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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene with

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Speaker 1: David Gura. Daily we bring you insight from the best

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Speaker 1: of economics, finance, investment, and international relations. Find Bloomberg Surveillance

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Speaker 1: on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course

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Speaker 1: on the Bloomberg. One of these David Gurr and I

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Speaker 1: like to do is paint the picture of our geography

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Speaker 1: and as the movie of years ago, the Russians are coming.

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Speaker 1: The Russians are coming, David. If you're in Richmond, which

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Speaker 1: is like a d twelve percent Republican, they're coming because

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Speaker 1: they're commuting from Richmond into Washington, and this is east

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Speaker 1: and north of Richmond, Henrico County. They're coming, and they're

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Speaker 1: changing the demographics of any given district, including the seventh

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Speaker 1: District of Virginia. And the representative of that district is

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Speaker 1: when Dave Bratt, Congressman Dave Bratt, who's also remember the

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Speaker 1: House Budget Committee, an important committee as we look ahead

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Speaker 1: to the prospects for taxi from he joins us now

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Speaker 1: on our phone lines, so we can get into the

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Speaker 1: difficulties of that commute between Richmond and Washington a little

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Speaker 1: bit of your cars if you if you want, But

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Speaker 1: let me just ask you where we stand in this process.

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Speaker 1: I spoke to your chairwoman yesterday, Diane Black from Capitol Hill,

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Speaker 1: and she assured me she thinks there's going to be

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Speaker 1: a vote on Thursday on the budget resolution. Where do

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Speaker 1: things stand as you see it? Yeah, right now? I

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Speaker 1: mean we're we're standing by the basic architecture, which is good, right.

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Speaker 1: I mean that that just means the corporate rate passed

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Speaker 1: through twenty five, repatriation, some money coming back from abroad,

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Speaker 1: and then a Middle Class Act cut. And we're flashing

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Speaker 1: out the details right, which are huge and significant over

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Speaker 1: the past few weeks. We've been holding meetings every day.

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Speaker 1: But the real deal will be whether we can keep

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Speaker 1: the pay for us right if we lose all we're

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Speaker 1: trying to get rid of some of that deductions and loophole's,

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Speaker 1: special interests and all that kind of thing. If you

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Speaker 1: get rid of those, uh, those are the pay for

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Speaker 1: is that help to reduce tax rates for the middle class.

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Speaker 1: And so that's the big deal. And so that's gonna

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Speaker 1: be fighting off the swamp. You're gonna hear everybody in

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Speaker 1: the nation, right, every special interest on K. Street coming

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Speaker 1: up here and saying, hey, don't get rid of my

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Speaker 1: special deduction. And if you don't do that, then you

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Speaker 1: can't give as much shut to the middle class until

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Speaker 1: the small business escorp. And so just roughly speaking, that's

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Speaker 1: where we're at, Carson Brot. You've been there for for

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Speaker 1: a few years now. You know that when that begins

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Speaker 1: to happen, when the special interest is send on capital

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Speaker 1: whom begin meeting with you and your colleagues, that tends

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Speaker 1: to slow the process down. How worried are you that

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Speaker 1: as a result of that, as a result of so

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Speaker 1: many people trying to get a piece of this or

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Speaker 1: change parts of it. Uh, it's going to become increasingly difficult,

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Speaker 1: something that's already being positive as being increasingly difficult, it's

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Speaker 1: gonna get even harder. Yeah, well, that that's the major concern.

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Speaker 1: I mean, the Freedom Caucus, weep in the warriors, we

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Speaker 1: get hit over the head every day for try end

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Speaker 1: of the halt spending up here. The deficit this year

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Speaker 1: under our own leadership at six six six billion, right,

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Speaker 1: not a good number for many reasons, and so we're

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Speaker 1: working on the spending part. But we have agreed to

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Speaker 1: forego some savings, right, we find two billion mandatory savings. Uh,

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Speaker 1: in order to keep the process moving, because everybody sees

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Speaker 1: what the Senate did last time on healthcare, they just

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Speaker 1: space planet. And so that's the challenge. We got to

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Speaker 1: keep keep the momentum. Do you see what the gentleman

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Speaker 1: there from the Prince and Theological Seminary did, Tom, Yeah,

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Speaker 1: I saw that. I you know, I don't even want

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Speaker 1: to go there. I'm gonna, you know, end up with

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Speaker 1: you know, the hate the congressman, the hate mail will

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Speaker 1: all come to me. Um, what I want to know,

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Speaker 1: Dave brad As, you came out of the common sense

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Speaker 1: of Hope College, Calm Zoom, Michigan. You came out of

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Speaker 1: the common sense of Virginia, the fabric of Virginia. You

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Speaker 1: did the the upset meeting air cancer and all that

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Speaker 1: years ago. And now you've got to be a deficit

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Speaker 1: responsive a Republican. How many of of of you guys

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Speaker 1: are there out there? I mean, at some point, does

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Speaker 1: puppy gets scored? Everybody figures out the math and we're

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Speaker 1: going to expand the deficit based on everything I've read.

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Speaker 1: Are you going to push back against that? Yeah? I

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Speaker 1: mean we we always do. We push back, but this

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Speaker 1: one I taught college kids for twenty years. Right, and

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Speaker 1: so the real deal the swamp is the spending. Right

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Speaker 1: that it's untouchable. We tried so hard at the fine savings,

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Speaker 1: and the Democrat budget never gets brought up. Right, But

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Speaker 1: the Democrat Progressive cocus hundred votes two weeks ago. They

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Speaker 1: attack increase attacks increase of ten trillion, which raises the

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Speaker 1: debt and deficit even. But but here's a critical question.

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Speaker 1: I put in a well, let me let me just quickly.

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Speaker 1: We I put in a debt a debt sealing increased

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Speaker 1: uff balanced budget amendment gets fifty votes, No Democrats and

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Speaker 1: very few Republicans. It's tough. This is critical. Whether it's

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Speaker 1: kalamazoomas Michigan where you went to college, or it's some

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Speaker 1: you know, rich establishment Republicans at the Jefferson Hotel in Richmond.

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Speaker 1: Are they gonna squawk about a ballooning deficit or not? No? Nope,

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Speaker 1: nope they're not. I mean that That's why I wish

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Speaker 1: more Americans would really raise a ruckets over the spending,

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Speaker 1: because that is the crucial problem up here. But the

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Speaker 1: Democrats racked up another ten trillion under Bush. We didn't

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Speaker 1: do great, that's the continuing but we have a hundred

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Speaker 1: trillion and unfunded liabilities to the kids. Right so, with

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Speaker 1: a straight face, the only thing I can offer that

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Speaker 1: twenty year old kid is hey, medicare so security. They're

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Speaker 1: all in trouble, they're upside down insolvent. The only thing

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Speaker 1: I can offer you with a straight face right now

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Speaker 1: is a is an economy that we're gonna try to

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Speaker 1: pop where you better jump in, get yourself skilled up,

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Speaker 1: and get ready to compete in the global workforce. And

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Speaker 1: that's it. You better go, David Garra, jump in here,

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Speaker 1: because I'm gonna start waxing microeconomics and no one wants

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Speaker 1: though he would know no, well, of course the academics.

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Speaker 1: I'm thinking back to what Senator Flake said yesterday. He's

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Speaker 1: talking about his regrets, his regrets about the political process.

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Speaker 1: Diane Black told me yesterday she's not completely happy with

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Speaker 1: the budgets it stands now. She wanted a more conservative

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Speaker 1: budget than the one she's gonna end up having to

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Speaker 1: vote for. Pass on to to all of your your colleagues.

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Speaker 1: Given all of that, how much enthusiasm do you have

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Speaker 1: for passing this, this budget, do you see it here

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Speaker 1: is nothing more than than a necessity to get to

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Speaker 1: taxi form. How would you characterize your enthusiasm for the

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Speaker 1: document as it stands now, Well, for the document as

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Speaker 1: it stands now, I'm very enthused. But you know, on healthcare,

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Speaker 1: we were we said we're gonna repeal Obama Care and

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Speaker 1: then we're gonna have free market principles and competition. And

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Speaker 1: then the first bill out of the shoot is this

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Speaker 1: huge federal government thing. And so you see what the

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Speaker 1: swamp can do to good ideas. They just get crushed

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Speaker 1: and then you get down to skinny bill and then

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Speaker 1: down to nothing. So if we keep this current document,

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Speaker 1: this will pop the economy probably one percent, right, we'll

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Speaker 1: go from two pers that the three. In fact, we're

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Speaker 1: growing at three the real economy right, the markets are right,

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Speaker 1: the real economy is up about three on the expectation

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Speaker 1: that we put this into place in the future. If

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Speaker 1: we don't do that, hopefully Okay, But the raging debate

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Speaker 1: right now is led by Dr Hassett, chairman of the

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Speaker 1: President's Council of Economic Advisors, and opposing him are more

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Speaker 1: Democrat economists like Dr Krugman of Princeton and UH secretary

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Speaker 1: former Secretary Treasurer Lawrence SMRs, but many Republican economists as well,

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Speaker 1: is a certitude the tax reform will lead to growth

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Speaker 1: in a prosperous middle class outside Richmond, Virginia. Do you

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Speaker 1: buy that sequence that will lead to growth in the

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Speaker 1: middle class? Yes, yeah, yeah, I do. I mean that's

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Speaker 1: where the the Democrats and Republicans get into a brawl, right.

