker 1: Van Berninki not mean to name drop here, but he 58 00:03:31,240 --> 00:03:34,360 Speaker 1: noted these inconsistencies as well. And the last Federal Reserve 59 00:03:34,800 --> 00:03:37,800 Speaker 1: Summary of Economic Projections is a quarterly report the FED 60 00:03:37,840 --> 00:03:41,800 Speaker 1: produces that shows projections on economic growth, on employment, and inflation. 61 00:03:41,840 --> 00:03:44,840 Speaker 1: There was a big inconsistent here. It is FED projected 62 00:03:44,880 --> 00:03:47,600 Speaker 1: economic growth like we do have two and a half percent, 63 00:03:48,920 --> 00:03:51,960 Speaker 1: but it did not project a meaningful drop in the 64 00:03:52,080 --> 00:03:55,400 Speaker 1: unemployment rate, nor an increase in inflation, nor an increase 65 00:03:55,400 --> 00:03:58,880 Speaker 1: in interest rate hikes. And so something has to give, 66 00:03:58,960 --> 00:04:03,520 Speaker 1: and that give may mean a fourth rate hike, because 67 00:04:03,560 --> 00:04:06,760 Speaker 1: it probably will mean a lower jobs are real quick 68 00:04:06,760 --> 00:04:08,520 Speaker 1: on this, and the job is the simple math. It's 69 00:04:08,560 --> 00:04:11,320 Speaker 1: called the Oakland's laws. Member Nankee pointed out if job 70 00:04:11,440 --> 00:04:15,000 Speaker 1: if economic growth of two exceeds growth potential, which is 71 00:04:15,040 --> 00:04:17,760 Speaker 1: considered one point eight by seven tenths, the job is right, 72 00:04:17,839 --> 00:04:20,400 Speaker 1: by Oaklan's law, should fall half of that FED in 73 00:04:20,440 --> 00:04:23,240 Speaker 1: his summi economic rejections had only a two tenths drop 74 00:04:23,279 --> 00:04:25,880 Speaker 1: instead of roughly four that Okan's law would say that 75 00:04:25,920 --> 00:04:29,240 Speaker 1: it will drop next year. Hey listen, so might Rich 76 00:04:29,440 --> 00:04:33,400 Speaker 1: Clarida beyond that FED next year maybe thinking about doing 77 00:04:33,440 --> 00:04:35,680 Speaker 1: four rate increases. Of course, there's a report out there 78 00:04:35,760 --> 00:04:38,520 Speaker 1: in the Wall Street Journal, according to those in the 79 00:04:38,640 --> 00:04:42,600 Speaker 1: know that the White House has interviewed Mr Clarida, who's 80 00:04:42,640 --> 00:04:45,760 Speaker 1: of course imagining director at PIMCO, and also some others. 81 00:04:46,360 --> 00:04:48,240 Speaker 1: We talked about this on Bloomberg TV with our Marty 82 00:04:48,279 --> 00:04:52,240 Speaker 1: schenk or Um and any insight you can just give 83 00:04:52,279 --> 00:04:53,840 Speaker 1: pim and me, it's just the three of us. Well, 84 00:04:53,839 --> 00:04:58,559 Speaker 1: they would There would only be one announcement, of course, 85 00:04:58,600 --> 00:05:01,960 Speaker 1: of whether or not Rich Claire his name to the 86 00:05:02,000 --> 00:05:04,280 Speaker 1: Federal Reserve, and that would of course come from the 87 00:05:04,279 --> 00:05:07,760 Speaker 1: White House. But I would say about rich and Uh 88 00:05:07,760 --> 00:05:12,800 Speaker 1: that he's expert, he's exemplary, he's exceptional, and these qualities 89 00:05:12,800 --> 00:05:16,920 Speaker 1: are important. Also he's he's very affable and works well 90 00:05:16,960 --> 00:05:20,719 Speaker 1: with people. This is important collegial. Here's his story I 91 00:05:20,760 --> 00:05:23,560 Speaker 1: have from Alan Greenspan. He visited us when he was 92 00:05:23,600 --> 00:05:26,360 Speaker 1: an advisor to Pempico with Newport Beach, and he said 93 00:05:26,360 --> 00:05:29,280 Speaker 1: that when he joined the FED in seven as FED chair, 94 00:05:29,839 --> 00:05:32,320 Speaker 1: that he learned that it it was the most collegial organization 95 00:05:32,320 --> 00:05:36,120 Speaker 1: he ever worked for. For example, he expected staffers PhD 96 00:05:36,160 --> 00:05:39,480 Speaker 1: staffords to walk into his room with competing views on 97 00:05:40,240 --> 00:05:44,279 Speaker 1: the policy, and instead they were working together. This collegiality 98 00:05:44,400 --> 00:05:48,359 Speaker 1: is something that someone like Rich Clarata would contribute well to. 99 00:05:48,440 --> 00:05:51,560 Speaker 1: It's very important to the institution of the FED and uh, 100 00:05:51,920 --> 00:05:55,440 Speaker 1: Rich of course would be ideally suited if chosen. Can 101 00:05:55,480 --> 00:05:57,120 Speaker 1: I just push back on that, I mean, why do 102 00:05:57,160 --> 00:05:59,920 Speaker 1: you want everybody to agree with each other for the collegiality? 103 00:06:00,040 --> 00:06:02,720 Speaker 1: But this is not agreeing with each other. It's not 104 00:06:03,200 --> 00:06:09,120 Speaker 1: it's providing inputs, right, And somebody says don't raise interestsgiality 105 00:06:09,600 --> 00:06:13,560 Speaker 1: in the Federal Reserve sense means healthy discussion. They're all 106 00:06:13,600 --> 00:06:16,120 Speaker 1: working together with their varied points of view. This is 107 00:06:16,120 --> 00:06:19,039 Speaker 1: something that PIMCO knows well. We hold in our quarterly 108 00:06:19,080 --> 00:06:21,600 Speaker 1: forums and Rich Clarence as head of them. Uh. Two 109 00:06:22,040 --> 00:06:26,680 Speaker 1: people attending U in Newport Beach contributing views. It's a 110 00:06:26,680 --> 00:06:29,880 Speaker 1: flat structure where everyone has a voice. One could have 111 00:06:29,920 --> 00:06:33,320 Speaker 1: no rank at all in terms of official rankings. Of course, 112 00:06:33,440 --> 00:06:36,000 Speaker 1: they have high rankings as human beings. Uh. They could 113 00:06:36,000 --> 00:06:39,320 Speaker 1: be vice president of senior vice president, executive managing director. 