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Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane.

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Speaker 1: Always with Michael McKee daily we bring you insight from

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Speaker 1: the best in economics, finance, investment, and international relations. Find

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Speaker 1: Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of

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Speaker 1: course on the Bloomberg. It has been too long since

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Speaker 1: we have spoken with David wu a Bank of America,

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Speaker 1: Maryland's David. There's any number of ways to start out.

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Speaker 1: Let's start out a little more view from thirty thousand

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Speaker 1: feet or even uh sixty thousand feet, and that is

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Speaker 1: the idea of Janet Yelling, a central banker to the world.

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Speaker 1: As you mentioned earlier on television, she's got Asian movements

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Speaker 1: which import deflation, excuse me, export deflation and disinflation into

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Speaker 1: the United States. Is she working with a self inflicted

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Speaker 1: tightening cycle from other markets and nations? I think so.

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Speaker 1: I think the point is in Thomas, you know, like

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Speaker 1: you know what you know? Ten years ago we had

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Speaker 1: the so called global saving blot, meaning that the rest

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Speaker 1: of the world, especially the central banks, but a lot

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Speaker 1: of U. S. Treas exactly buil up prices and not

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Speaker 1: created housing bubble. Now you have the same basically saving gluts.

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Speaker 1: Like once again basically with Japanese and European investors poling

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Speaker 1: the US treasuries market driving down usn't driving up starts?

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Speaker 1: Is that bubble now if it's not housing some people,

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Speaker 1: like some of my colleagues in equity research, for example,

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Speaker 1: the Bank will suggest that equity market definitely has become

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Speaker 1: one of those things, especially for the high divided yielding stocks.

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Speaker 1: They're definitely training a valuation that is no longer compatible

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Speaker 1: with any kind of fundamental justifications. It's not a proper question,

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Speaker 1: but it's Monday. Can you own multinational, fully priced blue

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Speaker 1: chip US equities? Reminding it's your real trouble. I'm gonna

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Speaker 1: get David Wore in no trouble here. We're not going

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Speaker 1: there this morning. What I see moving this morning is

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Speaker 1: sterling weaker, that's mostly strong dollar. What is David Who's

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Speaker 1: call on the brutality of the dollar move? I think

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Speaker 1: you know, listen, I mean the fact is you know

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Speaker 1: what you know. Unless the Fed is prepare to counter balance,

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Speaker 1: that's easy and monetary policy as a result of ECB

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Speaker 1: and basically Japanese up to you know, the dollar is

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Speaker 1: going nowhere. And this is this is where the issue

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Speaker 1: is for me. So I think from that point of

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Speaker 1: me again, I'm hoping to see some sick, some signs

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Speaker 1: between now and Jackson Hole that the FED actually taking

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Speaker 1: very seriously, that we've seen a massive easing of financial

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Speaker 1: conditions in the US, and the last six weeks we've

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Speaker 1: seen data finally picking up the writing for the FED

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Speaker 1: to do actually start hiking rates, as might call Ethan

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Speaker 1: Harris is calling for. Well, they may do that, and

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Speaker 1: it may be September or December. What is it one

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Speaker 1: or done? Or is there a new measured vector away

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Speaker 1: from stand Fisher's alter accommodation. I mean that's an arch call.

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Speaker 1: What Seasan say? What do you say? I think you know,

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Speaker 1: I mean, you know, even as calling for a hike

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Speaker 1: in p Sam Burt, So, I think that's suddenly I think,

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Speaker 1: you know, it's definitely consistent with my view. But I

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Speaker 1: also think that this is this is a place. And

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Speaker 1: again the big lesson from the Global Saving blog is

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Speaker 1: that you've gotta you cannot ignore a surprises because if

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Speaker 1: you ignore a surprises, and if the consequences could be

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Speaker 1: even more dire when the bubble finally pursed, and I

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Speaker 1: think the question is what the fed entree has the

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Speaker 1: understanding learned from the lesson ten years ago. It's not

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Speaker 1: gonna make the same mistake. But folks, this is important

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Speaker 1: when you're when you're in the grind of this. Every day,

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Speaker 1: there's little headlines that stick out over ninety days. There

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Speaker 1: was that headline X number of Bank of England meetings

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Speaker 1: ago where Karney basically said, I'm sorry, there's no inflation.