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Speaker 1: The Republicans are not afraid to say we want to

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Speaker 1: pump up the supply side of the economy. Mean, the

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Speaker 1: supply side is everybody who gets up in the morning,

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Speaker 1: it sets an alarm, clod goes to work, right, supply curve,

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Speaker 1: that's everyone in business. The Democrats make fun of the

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Speaker 1: supply curve. Okay, but will those benefits Congress, Will those

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Speaker 1: benefits owned go to the fancy big houses around the

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Speaker 1: University of Richmond? Are they going to go to some

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Speaker 1: place twelve miles east of the Richmond Airport? Yeah? No.

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Speaker 1: There's there's a huge economic literature out there on this

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Speaker 1: stuff on the A S Corp And even decorps stuff.

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Speaker 1: Corporations don't pay taxes, right, so they gotta They're they're

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Speaker 1: not people so somebody pay taxes sev of the rate

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Speaker 1: reductions to corporations as corps go to way journals right,

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Speaker 1: and we got to do better on even there which

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Speaker 1: way journals right in the distribution. We want to make

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Speaker 1: sure it does get through the middle but the middle class,

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Speaker 1: the lower middle class. The worst thing you can do

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Speaker 1: right in Bernank you said this after the financial crisis

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Speaker 1: is lose those skills. We lost half the value of

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Speaker 1: the stock market in Bernankan greenspans. That's not the worst part.

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Speaker 1: The worst part is for the poor and the lower

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Speaker 1: income boas the skill loss that they will lose, and

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Speaker 1: the psychological health right as you get from place from

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Speaker 1: the workforce and you lose your psychological happiness, that's the damage.

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Speaker 1: Dave Brad, thank you so much. The seventh District of

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Speaker 1: Virginia as well. I might point out, Mr Gurrow, that

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Speaker 1: the gentleman that figured that out was Laurence Summers, writing

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Speaker 1: with Olivia Blanchard in about this is Bloomberg. David. You

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Speaker 1: know he publishes every day and it's always interesting, but

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Speaker 1: yesterday it was particularly meant. Greg Villier, why don't you

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Speaker 1: bring up in value giving us important perspective on what's

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Speaker 1: going on in Washington, both the legislatively politically policy wise

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Speaker 1: as well. He is with harizes investments and joins us

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Speaker 1: on our phone lines s Greg this morning. And you know,

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Speaker 1: you focus on distractions in the way by which the

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Speaker 1: press it might be able to to harness them. We

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Speaker 1: certainly had a big one yesterday, uh, distracting from the

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Speaker 1: legislative agenda, as he and Senator Corker went back and

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Speaker 1: forth on Twitter and the cable networks as well. What

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Speaker 1: do you make of how all of this played out

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Speaker 1: and what are the ramifications of it going to be?

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Speaker 1: As we pointed out a couple of times on the

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Speaker 1: show this morning, the timetable here for tax ref him

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Speaker 1: is tight. Yeah, two points I make good morning data.

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Speaker 1: First of all, I think that the fundamentals of the

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Speaker 1: economy still dominate the markets, and the fundamentals are good

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Speaker 1: despite all of the nonsense and the tweets in Washington.

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Speaker 1: The second point I'd make is that Trump should go

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Speaker 1: to church today and thank the Lord for the story

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Speaker 1: in the Washington Post last night that apparently indicates that

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Speaker 1: Hillary Clinton and the Democratic Party funded this group that's

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Speaker 1: putting together opposition research at dossier on Trump. Trump can

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Speaker 1: now claim who is adoring basement, there's a conspiracy to

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Speaker 1: get him, and there's some justifications for him to say

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Speaker 1: that this is a big piece by Adimantus of the

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Speaker 1: Post who's heading off to to the New York are

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Speaker 1: big investigative report for them, And indeed the President did

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Speaker 1: tweet about this shortly after you. You sent out your note.

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Speaker 1: This warning, Greg, so predictive as always. Uh, what's what's

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Speaker 1: the fallout from this going to be? I'm sure you

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Speaker 1: listen to Senator Flake speak on the Senate floor yesterday,

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Speaker 1: heard what he had to say about the faults of

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Speaker 1: the institution right now and of the party system and

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Speaker 1: politics generally. What's the fallout from that going to be? Well,

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Speaker 1: I don't think it matters that much for Trump's base.

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Speaker 1: Trump's based despised traders like Flake, as Flake never would

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Speaker 1: have won renomination in Arizona, and now Trump's based of

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Speaker 1: believes it's all fake news anyway, has this news story

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Speaker 1: this morning, and there's also the uranium story. So Trump's

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Speaker 1: bass I think we'll hang in there, and as long

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Speaker 1: as they do, he's innoculated. Is Trump's base correlated with

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Speaker 1: his declining poll numbers. Well, the declining poll numbers, Tom,

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Speaker 1: are largely because Independence have abandoned him. Democrats already had,

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Speaker 1: so the three segments, you've got two of three that

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Speaker 1: have abandoned him. But as long as the Republicans support him,

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Speaker 1: a lot of members of the Senate are too afraid

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Speaker 1: to speak out. I mean, I look at this Greg

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Speaker 1: and the sea change, and you know yesterday where they

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Speaker 1: could actually lose the House and the Democrats could take

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Speaker 1: the House. Which of those three is a dynamics Democrats

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Speaker 1: actually show up to vote, or Independence are the game changers?

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Speaker 1: Or is it about the president's loyal base leaving him?

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Speaker 1: Which is it? Well, I I think there's a bit

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Speaker 1: of all three. But I'd add one other thing, Tom,

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Speaker 1: and that is money. Money is just flowing into Democrats

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Speaker 1: and running for House seats. The Republicans are stunned, with

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Speaker 1: a lot of angry Democrats out there. What did you

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Speaker 1: make of I mean, we we have insight into what

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Speaker 1: the President had to say to Republican senators yesterday, but

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Speaker 1: he did make the trip up to Capitol Hill to

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Speaker 1: speak at that Weekly Policy at luncheon. What do you

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Speaker 1: make of him doing that? And what role do you

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Speaker 1: see him playing here. He said it to Dallas tonight.

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Speaker 1: I believe he's going to speak at a rally there

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Speaker 1: and it's gonna do fundraising as well. Where do you

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Speaker 1: see President Trump playing a role when it comes to

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Speaker 1: advance and tax reform at this point, Well, yesterday was

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Speaker 1: a nice pep rally, but I would have to say

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Speaker 1: that there's a growing risk that he's going to be meddlesome.

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Speaker 1: He's going to be like George Steinburner used to be

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Speaker 1: with the Yankees. He's going to micro manage the state

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Speaker 1: and local tax, on the estate tax, so on issue

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Speaker 1: after issue, Republicans have to look over their shoulders to

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Speaker 1: see if he's going to second guess them, And does

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Speaker 1: that highlight greg the fundamental problem here, which is we

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Speaker 1: don't really have a Donald Trump policy or White House

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Speaker 1: policy when it comes to taxes, just as we don't

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Speaker 1: or didn't when it comes to healthcare reform as well.

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Speaker 1: You have Republicans on Capitol Hill debate in the four

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Speaker 1: one K provision the tax code, for instance, we didn't

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Speaker 1: know up until that point how the President felt about it. Yeah,

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Speaker 1: basically what he wants is a victory period. Details are

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Speaker 1: all very fluid. And negotiable. But he does wantit, and

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Speaker 1: I still think he's going to get a tax bill.

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Speaker 1: I just think getting it done between now and the

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Speaker 1: end of the year is a long shot. There's just

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Speaker 1: too many divisive issues. It's probably going to come at

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Speaker 1: the end of the winter. I think you'll get a

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Speaker 1: deal finally. Okay, so it gets a deal, but that

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Speaker 1: means the Senate, I believe the correct me. If I'm Roy,

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Speaker 1: it's you know, I flung civics, But I believe the

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Speaker 1: Senate has to vote for it. Maybe Mr Corker, Mr

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Speaker 1: Flaker upset. Maybe Mr Paul is unpredictable. Is there a

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Speaker 1: fourth Senator Greg Villiers watching? Well? No, if the three

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Speaker 1: would do it, Let's say the Democrats all say no,

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Speaker 1: that's not certain, but it's problems. Then if they lose

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Speaker 1: just two votes, that means pants would have to break

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Speaker 1: a tie. If they lose three votes, they lose. Okay,

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Speaker 1: But who's the fourth senator you're watching? I mean, I

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Speaker 1: don't have time to watch all this song and dance

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Speaker 1: like you and David Gura. Who who's the name that

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Speaker 1: you're watching besides Paul flake in Corker? Maybe I think

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Speaker 1: mccan will vote for it. I think Susan Collins will

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Speaker 1: vote for the tax bill. I think those are the

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Speaker 1: only three that you could look at say they could defect.