114 00:06:39,760 --> 00:06:41,560 Speaker 1: Who who knows? The main thing is that it's a 115 00:06:41,640 --> 00:06:43,719 Speaker 1: voice and it's a it's an input. And this is 116 00:06:43,760 --> 00:06:48,080 Speaker 1: something that which absolutely understands quite well. Exceptionally well. What 117 00:06:48,160 --> 00:06:50,640 Speaker 1: about though? Also we know that Rich served as an 118 00:06:50,640 --> 00:06:54,719 Speaker 1: Economic Policy Assistant Secretary for Economic Policy the Treasury Department 119 00:06:55,120 --> 00:06:58,560 Speaker 1: from O two to oh three, So he comes at 120 00:06:58,600 --> 00:07:04,600 Speaker 1: things with an ponomous background, with a financial background, if 121 00:07:04,640 --> 00:07:06,400 Speaker 1: you will, Will comes at it from a couple of 122 00:07:06,400 --> 00:07:09,320 Speaker 1: different angles, Tony, How might that help the FED, particularly 123 00:07:09,800 --> 00:07:13,000 Speaker 1: in what might come in It's also important to have 124 00:07:13,080 --> 00:07:15,960 Speaker 1: a great Anyone who's appointed to the FED should have 125 00:07:15,960 --> 00:07:19,320 Speaker 1: a great understanding about communications. Remember a great line from 126 00:07:19,320 --> 00:07:22,280 Speaker 1: Bamburnanking his most recent book, The Courage to Act. He 127 00:07:22,360 --> 00:07:24,880 Speaker 1: said that he's repeated this to us at PIMCO, that 128 00:07:24,960 --> 00:07:31,320 Speaker 1: that monetary policies on two percent action communication. In other words, 129 00:07:31,760 --> 00:07:35,240 Speaker 1: what the FED says can affect markets and people's expectations, 130 00:07:35,280 --> 00:07:38,440 Speaker 1: and it's important to have an understanding of that, and 131 00:07:38,480 --> 00:07:43,720 Speaker 1: the understanding of economics and monetary policy historically matters too. 132 00:07:43,880 --> 00:07:46,600 Speaker 1: We spoke about this on television a little while ago, 133 00:07:46,640 --> 00:07:50,480 Speaker 1: Carol about how Ben Bernanke understood the dilemma of the 134 00:07:50,480 --> 00:07:53,920 Speaker 1: Great Depression and how the FED failed in the nineteen 135 00:07:53,960 --> 00:07:57,440 Speaker 1: thirties to produce enough money to prevent a collapse in 136 00:07:57,480 --> 00:07:59,920 Speaker 1: the money supply. The amount of money that existed if 137 00:08:00,000 --> 00:08:02,440 Speaker 1: failed by a third according to Milton Friedman, and it 138 00:08:02,560 --> 00:08:06,440 Speaker 1: was a great contributor to the Great Depression lack of money. Uh. 139 00:08:06,560 --> 00:08:08,880 Speaker 1: Bam Bernanke understood that it was that it was importantly 140 00:08:08,920 --> 00:08:11,520 Speaker 1: printed lots of money, just as corroded did in Japan 141 00:08:11,960 --> 00:08:15,560 Speaker 1: and dragging in Europe. Uh. These are very important things 142 00:08:15,600 --> 00:08:18,480 Speaker 1: to understand. Um, that's a big example, but there are 143 00:08:18,480 --> 00:08:22,120 Speaker 1: a lot of little examples about how knowledge about monetary 144 00:08:22,160 --> 00:08:25,840 Speaker 1: policy can conserve a member of the Federal reserved Quite well, 145 00:08:26,520 --> 00:08:29,320 Speaker 1: do you think it's more it's easier to manipulate people's 146 00:08:29,360 --> 00:08:34,400 Speaker 1: opinions now than it was, let's say, in the nineteen thirties. Yes, Um, so, 147 00:08:34,440 --> 00:08:37,800 Speaker 1: then that apocalypse that you describe, where that sudden change 148 00:08:37,920 --> 00:08:42,400 Speaker 1: in people's expectations is perhaps more likely to happen now 149 00:08:42,400 --> 00:08:47,319 Speaker 1: than it was before we had Twitter, smartphones and sevens. Probably, 150 00:08:47,840 --> 00:08:52,160 Speaker 1: perhaps it's not the that the Fed can convince or 151 00:08:52,240 --> 00:08:56,160 Speaker 1: communicate more. Uh. The temple the speed at which things happen, 152 00:08:56,200 --> 00:08:59,000 Speaker 1: of course as faster, but of course the public could 153 00:08:59,400 --> 00:09:03,400 Speaker 1: could have a fear permier quickly. Think of the movie 154 00:09:03,400 --> 00:09:06,600 Speaker 1: It's Wonderful Life with Jimmy Stewart. Uh, there's a scene 155 00:09:06,760 --> 00:09:09,880 Speaker 1: I recall with a bank run. How do people know 156 00:09:09,960 --> 00:09:12,640 Speaker 1: that there's a bank run occurring in that day and age? 157 00:09:12,640 --> 00:09:15,320 Speaker 1: It's simply where it eventually gets around. Today was simply 158 00:09:15,360 --> 00:09:17,199 Speaker 1: the speed at which it gets around is faster. Now 159 00:09:17,200 --> 00:09:22,440 Speaker 1: you just pound the uh, you know, online button, tweet. 160 00:09:22,559 --> 00:09:24,760 Speaker 1: But I mean if you go to a website and 161 00:09:24,800 --> 00:09:28,040 Speaker 1: it stops working and it's your bank, all of a sudden, 162 00:09:28,120 --> 00:09:31,280 Speaker 1: everybody in the world knows that everything's changed, or a 163 00:09:31,280 --> 00:09:36,359 Speaker 1: tweet or something posted on a social website. Absolutely, communication 164 00:09:36,440 --> 00:09:38,840 Speaker 1: is important to central bankers, and that's one of the 165 00:09:39,040 --> 00:09:42,440 Speaker 1: key things that's keeping interest rates low and make causing 166 00:09:42,440 --> 00:09:45,160 Speaker 1: the yield curve to be flat, as they say, meaning 167 00:09:45,360 --> 00:09:48,000 Speaker 1: short term rates are close to long term rates. Is 168 00:09:48,040 --> 00:09:51,520 Speaker 1: the idea that this communication is calmed investors. They don't 169 00:09:51,559 --> 00:09:54,520 Speaker 1: worry and ask what compensate compensation against the risk of 170 00:09:54,559 --> 00:09:59,400 Speaker 1: higher inflation and higher policy rates anymore. Alright, we're going 171 00:09:59,440 --> 00:10:01,959 Speaker 1: to continue the conversation. We've got more with Tony Krissense, 172 00:10:02,080 --> 00:10:06,560 Speaker 1: Pimco market strategist and portfolio manager. I'm pim Fox along 173 00:10:06,600 --> 00:10:27,600 Speaker 1: with Carol Masser, and this is Bloomberg Surveillance. I'm Carol 174 00:10:27,640 --> 00:10:30,040 Speaker 1: Masser along with Pim Fox. We are in for Tom 175 00:10:30,080 --> 00:10:32,520 Speaker 1: Keene and Jonathan Farrell on this Wednesday. We want to 176 00:10:32,520 --> 00:10:35,000 Speaker 1: talk a little bit about the tax legislation. We mentioned 177 00:10:35,000 --> 00:10:37,679 Speaker 1: earlier about Barkley's taking a one time hit from the 178 00:10:37,760 --> 00:10:40,400 Speaker 1: U S tax bill, but expecting to make it back 179 00:10:40,480 --> 00:10:43,720 Speaker 1: to some extent on future earnings. David Burton is with 180 00:10:43,760 --> 00:10:46,880 Speaker 1: the Heritage Foundation, Senior fellow at the Heritage Foundation. We 181 00:10:46,960 --> 00:10:49,720 Speaker 1: find him on the phone from the nation's capital on 182 00:10:49,880 --> 00:10:52,800 Speaker 1: this Wednesday. David, nice to have you here on Bloomberg Radio. 