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Speaker 1: I'm looking at five year five year four wards is

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Speaker 1: one measure. I'm sorry, David. The market is clearly predicting

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Speaker 1: disinflation and in some countries outright deflation. No, I I agree,

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Speaker 1: there's no question that this. You know, the big story

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Speaker 1: of this year is that the market is totally lost

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Speaker 1: confidence in central banks. And this is why to me, Tom,

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Speaker 1: we haven't talked about this. To me, the single biggest

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Speaker 1: issue I think if I think about going two thousands

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Speaker 1: seven things that held fiscal policy, because we know the

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Speaker 1: monetary policy has now reach a limit, the question is

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Speaker 1: are we going to see easy fiscal policy? And to me,

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Speaker 1: the big question there is what we see easier fiscal

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Speaker 1: policy in the US, And to me, I don't have

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Speaker 1: to tell you because of the gridlock in Washington last

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Speaker 1: basically six years, we had very tight fiscal policy. Question

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Speaker 1: is whether the November elections is going to bring forward

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Speaker 1: easier fiscal policy, because if that happens, you will definitely

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Speaker 1: see a much more aggressive FED in two thousands. Doesn't

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Speaker 1: that easier? Um? I mean the Wall Street Journal with

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Speaker 1: a wild with David Harrison and other dealers in the

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Speaker 1: Wall Street Journal, localities opt for less debt over new infrastructure.

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Speaker 1: I mean, it's I don't want to say it's a

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Speaker 1: policy of Austeria. It's an ethos of of austerity, isn't

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Speaker 1: it exactly? But you're gonna hear from Trump today. Okay?

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Speaker 1: To me, you know what paint bolt only. You know,

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Speaker 1: the Republicans the only paper lift servers to fiscal responsive.

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Speaker 1: But when the Democrats are in charge, if I think

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Speaker 1: we get a clean sweep, okay, but i'd the party.

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Speaker 1: I think in this in November, you will probably see

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Speaker 1: a very very I think, you know, significant loose net

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Speaker 1: fiscal policy next year. I mean, well, okay, you say

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Speaker 1: we're gonna see a coordinated effort in the January and

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Speaker 1: fiscal policy. I took amtrak this week full disclosure, folks,

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Speaker 1: I had two wonderful trips on Amtrak, all on time.

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Speaker 1: They nailed it, absolutely nailed. You know, we all bad

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Speaker 1: mouth Joseph Boardman's Amtrak. Mr. Boardman's a lifelong rail guy,

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Speaker 1: the CEO of Amtrak. I believe he's retiring this year

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Speaker 1: or next year. The things are dump I mean, there's

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Speaker 1: no other way to put it. You're telling me that

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Speaker 1: in January the Congress of the United States is going

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Speaker 1: to vote to do the airplanes, to do the roads,

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Speaker 1: to do Amtrak, etcetera. I'm saying that, you know what,

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Speaker 1: what matters much more than whether it's Trump or Clinton.

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Speaker 1: It's going to be a question of whether a party

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Speaker 1: can do a clean sweep in November, meaning winning the

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Speaker 1: White House and winning both houses of Congress. Because once

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Speaker 1: that happens, you will see a dramatic unleashed fiscal stimulus.

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Speaker 1: You know, last week there was a report that showed

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Speaker 1: a number of cars in the US that are broking

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Speaker 1: breaking down the road that the record high because how

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Speaker 1: bad the roads are. I think that's where it is

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Speaker 1: by part of the support, which is, you know, you

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Speaker 1: need to get some infrastructure spending going. When you look

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Speaker 1: David at all of this and within the great distortion.

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Speaker 1: And this goes back to my interviews Mr Gross on Friday.

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Speaker 1: He's talking about a financial repression of a decade. Let's

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Speaker 1: shave off two years because maybe Bill said that two

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Speaker 1: years ago. How do you get politicians or businesses to

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Speaker 1: quote unquote invest is they observed this rate market? I

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Speaker 1: mean the rate market is a fiction, right absolutely. I

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Speaker 1: mean think about this. I mean rates are so low

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Speaker 1: and yet we're seeing basically negative you know, it's a

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Speaker 1: growth rate and investment right now. So I think from

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Speaker 1: no point of view, this is you know again, I

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Speaker 1: don't want to be you know, keep beating my head

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Speaker 1: at the table. I think the fiscal policy is going