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Speaker 1: And again it's the three deffect that's a big problem

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Speaker 1: for the walk us through the timetable here if you would,

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Speaker 1: as I mentioned, the timetable is tight. What are the

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Speaker 1: things you're going to be watching for? His indicators that

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Speaker 1: this may or may not happen, could happen as you say,

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Speaker 1: in early winter, might happen by the end of the year. Well,

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Speaker 1: first of all, you've got to get tomorrow a vote

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Speaker 1: on the budget resolution, which everyone thought would be easy

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Speaker 1: coming out of the House, just to reaffirm what the

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Speaker 1: Senate did. But a lot of House members are upset

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Speaker 1: over the state and local tax break being rescinded, a

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Speaker 1: lot of moderate Republicans from the Northeast, for example, So

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Speaker 1: that could be a close vote on Thursday. Then the

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Speaker 1: next thing to look for is next week, Kevin Brady,

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Speaker 1: the ways in these Committee Chairman will unveil his bill.

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Speaker 1: It will be controversial. You can't do make an omelet

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Speaker 1: without breaking eggs, and I think there will be a

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Speaker 1: lot of controversial proposals Once we get that done, you know,

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Speaker 1: maybe by early December we get the Senate moving. But

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Speaker 1: I just think the one final point I'd make, there's

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Speaker 1: going to be a huge budget fight in early December

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Speaker 1: because the budget expires. I think Schumer, Schumer and others

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Speaker 1: are going to have a field day with that. Another

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Speaker 1: reason why we don't get taxes this year. When do

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Speaker 1: we get a scoring? Im sing phrase, the phrase is

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Speaker 1: an amateur? When do we get a scoring of all

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Speaker 1: this text bleather in the next couple of weeks once?

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Speaker 1: Really that soon it comes up? Yeah, I think so,

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Speaker 1: And I'm sure people will say it only favors the wealthy,

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Speaker 1: that aggravates populus on the left and on the right.

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Speaker 1: That's still another reason why this is maybe going to

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Speaker 1: have a few speed bumps during the month of December.

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Speaker 1: What's the fallout ben from this back and forth between

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Speaker 1: Kevin Hassett at the White House Laurence Summer's professorate at

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Speaker 1: Harvard University Paul crew and jumping into the phrase as well,

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Speaker 1: what's the fallout bet in Washington? From that? This debate

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Speaker 1: over the integrity of of of economic research in Washington today.

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Speaker 1: Although there's lives, there's damn lives, and then there's statistics,

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Speaker 1: and you can prove anything you want with statistics. I

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Speaker 1: think that this is a theological issue. It's not a

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Speaker 1: mass issue. And I think that theologically you've got enough

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Speaker 1: Republicans united to pass a bill. Randall crossing or at

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Speaker 1: the Boost School Chicago teaches that course greg theology and

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Speaker 1: micro economics. So it's a really it's a barn burner.

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Speaker 1: We say good morning to all out at the Boost

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Speaker 1: School Chicago, which is where I actually, as somebody say

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Speaker 1: this once in a lectured at a e A. Yes,

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Speaker 1: what we do with Chicago's we teach microeconomics and then

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Speaker 1: we teach more microeconomics. Correct, thank you for a perspective

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Speaker 1: on Washington and the politics. It's out there. As David,

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Speaker 1: I'm so glad you brought up that question. I'm gonna

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Speaker 1: put out the Krugman article with a great classic marginal

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Speaker 1: chart of economics. It's complex for Kruman rights that like

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Speaker 1: everybody knows this, well, guess what, David, they don't they

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Speaker 1: go down in flames freshman year looking at some of

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Speaker 1: these dynamics. But to your wonderful point, David, it is

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Speaker 1: about an adult conversation on theory and law that we

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Speaker 1: know versus Gregg says the theology of it all, and

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Speaker 1: I think, as Lauren Sumbrys would say, it's about the

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Speaker 1: integrity of these institutions as well. He says that he's

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Speaker 1: watched Council of Economic Advisors chairman defend their positions before

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Speaker 1: the President not operate within the political framework of a

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Speaker 1: given White House. And the point he's making here is

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Speaker 1: that's what should be continuing. And uh, I'm scheduled to

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Speaker 1: speak with Kevin Hassett on Friday at one o'clock PM,

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Speaker 1: so we'll see what he has to say about to

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Speaker 1: all of the conversation surrounding that first paper he wrote

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Speaker 1: about corporate tax reforhim and its effect on individuals. This

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Speaker 1: is Bloomberg Surveillance. On Bloomberg Radio, David Gura and Tom

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Speaker 1: Keane in New York. Michael Purvis joins us now with

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Speaker 1: Weed and there's like eight things to talk about. We

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Speaker 1: don't have a time for that. David, I know you

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Speaker 1: want to get the vix. I gotta go back to

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Speaker 1: your wonderful call on weak Asia currencies versus the US

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Speaker 1: dollar you held it. And then right now we've got

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Speaker 1: the oddest thing we've got the dollar strengthening, an Asia

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Speaker 1: currency strengthening at the same time discuss well, there's uh,

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Speaker 1: you know, the dollar has been of course rawling since

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Speaker 1: early September, so many different currencies there, and to a

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Speaker 1: certain degree that was a relief rally right after Trump's

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Speaker 1: election that you know, the dollar surge, and then after

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Speaker 1: the inauguration, the dollar tended to get weaker and weaker

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Speaker 1: and weaker. And if if you if you overlay the

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Speaker 1: d x Y chart or for that matter, the b

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Speaker 1: d x Y chart with Trump's approval ratings, you'll see

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Speaker 1: a very obvious correlation, right and to me that that's

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Speaker 1: that's a statement about the Trump call if you will

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Speaker 1: falling out of the money so brilliantly said, is strong

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Speaker 1: US dollar now a Washington political strong dollar? Well, it's

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Speaker 1: certainly a big part of that. That coin. If if

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Speaker 1: if tax gets further attraction here, yes, you're gonna see

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Speaker 1: the dollar that d x Y get up to the

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Speaker 1: high nineties. I would I would suspect that I do

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Speaker 1: three point eight three now, David, girl, but but, but,

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Speaker 1: but Tom, when you referenced you know, my a d

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Speaker 1: x Y discussions and its relationship to the vix from

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Speaker 1: you know, in the aftermath of the shocked de val

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Speaker 1: in China in August of two thousand and fifteen. You know,

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Speaker 1: China is a different China right now, um. And and

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Speaker 1: one of the themes that I think is is very

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Speaker 1: resonant is that if you look at the China PPI data, um,

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Speaker 1: the correlation of that over the last twenty four months

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Speaker 1: since since I made that, uh call um, the correlation

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Speaker 1: of that with forward inflation in the US has been

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Speaker 1: extraordinarily strong. Uh. You know, it's it's there are squared

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Speaker 1: is about point eight there and so so the China

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Speaker 1: PPI you have to watch when you're talking of when

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Speaker 1: you're having a US inflation discussion. It dipped in Q

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Speaker 1: two along with our inflation, and then in July and

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Speaker 1: August and in September it the pp I continued to recover.

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Speaker 1: And I think that feeds into Janet's you know, sort

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Speaker 1: of full damn the torpedo, full speed ahead. David. All

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Speaker 1: you gotta know about China inflation, it's all about pork you,

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Speaker 1: David min Let me ask you what you've you've heard

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Speaker 1: from the FED chair on the subject of inflation. If

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Speaker 1: you agree with you that we're seeing through transitory effects here,

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Speaker 1: and al's just that what do you make the introspection

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Speaker 1: that we've heard from her when she's spoken Cleveland, for instance,

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Speaker 1: she talked about the problems of modeling, She talked about

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Speaker 1: technologies rule in all of this as well. Do you

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Speaker 1: see that the conversation about inflation evolving? It's evolving. I

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Speaker 1: don't think it's evolving as as faster clip as as

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Speaker 1: some of us would like to see it. Um, you

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Speaker 1: know what, I what I look at the data dependency narrative.

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Speaker 1: That that to me, to my mind, that's a way

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Speaker 1: of saying our Phillips curves are kind of broken, or

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Speaker 1: at least how they distorted, and we're making it up

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Speaker 1: as we as we go along. And I think that's fair.