183 00:10:53,559 --> 00:10:56,760 Speaker 1: This tax proposal, we talked about it earlier, not proposal, 184 00:10:56,840 --> 00:10:59,920 Speaker 1: this new tax legislation overhaul, if you will, we talk 185 00:11:00,080 --> 00:11:07,080 Speaker 1: about it earlier. Greatest benefit really is for corporations. Yes, 186 00:11:07,240 --> 00:11:12,640 Speaker 1: in terms of the positive economic effects, the biggest benefit 187 00:11:13,280 --> 00:11:19,680 Speaker 1: is the reduction and corporate tax rate from which was 188 00:11:19,720 --> 00:11:23,160 Speaker 1: a while it sounds like a lot. Um actually puts 189 00:11:23,200 --> 00:11:26,080 Speaker 1: this in the middle of the pack among industrialized countries. 190 00:11:27,040 --> 00:11:31,640 Speaker 1: Will be at about one state corporate taxes are taken 191 00:11:31,640 --> 00:11:37,080 Speaker 1: into account, but until next week, we're literally the worst 192 00:11:37,800 --> 00:11:41,880 Speaker 1: highest corporate tax rate in the industrialized world. So we've 193 00:11:41,880 --> 00:11:45,720 Speaker 1: made progress. Uh. It also contains a number of other 194 00:11:45,840 --> 00:11:52,040 Speaker 1: provisions that are constructive. Probably the most notable is expensing 195 00:11:52,200 --> 00:11:57,000 Speaker 1: for machinery and equipment for five years, so businesses can 196 00:11:57,040 --> 00:12:00,800 Speaker 1: deduct the cost of buying machinery and witment rather than 197 00:12:00,840 --> 00:12:05,559 Speaker 1: having to deducted over many years, five, seven, ten years um. 198 00:12:06,120 --> 00:12:08,240 Speaker 1: There are a number of other positive things in the 199 00:12:08,280 --> 00:12:14,480 Speaker 1: international tax area that will help US headquartered companies, But 200 00:12:14,600 --> 00:12:17,920 Speaker 1: on the individual side, it's not all that much to 201 00:12:18,160 --> 00:12:22,240 Speaker 1: brag about. It reduces individual tax rates a couple of points, 202 00:12:22,240 --> 00:12:25,080 Speaker 1: but for a lot of people that's taken back immediately 203 00:12:25,200 --> 00:12:28,760 Speaker 1: by the repeal of the state and local tax deduction. David, 204 00:12:28,760 --> 00:12:30,839 Speaker 1: do you believe that the economy is doing fairly well 205 00:12:30,960 --> 00:12:37,720 Speaker 1: right now? Yes? I mean it is just doing reasonably well. 206 00:12:38,360 --> 00:12:42,400 Speaker 1: There's plenty of room for improvement, both in terms of 207 00:12:42,640 --> 00:12:47,440 Speaker 1: investments and productivity gains. But also there's a lot of 208 00:12:47,440 --> 00:12:51,880 Speaker 1: people who aren't encountered as unemployed, who normally would be 209 00:12:51,960 --> 00:12:56,200 Speaker 1: in the workforce. Well, do we know exactly how many 210 00:12:56,240 --> 00:12:59,000 Speaker 1: of those people are there and whether that is what 211 00:12:59,120 --> 00:13:01,679 Speaker 1: is tipping the political scales to force this overhaul of 212 00:13:01,720 --> 00:13:05,240 Speaker 1: the tax code. You can get a cent of how 213 00:13:05,240 --> 00:13:08,600 Speaker 1: many people are there by looking at the broader definitions 214 00:13:08,600 --> 00:13:13,000 Speaker 1: of unemployment that the Beer of Labor Statistics put out. Um, 215 00:13:13,360 --> 00:13:18,360 Speaker 1: they put out lots of different measures. The you know 216 00:13:18,400 --> 00:13:22,000 Speaker 1: that what you usually hear on the radio, uh is 217 00:13:22,240 --> 00:13:26,760 Speaker 1: one measure, but there are broader measures, uh that would 218 00:13:26,760 --> 00:13:31,040 Speaker 1: have unemployment up there. I forget the exact number right now, 219 00:13:31,120 --> 00:13:34,440 Speaker 1: it's but it's about ten. Uh. Those are people who 220 00:13:34,440 --> 00:13:39,520 Speaker 1: have not reported in the conventional unemployment rates. But use 221 00:13:39,600 --> 00:13:43,040 Speaker 1: six is what this is called is is uh. It 222 00:13:43,200 --> 00:13:46,480 Speaker 1: reflects people who have gonna affect given up looking for 223 00:13:46,520 --> 00:13:49,040 Speaker 1: work for the time being. Okay, so I'm just trying 224 00:13:49,040 --> 00:13:51,520 Speaker 1: to understand why would you put together a tax overhaul 225 00:13:51,559 --> 00:13:54,080 Speaker 1: plan at a time that the economy, by your own admission, 226 00:13:54,160 --> 00:13:57,120 Speaker 1: is doing pretty well. And you're pointing to all these 227 00:13:57,120 --> 00:14:00,440 Speaker 1: people that are outside the workforce that perhaps aren't counted. 228 00:14:00,600 --> 00:14:04,080 Speaker 1: And yet Uh, if you've got to pass through corporation, 229 00:14:04,080 --> 00:14:07,760 Speaker 1: you're gonna end up paying what tax? But if you're 230 00:14:07,800 --> 00:14:10,960 Speaker 1: actually working for a pay check, as chances are that 231 00:14:11,000 --> 00:14:13,319 Speaker 1: your tax rate is going to be a lot higher. 