Speaker 1: Who you put your trust in matters. Investors have put
Speaker 1: their trust in independent registered investment advisors to the tune
Speaker 1: of four trillion dollars. Why learn more and find your
Speaker 1: independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keane. Always with Michael McKee. Daily we bring
Speaker 1: you insight from the best in economics, finance, investment and
Speaker 1: international relations. Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com,
Speaker 1: and of course on the Bloomberg. It is wonderful to
Speaker 1: start off our radio surveillance this morning with William Lee
Speaker 1: of a City Group. You bring such a rich heritage
Speaker 1: of city group economics. Working with Villin Powder me go
Speaker 1: broader global before we tear apart what we observed yesterday
Speaker 1: Catherine Man and O. E. C. D. I believe are
Speaker 1: looking for two point nine global growth down from three.
Speaker 1: I believe that's a recession in most textbooks. Is it
Speaker 1: well when you start to get to trend and trend
Speaker 1: is closer to two percent, but bordering on that because
Speaker 1: the measurement error is just huge on global GDP. The
Speaker 1: big problem is we have global slowdown, global productivity slowdown,
Speaker 1: global investment slowdown. These are the pillars of sustainable expansion
Speaker 1: that we no now. I love to tell Villain Bowder
Speaker 1: when he's wrong. That doesn't happen very often. You guys
Speaker 1: have been so out front in right about global slow down,
Speaker 1: global tepid growth. What's the distinction of why equals C
Speaker 1: plus I plus G plus annex to the global tround.
Speaker 1: I'm gonna guess it's non trade or flat trade exactly.
Speaker 1: The trade volume used in Coral it's six or seven percent.
Speaker 1: And that was the source and engine of growth for
Speaker 1: all emerging markets. Everyone said, oh, it's China doing It's
Speaker 1: not just China, but China and the entire supply chain
Speaker 1: all into South Asia, and and and and the rest
Speaker 1: of the world that was going to export stuff to
Speaker 1: the advanced economies. Now, with trade volume going down because
Speaker 1: they slow down in domestic advanced economies, you have a
Speaker 1: collapse in the emerging markets. And the hardest thing for
Speaker 1: investors to do now is the investing emerging markets because
Speaker 1: you no longer have to. You have to look for
Speaker 1: domestic stories. The hardest thing to do is be Janet
Speaker 1: yelling should she focus on the domestic economy? All of
Speaker 1: the three dissenters, or can she take an internationalist approach
Speaker 1: of the slow grows Tom The radio ones can't see
Speaker 1: how much great here we've got. But one of the
Speaker 1: things that I was doing at the at the board,
Speaker 1: excuse me, the radio audience knows how we have continued.
Speaker 1: When I entered the board right after my PhD, my
Speaker 1: first assignment was to work on the international sector of
Speaker 1: what's known as the Ferbest Model. Now that was UM.
Speaker 1: The Board has and the FED has always been globally oriented,
Speaker 1: and we have always looked at what's going on the world,
Speaker 1: what we're not doing. What we're doing now that's different
Speaker 1: is that we're letting the world run US monetary policy.
Speaker 1: That's been a shift in the way Montrey policy has
Speaker 1: been conducted between Chair Volca and Chair Yelling, and that shift,
Speaker 1: I think is not for the good. Always, yes, we
Speaker 1: should consider the rest of the world, but we shouldn't
Speaker 1: let the rest of the world dominate in deciding what's
Speaker 1: probably monster pulse for us. Let's dive into the press
Speaker 1: conference yesterday, and for those of you that heard every
Speaker 1: word of it, thank you so much for listening to
Speaker 1: to Bloomberg. From everything from Eric Chiasker's question that led
Speaker 1: to the debate on product discussion rather on productivity, to
Speaker 1: just the sheer confusion. There were billy three or four
Speaker 1: times where Chair Yelling stated something of what we want
Speaker 1: to do, a prescriptive fread and out front fed, and
Speaker 1: then she came back a minute later or two minutes
Speaker 1: later and said, but we need evidence. I'm baffled. Help.
Speaker 1: Not only are we baffled, but it is clearly showing
Speaker 1: how the FETE has lost its way, is working without
Speaker 1: a rudder. And Eric asked exactly the question I would
Speaker 1: have asked, how can you in this slowing economy where
Speaker 1: your forecast is slowing down, are you pushing up rates
Speaker 1: by several hundred basis points and you're and you're telling
Speaker 1: us a normalized interest rate is one with a real
Speaker 1: rate that's near zero, and yet you don't see the
Speaker 1: inflation going up several hundred basis points in your forecast.
Speaker 1: So so that I think is caught yelling to the
Speaker 1: point where she had to stumble and said, well, this productivity, well,
Speaker 1: as she went to her script, which is to say,
Speaker 1: we've got structural headwinds. We need to address the headwinds.
Speaker 1: And that's The only thing she could rely on within
Speaker 1: the Strug struggle was the idea of Vector's traditional economics
Speaker 1: is to set up a VECTOR personified by Chairman Greenspan,
Speaker 1: and the idea of a measured approach. We've got suits
Speaker 1: and ties on, fancy dresses, were organized, we know what
Speaker 1: we're doing. We're in control roll. And then there's the
Speaker 1: idea of just let's get back to normal and let
Speaker 1: the market in the system work it out. What would
Speaker 1: be the consequences if the dissenters win and we get
Speaker 1: to one or two or three rate increases, So the
Speaker 1: macroeconomy absolutely nothing, because between zero and a hundred and
Speaker 1: fifty basis points, the cost of capital is still going
Speaker 1: to be negative or zero. Everyone is incentivized with the
Speaker 1: cost of capital as much as they can be right now.