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Speaker 1: I think that was a good that that's to my mind,

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Speaker 1: sensible policy. I think the question is is there's this

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Speaker 1: you know, we are in a different place here than

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Speaker 1: we were before the financial crisis in terms of the

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Speaker 1: rate of technological adoption uh and and and the implications

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Speaker 1: for um for inflation. And I think there's there's there's

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Speaker 1: a much more nuanced discussion on inflation and how the

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Speaker 1: FED models need to be calibrated, David very quickly here, David, uh,

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Speaker 1: the tenure yield at two point for seven percent is

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Speaker 1: now three standard deviations higher yield. That's not like a crisis,

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Speaker 1: it's not like a plunge. But that's that's a yield

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Speaker 1: market that's moving with a vengeance three standard deviations on

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Speaker 1: the tenure yield. I rarely say that. Let me ask

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Speaker 1: you about what you're you're expecting to hear from the

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Speaker 1: e c B tomorrow. From a market perspective, how much

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Speaker 1: does the size of of a taper matter. Well, what

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Speaker 1: I've been arguing for for for some time now, I

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Speaker 1: think three years maybe, is that the short end is

427
00:22:39,520 --> 00:22:43,040
Speaker 1: really governed by US economic data and and the FED.

428
00:22:43,119 --> 00:22:46,399
Speaker 1: Of course, the long end is really governed since QUI

429
00:22:46,560 --> 00:22:49,520
Speaker 1: started in Europe um by by Mario Draggy, and so

430
00:22:50,040 --> 00:22:52,359
Speaker 1: you know, we we we have our QT announced and

431
00:22:52,480 --> 00:22:54,800
Speaker 1: articulated the ten billion going to fifty over the next

432
00:22:54,800 --> 00:22:56,920
Speaker 1: twelve months here in the US. But to my mind,

433
00:22:57,240 --> 00:22:59,680
Speaker 1: whether there's two point four or five percent yield becomes

434
00:22:59,720 --> 00:23:01,760
Speaker 1: a two point six five percent yield or two point

435
00:23:01,800 --> 00:23:04,440
Speaker 1: two five percent yield, it's gonna hinge much more on

436
00:23:04,480 --> 00:23:07,200
Speaker 1: what Mario Draggy says and does, and then not just tomorrow,

437
00:23:07,280 --> 00:23:11,160
Speaker 1: but in the in the coming weeks, I'm gonna suggest

438
00:23:11,200 --> 00:23:14,200
Speaker 1: that he's could have probably take a conservative and gentle

439
00:23:14,320 --> 00:23:17,120
Speaker 1: path for the markets. And the fact that this we're seeing,

440
00:23:17,200 --> 00:23:19,080
Speaker 1: this sort of rate surge here is not going to

441
00:23:19,119 --> 00:23:21,960
Speaker 1: be lost on Mario drag Um, even if his boons

442
00:23:22,000 --> 00:23:24,359
Speaker 1: are not moving quite as dramatically. I'll mentioned the vix

443
00:23:24,440 --> 00:23:25,760
Speaker 1: Let me let me just ask you about what it's

444
00:23:25,760 --> 00:23:28,000
Speaker 1: going to take to to catalyze that move upwards some

445
00:23:28,119 --> 00:23:30,720
Speaker 1: I mean, it's been stuck very much around I guess

446
00:23:30,800 --> 00:23:33,320
Speaker 1: nine ten eleven here for for weeks and weeks and weeks. Well,

447
00:23:33,359 --> 00:23:35,400
Speaker 1: I would first say that I think there's a there's

448
00:23:35,440 --> 00:23:37,560
Speaker 1: a scenario here where I think we'll see eight prints

449
00:23:37,600 --> 00:23:40,800
Speaker 1: and seven prints on the vix Um between now and

450
00:23:40,880 --> 00:23:43,240
Speaker 1: the end of the year. Um I know that sounds

451
00:23:43,240 --> 00:23:45,320
Speaker 1: an outlier case, and I'm not saying that that that's

452
00:23:45,359 --> 00:23:47,480
Speaker 1: a probable case. I'm saying it's a very real scenario.

453
00:23:48,200 --> 00:23:50,399
Speaker 1: Um uh. And And if you go back, you know,

454
00:23:50,440 --> 00:23:52,400
Speaker 1: we all think about the vick starting in nineteen ninety,

455
00:23:52,440 --> 00:23:54,440
Speaker 1: which it did, but if you go look at realized

456
00:23:54,480 --> 00:23:57,440
Speaker 1: by in nineteen sixty four, you had levels much lower

457
00:23:57,480 --> 00:23:58,920
Speaker 1: than they are right now. And if you had a

458
00:23:59,000 --> 00:24:01,960
Speaker 1: VIX back in nineteen six sixty five, you would see

459
00:24:02,000 --> 00:24:04,800
Speaker 1: the VICK sprints of six, seven and eight. And if

460
00:24:04,840 --> 00:24:07,280
Speaker 1: you look at you know, the Q four melt up

461
00:24:07,320 --> 00:24:10,800
Speaker 1: scenario into year end with a you know, a performance

462
00:24:10,880 --> 00:24:14,920
Speaker 1: chasing dynamics and uh, you know, decent enough growth and

463
00:24:15,040 --> 00:24:17,359
Speaker 1: let's assume the dollar and rates you know, are are

464
00:24:18,119 --> 00:24:20,160
Speaker 1: our friendly in that in that environment, we don't get

465
00:24:20,160 --> 00:24:22,880
Speaker 1: any major shocks that way, Um, I could see really

466
00:24:23,000 --> 00:24:25,439
Speaker 1: this bleed up just draining realized and draining the VIX.

467
00:24:25,800 --> 00:24:28,240
Speaker 1: This is really important what Mr Purvis just said. They're

468
00:24:28,280 --> 00:24:32,840
Speaker 1: folks to review this. A VIX of twenties average crisis

469
00:24:33,000 --> 00:24:35,840
Speaker 1: is thirty forty thing Lehman lows and all that. We've

470
00:24:35,920 --> 00:24:39,000
Speaker 1: come down with a massive bullmarket to a quiet of

471
00:24:39,119 --> 00:24:43,520
Speaker 1: twelve eleven ten, rarely a nine. You say we're going

472
00:24:43,560 --> 00:24:48,040
Speaker 1: to drive to an evermore quiescent VIX. Why what's gonna

473
00:24:48,040 --> 00:24:50,080
Speaker 1: be the driving force? Is it going to be sheer

474
00:24:50,200 --> 00:24:54,480
Speaker 1: price appreciation of the SMP five right now? You know

475
00:24:54,600 --> 00:24:57,720
Speaker 1: within the SMP five hundred, which is what what drives

476
00:24:57,760 --> 00:25:00,159
Speaker 1: the VIX, is that you have a few few, few

477
00:25:00,280 --> 00:25:04,479
Speaker 1: very favorable factors. You have, you have a very healthy

478
00:25:04,720 --> 00:25:08,359
Speaker 1: sector rotation. You have stretched valuation, so so the market

479
00:25:08,359 --> 00:25:10,800
Speaker 1: doesn't leap up every day or or every week. It

480
00:25:11,000 --> 00:25:14,560
Speaker 1: sort of bleeds up, grinds up. Uh. There, And that's

481
00:25:14,560 --> 00:25:17,280
Speaker 1: a recipe for low realized volatility. And if low, if

482
00:25:17,600 --> 00:25:22,440
Speaker 1: volatility continue, is perceived to stay low um and and

483
00:25:22,560 --> 00:25:25,119
Speaker 1: I would argue you can get even lower um. You know,

484
00:25:25,160 --> 00:25:28,880
Speaker 1: against that that backdrop, you you will see the VIX

485
00:25:29,119 --> 00:25:32,400
Speaker 1: get repriced. And we've already taken out that that lifetime

486
00:25:33,160 --> 00:25:35,880
Speaker 1: low print on the vix. Uh just two weeks ago.

487
00:25:36,040 --> 00:25:38,120
Speaker 1: I think we could you know, start seeing eight handles

488
00:25:38,400 --> 00:25:40,400
Speaker 1: again before between now and the end of the year,

489
00:25:41,200 --> 00:25:43,760
Speaker 1: you highlight the convergency of we're talking about the dollar.

490
00:25:44,200 --> 00:25:46,160
Speaker 1: It's earning season as well. We're gonna get a premier

491
00:25:46,200 --> 00:25:47,680
Speaker 1: here from Dave Wilson just a little bit about what

492
00:25:47,760 --> 00:25:51,639
Speaker 1: he's he's watching, What does that convergion convergence mean, and

493
00:25:51,720 --> 00:25:53,719
Speaker 1: what have you observed in this earning season thus far?