232 00:14:13,760 --> 00:14:18,120 Speaker 1: How does that make sense? Well, for one, our labor 233 00:14:18,160 --> 00:14:22,600 Speaker 1: force produci patient rate is that historic loads are near 234 00:14:22,880 --> 00:14:26,480 Speaker 1: those loads. This tremendous number of people not working. It 235 00:14:26,560 --> 00:14:30,400 Speaker 1: could be working, and presumably you would prefer that they 236 00:14:30,560 --> 00:14:35,200 Speaker 1: be working and self sufficient rather than uh collecting the 237 00:14:35,240 --> 00:14:39,040 Speaker 1: disability or unemployment insurance. I don't think anybody argues that, 238 00:14:39,080 --> 00:14:42,040 Speaker 1: but I think the question is how do you make 239 00:14:42,160 --> 00:14:45,880 Speaker 1: how do you maintain this sort of idea that this 240 00:14:46,000 --> 00:14:51,080 Speaker 1: tax overhaul plan that reduces You said it's good for corporations, right, 241 00:14:51,120 --> 00:14:53,360 Speaker 1: I mean it will reduce their tax rate, although most 242 00:14:53,400 --> 00:14:58,600 Speaker 1: companies don't necessarily overseas pay that tax rate. Of how 243 00:14:58,720 --> 00:15:01,880 Speaker 1: is the relevant thing you would think is you would 244 00:15:01,880 --> 00:15:06,400 Speaker 1: want people to invest in producing things here in the 245 00:15:06,480 --> 00:15:09,080 Speaker 1: United States, So why not make the tax cut contingent 246 00:15:09,280 --> 00:15:11,760 Speaker 1: on their actual hiring. I mean you can do that. 247 00:15:11,840 --> 00:15:14,400 Speaker 1: You can put all the details you want into the 248 00:15:14,400 --> 00:15:17,080 Speaker 1: tax code. Why just assume that they're going to do 249 00:15:17,120 --> 00:15:20,480 Speaker 1: it or encourage it? When chief executives have already raised 250 00:15:20,480 --> 00:15:22,400 Speaker 1: their hands and said we're going to buy back stock 251 00:15:22,440 --> 00:15:26,160 Speaker 1: and we're going to increase dividends. Well, we'll do some 252 00:15:26,320 --> 00:15:27,960 Speaker 1: of that, and that's fine. The money that when they 253 00:15:28,040 --> 00:15:30,440 Speaker 1: buy back the stock, that money doesn't disappear. It gets 254 00:15:30,440 --> 00:15:33,720 Speaker 1: reinvested somewhere else, and the market determines where it goes. 255 00:15:33,840 --> 00:15:36,920 Speaker 1: It goes to the generally what people believe will be 256 00:15:36,960 --> 00:15:41,840 Speaker 1: the highest return investments. UH. As you probably are aware, 257 00:15:41,920 --> 00:15:45,600 Speaker 1: a tremendous number of US companies have been leaving, for example, 258 00:15:45,640 --> 00:15:49,000 Speaker 1: Onizer Bushes now Belsenburger King Is now Canadian and selling 259 00:15:49,080 --> 00:15:52,480 Speaker 1: down the line. By reducing our core for tax rate 260 00:15:52,600 --> 00:15:57,880 Speaker 1: and improving the international treatment of US businesses, we're going 261 00:15:57,920 --> 00:16:00,280 Speaker 1: to see less of that. We're going to see more 262 00:16:00,440 --> 00:16:03,320 Speaker 1: factories being built in the United States. We're gonna see 263 00:16:03,320 --> 00:16:06,560 Speaker 1: a higher rates of productivity growth. We're going to see 264 00:16:06,640 --> 00:16:09,680 Speaker 1: a lot of positive things as a result of this legislation. 265 00:16:10,240 --> 00:16:12,920 Speaker 1: But I don't want to oversell this legislation. It is 266 00:16:12,920 --> 00:16:16,440 Speaker 1: a shadow of what it should have been. UH. It's 267 00:16:16,520 --> 00:16:19,960 Speaker 1: probably going to result in two and a half uh 268 00:16:20,120 --> 00:16:23,680 Speaker 1: increase in the GDP or the overall size of the 269 00:16:23,680 --> 00:16:27,600 Speaker 1: economy over the next ten years. It should have been 270 00:16:27,600 --> 00:16:30,560 Speaker 1: more up around the neighborhood of ten percent. This is 271 00:16:30,600 --> 00:16:36,120 Speaker 1: going to be a relatively small positive effect on the 272 00:16:36,120 --> 00:16:40,800 Speaker 1: economy as opposed to the transformational, huge kick in the 273 00:16:40,840 --> 00:16:43,560 Speaker 1: pants that it could have been if they've done it right. 274 00:16:43,720 --> 00:16:45,480 Speaker 1: And let me just point out the Joint Committee on 275 00:16:45,600 --> 00:16:49,160 Speaker 1: Taxation UM, the group within the Congress that really kind 276 00:16:49,160 --> 00:16:52,000 Speaker 1: of figures out, you know, what kind of kick this 277 00:16:52,120 --> 00:16:54,120 Speaker 1: legislation will have. They actually say that it's going to 278 00:16:54,160 --> 00:16:57,760 Speaker 1: be maybe eight tenths of a percent increase to the 279 00:16:57,800 --> 00:17:01,560 Speaker 1: accounty over ten years, so it's a lot less substantial. 280 00:17:02,160 --> 00:17:06,800 Speaker 1: The Joint Committee on Taxation staff basically has a long 281 00:17:07,000 --> 00:17:12,280 Speaker 1: history of underestimating the economic growth effects of any tax legislation. 282 00:17:12,840 --> 00:17:17,080 Speaker 1: That said, you know, I don't want to overseell this legislation. 283 00:17:17,200 --> 00:17:20,159 Speaker 1: It's not going to have magical effects. But David, let 284 00:17:20,160 --> 00:17:22,320 Speaker 1: me ask you. You say that there was a missed opportunity. 285 00:17:22,359 --> 00:17:24,560 Speaker 1: They could have done a lot more. What should they 286 00:17:24,560 --> 00:17:26,679 Speaker 1: have done in your view? Should it have been more 287 00:17:26,680 --> 00:17:30,880 Speaker 1: of an individual tax cut? What? Wow? The biggest thing 288 00:17:30,920 --> 00:17:34,520 Speaker 1: that they failed to do is improve permanently the tax 289 00:17:34,560 --> 00:17:40,280 Speaker 1: treatment of investment in things like factories or technologlogical developments 290 00:17:40,400 --> 00:17:43,879 Speaker 1: on the line. In other words, they did not expense 291 00:17:44,119 --> 00:17:48,679 Speaker 1: capital investment. Uh, they didn't expense structures, they didn't expense 292 00:17:48,720 --> 00:17:53,560 Speaker 1: equipment uh permanently. Uh. They made a lot of other mistakes. 293 00:17:53,600 --> 00:17:56,320 Speaker 1: They kept the capital gains rate where it is. They 294 00:17:56,400 --> 00:18:01,800 Speaker 1: kept the rate on pass through businesses or or individuals 295 00:18:01,920 --> 00:18:05,320 Speaker 1: uh very high and for a lot of people who 296 00:18:05,359 --> 00:18:11,240 Speaker 1: actually see marginal tax rate increases. Uh. So there's then 297 00:18:11,320 --> 00:18:13,320 Speaker 1: I can get into a lot more details, but there's 298 00:18:13,800 --> 00:18:16,000 Speaker 1: a long list of things they did not do to 299 00:18:16,119 --> 00:18:22,399 Speaker 1: improve the tax system, David, If the consequences of the 300 00:18:22,520 --> 00:18:27,520 Speaker 1: overhaul lead to muted growth, in other words, this pop 301 00:18:27,680 --> 00:18:30,880 Speaker 1: that you're describing, or indeed even the stronger economy that's 302 00:18:30,880 --> 00:18:34,000 Speaker 1: being described by the Republicans who passed it, if that 303 00:18:34,040 --> 00:18:37,639 Speaker 1: does not appear, is there a way to put to 304 00:18:37,760 --> 00:18:43,280 Speaker 1: rest the notion that tax cuts fuel economic growth. I 305 00:18:43,320 --> 00:18:48,920 Speaker 1: think it's vertually certain that tax reductions and marginal tax 306 00:18:49,040 --> 00:18:51,960 Speaker 1: rates and reductions in the cost of capital will fuel 307 00:18:52,000 --> 00:18:56,520 Speaker 1: economic growth. That's pretty basic pricetery, pretty basic public finance. 