Speaker 1: And where's it led us to? Nothing? Nothing? What we what?
Speaker 1: What I think everyone is concerned about is that my
Speaker 1: god basis points and a vector of another hundred basis
Speaker 1: points over three years is going to collapse with the
Speaker 1: U S economy, There's no But what it will do
Speaker 1: is remove that distortion that's preventing firms from investing resources
Speaker 1: adequately and in the right places short of markets, throw
Speaker 1: off markets. Vice Chairman Fisher entered the press conference briefly.
Speaker 1: He made a cameo appearance. I don't know if you
Speaker 1: saw that, where cheer yelling discuss alter a com dative
Speaker 1: shifting to modestly accommodative. It's like we're doing adverb economics.
Speaker 1: I mean Matt Winkler, the emeritus editor in chief of
Speaker 1: Bloomberg News, would say he'd be starts. Matt's bow tie
Speaker 1: would be spinning, as we all were yesterday over adverb economics.
Speaker 1: That's what we've come down to. And and even worse
Speaker 1: with adverb economics, we know have a framework. We are
Speaker 1: we are data dependent in an adverbial way, and that's ridiculous.
Speaker 1: We we used to be tied with full employment and
Speaker 1: massill employment and postability and a framework to get their
Speaker 1: steady Montrey policy correcting market distortions. That was Montrey policy.
Speaker 1: Now we are adding to market distortions and not going
Speaker 1: into steady fashion. We're letting events and immediate data drive
Speaker 1: from Monty policy. And now, folks, my dumb question of
Speaker 1: the press conference, I could you imagine me given share
Speaker 1: yelling a question of the press conference, it would be
Speaker 1: a frightening thing. Bill Lee, what's the difference between evidence
Speaker 1: and data dependence? Help me here. And that's the struggle
Speaker 1: that that I think they're coming with, which is to say,
Speaker 1: we don't we get a lot of data and we
Speaker 1: are not consistently reacting to it. We're acting to some
Speaker 1: source of events like the child evaluation, we're reacting to fears,
Speaker 1: but we're not reacting in a consistent framework. Help me
Speaker 1: with here, and folks, this is a cottage industry, and
Speaker 1: the United Kingdom is called economic epistemology. It's not that
Speaker 1: much trained in the U S. Bruce Cadwell is legendary
Speaker 1: at North Carolina. But there was a guide bill a
Speaker 1: years ago, Mark Blogg out of Yale and then over
Speaker 1: to Llse and Louvin and I had the honor of
Speaker 1: interviewing him a few times. And Professor Blogg set up
Speaker 1: the philosophy of economics, and the heart of it is
Speaker 1: ex post ex ante, an institution that gets out front
Speaker 1: versus an institution that reacts to evidence and data. The historians,
Speaker 1: including going Bi Bernanke, would say, by definition their ex post,
Speaker 1: where is this idea that we can get out front
Speaker 1: as a central bank? Come from the heart of the
Speaker 1: SEP right. The projections of the FOLC members is to
Speaker 1: say we need to base policy on looking forward our
Speaker 1: ex anti presumptions of where the economy is going. To
Speaker 1: say that we are driving Montree policy by looking at
Speaker 1: data realizations, which is a beautifull ridiculous. But come on,
Speaker 1: it's ridiculous. But I heard her say four times in
Speaker 1: the press conference and making that up folks, maybe two times,
Speaker 1: maybe eight times, that she needs to see evidence, which
Speaker 1: is by definition expost We've never had more Latin. We've
Speaker 1: never had more Latin on surveillance than we are right now.
Speaker 1: Which is it. She's been driven into this evidence based
Speaker 1: world because the brainers and the other doves have said
Speaker 1: the costs and benefits are asymmetric, and we need to
Speaker 1: make sure that we don't see downside evidence and we
Speaker 1: are not seeing upside evidence, so we cannot do everything
Speaker 1: consistent with ex anti upside. I don't want to get
Speaker 1: you in trouble with the General Council of City Group
Speaker 1: or with Mr Corbett, but the basic idea here, would
Speaker 1: you suggest Vice Sherman Fisher and John Williams, non voter,
Speaker 1: would have dissented as well. They would have absolutely dissented.
Speaker 1: And in fact, I think Fisher is tying his hands
Speaker 1: behind his back so he doesn't punch her out. No,
Speaker 1: that's what he did in my interview with him, he
Speaker 1: had his hands behind his back so he wouldn't touch me.
Speaker 1: Bill Lee with us a city, go how about a
Speaker 1: little bit of surveillance inside baseball? We do different things here. No,
Speaker 1: I'm not talking red Side the first place, Boston Red Sox.
Speaker 1: John Tucker does certain things. Why you yen Wire producer
Speaker 1: Colin Our, producer, Ken Folio Global technical director, Michael McKee
Speaker 1: does certain things. He dredges up ancient documents quote. It
Speaker 1: was agreed that the next meeting of the committee would
Speaker 1: be held on Tuesday, November. The meeting adjourned Greenspan, Corrigan,
Speaker 1: Angel Bain, Boykin, Buskins, Kelly la where Mullen, Seeger and Stern.
Speaker 1: Mr Melzer of St. Louis attended the meeting. One of
Speaker 1: the giants of a Siren of economics, so Thecone is
Speaker 1: a secretary and economist Donald Cone, Ted Truman I believe
Speaker 1: was in the room. Mike McKee. What happened on October two? Well,
Speaker 1: he had four descents that day, um which was unusual.
Speaker 1: It's it was the last time he had four descents.