494
00:25:55,440 --> 00:25:57,399
Speaker 1: To clarify the question talking about more about how the

495
00:25:57,440 --> 00:26:01,120
Speaker 1: earning the trajectory of earnings is. Yes, well, you know, look,

496
00:26:01,200 --> 00:26:03,440
Speaker 1: I I think like the Q three sort of coming in,

497
00:26:04,119 --> 00:26:07,119
Speaker 1: you know, slightly better than expectations, more or less like

498
00:26:07,280 --> 00:26:09,680
Speaker 1: several almost every quarter of the last few years. Have

499
00:26:09,920 --> 00:26:12,760
Speaker 1: I think the companies have gotten this game down, that

500
00:26:12,880 --> 00:26:15,240
Speaker 1: it's an algorithm they run with the cell side where

501
00:26:15,280 --> 00:26:18,879
Speaker 1: they make sure to beat earnings in aggregate um, you know,

502
00:26:18,960 --> 00:26:22,080
Speaker 1: by decent number. Of course, there's always several single stock exceptions,

503
00:26:22,119 --> 00:26:24,960
Speaker 1: but if you look at the the the entire group,

504
00:26:25,040 --> 00:26:27,320
Speaker 1: they tend to you know, beat unrevenues being un earnings

505
00:26:27,400 --> 00:26:30,000
Speaker 1: and and so forth. The big question is is Q four,

506
00:26:30,160 --> 00:26:32,040
Speaker 1: which of course we won't know till mid late winter,

507
00:26:32,520 --> 00:26:34,920
Speaker 1: how it really comes in. It's not going to be

508
00:26:35,080 --> 00:26:37,480
Speaker 1: what the market is expecting year over a year, it

509
00:26:37,480 --> 00:26:40,040
Speaker 1: will be more like Q three eight nine. Michael Purvis,

510
00:26:40,160 --> 00:26:42,320
Speaker 1: thank you so much, greatly appreciate it. With Wheeden and

511
00:26:42,400 --> 00:26:46,480
Speaker 1: again the idea here is uh two ideas. They're the

512
00:26:46,680 --> 00:26:49,000
Speaker 1: interesting dynamics of the dollar in a d x y,

513
00:26:49,400 --> 00:26:52,200
Speaker 1: the Asian dollar, and also of course Vic's dynamics. Just

514
00:26:52,320 --> 00:26:55,200
Speaker 1: extraordinary John Tucker working on the headlines to get that

515
00:26:55,280 --> 00:27:12,080
Speaker 1: out of the Bloomberg terminal. This is an immense joy

516
00:27:12,240 --> 00:27:16,080
Speaker 1: we have with us today. Two people in a building

517
00:27:16,240 --> 00:27:19,200
Speaker 1: Wells Fargo research capability. One of them is a familiar

518
00:27:19,320 --> 00:27:22,919
Speaker 1: name to us. Michael Mayo is senior analysts with Wells Fargo.

519
00:27:23,320 --> 00:27:25,840
Speaker 1: I believe he covers banks too big to succeed or

520
00:27:25,880 --> 00:27:27,720
Speaker 1: too big to buy or too big to hold, or

521
00:27:28,119 --> 00:27:30,960
Speaker 1: whatever it is, the big banks. And joining him is

522
00:27:31,000 --> 00:27:35,400
Speaker 1: his colleague Michael Schumacher from Wells Fargo, who I knew

523
00:27:35,480 --> 00:27:38,640
Speaker 1: for years under the combine at u BS and Michael,

524
00:27:39,000 --> 00:27:41,080
Speaker 1: let me start with you with the new sols. Nice

525
00:27:41,119 --> 00:27:43,760
Speaker 1: of you to bring us higher yields. I'm surprised you

526
00:27:43,800 --> 00:27:48,160
Speaker 1: almost didn't cancel the interview. Are we at a tipping point?

527
00:27:48,280 --> 00:27:51,480
Speaker 1: When you look at the vector on a log y

528
00:27:51,600 --> 00:27:54,800
Speaker 1: axis of two year ten uere thirty year bond? Is

529
00:27:54,880 --> 00:27:58,080
Speaker 1: there something special in the Pixie does of this week

530
00:27:58,119 --> 00:28:01,320
Speaker 1: of October? It's I do think there's something special, and

531
00:28:01,359 --> 00:28:03,200
Speaker 1: that is you've got a big shift in central bank

532
00:28:03,240 --> 00:28:06,040
Speaker 1: policy globally. Certainly over here people talk about the FED,

533
00:28:06,119 --> 00:28:08,119
Speaker 1: but it's not just the Fed. For instance, tomorrow, the

534
00:28:08,240 --> 00:28:10,159
Speaker 1: u c B is probably going to announce the cutback

535
00:28:10,200 --> 00:28:12,960
Speaker 1: and its purchases second time this year. We think it

536
00:28:13,040 --> 00:28:15,359
Speaker 1: goes down to forty billion euro per month. That's a

537
00:28:15,400 --> 00:28:17,879
Speaker 1: fifty percent cut on the year. When you think about

538
00:28:17,920 --> 00:28:20,080
Speaker 1: the FED, look at the probability of a decent rate height.

539
00:28:20,160 --> 00:28:22,359
Speaker 1: Now it's eighty percent plus and two months ago it

540
00:28:22,440 --> 00:28:25,000
Speaker 1: was probably thirty. Bank of England is likely to tighten

541
00:28:25,080 --> 00:28:26,959
Speaker 1: next month or next week. Actually I don't think that's

542
00:28:26,960 --> 00:28:28,560
Speaker 1: a great idea, but they'll probably do it anyway. So

543
00:28:28,640 --> 00:28:31,640
Speaker 1: you've got three big central banks, the trifecta in play,

544
00:28:31,680 --> 00:28:33,400
Speaker 1: and I think that's the big change that we've filed

545
00:28:33,440 --> 00:28:35,040
Speaker 1: over the last couple of months. It's just good for

546
00:28:35,160 --> 00:28:37,000
Speaker 1: your world. I mean, I know you're not on speaking

547
00:28:37,160 --> 00:28:39,520
Speaker 1: terms of concenta, but when you look at my shoemaker,

548
00:28:40,160 --> 00:28:42,440
Speaker 1: is this good for the banking world? That maybe we're

549
00:28:42,440 --> 00:28:48,800
Speaker 1: actually normalizing. This entire environment has been the long aftermath

550
00:28:48,920 --> 00:28:51,640
Speaker 1: of the financial crisis. I mean, the idea of quantitative

551
00:28:51,720 --> 00:28:54,360
Speaker 1: easing has never been done to this level before, and

552
00:28:54,360 --> 00:28:57,400
Speaker 1: the reverse of quantitative easing has never happened before, so

553
00:28:57,880 --> 00:29:00,680
Speaker 1: there's a lot of uncertainties. Having said that, getting back

554
00:29:00,760 --> 00:29:03,560
Speaker 1: to a more normal environment would be good for the banks.

555
00:29:04,160 --> 00:29:08,160
Speaker 1: Higher yields, as Mike Schumacher expects and in the tenure,

556
00:29:08,240 --> 00:29:10,160
Speaker 1: could be good for the banks. And what you saw

557
00:29:10,240 --> 00:29:12,800
Speaker 1: at the third quarter earnings. You know, Main Street Banking

558
00:29:12,840 --> 00:29:15,080
Speaker 1: did better than Wall Street Banking. So Main Street Banking

559
00:29:15,120 --> 00:29:18,480
Speaker 1: could benefit from a steeper yeel curve if that plays out,

560
00:29:18,840 --> 00:29:21,560
Speaker 1: and then Wall Street Banking could benefit by having more

561
00:29:21,720 --> 00:29:24,840
Speaker 1: normal volatility where you need the financial intermediation of the

562
00:29:24,960 --> 00:29:27,400
Speaker 1: likes of some of the large banks. Michael schumakers down

563
00:29:27,400 --> 00:29:29,080
Speaker 1: in d C yesterday talking to some of our colleagues

564
00:29:29,120 --> 00:29:31,040
Speaker 1: on the economic team, and they were all a buzz

565
00:29:31,080 --> 00:29:33,080
Speaker 1: about something that Bennum and Apple Bom tweeted yesterday. The

566
00:29:33,120 --> 00:29:34,880
Speaker 1: way in which Reagan announced his FED a point. He

567
00:29:34,960 --> 00:29:37,280
Speaker 1: was in a Saturday addressed to the nation just at

568
00:29:37,320 --> 00:29:38,920
Speaker 1: the bottom. His aids weren't even aware that he was

569
00:29:39,040 --> 00:29:40,280
Speaker 1: he was going to do it. So we're waiting for

570
00:29:40,360 --> 00:29:43,040
Speaker 1: this this this word. How do you begin to forecast

571
00:29:43,160 --> 00:29:45,560
Speaker 1: or plot out or play out what it's gonna mean

572
00:29:45,600 --> 00:29:47,640
Speaker 1: if we have Kevin Warsh in the main seat or

573
00:29:47,880 --> 00:29:51,040
Speaker 1: or John Taylor and any number of these configurations going forward.