308 00:18:57,160 --> 00:19:00,320 Speaker 1: It's not the tax cuts per se has and do 309 00:19:00,359 --> 00:19:03,520 Speaker 1: its sort of kensy and multipliers and things like that. 310 00:19:03,840 --> 00:19:06,159 Speaker 1: It's the fact that people are economically rational and if 311 00:19:06,160 --> 00:19:07,880 Speaker 1: they can get a higher rate of return, they're more 312 00:19:07,920 --> 00:19:10,720 Speaker 1: likely to invest, they're more likely to work, they're more 313 00:19:10,760 --> 00:19:16,480 Speaker 1: likely to say uh. And so I don't think we'll 314 00:19:16,480 --> 00:19:19,760 Speaker 1: get over that because I think it's almost incontrovertibly true. 315 00:19:20,800 --> 00:19:23,640 Speaker 1: But then the question is how do you do that? 316 00:19:24,480 --> 00:19:27,440 Speaker 1: And reducing marginal tax race is part of it. Reducing 317 00:19:27,480 --> 00:19:30,160 Speaker 1: the cost of capital as part of it. This bill 318 00:19:31,000 --> 00:19:34,879 Speaker 1: or or legislation does improve those things, but it's not 319 00:19:35,040 --> 00:19:38,359 Speaker 1: nearly as dramatic as it could have been, should have 320 00:19:38,400 --> 00:19:41,320 Speaker 1: been as not as as dramatic as it started out. 321 00:19:41,800 --> 00:19:45,240 Speaker 1: They ended up having to keep a long laundry list 322 00:19:45,280 --> 00:19:49,919 Speaker 1: of special tax provisions uh and and various things on 323 00:19:49,960 --> 00:19:53,119 Speaker 1: the individual side. It don't affect by people off because 324 00:19:53,160 --> 00:19:57,359 Speaker 1: there they needed virtually every Republican vote to get it done. 325 00:19:57,840 --> 00:19:59,960 Speaker 1: All right, well, we're gonna leave it there, but thanks 326 00:20:00,080 --> 00:20:02,560 Speaker 1: very much at David Burton. Looking forward to having you 327 00:20:02,600 --> 00:20:04,840 Speaker 1: in the new year and to go over the effects 328 00:20:04,840 --> 00:20:08,400 Speaker 1: of the attacks overhaul plan. David Burton is the Heritage 329 00:20:08,400 --> 00:20:13,040 Speaker 1: Foundation's Senior Fellow in Economic policy on the tax plan. 330 00:20:13,080 --> 00:20:15,639 Speaker 1: You're listening to Bloomberg Surveillance. I'm Pim Fox along with 331 00:20:15,760 --> 00:20:31,320 Speaker 1: Carol Masser. I'm Carol Masser along with the wonderful Pim 332 00:20:31,359 --> 00:20:34,080 Speaker 1: Fox right here on Bloomberg Radio. We are in for 333 00:20:34,280 --> 00:20:37,040 Speaker 1: Jonathan Farroll and Tom Keene. We do want to talk 334 00:20:37,080 --> 00:20:39,040 Speaker 1: a bit about the economic outlook what it might mean 335 00:20:39,080 --> 00:20:41,720 Speaker 1: for FED policy. Joining us right now is Kevin Cummins. 336 00:20:42,000 --> 00:20:46,120 Speaker 1: He's senior US economist at NatWest Market, joining us on 337 00:20:46,320 --> 00:20:49,920 Speaker 1: the phone from I Believe, Connecticut. Kevin, good to have 338 00:20:49,960 --> 00:20:52,160 Speaker 1: you here on Bloomberg Radio. You look at the outlook, 339 00:20:52,200 --> 00:20:54,119 Speaker 1: you look at the economic outlook. There are folks that 340 00:20:54,160 --> 00:20:57,240 Speaker 1: come on and they are optimistic about what's to come. 341 00:20:57,600 --> 00:21:01,480 Speaker 1: They continue to see growth into one eighteen summer. Tempering 342 00:21:01,480 --> 00:21:04,080 Speaker 1: it back, Where are you, hi, Good morning, Well, thanks 343 00:21:04,080 --> 00:21:07,159 Speaker 1: for having me Carol. Um. Yeah, we're pretty optimistic on 344 00:21:07,200 --> 00:21:11,040 Speaker 1: the overall outlook. We think the expansion is going to continue. Um, 345 00:21:11,240 --> 00:21:14,199 Speaker 1: we're looking for growth this year right around two and 346 00:21:14,200 --> 00:21:17,480 Speaker 1: a half percent and to gradually accelerate into next year 347 00:21:17,520 --> 00:21:21,439 Speaker 1: closer to I want to know about automobile sales and 348 00:21:21,640 --> 00:21:24,960 Speaker 1: what what weight you give those to your outlook, because 349 00:21:25,000 --> 00:21:27,560 Speaker 1: it looks as though we are set for the first 350 00:21:27,600 --> 00:21:31,600 Speaker 1: decline full year sales decline since the Great Recession. And 351 00:21:31,640 --> 00:21:33,600 Speaker 1: I know that there are a lot of statistics that 352 00:21:33,680 --> 00:21:38,119 Speaker 1: you know, exclude automobiles, They exclude energy, whether that's inflation. 353 00:21:38,400 --> 00:21:40,880 Speaker 1: But I'm wondering if you could talk about automobile sales 354 00:21:40,920 --> 00:21:44,320 Speaker 1: and how you figured that that flows into the economy. Yeah, 355 00:21:44,400 --> 00:21:48,400 Speaker 1: I mean, obviously, the manufacturing more broadly is an important 356 00:21:48,480 --> 00:21:51,680 Speaker 1: sector of the economy. In particular, autos drives a lot 357 00:21:51,680 --> 00:21:56,280 Speaker 1: of manufacturing UM and as you mentioned, those are set 358 00:21:56,359 --> 00:22:01,520 Speaker 1: to moderate, although more recent months you've seen very strong 359 00:22:01,640 --> 00:22:04,919 Speaker 1: demand in the wake of the hurricanes, which impacted a 360 00:22:04,960 --> 00:22:08,399 Speaker 1: lot of UH. You know, replacement automobiles have picked up 361 00:22:08,880 --> 00:22:11,600 Speaker 1: in the in the wake of that. UH. In fact, 362 00:22:11,760 --> 00:22:15,440 Speaker 1: we're looking for a nice rebound that will get at 363 00:22:15,440 --> 00:22:18,240 Speaker 1: the start of the year a pretty healthy reading close 364 00:22:18,280 --> 00:22:21,200 Speaker 1: to eighteen million units at an annualized rate. So that's 365 00:22:21,240 --> 00:22:26,399 Speaker 1: a very strong, probably unsustainable pace. More broadly, UM, but 366 00:22:26,680 --> 00:22:29,240 Speaker 1: this year we're looking for a closer to about a 367 00:22:29,280 --> 00:22:31,920 Speaker 1: seventeen million unit rate when it's all said and done 368 00:22:31,960 --> 00:22:35,160 Speaker 1: for the twelve months of the year UM, and we're 369 00:22:35,200 --> 00:22:38,200 Speaker 1: looking for that to be pretty much sustained into two 370 00:22:38,240 --> 00:22:41,639 Speaker 1: thousand and eighteen. As the consumers and still pretty healthy shape. 