Speaker 1: Governors Seeger and Angel dissented, President Boyken of Dallas, and
Speaker 1: President Hoskins of Cleveland, for those of you old enough
Speaker 1: to remember those names. Uh. They disagreed with the apparently
Speaker 1: because his specifics weren't recorded, but they disagreed with the
Speaker 1: idea that they should be lowering interest rates. Take us
Speaker 1: to one William Lee on this descent. Uh, it is
Speaker 1: very unusual to have three descents. Obviously, it is almost
Speaker 1: unheard of to have four. But I've been going back.
Speaker 1: I still am. I'm going back through all the minutes
Speaker 1: of the previous meetings where we had at least three descents.
Speaker 1: I can't find a time when you had three people
Speaker 1: dissent in favor of higher rates. Uh. This is this
Speaker 1: is obviously a strong message to the chair that there
Speaker 1: are some people concerned. Absolutely, and in fact, it's even
Speaker 1: more shocking in a consensus oriented Yelling fed where you
Speaker 1: have three descents, because Yelling's modus at Brenda has always
Speaker 1: been to try to forge that consensus even before the
Speaker 1: meeting starch that she can have a clear sense of
Speaker 1: backing from the rest of the FOMC. I think she
Speaker 1: differs from the chairs of Vote Vocal and Greenspan because
Speaker 1: they were personality driven in the sense that they said,
Speaker 1: I think this, what do you guys think? Chair Yelling
Speaker 1: goes around asking what is it that it's on your
Speaker 1: mind and how can we forge a consensus together. I
Speaker 1: think that's her strength, but it's also been her weakness
Speaker 1: because the consensus that has driven the pop policy decisions
Speaker 1: has been consensus driven by Brainer and the doves on
Speaker 1: the committee, and I think the hawks have finally said,
Speaker 1: we're putting our foot down now. Remember the history of
Speaker 1: the FED is that the Board has always been a
Speaker 1: more devish leaning part of the fom C, and the
Speaker 1: regional FETs have always tended to be somewhat more hawkish
Speaker 1: because they, I think, are closer in touch with markets
Speaker 1: and people who are doing business, and the business people say,
Speaker 1: we need their market signals. We cannot have FED distortions,
Speaker 1: and that's what we have now. Mike Wayne Angel being
Speaker 1: the example of that from Wayne was. I was there
Speaker 1: when Wayne was there, and I must say he was
Speaker 1: quite a supply cider, so he was quite an extremist,
Speaker 1: but nevertheless he was very market oriented and this consistent
Speaker 1: message from Wayne and and and and and a lot
Speaker 1: of the regional fed governors of uh presidents now is
Speaker 1: that the governors on the fl on the board have
Speaker 1: really lost touch with what is needed in markets, which
Speaker 1: is clear signals. And you cannot have clear signals when
Speaker 1: you have distortions caused by or rate policies. But for
Speaker 1: eight years, and to go back to something that Tom said, well,
Speaker 1: it was actually Fran said earlier on Surveillance TV. Should
Speaker 1: we cut them break in the sense that we have
Speaker 1: not seen monetary conditions like this or any economy like
Speaker 1: this since the Great Depression. So they're working from a
Speaker 1: playbook that is eighty years old and still um and
Speaker 1: may not be completely relevant because of conditions. So the
Speaker 1: fact that there are disagreements, it's not something that should
Speaker 1: be unusually absolutely by. But the conditions that we're seeing
Speaker 1: and the ones that that share yellings highlighting are low productivity,
Speaker 1: low investment, and slow growth. Those are not the things
Speaker 1: that monstro policy can address because, as we all know
Speaker 1: from our textbooks, monster policy cannot create growth. You can
Speaker 1: only move it around. You can borrow it from the
Speaker 1: future by lowing rates, or you take it from a neighbor.
Speaker 1: But I depreciate the exchange rate. But you can only
Speaker 1: set the conditions to allow market force to work and
Speaker 1: structural policies that really get growth and enhance Billy very quickly.
Speaker 1: Eric Schatz had a dashon airplane yesterday after his killer question.
Speaker 1: He cracked the door open to the press conference. How
Speaker 1: much credibility leaked out of the room. In fact, the
Speaker 1: press conference was an example of how credibility just disappeared
Speaker 1: in a heartbeat because chair yelling was flailing. Four answers
Speaker 1: as as you quite uh you know rightly mentioned words
Speaker 1: like data dependent, evidence based. How is it that we
Speaker 1: are letting a world of of expost data drive future policy.
Speaker 1: How is it that we're letting past events drive where
Speaker 1: futures are going? When past events are at hawk chosen
Speaker 1: in an alcoholic exceptionally valuable. I'll be blunt. We would
Speaker 1: kill to get you and villin powder, Stephen England or
Speaker 1: whatever all on the table at the same time. Billy,
Speaker 1: I gotta kill you. He's a city group just just wonderful, wonderful.
Speaker 1: This is fun. Michael McKeon, Tom Kane, this is Bloomberg.
Speaker 1: John Manley is well Sarto's chief equity strategists. So he's
Speaker 1: the guy who was sitting around on the trading guest
Speaker 1: yesterday watching the FED decision come in and telling people, well,
Speaker 1: here's what you do next. And clearly John the advice
Speaker 1: for most strategists was by because the FED has put
Speaker 1: off raising rates. But I wonder how long can that
Speaker 1: knee jerk reaction be justified, given the fact that there's
Speaker 1: so much data between now and December, and we really
Speaker 1: don't know where the economy is going at this point.