574
00:29:51,840 --> 00:29:54,720
Speaker 1: Our approaches. We looked at the various candidates and compared

575
00:29:54,840 --> 00:29:57,120
Speaker 1: market moves both in FED funds and also the yield

576
00:29:57,120 --> 00:29:59,360
Speaker 1: curve to changes in some of the online markets. But

577
00:29:59,480 --> 00:30:02,520
Speaker 1: we found a John Taylor was a disruptive, no question

578
00:30:02,560 --> 00:30:05,320
Speaker 1: about it, higher short term rates flatter. Okay, but this

579
00:30:05,440 --> 00:30:08,160
Speaker 1: is so important. Could John Taylor be a dove win necessary?

580
00:30:08,360 --> 00:30:10,760
Speaker 1: Could John Taylor be a double necessary? John Taylor is

581
00:30:10,760 --> 00:30:12,760
Speaker 1: a model guy, Tom and if the models does dove,

582
00:30:12,880 --> 00:30:15,440
Speaker 1: he means stuff. That's it, so he'll stick to his model.

583
00:30:15,480 --> 00:30:18,120
Speaker 1: I think, okay, but the model has too many plugins.

584
00:30:18,160 --> 00:30:19,840
Speaker 1: I mean we all you study this at Cornell, I

585
00:30:19,880 --> 00:30:24,160
Speaker 1: mean Lake Seneca or whatever went down three study they're

586
00:30:24,160 --> 00:30:26,680
Speaker 1: so cayuga. I'm sorry, what do I know? I don't

587
00:30:26,720 --> 00:30:29,240
Speaker 1: know my finger legs? What is this a quiz? Anyways?

588
00:30:29,800 --> 00:30:33,000
Speaker 1: You study this as at Cornell, where there's too many

589
00:30:33,040 --> 00:30:35,200
Speaker 1: plug ins in the Taylor rule, he's a model guy.

590
00:30:35,520 --> 00:30:38,520
Speaker 1: I adore John, But there's just too many variables. Isn't

591
00:30:38,560 --> 00:30:40,840
Speaker 1: there a lot of variables? And you can tweak them too, right,

592
00:30:40,920 --> 00:30:43,440
Speaker 1: there's no magic rules saying these coefficients ought to be

593
00:30:43,600 --> 00:30:45,520
Speaker 1: point five all the time. That can change quite a bit.

594
00:30:45,600 --> 00:30:47,920
Speaker 1: But still to your point, I think he could be

595
00:30:48,040 --> 00:30:50,360
Speaker 1: Dovish in a different scenario. Was he dovish today? No?

596
00:30:50,640 --> 00:30:51,960
Speaker 1: Is he likely to be a Dovish in the next

597
00:30:52,000 --> 00:30:53,760
Speaker 1: two years? I doubt it so to me, he's a

598
00:30:53,800 --> 00:30:56,000
Speaker 1: hawkish candidate today, Like, man, how much does this matter

599
00:30:56,000 --> 00:30:57,719
Speaker 1: to those who are running these the big banks? I mean,

600
00:30:57,960 --> 00:30:59,720
Speaker 1: is it is it worth them speculating what's going to

601
00:30:59,800 --> 00:31:01,360
Speaker 1: happen and who's gonna be there, or they're just gonna

602
00:31:01,360 --> 00:31:03,440
Speaker 1: wait and see what the fallout from it may be. Well,

603
00:31:03,560 --> 00:31:06,920
Speaker 1: it certainly matters to the continuity of monetary policy. I'm

604
00:31:07,000 --> 00:31:09,320
Speaker 1: talking to to Mike Schumacher all the time, and on

605
00:31:09,360 --> 00:31:11,440
Speaker 1: the equity side, he's on the fixed income side. I'm like,

606
00:31:11,800 --> 00:31:15,360
Speaker 1: what does this mean? And you know his what if

607
00:31:15,360 --> 00:31:18,640
Speaker 1: I'm interpreting what you say, Mike Schumacher correctly that this

608
00:31:18,720 --> 00:31:22,400
Speaker 1: should lead to more volatility, but volatility around a trend,

609
00:31:22,440 --> 00:31:25,160
Speaker 1: the good sort of volatility. If so, that would be

610
00:31:25,240 --> 00:31:27,920
Speaker 1: a good scenario because then you have more market activity,

611
00:31:28,000 --> 00:31:31,480
Speaker 1: more market participants getting involved, more market making, and that

612
00:31:31,560 --> 00:31:34,000
Speaker 1: could be for the capital market players because their services

613
00:31:34,040 --> 00:31:36,040
Speaker 1: would be needed more. We're gonna go see if A

614
00:31:36,160 --> 00:31:38,479
Speaker 1: on everybody here right now, Micro Schumacher. When I look

615
00:31:38,520 --> 00:31:42,480
Speaker 1: at FIBOSI and the breakup, if you will, of yield

616
00:31:42,600 --> 00:31:46,320
Speaker 1: dynamics right now, what has your attention within the term structure?

617
00:31:46,480 --> 00:31:48,920
Speaker 1: Is it a real rate analysis. Is there's an all

618
00:31:49,000 --> 00:31:51,480
Speaker 1: in nomenal rate analysis? Is it have to do with

619
00:31:51,520 --> 00:31:54,600
Speaker 1: the dynamics of duration? What is it? Yeah? For us time,

620
00:31:54,680 --> 00:31:57,120
Speaker 1: I would say that it's a combination of real anominal.

621
00:31:57,160 --> 00:31:59,080
Speaker 1: It sounds like a little bit of a cop What

622
00:31:59,240 --> 00:32:03,080
Speaker 1: is the Washington All right, I'll give you our biggest

623
00:32:03,080 --> 00:32:05,160
Speaker 1: call and I'll tell you why it is that when

624
00:32:05,200 --> 00:32:07,040
Speaker 1: you look at the intermediate part of the treasury curve,

625
00:32:07,120 --> 00:32:09,600
Speaker 1: we think it will flatten. And the reason is effectively

626
00:32:09,640 --> 00:32:12,360
Speaker 1: the Fed's balance sheet reductions. And it's pretty simple. You

627
00:32:12,400 --> 00:32:13,920
Speaker 1: don't have to go to Fibosi, you don't have to

628
00:32:13,960 --> 00:32:16,120
Speaker 1: go to Cornell, you don't have to go to Maryland

629
00:32:16,200 --> 00:32:17,280
Speaker 1: or whatever it might be. You don't have to go

630
00:32:17,320 --> 00:32:19,160
Speaker 1: to school for that matter. All you need to do

631
00:32:19,320 --> 00:32:20,920
Speaker 1: is look at what the Fed's been buying over the

632
00:32:21,000 --> 00:32:22,840
Speaker 1: last year and say, if the FED buy is fewer,

633
00:32:22,920 --> 00:32:25,360
Speaker 1: those securities probably get yet. And what is the FED

634
00:32:25,440 --> 00:32:28,040
Speaker 1: been buying most of for the last year Five year treasuries.

635
00:32:28,200 --> 00:32:30,960
Speaker 1: So we think the five years most exposed ten years

636
00:32:31,000 --> 00:32:33,360
Speaker 1: probably a lot less. In the ratio of five to

637
00:32:33,440 --> 00:32:35,480
Speaker 1: ten year purchases about two to one, So we think

638
00:32:35,520 --> 00:32:37,680
Speaker 1: the curve is going to flatten quite a bit, because

639
00:32:37,720 --> 00:32:40,080
Speaker 1: the five year yield goes up, call it forty fifty

640
00:32:40,120 --> 00:32:43,120
Speaker 1: basis points over six to nine months, tenure yield goes

641
00:32:43,200 --> 00:32:45,560
Speaker 1: up maybe twenty. So that to me is the big

642
00:32:45,640 --> 00:32:48,520
Speaker 1: play right now. To translate that, David Girl, because I

643
00:32:48,600 --> 00:32:51,840
Speaker 1: know you're doing this at home, if you're Bloomberg terminal,

644
00:32:52,080 --> 00:32:54,920
Speaker 1: is the five tens spread is worth watching? The You

645
00:32:55,000 --> 00:32:56,480
Speaker 1: go very quickly here. Mike will come back in just

646
00:32:56,600 --> 00:32:58,880
Speaker 1: a second with both of you. But how confident are

647
00:32:58,880 --> 00:33:00,800
Speaker 1: you that the process of normal zation as it's been

648
00:33:00,840 --> 00:33:03,520
Speaker 1: outlined and telegraphed by this FED will continue no matter

649
00:33:03,560 --> 00:33:05,760
Speaker 1: who's in the main chair at the FED. Oh? I

650
00:33:05,800 --> 00:33:08,040
Speaker 1: think the chair always matters. There's not much doubt about that.