371 00:22:42,000 --> 00:22:44,719 Speaker 1: Do you think that consumer is in healthy enough shape 372 00:22:44,720 --> 00:22:47,439 Speaker 1: to actually buy one of these new cars, because the 373 00:22:47,520 --> 00:22:51,200 Speaker 1: Kelly Blue Book says that the average sticker price paid 374 00:22:51,280 --> 00:22:56,040 Speaker 1: for a new vehicle is nearly thirty six thousand dollars. 375 00:22:56,080 --> 00:22:58,280 Speaker 1: That's up two percent from a year earlier. Those are 376 00:22:58,280 --> 00:23:01,919 Speaker 1: November figures. Yeah, those are big numbers. But uh, you know, 377 00:23:02,000 --> 00:23:05,200 Speaker 1: with the sort of labor market that we've gotten, Um, 378 00:23:05,320 --> 00:23:08,080 Speaker 1: you know, it's the consumers seems to be kind of 379 00:23:08,119 --> 00:23:10,680 Speaker 1: firing on all cylinders as we headed into the start 380 00:23:10,720 --> 00:23:13,040 Speaker 1: of the year. Do you think that they'll be able 381 00:23:13,080 --> 00:23:15,160 Speaker 1: to continue to afford it whether they put cash down 382 00:23:15,160 --> 00:23:18,320 Speaker 1: which is unlikely, but more likely to borrow or lease. Yeah, 383 00:23:18,359 --> 00:23:20,760 Speaker 1: that's kind of the American way. I mean, you know, 384 00:23:20,800 --> 00:23:23,640 Speaker 1: the labor market has remained very solid. If you look 385 00:23:23,680 --> 00:23:26,920 Speaker 1: at payroll growth, we've averaged about a hundred and seventy 386 00:23:26,960 --> 00:23:29,560 Speaker 1: five or so thousand jobs over the last twelve months 387 00:23:29,600 --> 00:23:33,679 Speaker 1: or so. UM. The employment report that we'll get at 388 00:23:33,720 --> 00:23:35,879 Speaker 1: the start of the year suggests that the consumer is 389 00:23:35,920 --> 00:23:41,159 Speaker 1: likely to have have a pretty good uh wherewithal to 390 00:23:41,359 --> 00:23:44,440 Speaker 1: spend h to start two thousand and eighteen. And now 391 00:23:44,480 --> 00:23:46,560 Speaker 1: that you've gotten a little bit of momentum in the 392 00:23:46,680 --> 00:23:50,199 Speaker 1: overall economy as we head into the year, uh, you know, 393 00:23:50,240 --> 00:23:54,199 Speaker 1: when people are reminded U that confidence is high. We'll 394 00:23:54,240 --> 00:23:56,679 Speaker 1: get a reading in that in a little bit with 395 00:23:56,760 --> 00:23:59,800 Speaker 1: the Conference Board measure. But but by all indications, there's 396 00:23:59,800 --> 00:24:02,120 Speaker 1: no reason to suggest that there's going to be any 397 00:24:02,160 --> 00:24:05,520 Speaker 1: sort of pull back from the consumer sector as two 398 00:24:05,400 --> 00:24:08,399 Speaker 1: thousand eighteen starts. All Right, Kevin Cummins, I'm a half 399 00:24:08,600 --> 00:24:11,399 Speaker 1: glassful kind of girl. I'm just going to say that 400 00:24:11,440 --> 00:24:15,720 Speaker 1: I'm pretty optimistic. UM. Having said that, we have seen 401 00:24:15,720 --> 00:24:18,959 Speaker 1: this economic cycle go on for some time. I know 402 00:24:19,160 --> 00:24:21,240 Speaker 1: there isn't a mark on the calendar that just says, okay, 403 00:24:21,280 --> 00:24:24,280 Speaker 1: time for the economy to turn down. But what is 404 00:24:24,320 --> 00:24:27,639 Speaker 1: it that you're watching out for, um to see a 405 00:24:27,680 --> 00:24:32,320 Speaker 1: different twist in this economic cycle? Uh, is a recession 406 00:24:33,080 --> 00:24:37,000 Speaker 1: at all on the outlook for you? UM, not for 407 00:24:37,160 --> 00:24:40,640 Speaker 1: the next day, twelve or so months. I put the odds. 408 00:24:40,760 --> 00:24:44,639 Speaker 1: I mean, normally there's probably a chance of about ten percent, 409 00:24:44,680 --> 00:24:47,239 Speaker 1: and any given expansion that you can uh, you know 410 00:24:47,320 --> 00:24:49,679 Speaker 1: that a recession is going to come. So I I 411 00:24:49,760 --> 00:24:53,400 Speaker 1: put the odds somewhere close to that, maybe ten fifteent 412 00:24:53,480 --> 00:24:56,320 Speaker 1: odds that you're gonna get experience a recession in the 413 00:24:56,320 --> 00:24:59,240 Speaker 1: next twelve months. But you know, there's no real warning 414 00:24:59,320 --> 00:25:02,040 Speaker 1: signs in fundamentals for the economy. As I mentioned, the 415 00:25:02,119 --> 00:25:05,960 Speaker 1: labor market remains very solid. We've seen good uh income 416 00:25:06,000 --> 00:25:08,440 Speaker 1: growth if you look at wages and salaries last week. 417 00:25:08,440 --> 00:25:11,479 Speaker 1: We've got personal income and spending and it showed wages 418 00:25:11,480 --> 00:25:15,160 Speaker 1: and salary growth over four percent, So you know, that's 419 00:25:15,240 --> 00:25:18,359 Speaker 1: a very healthy pace for the consumer. And given that 420 00:25:18,440 --> 00:25:22,560 Speaker 1: the consumer uh AfD account for import growth is probably 421 00:25:22,600 --> 00:25:26,479 Speaker 1: about six or so of the overall economy. Um, you 422 00:25:26,480 --> 00:25:30,160 Speaker 1: know that that right there suggests that your overall economy 423 00:25:30,280 --> 00:25:32,800 Speaker 1: is in pretty healthy shape. I mean, one of the 424 00:25:32,840 --> 00:25:36,320 Speaker 1: more positive things as we head into two thousand eighteen, 425 00:25:36,440 --> 00:25:40,280 Speaker 1: especially in the wake of the UH plan for the 426 00:25:40,320 --> 00:25:46,280 Speaker 1: tax cuts, our business investment, and by all indications, we're 