Speaker 1: I know it's a set exactly, and I think that's
Speaker 1: part of the trick. I think it's important to realize
Speaker 1: the FED will raise interest rates just as soon as
Speaker 1: they think they can without adversely affecting the economy. As
Speaker 1: the economy gets stronger, it needs less stimulation from the Fed. Uh,
Speaker 1: it can deal with higher interest rates, and market can
Speaker 1: deal with higher interest rates. I think the trick is
Speaker 1: to wait. The set is trying to get a sense
Speaker 1: that the economy has enough momentum that they can ease
Speaker 1: off the throttle. They're not tapping the brake, they're easing
Speaker 1: off the throttle of it. Are you when you look
Speaker 1: at what the fed. Did you pay more attention to
Speaker 1: the fact that they're saying, well, we're getting closer to
Speaker 1: an interest rate increase, or to the fact that they
Speaker 1: lowered the number of interest rate increases they're looking at
Speaker 1: for two thousand seventeen from three to two. Well, as
Speaker 1: with anything a human being does, it's always the best
Speaker 1: guest what are they going to do in the future.
Speaker 1: I think to me, the most important thing is they're
Speaker 1: thinking about it. They realize the risk involved in raising
Speaker 1: rates too quickly. I think there's a muted risk of
Speaker 1: raising them too slowly with that's something you can deal
Speaker 1: with later on. I think they're going to be dated
Speaker 1: dependent in the same way I'm daated dependent. When I
Speaker 1: get off an airplane, I know when it's supposed to land,
Speaker 1: but if it's late and don't get off early, and
Speaker 1: if it's earlier, I don't get off late. Uh. They're
Speaker 1: going to have I think, ample justification to raise rates,
Speaker 1: and I think at some point that's ther were you yesterday?
Speaker 1: Come on, John Manley, I mean you were hanging on
Speaker 1: every word Michael McKee said yesterday afternoon. Of course, data
Speaker 1: dependent is so two thousand and fifteen. It's evidence, evidence
Speaker 1: we need evidence. Evidence is the new word. That's what
Speaker 1: I learned yesterday. I'm an old fashioned guy. Uh, and
Speaker 1: this prosy Tom, your research note is brilliant and you
Speaker 1: absolutely nailed what we observed yesterday. You talk about the
Speaker 1: idea and the risk that a central bank could lose control.
Speaker 1: Did the central bank lose control and that press conference yesterday?
Speaker 1: I don't think so. I mean, um, you know, controlling
Speaker 1: a press conference and controlling the economy are two different things,
Speaker 1: and uh, I think one is more difficult than the other.
Speaker 1: And it's not the obvious one. Um. Uh. The said
Speaker 1: still is in control or the economy is in control.
Speaker 1: The you know, they only have so many tools. They
Speaker 1: can't make us do things, so it's always a question
Speaker 1: of pushing or pulling money to us or from us,
Speaker 1: And that's inherently will look like they don't have absolute
Speaker 1: control because they never have absolute control on bounce though,
Speaker 1: I don't think the economy is running away from them,
Speaker 1: and I don't think it's plunging too quickly. I'll say
Speaker 1: they're in control. With that, in control of the economy
Speaker 1: to what extent um As you say, Uh, they only
Speaker 1: have some tools, so can they only maybe put a
Speaker 1: floor under things. They can't create growth. That was the
Speaker 1: point that Bill Lee was talking about. They can't, Uh,
Speaker 1: they can. They can't make us buy a car, or
Speaker 1: build a house, or start a factory. All they can
Speaker 1: do is make the money we used to do those
Speaker 1: things seem cheaper expensive. So it truly is leading a
Speaker 1: horse to water. It's an imperfect control. Because this is
Speaker 1: a free market economy. We do not have planned growth.
Speaker 1: We don't build so many steel mills or flour mills
Speaker 1: or whatever because the government wants, and we build them
Speaker 1: by supply and demand. The FED, using interest rates, using
Speaker 1: the pressure of money in or out, tries to push
Speaker 1: that along in the way they want to, and then
Speaker 1: it should run by itself. You don't constantly need the
Speaker 1: Fed to push. Let's state it right now. What is
Speaker 1: the level of bullishness that you are It's it's I'm
Speaker 1: still my head spinning off the press conference yesterday. Let
Speaker 1: me just spact something clear. Should I acquire shares this morning?
Speaker 1: I would Yes, it's radio John. You can ask why
Speaker 1: if you give us longer answers? Well, I think I
Speaker 1: think you should. I think you know, it depends on
Speaker 1: what you want. Obviously, individuals what you want to do.
Speaker 1: I think the markets can move higher from here, and
Speaker 1: I think there's a chance that people finally get excited
Speaker 1: about markets, and that usually happens before Beau markets. There's
Speaker 1: a b exclusive right there. Michael McKee and Tom Keene
Speaker 1: were trying to digress away from the FED for like,
Speaker 1: oh six or seven minutes totally. John Manley with US
Speaker 1: with Wells Fargo Asset Management. John, If I had a
Speaker 1: given company and they take sixty two cents on the
Speaker 1: dollar down to gross profit, they take a very ample
Speaker 1: thirty two cents on the dollar down to IBADAR operating
Speaker 1: income net income? Is it exceptionally risk twenty cents on
Speaker 1: the dollar? Free cash flow is ginormous as compared to
Speaker 1: net income. That would be a stock that would develop
Speaker 1: a lot of cash that would have to make a
Speaker 1: decision should they invest or should they give it back
Speaker 1: to shareholders? That company would be Microsoft. Is it financial
Speaker 1: engineering when a blue chip multinational goes, we don't know
Speaker 1: what to do with our cash, let's give it back
Speaker 1: to shareholders. I don't think it is. I think it's
Speaker 1: a legitimate investment decision. Obviously not speaking about the specific company,
Speaker 1: but when a company is generating tremendous profits and doesn't
Speaker 1: see in the opportunity to invest, they shouldn't invest just
Speaker 1: because they're supposed to invest. They should find the best
Speaker 1: place for that money, and that could mean buying into
Speaker 1: their business. So they're I don't think they're necessarily trying
Speaker 1: to manipulate stock prices. That they're trying to buy into
Speaker 1: an attractive business. It just happens to be their own.