651
00:33:08,120 --> 00:33:10,000
Speaker 1: And I think that if you get a chair this

652
00:33:10,160 --> 00:33:12,760
Speaker 1: radically different from the other members, is everyone I remember

653
00:33:12,800 --> 00:33:15,040
Speaker 1: going to follow along, not necessarily, but still the leader.

654
00:33:15,880 --> 00:33:18,440
Speaker 1: This has been a wonderful monologue with Michael Schumacher. We're

655
00:33:18,440 --> 00:33:21,280
Speaker 1: gonna come back and maybe talk to Michael Mayo about

656
00:33:21,320 --> 00:33:23,880
Speaker 1: the future of the banks as well. Michael may Mayo,

657
00:33:24,000 --> 00:33:27,280
Speaker 1: Michael Schumacher where us of course they are with Wells Fargo,

658
00:33:27,400 --> 00:33:29,680
Speaker 1: thrilled to have them in the studio. Mike may always

659
00:33:29,680 --> 00:33:33,040
Speaker 1: spent way too much time with Mr Schumacher. Last time around,

660
00:33:33,600 --> 00:33:35,440
Speaker 1: I'm gonna put out on Twitter. You'll see it first

661
00:33:35,480 --> 00:33:39,240
Speaker 1: on Bloomberg Radio. City Group reverse split from four or

662
00:33:39,280 --> 00:33:43,200
Speaker 1: five undred to share total collapse and saved ten dollars

663
00:33:43,280 --> 00:33:45,960
Speaker 1: a share. But if you forget about the gloom ten

664
00:33:46,040 --> 00:33:49,040
Speaker 1: to seventy four, this is your single best buy. This

665
00:33:49,200 --> 00:33:51,240
Speaker 1: is the thing you're like the best. What is it

666
00:33:51,400 --> 00:33:54,960
Speaker 1: specific about City Group that makes it more attractive three

667
00:33:55,120 --> 00:33:58,360
Speaker 1: five years out than the other two big to fail banks. Well,

668
00:33:58,440 --> 00:34:01,680
Speaker 1: we are positive on off three of the largest banks,

669
00:34:02,080 --> 00:34:04,120
Speaker 1: but City Group is our top idea. We think the

670
00:34:04,200 --> 00:34:07,120
Speaker 1: stock price can double over five years. And it's not

671
00:34:07,320 --> 00:34:10,720
Speaker 1: like the one item that's so great, it's the thousands

672
00:34:10,800 --> 00:34:13,359
Speaker 1: of items that are now much more solid. City Group

673
00:34:13,760 --> 00:34:18,319
Speaker 1: has had the biggest structural risk reduction of any large bank.

674
00:34:18,440 --> 00:34:20,200
Speaker 1: So I might be the only person saying this, but

675
00:34:20,560 --> 00:34:23,480
Speaker 1: thank you regulators. You know City Group and some of

676
00:34:23,480 --> 00:34:25,480
Speaker 1: the large banks when kicking and screaming, oh we need

677
00:34:25,520 --> 00:34:27,240
Speaker 1: to have more Catherine, we need to have more liquidity.

678
00:34:27,360 --> 00:34:29,840
Speaker 1: Well guess what City groups balance sheet now is the

679
00:34:29,920 --> 00:34:33,080
Speaker 1: strongest that it's been in a generation, and something happened

680
00:34:33,160 --> 00:34:36,640
Speaker 1: during earnings which was unpleasant. The stock traded down, and

681
00:34:36,680 --> 00:34:39,600
Speaker 1: city groups said they would take five million dollars of

682
00:34:39,719 --> 00:34:43,200
Speaker 1: extra reserves for you know, credit card losses and stuff.

683
00:34:43,280 --> 00:34:46,320
Speaker 1: But contrast that to a decade ago, literally a decade

684
00:34:46,360 --> 00:34:49,200
Speaker 1: ago now, when they had over a hundred times that

685
00:34:49,280 --> 00:34:51,880
Speaker 1: amount and unrealized losses in the balance sheet. It's night

686
00:34:51,920 --> 00:34:54,120
Speaker 1: and day from where they were a decade ago. Does

687
00:34:54,160 --> 00:34:57,319
Speaker 1: America have shadow banking? In two thousand, seventeen and two

688
00:34:57,360 --> 00:34:59,759
Speaker 1: thousands agen David Goldman was in the other day from

689
00:34:59,760 --> 00:35:04,520
Speaker 1: Bank of America years ago who absolutely nailed the derivative

690
00:35:04,640 --> 00:35:07,920
Speaker 1: issues senior tranches in that that blew up in oh seven.

691
00:35:08,080 --> 00:35:11,000
Speaker 1: Do we have shadow banking now? Mike Mayo, There's always

692
00:35:11,080 --> 00:35:12,880
Speaker 1: going to be a degree of shadow banking. What I

693
00:35:12,960 --> 00:35:16,160
Speaker 1: analyze and what's very strong would be the US banks,

694
00:35:16,320 --> 00:35:19,000
Speaker 1: which have the strongest balance sheets in a generation, the

695
00:35:19,120 --> 00:35:22,279
Speaker 1: highest level of capital liquidity and a generation, and they

696
00:35:22,320 --> 00:35:25,840
Speaker 1: can absorb not just one financial crisis, but to financial crises.

697
00:35:26,000 --> 00:35:28,480
Speaker 1: So there will be problems, but I would say it's

698
00:35:28,520 --> 00:35:31,320
Speaker 1: more likely the biggest problem will be outside of the

699
00:35:31,440 --> 00:35:33,680
Speaker 1: largest US banks. Michael she Markert, help us understand what

700
00:35:33,719 --> 00:35:36,200
Speaker 1: the landscape looks like. Regulatorily, we're talking about a lot

701
00:35:36,239 --> 00:35:38,640
Speaker 1: of changes to the Federal Reserve. How keenly focused are

702
00:35:38,680 --> 00:35:41,080
Speaker 1: you on what could change in terms of their regulatory

703
00:35:41,120 --> 00:35:43,239
Speaker 1: responsibility is how they might be altered, And I guess

704
00:35:43,280 --> 00:35:46,920
Speaker 1: more broadly speaking, d d C regulations being reduced at

705
00:35:46,960 --> 00:35:49,680
Speaker 1: all dramatically in Washington, we do. And I think the

706
00:35:49,760 --> 00:35:52,040
Speaker 1: first episode took is sending quarrels on the board. Now

707
00:35:52,120 --> 00:35:54,640
Speaker 1: that helps, and he's really the regulatories are, for lack

708
00:35:54,719 --> 00:35:57,320
Speaker 1: of a better term, And even before he came aboard,

709
00:35:57,360 --> 00:35:59,080
Speaker 1: the FETE seemed to be a little bit more mild

710
00:35:59,160 --> 00:36:01,120
Speaker 1: on the regulatory run, So I think that's a plus.

711
00:36:01,239 --> 00:36:03,120
Speaker 1: It's not just the Fed. You've got other entities I

712
00:36:03,200 --> 00:36:05,239
Speaker 1: think that are taking a bit of a lighter touch,

713
00:36:05,280 --> 00:36:08,360
Speaker 1: whether it's a CFTC, etcetera. So that seems to be happening.

714
00:36:08,800 --> 00:36:11,040
Speaker 1: And if you look at the Trump administration, it's introduced

715
00:36:11,080 --> 00:36:13,880
Speaker 1: far fewer new regulations and really any other president in

716
00:36:13,880 --> 00:36:16,360
Speaker 1: the last four or five. So it's a notable shift.

717
00:36:16,480 --> 00:36:18,719
Speaker 1: Like I've given that you talked about the integrity of

718
00:36:18,800 --> 00:36:20,360
Speaker 1: the strength of the balance sheet, is it likely to

719
00:36:20,440 --> 00:36:23,040
Speaker 1: become maybe not weaker, but less strong as a result

720
00:36:23,080 --> 00:36:25,000
Speaker 1: of what we see in Washington. Well, that's a great question.

721
00:36:25,200 --> 00:36:28,040
Speaker 1: When does deregulation go too far? And I will say

722
00:36:28,080 --> 00:36:31,160
Speaker 1: I'm week thirteen at Wells Fargo Securities, and I talked

723
00:36:31,200 --> 00:36:34,279
Speaker 1: to the fixed income side, like Mike Schumacher, and the

724
00:36:34,800 --> 00:36:37,000
Speaker 1: credit side is right number one, and I I Magazine,

725
00:36:37,040 --> 00:36:41,839
Speaker 1: I'm fixed income for five years. Having I have a point.