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Speaker 1: to be a huge thing. I mean again, I mean

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Speaker 1: this is about you know, this is about sennation. The

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Speaker 1: US say should the picking up you know where the

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Speaker 1: piece is essentially putting from growth in the system. To

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Speaker 1: be clear, here Ethan Harrison. You are looking for the

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Speaker 1: FED to finally act. Can they do it is a

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Speaker 1: one and done language or rhetoric or by definition, do

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Speaker 1: they go back to a Greenspan measured approach where you know,

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Speaker 1: da da da da da. I think these guys. I think, honestly,

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Speaker 1: these guys are you know, these guys are nervous about

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Speaker 1: the market. They don't you know, remember I've been talking

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Speaker 1: about global courtncy war. If they keep hiking rate steadily,

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Speaker 1: that all is gonna strengthen. It's gonna be a big problem.

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Speaker 1: So I think, from no point of view, is going

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Speaker 1: to be opportunistic hike. I think this is what I

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Speaker 1: would I I will go. I like that phrase, an

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Speaker 1: opportunistic hike. What we're observing is recordizing equities, bonds, price

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Speaker 1: to perfection. A guy like Bill Gross saying by stamp scenario,

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Speaker 1: rugs and whatever intangibles he wants to do. I mean,

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Speaker 1: Janet Yellen is working in an absolutely original Millie right now,

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Speaker 1: isn't she absolutely? But I think you know, again, you know,

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Speaker 1: you're the chairman of Federal Reserve. You've gotta have you know,

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Speaker 1: you've gotta have guts, You've gotta sometimes do the right thing.

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Speaker 1: And I think from that point of you doing the

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Speaker 1: right thing may not be what is she gonna spark

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Speaker 1: out this at Jackson Hole? You do say Jackson is important.

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Speaker 1: I think it's very important. I think, you know, I personally,

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Speaker 1: I think she has to basically, you know, I think

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Speaker 1: you know, conveyed impression that the FED cares about asset prices.

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Speaker 1: I think that is important, but I think it's critical

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Speaker 1: that she's gonna reframe that at Jackson Hole and we

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Speaker 1: come out of there with a September meeting. Would you

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Speaker 1: suggest they will raise rates in September? I'm personally think

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Speaker 1: that the probability is probably higher than what the markets

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Speaker 1: priced in. I think the markets are anywhere near what

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Speaker 1: they are now, meaning the doll is reasonably weak, the

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Speaker 1: stock market, the all time high bonos at this level,

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Speaker 1: you have to believe that the Fed it's going to

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Speaker 1: basically have to basically is something about it. David wo

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Speaker 1: with Bank of America. Marylyn's first, we welcome from London. Francine.

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Speaker 1: Like Francine, where's Brexit over the weekend? Are people riveted

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Speaker 1: by the follow on to Brexit? Or is it like

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Speaker 1: so June? And of course Tom, we need to know

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Speaker 1: more about Brexit because we haven't really had any real

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Speaker 1: data to support. Mark Carney has done right, so we

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Speaker 1: had sentiment. Uh, for for now we wait more data.

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Speaker 1: But look you have Mark Arney. He's been doing a

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Speaker 1: great job just because he's kept calm and carried on

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Speaker 1: as the UK as the Brits would say, right, and

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Speaker 1: David Wood that was the theme yere with this, Carney

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Speaker 1: was playing off a massively ex ante theme of get

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Speaker 1: out front of the data. That's pretty original, isn't it

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Speaker 1: for a central bank? I think the end of the

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Speaker 1: day before we're looking and especially given the fact that

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Speaker 1: Sterling has been trading so peacefully like a baby basically

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Speaker 1: in a crater over the last essentially six weeks, that

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Speaker 1: gives me a lot of Basically, I think your ammunition

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Speaker 1: to watch the really leashed the QUI David, you're expecting

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Speaker 1: a significantly weaker pound right to about one twenty or

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Speaker 1: is that too low? Let's say around and actually will

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Speaker 1: they benefit? The economy doesn't export that much, Let's be

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Speaker 1: truthful exactly, but the economy could actually benefit from some

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Speaker 1: imporse obstitution, right I mean now, of course, you know,

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Speaker 1: meaning that UK could actually start producing things that they

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Speaker 1: currently import. However, I think that process is going to