Speaker 1: Mike point, Mike is there are many apples, and many
Speaker 1: many apples. Microsoft Cash fifty three sixty three, seventy seven,
Speaker 1: eighties six nine, seven hundred and thirteen billion, one tenth
Speaker 1: of a trillion dollars. Michael McKey, Yeah, and you know
Speaker 1: Apple has the same kind of cash. I know, John,
Speaker 1: you don't want to talk about individual companies, although if
Speaker 1: you'd like to insult any of them, please feel free.
Speaker 1: It will help our ratings. Uh. But you seem to
Speaker 1: be taking issue with the conventional wisdom that the only
Speaker 1: reason companies are deploying cash is to keep the stock
Speaker 1: price up so the CEO gets paid. Well, the CEO
Speaker 1: wants to get paid. But that's how the world works,
Speaker 1: or at least that's how it works in America. We're
Speaker 1: all profit motivated. We all want more for ourselves, or
Speaker 1: many of us do. Let's put it that way. And
Speaker 1: I think that's what draws the economy, that's what's meant
Speaker 1: is to success around the world. And I think there's
Speaker 1: nothing wrong with that. I think that what you have
Speaker 1: to look at his corporations are looking for the best
Speaker 1: way to benefit their shareholders. Ultimately, now the CEO thinks
Speaker 1: he or she's gonna get paid if he or she
Speaker 1: does that, hopefully they align close enough. I think what
Speaker 1: has to happen, you know the old saying for a
Speaker 1: field of dreams building and they shall come as backwards.
Speaker 1: When when your corporations, they shall come, and then you
Speaker 1: build it. Uh, you know, I don't see the point
Speaker 1: of adding to capacity with capacity isn't needed, and I
Speaker 1: think the demand has to come to them. And that
Speaker 1: means eventually all recoveries in the economy, all successful extended
Speaker 1: recoveries come from the consumer. We want to buy more things.
Speaker 1: Corporations decide they have to expand capacities provide us with
Speaker 1: those things. That's I think healthy. Until that happens, why
Speaker 1: not just invest in your own very profitable business well,
Speaker 1: how do you get from here to there? How do
Speaker 1: you get to the point where the economy is generating
Speaker 1: more demand? Well, you know, we're all concerned. Has got
Speaker 1: to pay me more for me to want to spend more. Well,
Speaker 1: the company, You've got to feel more comfortable your situation,
Speaker 1: depending what you're buying, of course, but you know, if
Speaker 1: you if the job situation looks better, certainly better than
Speaker 1: it did seven or eight years ago. If the housing
Speaker 1: situation looks more secure, well, there's your income, there's your wealth.
Speaker 1: You're going to feel a bit more confident in spending something,
Speaker 1: and at some point in time, being one of millions
Speaker 1: of people, you start to spend more. You you don't
Speaker 1: hunker down as much as you did before. This is
Speaker 1: how it's always worked, as far as I can tell,
Speaker 1: to a degree of fright that goes away, that matters,
Speaker 1: And I think that's what's happening. I think after eight
Speaker 1: or nine years of being hunkered down for good reasons,
Speaker 1: I think American consumers are starting to feel better. If
Speaker 1: I want to acquire shares, mutual fun e t F folks,
Speaker 1: individual securities. I don't know if some of you knew this.
Speaker 1: You can buy shares of individual companies. John Manley. Where
Speaker 1: do I want to be and where what do I
Speaker 1: want to avoid? Well, I think one of the changes
Speaker 1: in the last six months, in my mind, has been
Speaker 1: mid caps um Historically, they have a habit of outperforming
Speaker 1: on a risk adjusted basis, and I think part of
Speaker 1: that is because they're sort of the small caps that
Speaker 1: got big. You have a certain screening process. I think
Speaker 1: that it on here. They also have liquidity characteristics somewhat
Speaker 1: like the large caps, but inefficiently like the small caps,
Speaker 1: So I think it's naturally a good place to be. However,
Speaker 1: there's been no earnings growth for the last two years
Speaker 1: from midcaps large cap small caps earnings growth has essentially
Speaker 1: gone flat. I think that's changing. I think one of
Speaker 1: the things I pick up in my little graphs is
Speaker 1: the earnings expectations are starting to rise there back to
Speaker 1: the old highs years ago for the large cast, but
Speaker 1: new highs for the MidCap. Is that earnings expectations is
Speaker 1: that really about a nominal GDP liftoff which means you
Speaker 1: get a revenue pop which works down the income statement.
Speaker 1: I think it is. I think it's also a little
Speaker 1: bit of return to more normal oil prices rather than depressed.
Speaker 1: I think the comparisons for oil gets easier, and I
Speaker 1: think there is some greater demand from the consumer that
Speaker 1: pushes things along a little bit. I'm, as I said
Speaker 1: earlier in the in the show, I'm sort of old fashioned.