726
00:36:41,880 --> 00:36:43,719
Speaker 1: I have a point. The reason I do this, when

727
00:36:43,880 --> 00:36:47,120
Speaker 1: deregulation goes too far, the people on the credit side

728
00:36:47,160 --> 00:36:49,719
Speaker 1: of the house start to get worried. So I talked

729
00:36:49,719 --> 00:36:51,399
Speaker 1: to them all the time. He said, Okay, you're gonna

730
00:36:51,400 --> 00:36:53,880
Speaker 1: relax the vocal rule. You canna relax Dot Frank, you

731
00:36:53,960 --> 00:36:56,840
Speaker 1: really relaxed capital standards when you get worried as a

732
00:36:56,920 --> 00:36:59,560
Speaker 1: holder of bank bonds. And so I have an in

733
00:36:59,680 --> 00:37:02,200
Speaker 1: house check and I'd say, right now, we're nowhere close

734
00:37:02,280 --> 00:37:05,520
Speaker 1: to that chance. Do our will overshoot like we've done

735
00:37:05,800 --> 00:37:08,279
Speaker 1: the last many decades, But right now we're not in

736
00:37:08,400 --> 00:37:09,840
Speaker 1: risk of that. Just because the time. I want to

737
00:37:09,840 --> 00:37:11,600
Speaker 1: go back to Michael Schumacher here, one of the great

738
00:37:11,640 --> 00:37:15,080
Speaker 1: ideas here, Michael, with yields, we may be moving out

739
00:37:15,200 --> 00:37:17,440
Speaker 1: and we may get escape velocity and all the fed

740
00:37:17,560 --> 00:37:20,360
Speaker 1: Derby And that is a concept of so many of

741
00:37:20,400 --> 00:37:23,440
Speaker 1: our listeners of financial repression. I'm gonna associate that with

742
00:37:23,560 --> 00:37:25,600
Speaker 1: Bill Gross, but I think it's sort of generally out

743
00:37:25,680 --> 00:37:28,600
Speaker 1: in the zeitgeist, the idea that on a real yield basis,

744
00:37:28,640 --> 00:37:30,400
Speaker 1: I'm never gonna make it back like I used to

745
00:37:30,480 --> 00:37:33,440
Speaker 1: make real yield ten and twenty thirty years ago. Are

746
00:37:33,520 --> 00:37:37,200
Speaker 1: we going to escape financial repression? Is yields come up,

747
00:37:38,080 --> 00:37:39,759
Speaker 1: we might time, but that's gonna take a long time.

748
00:37:39,840 --> 00:37:41,799
Speaker 1: I would say you're looking at five to ten years

749
00:37:41,880 --> 00:37:44,880
Speaker 1: probably best case. There have been other instances of financial repression.

750
00:37:44,920 --> 00:37:48,080
Speaker 1: That's really what the the established countries did after World

751
00:37:48,120 --> 00:37:49,640
Speaker 1: War Two, the ones that we're still on their feet,

752
00:37:49,640 --> 00:37:51,840
Speaker 1: and it took a good decade plus. So when you

753
00:37:51,920 --> 00:37:54,120
Speaker 1: think about the size of central bank balance sheets, I

754
00:37:54,200 --> 00:37:56,239
Speaker 1: agree with your theory. I think the exits rocky, but

755
00:37:56,280 --> 00:37:58,360
Speaker 1: I don't think you get back to quote normal conditions

756
00:37:58,440 --> 00:38:00,520
Speaker 1: anytime soon. Do you have a sing the best buy?

757
00:38:00,560 --> 00:38:02,560
Speaker 1: I mean we we kid may know about Siabus buying

758
00:38:02,600 --> 00:38:04,640
Speaker 1: a city group and that, and you know there's always

759
00:38:04,680 --> 00:38:06,919
Speaker 1: a different theme, et cetera. Is there a single best

760
00:38:07,000 --> 00:38:09,880
Speaker 1: buy in the shoemaker world, single best. I guess I

761
00:38:09,920 --> 00:38:11,719
Speaker 1: would think about it a little bit more differently. I

762
00:38:11,800 --> 00:38:13,560
Speaker 1: think about it in terms of single best trade for

763
00:38:13,680 --> 00:38:16,080
Speaker 1: US flatter yeel curve in the US that's back in

764
00:38:16,160 --> 00:38:17,840
Speaker 1: that five to ten years space. I've got to do

765
00:38:17,920 --> 00:38:20,080
Speaker 1: the charts, Dave, see how he reminded me to put

766
00:38:20,120 --> 00:38:25,239
Speaker 1: that chart out. I'm looking at David. One final question, please, yeah, Michael,

767
00:38:25,600 --> 00:38:26,719
Speaker 1: let me just ask you what you're gonna be listening

768
00:38:26,719 --> 00:38:29,800
Speaker 1: for tomorrow from the the ECB good questions, What indications

769
00:38:29,840 --> 00:38:31,440
Speaker 1: you're looking for in terms of size of taper, or

770
00:38:31,480 --> 00:38:33,759
Speaker 1: what we might hear from Mario dragging? Frankly, to me,

771
00:38:33,840 --> 00:38:35,720
Speaker 1: it's the tone of Mario drug in the press conference.

772
00:38:35,800 --> 00:38:38,160
Speaker 1: I think the taper is very likely. I suspect he

773
00:38:38,280 --> 00:38:40,200
Speaker 1: does not want to do it. He's being drag kicking

774
00:38:40,239 --> 00:38:42,279
Speaker 1: and screaming. And the question is will he give any

775
00:38:42,360 --> 00:38:44,520
Speaker 1: hints that this is the last, or this is the

776
00:38:44,600 --> 00:38:47,279
Speaker 1: last for a long time, or don't even think about

777
00:38:47,360 --> 00:38:49,040
Speaker 1: ray hikes. That's the thing you want to focus. Is

778
00:38:49,080 --> 00:38:52,280
Speaker 1: he being dragged by the Bundesbank or tangentially by Shoibla

779
00:38:52,440 --> 00:38:54,960
Speaker 1: exit into the bundes dug yeah, I think the Bundas

780
00:38:55,000 --> 00:38:56,840
Speaker 1: Bank has been unhappy for a long time and I

781
00:38:56,920 --> 00:38:58,759
Speaker 1: do think that's right. Tom. It's the Germans who are

782
00:38:58,840 --> 00:39:01,560
Speaker 1: finally winning one out on the ECB. This has been great.

783
00:39:01,600 --> 00:39:03,560
Speaker 1: Michael Schumacher, thank you so much. Thank you for bringing

784
00:39:03,600 --> 00:39:07,480
Speaker 1: Michael mayon. Good to see they are with Wells Fargo.

785
00:39:07,920 --> 00:39:09,279
Speaker 1: Did you see I didn't look out in the at

786
00:39:09,719 --> 00:39:12,600
Speaker 1: stagecoach out in the antrium. You know what those horses

787
00:39:12,640 --> 00:39:14,960
Speaker 1: are like in Central Park Sells. It could be a

788
00:39:15,040 --> 00:39:19,120
Speaker 1: threat to us here. They're with Wells Fargo. Really really,

789
00:39:19,480 --> 00:39:22,600
Speaker 1: and I'll be honest saying something about giving uh the

790
00:39:23,000 --> 00:39:25,200
Speaker 1: sport of Wells Fargo over the last two or three

791
00:39:25,280 --> 00:39:28,320
Speaker 1: years as they build out their research capability, including Ken's

792
00:39:28,360 --> 00:39:32,160
Speaker 1: Ken Senta. What does Ken Senna do for you guys? Well, look,

793
00:39:32,200 --> 00:39:34,680
Speaker 1: we're collaborating a lot. I talked to Ken Senna a lot.

794
00:39:34,760 --> 00:39:36,799
Speaker 1: As you know, he's the new Internet analyst at Wells

795
00:39:36,840 --> 00:39:40,640
Speaker 1: Fargo Securities. He's talking about greater automation. We think US

796
00:39:40,680 --> 00:39:43,279
Speaker 1: banks would be the most efficient in history in five years.

797
00:39:43,840 --> 00:39:46,319
Speaker 1: It's you know, some of the automation from Ken's area

798
00:39:46,400 --> 00:39:49,360
Speaker 1: can help. There's a lot of means reducing brands. So

799
00:39:49,640 --> 00:39:53,640
Speaker 1: Ken Senna is Mr Future in terms of research and

800
00:39:53,680 --> 00:40:06,279
Speaker 1: the Internet. From Mike Bayo, this is Bloomberg. Yeah. Thanks

801
00:40:06,360 --> 00:40:10,479
Speaker 1: for listening to the Bloomberg Surveillance podcast. Subscribe and listen

802
00:40:10,520 --> 00:40:16,160
Speaker 1: to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform

803
00:40:16,239 --> 00:40:19,560
Speaker 1: you prefer. I'm on Twitter at Tom Keene. David Gura

804
00:40:20,120 --> 00:40:23,760
Speaker 1: is at David Gura. Before the podcast, you can always

805
00:40:23,840 --> 00:40:26,560
Speaker 1: catch us worldwide. I'm Bloomberg Radio.