427 00:25:46,359 --> 00:25:51,280 Speaker 1: likely to see UH further acceleration from that perspective. So 428 00:25:51,600 --> 00:25:53,720 Speaker 1: you know, you add that to the consumers part, and 429 00:25:53,760 --> 00:25:57,120 Speaker 1: you're you know, almost or so there. Does it also 430 00:25:57,200 --> 00:26:01,000 Speaker 1: mean no more inflation? And then that becomes maybe problem addict? Yeah, 431 00:26:01,000 --> 00:26:05,679 Speaker 1: I mean, inflation, surprisingly enough has been as soft as 432 00:26:05,760 --> 00:26:09,000 Speaker 1: it is, you know, trending below two percent, and the 433 00:26:09,080 --> 00:26:13,040 Speaker 1: Fed is obviously, uh pretty sensitive to that idea. So 434 00:26:13,080 --> 00:26:17,800 Speaker 1: I think, you know, the overall inflation backdrop doesn't suggest 435 00:26:17,840 --> 00:26:20,160 Speaker 1: that you're going to get any sort of real upside 436 00:26:20,240 --> 00:26:25,679 Speaker 1: risk inflation here, but probably more gradual UH pace of 437 00:26:25,840 --> 00:26:29,680 Speaker 1: somewhere around one and three quarters to two percent over 438 00:26:29,720 --> 00:26:32,159 Speaker 1: the next year or two. Kevin Cumming see is the 439 00:26:32,560 --> 00:26:52,240 Speaker 1: net West as senior economist. Our guest is r J. 440 00:26:52,440 --> 00:26:57,240 Speaker 1: Gallo of Federated Investors, Senior portfolio manager, Head of Duration Committee, 441 00:26:57,640 --> 00:27:03,280 Speaker 1: r J. Gallow. What is a duration committee? Our Duration 442 00:27:03,320 --> 00:27:08,600 Speaker 1: Committee is a group of senior portfolio managers traders are 443 00:27:08,640 --> 00:27:12,000 Speaker 1: Global fixed Incomes CEO Bob A. Strowski, and we convene 444 00:27:12,920 --> 00:27:16,679 Speaker 1: every month and sometimes more frequently to look across the 445 00:27:16,720 --> 00:27:19,479 Speaker 1: factors that we believe are driving us interest rates and 446 00:27:19,520 --> 00:27:23,359 Speaker 1: to set the duration governor that then permeates through the 447 00:27:23,359 --> 00:27:26,320 Speaker 1: intermed and long term bond portfolios or firm managers. So, 448 00:27:26,960 --> 00:27:29,600 Speaker 1: since durations one driver of bond returns, we try to 449 00:27:29,640 --> 00:27:32,879 Speaker 1: bring together minds from across the fixed income group to 450 00:27:33,080 --> 00:27:36,760 Speaker 1: set duration targeting that is then followed, you know, with 451 00:27:36,760 --> 00:27:39,640 Speaker 1: with judgment by the portfolio managers of the various portfolios 452 00:27:39,640 --> 00:27:42,479 Speaker 1: we run. Okay, can you give us an example of 453 00:27:42,600 --> 00:27:47,040 Speaker 1: how the group has changed its recommendation so that we 454 00:27:47,200 --> 00:27:53,520 Speaker 1: understand the mechanism by which it kind of implements these decisions. Yeah. Absolutely, 455 00:27:53,600 --> 00:27:59,080 Speaker 1: Every fixed income portfolio Federated has a strategy relevant benchmark. 456 00:27:59,320 --> 00:28:02,080 Speaker 1: So for example, of the Total Return Bond Fund, which 457 00:28:02,119 --> 00:28:08,080 Speaker 1: is our largest um investment grade portfolio multi sector across treasuries, corporates, 458 00:28:08,800 --> 00:28:13,399 Speaker 1: high yielder, emerging markets, et cetera. Has managed relative to 459 00:28:13,560 --> 00:28:17,480 Speaker 1: the Barkley's Aggregate Index UM. The out index, of course, 460 00:28:17,520 --> 00:28:21,320 Speaker 1: has a duration, and the duration committee Our output is 461 00:28:21,600 --> 00:28:26,040 Speaker 1: to provide a recommended percentage of that index duration that 462 00:28:26,080 --> 00:28:29,159 Speaker 1: the portfolio manager should follow, but they're given latitude around it. So, 463 00:28:29,200 --> 00:28:32,640 Speaker 1: for example, UM, for much of this year, we've expected 464 00:28:33,359 --> 00:28:37,919 Speaker 1: treasury yields to rise, and as a result, we have 465 00:28:37,960 --> 00:28:43,120 Speaker 1: been recommending a duration typically between ninety to sometimes seven 466 00:28:43,160 --> 00:28:47,160 Speaker 1: and a half. So being short your benchmark duration because 467 00:28:47,160 --> 00:28:49,920 Speaker 1: we anticipated as yields rise, being short would give you 468 00:28:49,920 --> 00:28:56,800 Speaker 1: opportunities for relative out performance. When the tax package passed 469 00:28:56,960 --> 00:28:59,400 Speaker 1: and as it was working its way through Congress, what 470 00:28:59,520 --> 00:29:01,920 Speaker 1: did you guys go back to your offices and sit 471 00:29:01,960 --> 00:29:03,440 Speaker 1: down and work and say, Okay, here's what we need 472 00:29:03,480 --> 00:29:06,360 Speaker 1: to think about different portfolios as a result of this. 473 00:29:06,440 --> 00:29:11,600 Speaker 1: What changed? That's a great question, UM. Interestingly enough, you know, 474 00:29:11,640 --> 00:29:14,120 Speaker 1: there's a lot of times we talk about you know, 475 00:29:14,280 --> 00:29:16,480 Speaker 1: everybody's been expecting yolks to rise for for a very 476 00:29:16,520 --> 00:29:19,880 Speaker 1: long time, and oftentimes people focus on the tenure of treasury. 477 00:29:19,880 --> 00:29:22,000 Speaker 1: But if you go back and you look at the 478 00:29:22,080 --> 00:29:26,120 Speaker 1: yield on the Bloomberg Barkley's Treasury Index, which is the 479 00:29:26,120 --> 00:29:29,880 Speaker 1: treasure component of the of the agg UH. That index 480 00:29:30,040 --> 00:29:35,320 Speaker 1: yield was eight basis points um at one. It's two 481 00:29:35,680 --> 00:29:39,320 Speaker 1: and twenty four basis points as of yesterday's close. On 482 00:29:39,360 --> 00:29:42,520 Speaker 1: this calendar year alone, it's risen thirty five basis points, 483 00:29:42,600 --> 00:29:45,320 Speaker 1: driven primarily by the fact that the two years up 484 00:29:45,360 --> 00:29:48,400 Speaker 1: seventy plus basis points and the five years up thirty 485 00:29:48,400 --> 00:29:51,040 Speaker 1: as is the three year up almost sixty. The tenure, 486 00:29:51,080 --> 00:29:53,720 Speaker 1: on the other hand, is about where it started the year, 487 