Speaker 1: I think in the economy gets better, profits get better. Mike, Mike,
Speaker 1: let's do this. We've done this before, but let's do
Speaker 1: an update here from Michael the key Exxon mobile with
Speaker 1: all the carnage and oil is down from its peak
Speaker 1: of a number of years ago. I mean, that's all
Speaker 1: you have thought the world had come to an end. Well,
Speaker 1: we've talked about how the majors are able to leverage
Speaker 1: all of their different business lines to keep profits from
Speaker 1: falling a lot. But I guess John, the question is, Uh,
Speaker 1: do you still want to look at energy because these
Speaker 1: guys are at least on the on the major caps. Uh,
Speaker 1: these guys are so good at what they do and
Speaker 1: managing their earnings and have a lot of business lines,
Speaker 1: and maybe it's time to look at getting back in
Speaker 1: or is energy still you know, a little bit radioactive
Speaker 1: because you don't know what's going to happen with oil prices. Well,
Speaker 1: I think you you make a very good point when
Speaker 1: you frese that question, because oil and oil stocks aren't
Speaker 1: necessarily the same things and how they trade provided oil
Speaker 1: doesn't collapse, and I don't see the reason for it.
Speaker 1: I think we've already had a normal overshoot. I think
Speaker 1: a large integrated international oils are attractive. I think they
Speaker 1: may not be as cheap as they were a few
Speaker 1: months ago. But when I look at high quality stocks
Speaker 1: that kind of I'm gonna want to retire on in
Speaker 1: five or ten or fifteen years, I know what I
Speaker 1: want to own. I'm not sure I want to buy
Speaker 1: something because some of them are not particularly cheap energy.
Speaker 1: The high quality stuff is still relatively cheap versus other
Speaker 1: high quality companies. That makes it attractive to me, and
Speaker 1: I think that's going to keep these stocks going doing
Speaker 1: pretty well. And you and I know that oil prices
Speaker 1: go up and down at some point in time, and
Speaker 1: it maybe three or four years and now we'll be
Speaker 1: worried about prices that are too high. Maybe it's longer
Speaker 1: than that, maybe it's shorter than that, but oil prices
Speaker 1: go up and down. They're still mostly down. The stocks
Speaker 1: are decent values. There what I want to own and
Speaker 1: that's that's enough evidence for me to buy. Well, do
Speaker 1: you hear that time? I think we made news there.
Speaker 1: John is actually planning on retiring, which is different from
Speaker 1: you and I. You can't, you can't, don't, don't worry,
Speaker 1: it won't happen. We're wondering that match man only thank
Speaker 1: you so much well as far ago, don't retire, get
Speaker 1: to work. Always interesting and really important comments there about
Speaker 1: lack of enthusiasm that are observed in equities. Who you
Speaker 1: put your trust in matters. Investors have put their trust
Speaker 1: in independent registered investment advisors to the tune of four
Speaker 1: trillion dollars. Why they see their role as to serve,
Speaker 1: not sell. That's why Charles Schwab is committed to the
Speaker 1: success of over seven thousand independent financial advisors who passionately
Speaker 1: dedicate themselves to helping people achieve their financial goals. Learn
Speaker 1: more and find your independent advisor dot com. This is
Speaker 1: a joy. Hans Rhdecker we usually speak to from London,
Speaker 1: where he's distrected. He's flown in from London to be
Speaker 1: with Morgan's Daney in New York. Possibly do sedate Ellen Zentner?
Speaker 1: Did you have to hold her hand yesterday during the
Speaker 1: press conference. Zender has been so right, it's sick and
Speaker 1: yet that was a confusing press conference. Did you and
Speaker 1: the Morgan standing team after calm her down? Is what
Speaker 1: are we going to delay too hands? I guess no,
Speaker 1: nobody needs to calm down Ellen. She's a very confident
Speaker 1: and person and a very successful economist. But as the
Speaker 1: point we take is that we have here Center Bank,
Speaker 1: who obviously, by its communication, wants to high crates. Against
Speaker 1: that you have a finding where you wonder why should
Speaker 1: be their rate tike? So we have the economy currently
Speaker 1: running at about three percent, we think that economic activity
Speaker 1: in the fourth quarter is going to reduce to something
Speaker 1: like one percent. Now, if you take that finding, it
Speaker 1: is going to be an increasing headwind for the FETE
Speaker 1: to deliver, and therefore we stay with our opinions at
Speaker 1: the it is not going to hike this here. That
Speaker 1: is an out of consensus call. What we link into
Speaker 1: that is our call on the US dollar. We think
Speaker 1: that's the US dollar in this environment is going to
Speaker 1: decline between four to five index wise. And what this
Speaker 1: means to is for the next couple of months you
Speaker 1: have a very positive risk environment simply because the market
Speaker 1: is priced for a fet that is more than sixty
Speaker 1: percent probability. When data are now coming in weekends the
Speaker 1: United States, you have an automatism in the marketplace where
Speaker 1: the FETE is going to be repriced. That means the
Speaker 1: curve on the front and is going to flatten, and
Speaker 1: that is going to lend support for risk appetite globally.
Speaker 1: You see, is that how emerging markets were reacting over
Speaker 1: the past two days. And there's more to Mike, I
Speaker 1: guess that's the evidence we need that Morgan Stanley with
Speaker 1: a few other houses in outline, we just got evidence. Well,
Speaker 1: you've got a FED that basically said there's nothing wrong
Speaker 1: with raising rates right now given the data that we have.