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Speaker 1: be very long drawn out. This is why I personally

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Speaker 1: think that the improvement of the current account deficit is

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Speaker 1: going to take a long time to come. But at

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Speaker 1: the same time. I think, you know, in the newer term,

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Speaker 1: because you know, basically sure sterling position is so crowded,

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Speaker 1: I think it's going to take a while for Sterling

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Speaker 1: to actually start basically moving lower. So I think from

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Speaker 1: not a point of yes, lower sterling, but I think

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Speaker 1: investors who are short that sterling right now have to

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Speaker 1: be a bit more patient. How do you write Mark

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Speaker 1: Karney's plan? So far, so UK government bonds rose, pushing

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Speaker 1: five year yields to a record low. Again, markets are

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Speaker 1: still trying to digest what we heard from Mark Carney

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Speaker 1: last Thursday. I think, you know, most interesting to me

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Speaker 1: about Mark Arney is the funk. As you probably know,

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Speaker 1: the guy doesn't care for negative interest rates. He has

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Speaker 1: basically said that, you know, actually negative interest rates are

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Speaker 1: not appropriate in the case of UK because of the

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Speaker 1: concerns we talked about with respective banks. So I think

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Speaker 1: from that point of view, this twenty five basis point cut,

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Speaker 1: I think could be, you know, and maybe all you're

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Speaker 1: gonna get and then que they've already bought, they already

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Speaker 1: owned a boy something like, you know, almost of all

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Speaker 1: outstanding government bonds. So I'm not sure there's not much

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Speaker 1: more that Mark county is going to be able to do.

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Speaker 1: This is why I think the next step is going

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Speaker 1: to be fiscal policy. I agree with that and that

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Speaker 1: he clearly alluded to that tone, but his language in

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Speaker 1: tone is a unique guy running a bank was remarkable

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Speaker 1: on the effect on savers and what that means is

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Speaker 1: the nominal rate and the real rate are not in

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Speaker 1: any of the textbooks. You had a tougher Columbia are there.

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Speaker 1: You're you're right, except Tom. You know what, But I

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Speaker 1: think we're starting to see some perverse effect. I don't

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Speaker 1: have to tell you. Every single day. In the U

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Speaker 1: s Alone, you've got about fifteen in the Americans reaching

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Speaker 1: age of sixty five. If you look at consumer confidence number,

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Speaker 1: people over the age of sixty five much lower confidence

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Speaker 1: about the economic outlook than people much younger. One reason

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Speaker 1: is because with interest ry at zero, these people are

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Speaker 1: never going to be able to retire. Okay, real wines

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Speaker 1: retire for the next twenty years. So I think that

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Speaker 1: the tragedy here could very well be as interest rates

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Speaker 1: fault that people were supposed to go and spend money

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Speaker 1: basically seeing reduced saving rate, they're actually saving more and more.

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Speaker 1: Francine after that astute observation by dr Rue that those

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Speaker 1: of a fossil level will never be able to retire.

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Speaker 1: I can assure you, Francy. You with younger children, that's

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Speaker 1: not true. The reason older people can't retire is the

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Speaker 1: cost of summer camp. That's why they just so you know, Francy,

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Speaker 1: that's why they can't retire. Yeah, but you know what,

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Speaker 1: it goes back as a sentiment, right, you feel you

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Speaker 1: can't retire, but tell I sure you probably you can

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Speaker 1: at some point, David does it go back to the

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Speaker 1: fact that it's not really hard data that we need

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Speaker 1: to look at brexits. It's the feeling that people won't

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Speaker 1: spend it. Even if we end up with helicopter money

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Speaker 1: in the UK, you need to be reassured about what's

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Speaker 1: coming up in order, you know, for you to spend

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Speaker 1: that money. That's exactly it. I mean, even if they

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Speaker 1: were to cut taxes tomorrow, you know, because regarding equivalence,

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Speaker 1: people actually might just basically end up basically saving more.