00:29:54,240 --> 00:29:56,880 Speaker 1: So we've had a massive flattening almost a twisting is 488 00:29:56,960 --> 00:30:00,120 Speaker 1: better term of the Treasury Yon curve. The fifth a 489 00:30:00,200 --> 00:30:02,680 Speaker 1: policy change that you just brought up the tax bill. 490 00:30:03,160 --> 00:30:06,040 Speaker 1: You know, we've been talking all year long, what will 491 00:30:06,080 --> 00:30:09,000 Speaker 1: the Trump administration and the Republican Capital will be able 492 00:30:09,000 --> 00:30:13,440 Speaker 1: to deliver with respect to significant changes in fiscal policy, 493 00:30:13,520 --> 00:30:17,960 Speaker 1: to include taxes, to include healthcare UH, and to include 494 00:30:18,200 --> 00:30:21,479 Speaker 1: deregulation and on that last point, the regulation. They've been 495 00:30:21,560 --> 00:30:27,400 Speaker 1: quietly making significant changes UM which arguably are stimulative at 496 00:30:27,440 --> 00:30:29,800 Speaker 1: least in the short run. As businesses feel that the 497 00:30:29,840 --> 00:30:34,080 Speaker 1: administration UH and Washington d C. Broadly speaking, UH, is 498 00:30:34,320 --> 00:30:37,400 Speaker 1: somewhat more business friendly. It's a it's a sentiment builder, 499 00:30:37,440 --> 00:30:39,200 Speaker 1: if you will, and they've been delivering on that for 500 00:30:39,240 --> 00:30:42,000 Speaker 1: a long time. Healthcare, we know what happened there, Uh, 501 00:30:42,040 --> 00:30:44,960 Speaker 1: you know, got closed, didn't change it. Um. And then 502 00:30:45,000 --> 00:30:49,320 Speaker 1: ultimately we felt that the failure on Obamacare would increase 503 00:30:49,360 --> 00:30:52,959 Speaker 1: the probability of a major tax bill being passed and 504 00:30:53,040 --> 00:30:56,600 Speaker 1: signed into law. We felt that the political imperative of 505 00:30:56,720 --> 00:30:59,640 Speaker 1: the somewhat fractious Republican Party between the White House and 506 00:30:59,680 --> 00:31:02,680 Speaker 1: Capital Hill. Um, they all shared common interest and they 507 00:31:02,720 --> 00:31:05,240 Speaker 1: needed to move forward, and we thought the tax about 508 00:31:05,280 --> 00:31:07,360 Speaker 1: would happen to be frank we thought it would be 509 00:31:07,400 --> 00:31:11,360 Speaker 1: signed in Q one eighteen UM. But that political imperative 510 00:31:11,360 --> 00:31:15,160 Speaker 1: was very motivating and it got signed in so. Um. 511 00:31:15,320 --> 00:31:18,080 Speaker 1: The the progress that we expected, in fact did manifest 512 00:31:18,080 --> 00:31:20,640 Speaker 1: themselves a little sooner than we expected. Uh. And we 513 00:31:20,680 --> 00:31:23,600 Speaker 1: do think it's going to be somewhat stimulative. UM. I 514 00:31:23,720 --> 00:31:26,040 Speaker 1: have questions about sort of the content of the tax cut. 515 00:31:26,080 --> 00:31:28,440 Speaker 1: I've heard some of your interview earlier with the individual 516 00:31:28,480 --> 00:31:30,680 Speaker 1: from the Heritage Foundation, and you were asking some some 517 00:31:30,760 --> 00:31:33,560 Speaker 1: of the questions I would ask so UM, but generally speaking, 518 00:31:33,560 --> 00:31:36,000 Speaker 1: I think the short term stimulative nature of the tax 519 00:31:36,000 --> 00:31:39,120 Speaker 1: cut is it's hard to deny. Long term, we worry 520 00:31:39,120 --> 00:31:42,680 Speaker 1: about deficits. So in the near term, the simple fact 521 00:31:42,760 --> 00:31:46,520 Speaker 1: that the deficits will probably go up. UM. I'm a 522 00:31:46,520 --> 00:31:48,640 Speaker 1: believer in dynamic scoring, but I'm also believed that the 523 00:31:48,640 --> 00:31:51,360 Speaker 1: tax cuts don't pay for themselves. History has not proven 524 00:31:51,400 --> 00:31:55,280 Speaker 1: that to be true. That suggests that it's one argument 525 00:31:55,320 --> 00:31:58,640 Speaker 1: for staying short duration. UH. There'll be more treasuries issued. 526 00:31:58,840 --> 00:32:00,600 Speaker 1: Happens to come at a time the FED will be 527 00:32:00,640 --> 00:32:04,560 Speaker 1: buying fewer treasuries. Uh. Supply and demand matter in everything, 528 00:32:04,800 --> 00:32:06,960 Speaker 1: and they should matter in the treasury market. So we 529 00:32:07,000 --> 00:32:10,720 Speaker 1: think that the trajectory of treasury yield generally speaking should 530 00:32:10,760 --> 00:32:14,320 Speaker 1: be upwards. The curve has been a massive twister. UM. 531 00:32:14,440 --> 00:32:17,440 Speaker 1: Don't know if that will last. Possible, some near term steepening, 532 00:32:17,440 --> 00:32:19,680 Speaker 1: in fact, will occur as you see a little bit 533 00:32:19,720 --> 00:32:23,720 Speaker 1: more economic stimulus, as you see inflation slowly building, UH, 534 00:32:23,760 --> 00:32:26,680 Speaker 1: and as you see more treasury issuance with less demand 535 00:32:26,680 --> 00:32:28,840 Speaker 1: from the FAT all at the same time. So our 536 00:32:28,920 --> 00:32:31,080 Speaker 1: view on the tax bill was that this is in 537 00:32:31,200 --> 00:32:34,400 Speaker 1: line with our anticipation that yields should be rising, and 538 00:32:34,400 --> 00:32:36,800 Speaker 1: it was one of the factors we considered in making 539 00:32:36,800 --> 00:32:38,840 Speaker 1: sure that we stayed short, you know, in the nineties, 540 00:32:38,880 --> 00:32:42,160 Speaker 1: if you will, relative to index duration as we got 541 00:32:42,200 --> 00:32:44,200 Speaker 1: through the fourth quarter of this year. R J. Gallow 542 00:32:44,480 --> 00:32:47,600 Speaker 1: Over at Federated Senior vice president, senior portfolio manager and 543 00:32:47,640 --> 00:32:50,280 Speaker 1: head a municipal bond investment group and also head of 544 00:32:50,320 --> 00:33:00,040 Speaker 1: the Duration Committee at Federated. Thanks for listening to a 545 00:33:00,040 --> 00:33:06,480 Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, 546 00:33:06,840 --> 00:33:11,080 Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at 547 00:33:11,120 --> 00:33:15,320 Speaker 1: Tom Keene before the podcast. You can always catch us worldwide. 548 00:33:15,840 --> 00:33:16,920 Speaker 1: I'm Bloomberg Radio.