Speaker 1: We just want to get some confirmation. So if nothing changes,
Speaker 1: you really have to forecast sort of decline in the
Speaker 1: economy to say that they won't raise rates because they
Speaker 1: seem to want to. Now that is that reminds us
Speaker 1: a little bit of last year. So in last year,
Speaker 1: as they came out and we're very clear that I
Speaker 1: wanted to hike rates at the end of the year,
Speaker 1: so we came into a kinde type of calendar guidance
Speaker 1: and the nwer question is how are they going to
Speaker 1: react to upcoming a data weakness. And I think that
Speaker 1: the likelihood offers them going to act in December should
Speaker 1: be not put higher than forty percent at this stage,
Speaker 1: but the market is expecting much more. And we should
Speaker 1: as well think about the quality of communication yesterday in
Speaker 1: the in the FATS press conference. So what you have
Speaker 1: is um that the Center Bank seems to look at
Speaker 1: at areas into various UH situations. We have on one hand,
Speaker 1: we have whereas the capital markets are currently trading, we
Speaker 1: have where the economy is, and then we have as
Speaker 1: well to look into the structure of economic role, So
Speaker 1: especially this situation where you have labor market strengths look
Speaker 1: at the initial claims today, but you have an undergoing
Speaker 1: decline in productivity. And I guess that that's a very
Speaker 1: good reason. So when you have a lack of investment
Speaker 1: activity is very difficult to develop productivity and that is
Speaker 1: a key element here. And Mike, when she mentioned productivity
Speaker 1: of Shasker's question yesterday, the end strengthened. That was a
Speaker 1: rule point where the end moved. What evidence do you
Speaker 1: have that the economy is going to be in a
Speaker 1: position where they would hold I mean, what are you
Speaker 1: looking at? What should investors look at between now and December?
Speaker 1: But you need to look at as UH when you
Speaker 1: when you have an economic viewpoint, you have always look
Speaker 1: at early indications in the economy and as a best
Speaker 1: indication you can get this credit and just look at
Speaker 1: the credit indicators we have seen now that consumer climate
Speaker 1: is a surprisingly week. Look at the University of Michigan indicator.
Speaker 1: And the investment site that is really the troubling spot
Speaker 1: in this economy. The investment site doesn't doesn't develop, and
Speaker 1: I think there's a very good reason for the investment
Speaker 1: site and not to develop. There's over there's over capacity globally,
Speaker 1: and I think that the FAT has to learn one thing.
Speaker 1: We may talk about global cost when it comes to wages,
Speaker 1: local cost when it comes to wages, but we have
Speaker 1: to talk about global inflation because of overcapacity. Definition. Let's
Speaker 1: come back with that with the CD marked on yesterday,
Speaker 1: the global growth that's been one of our themes as well.
Speaker 1: Hands Rahecker with it with Morgan Stanley throw they have
Speaker 1: him in our studios today. Is he visits New York
Speaker 1: from London. Hands I'm behind, I'm so damn far behind
Speaker 1: for the year. I need to create some alpha and
Speaker 1: I can only do it with brutal moves in foreign change.
Speaker 1: Where can I make money? Is I go to your end?
Speaker 1: Where will be the move within this ridiculously quiet market? Okay,
Speaker 1: I can make you two offerings. Offerings. One is for
Speaker 1: the very short term, so the next two two months
Speaker 1: I would sell dollars. I would go into high Beata
Speaker 1: as things that the positioning of further market in High
Speaker 1: Beata is still underrepresented. Of course we have seen a
Speaker 1: lot of flows going into this direction, but when you
Speaker 1: look into how a normal portfolio locations should look like,
Speaker 1: then this is still underrepresented. So by a merchant markets
Speaker 1: sells the US, South Africa and Brazilian real commodity based Well,
Speaker 1: I mean you need to look at the story and
Speaker 1: then you may have first of all to add a
Speaker 1: little bit with or you can play with momentum a bit.
Speaker 1: So the story where the story good. The story is
Speaker 1: good in Indonesia, the story is good in Brazil. The
Speaker 1: disadvantages there is that a lot of the move had
Speaker 1: been there already seen. And then yeah, father's where people
Speaker 1: are taking a risk and uh and to jump on
Speaker 1: a momentum trade and that is currently happening as you
Speaker 1: mentioned in South Africa. But I mean you have really
Speaker 1: to recognize that's a risk profile. There is a completely
Speaker 1: different one. And then of course the big exception to
Speaker 1: the rule there is Mexico where very specific different fundamentals
Speaker 1: and as well political political things are coming in. Right.
Speaker 1: If I look at dollar Indonesia, okay, folks, this is
Speaker 1: not something we mentioned, Mike doing this two or three
Speaker 1: times a week, we mentioned Dollar Indonesia rights, it's a
Speaker 1: twenty nine move back to the decade long trend of
Speaker 1: years ago. When you say you want to be in Indonesia,
Speaker 1: is it a structural call for that big move back
Speaker 1: to once what was? Or is it back to some resistance?
Speaker 1: Would you be say a quarter of that move Now,
Speaker 1: first of all, you have to look into the reform
Speaker 1: process in the country itself, so it's a very positive
Speaker 1: fundamental story behind it. So the country is improving to
Speaker 1: what's the better. Then secondly you need to look into
Speaker 1: what is the outlook for commodities for the next two months,
Speaker 1: And I think that the outlook for commodity since the
Speaker 1: next two months or is on the positive side. So
Speaker 1: Indonesia is going to benefit from that side. We have
Speaker 1: seen significant inflow wire fixed income related funds into Indonesia
Speaker 1: and that had been not fully reflected into exchange rate strengths.
Speaker 1: This is a story. It's amazing Michael McKee. Within the
Speaker 1: sophistication that Mr Roddicker works in the difference in the
Speaker 1: chart of dollar Indonesia versus yen Indonesia, well two different
Speaker 1: planets the dollar yen pair. Which one drives the trade
Speaker 1: right now? And the reason I ask is because then
Speaker 1: which one is going to drive emerging market? So first
Speaker 1: of all you can get currently the impression of that
Speaker 1: there you have three major funding currencies around right and
Speaker 1: that is because of center bank policy within Europe, within
Speaker 1: the United States and within with on on the Japanese side.