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Speaker 1: So I think from that point of view, I think

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Speaker 1: you're absolutely exactly right. I think you know, in some

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Speaker 1: sense this is why we're only the first ending of

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Speaker 1: this Basically Brigit business, and then it's going to be

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Speaker 1: very too mutuous. I think the only thing I would

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Speaker 1: say you know about Brixit and I just want to

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Speaker 1: take us a little bit away from what's happening in

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Speaker 1: the UK, is you know what you think about this

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Speaker 1: if the one if there's one thing brings us so

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Speaker 1: far as accomplished, is the fact that it's legitimize these

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Speaker 1: intaglobalization concerns. Before Brigit, if you're a Frenchman, is Swede

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Speaker 1: were in Italian, you were embarrassed to admit that you

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Speaker 1: would even considered voting for the the fun Nationale with

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Speaker 1: the Free Democrats, or for the matter of the Five

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Speaker 1: Star Party because you said that they're racism cent a phobics.

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Speaker 1: But after Braxit you said, what's not possible? The fifty

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Speaker 1: two percent of British voters are basically systems in the

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Speaker 1: public I think, not point of view. The most the

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Speaker 1: most important consequence of breaks is going to basically basically

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Speaker 1: help the French parties in terms of building on anti

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Speaker 1: globalization momentum. David would thank you so much, which is

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Speaker 1: in godless with us with the Boost School of Chicago,

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Speaker 1: you just wrote an essay, which I thought was brilliant.

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Speaker 1: I believe as a follow on essay on Italian banks

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Speaker 1: and how we unwind bad banks. I've never bought for

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Speaker 1: a moment good or bad banks. How much of a

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Speaker 1: fiction is the idea of a bad bank. I don't

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Speaker 1: think he's a fiction that the bank bank can help.

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Speaker 1: The question is at what price? In Italy. The current

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Speaker 1: narrative is that Italian loans are most secure. Uh there

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Speaker 1: is more property behind and non performing loan should not

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Speaker 1: be value as low as in other countries because eventually

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Speaker 1: the money will be paid. And part of this narrative

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Speaker 1: is linked to the history of Bancotinapoli that in the

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Speaker 1: mid nineties went past, and the current narrative is the

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Speaker 1: most of the money eventually was repaid. So I decided

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Speaker 1: actually to look for the real history. There is a

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Speaker 1: recent book that came out called the Miracle called Bad

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Speaker 1: Bank that helped me collect some of this information. And

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Speaker 1: I did a simple uh NET present value analysis. And

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Speaker 1: first of all, um, it's true that after twenty years

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Speaker 1: UH the bad bank of the Bancodinapoli recover most of

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Speaker 1: the money that paid for But first of all, is

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Speaker 1: most of the money they paid for not most of

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Speaker 1: the original value of the loans, and second it took

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Speaker 1: twenty years and a lot of money to manage that.

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Speaker 1: Once you take this into account, the net present value

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Speaker 1: of those loans depends not surprisingly or what which premium

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Speaker 1: you attached to the valuation. If you attach which premium

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Speaker 1: of five hundred basinis points over the T bond, the

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Speaker 1: net present value and as of the beginning of the

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Speaker 1: of the period was twenty two cents on the dollar,

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Speaker 1: so a pretty low valuation. I mean, for instance, it

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Speaker 1: is but which if you know, forget being repaid in

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Speaker 1: twenty years. At this rate, it will probably take twenty

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Speaker 1: years to fix the banks. Why are they taking their

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Speaker 1: sweet time as fears for the Italian banking sector are

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Speaker 1: increasing by the day. I think that if you are

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Speaker 1: a banker, you hope for things to sort of slow

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Speaker 1: down and eventually you're going to be fine. Um if

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Speaker 1: everything walks out and the problem is eventually and in

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Speaker 1: the meantime you don't land and the economy doesn't grow.

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Speaker 1: So I think that this is where there is a

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Speaker 1: tension between the perspective of the banker and the perspective

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Speaker 1: of of the government and the country. Overall, what's the prescription,

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Speaker 1: How do we fix this faster than the current regulation

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Speaker 1: and the current politicians wanted to. So the situation looks

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Speaker 1: remarkably similar to the one in the United States in

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Speaker 1: two thousand and eight, because back then there was a

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Speaker 1: lot of uncertainties about the value of the subprime mortgages,

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Speaker 1: and that uncertainty was paralyzing the market, was impairing the banks,

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Speaker 1: was making difficult to land, was really freezing the economy.

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Speaker 1: And at the time I was a big supporter of

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Speaker 1: doing sort of a debt for equity swap and get

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Speaker 1: through and resolved and what the government and that doing

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Speaker 1: not the initial proposal, but the second version of TAP

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Speaker 1: was an equity injection that exposed walk out fairly well.