Speaker 1: Now on on Japan, I would make do you sing
Speaker 1: a very big I would like to make a very
Speaker 1: big statement. So we had been bullish on the Japanese
Speaker 1: yen for three quarters. We called the year twenty sixteen
Speaker 1: the year of yen strengths. And it is no time
Speaker 1: slowly to turn the boat. And I think that the
Speaker 1: yen is as well traded in line with the global
Speaker 1: inflation outlook. It is traded in line with the local
Speaker 1: inflation outlook in Japan itself. And I think that in
Speaker 1: Japan itself there's a there's a change taking place. While
Speaker 1: we have talked so much about the fat, we actually
Speaker 1: should talk about the b O J. There seems to
Speaker 1: be a central bank moving one step further. This is
Speaker 1: called yield curve management. So they fix a ten year
Speaker 1: and they run as well as a responsibility for the
Speaker 1: short end of the market. And the question then is
Speaker 1: how do you fill this into a broader context and
Speaker 1: what are the implications for the Japanese en. The Japanese
Speaker 1: yen is driven by, or had been driven in the
Speaker 1: past three quarters by a significant decline in monetary velocity
Speaker 1: in Japan. So when you look at how much central
Speaker 1: bank money had been pumped and you compare that to
Speaker 1: the credit in the country, you see a significant diversion.
Speaker 1: So monetary velocity is declining. Why is it that has
Speaker 1: to do with the financial sector? The financial sector distribution
Speaker 1: channel of central bank liquidity seemed to be blocked. You
Speaker 1: need to unblock this distribution channel. Various measures are required
Speaker 1: for that. One is the yield curve management is a
Speaker 1: step in the right direction. Secondly, they have to push
Speaker 1: inflation expectations, for which I believe the MF is going
Speaker 1: to come in, so you will have a much tighter
Speaker 1: coordination of policy between the m o F and the
Speaker 1: b o J. And I think that the market has
Speaker 1: not woken to that. And I guess concerning doll again,
Speaker 1: you have now to see the slow turnaround, the slow
Speaker 1: turnaround to the better. And I think that next year
Speaker 1: doll again should actually trade higher, and that against the
Speaker 1: consensus view. Our analysis concerning positioning in the market does
Speaker 1: show that as a market is overwhelming the long the
Speaker 1: Japanese skin. When I came over here to this country
Speaker 1: in November last year to promote the idea of yen strength,
Speaker 1: nobody wanted to hear about that. Now I'm here back
Speaker 1: again in the United States and I promote the idea
Speaker 1: of potentially end weakness. Nobody wanted to hear about it. Well,
Speaker 1: we do. We're happy to have you in here. We
Speaker 1: don't make it feel bad and go home. You know,
Speaker 1: I'm not saying that that people feel that, but I
Speaker 1: mean this appointment, but it's still it's still doesn't get
Speaker 1: kind of my questions, which of the pair is going
Speaker 1: to drive currency movements in other markets as certainly I
Speaker 1: do look at who is most signal of currency, is
Speaker 1: most significant for funding purposes, and they're traditionally US dollar
Speaker 1: had played a major role, and therefore you need to
Speaker 1: analyze US dollar correctly to get the rest of the
Speaker 1: bunch in in good shape. So to be clear here,
Speaker 1: I don't hear a brutal move in US dollar. You know,
Speaker 1: we had some love here a couple of years ago,
Speaker 1: not like two You think, well, this this this brutal
Speaker 1: thing that was riches a way of arguing, now, I
Speaker 1: think that's the European Center Bank is actually in a
Speaker 1: very difficult situation. Now you see that euro dollar is
Speaker 1: going to basically go sideways. Our call is that we
Speaker 1: are going to see one eighteen at the end of
Speaker 1: the year. And you know the reason why I see
Speaker 1: that despite the situation in Italy, you despite upcoming election
Speaker 1: uncertainties ranging from whatever it is about, theres a lack
Speaker 1: of euros selling. There's nobody out there who can sell euros. Yeah,
Speaker 1: very quickly, hands sterling, we've had some real outlier cause
Speaker 1: in this how do you frame sterling one year or
Speaker 1: even two years out? I think yesterday is the o
Speaker 1: CD brought out a very important report. Basically, you're saying
Speaker 1: yet to our stabilization outlook long terms is negative. What
Speaker 1: it is is that the shift towards heart exit cannot
Speaker 1: be a good thing for Sterling. What's the scope and
Speaker 1: scale of that move? That seems to be the point.
Speaker 1: Our forecast is that in euro Sterling we are going
Speaker 1: to see ninety two to ninety four. We are currently
Speaker 1: today trading eighty six and in cable one twenty four.
Speaker 1: So here by the end of two thousand sixteen, by
Speaker 1: the end can you give me the end of two
Speaker 1: thousand seventeen, That is actually where we see that UM
Speaker 1: there is going to be um There's going to be
Speaker 1: a situation of more um U s dollar strength, general
Speaker 1: stabilization of of of many of many things in that year.
Speaker 1: I would focus on on euro Sterling. So I think
Speaker 1: that we are going to have a trading range between
Speaker 1: one twenty four and ABE one s three. Very good,
Speaker 1: Hans Rhdicker, Just fabulous, Thank you so much with Morgan Stanley.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
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Speaker 1: you prefer. I'm on Twitter at Tom Keane. Michael McKee
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