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Speaker 1: Now in in Italy, I think the debt for ecuty

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Speaker 1: swap is made very difficult by the fact that banks

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Speaker 1: sold a lot of their bonds to retail investors, and

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Speaker 1: so if we were to do that, that would be

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Speaker 1: a huge re percussion on the portfolio of households and

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Speaker 1: also probably this would trigger a bank run. So I

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Speaker 1: think the only sort of alternative is to do a

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Speaker 1: version of top blueges and gless with us with Brusco, Chicago,

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Speaker 1: author of one of my books of the summer, A

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Speaker 1: Capitalism for the People, and also Saving Capitalism from the

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Speaker 1: Capital is a great book with Roger Rogers. How's he done?

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Speaker 1: His Central Bank head of India. I mean, you're a

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Speaker 1: professor in Chicago. One day, you guys, wake up, should

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Speaker 1: we see the Cubs? The next day you wake up,

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Speaker 1: you go, let's see the White Sox today. And all

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Speaker 1: of a sudden, rug was ahead of the Indian Bank.

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Speaker 1: That was quite a challenge. It was a great challenge.

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Speaker 1: Of course I am biased because I'm a fan of

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Speaker 1: your Bible, but but I think he did a fantastic job.

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Speaker 1: He was able to keep down inflation, growth went up,

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Speaker 1: and also he fought a very good fight in trying

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Speaker 1: to clean up the banking sector from a lot of

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Speaker 1: coney loans at the time where the economy was spanning.

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Speaker 1: I think this is what I wish Italy had done

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Speaker 1: at the right time. That's right where I wanted to go.

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Speaker 1: Because you and for instat folks forensic like what many

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Speaker 1: of you will think, she's British, She's not British. She's

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Speaker 1: a soul mate of Luigis and galas would you explain

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Speaker 1: to me how we can have zingalas European capitalism if

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Speaker 1: we can't have merges of banks. It's unthinkable that Deutsche

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Speaker 1: Bank and UNI Credit would mate, right, Yes, I think

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Speaker 1: he is unthinkable, even most so after the financial crisis,

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Speaker 1: because remember Unique Credit did go through a seals of acquisition,

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Speaker 1: one of which was in Germany. So there was a

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Speaker 1: beginning of a consolidation of the banking sector in Europe.

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Speaker 1: But during the crisis there was a huge pressure from

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Speaker 1: the local central banks not to reallocate liquidity across countries.

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Speaker 1: So this is the tension of you up on the

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Speaker 1: one end, we pretend to be a common market. On

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Speaker 1: the other end, the political influence is still divided by

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Speaker 1: sort of borders, which I mean, the problem is that

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Speaker 1: you also have one regulator, right, And I understand. And

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Speaker 1: Tom loves to beat up on Italian banks or European

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Speaker 1: banks in general, and he says, well, why don't you

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Speaker 1: just merge? Why don't you and and it would make

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Speaker 1: more sense, except if you're trying to de risk the system,

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Speaker 1: then the last thing you want is a bigger bank,

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Speaker 1: and it's two banks merging to make a bigger one. Actually,

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Speaker 1: I am with Tom here. If the merger were across borders,

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Speaker 1: that would be good. The problem that you are right,

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Speaker 1: if the merger takes place within Italy, then you're basically

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Speaker 1: putting together too sort of weak candidates and it's not

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Speaker 1: obvious that they make a good one. But if you

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Speaker 1: were to allow how coss border mergers within you but

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Speaker 1: we shouldn't even call them course border, which called within

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Speaker 1: you a merger is uh, then then this the problem

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Speaker 1: would be different. And I think that there is a

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Speaker 1: potential solution. It's a potential solution for the bank that's

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Speaker 1: going under, but for the healthy bank that would be

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Speaker 1: buying something, it always spells bad news. Is that a

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Speaker 1: fair assumption if you look at RBS and A B

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Speaker 1: and EMROO, this is kind of what happened. Yes, but

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Speaker 1: in that particular case, the acquisition took place at super

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Speaker 1: inflated prices. I think now the problems and prices are

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Speaker 1: too low, not too high. So I think that there

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Speaker 1: are definitely benefits from cost border mergers in term of

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Speaker 1: cost savings UH and efficiencies. And also I think that

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Speaker 1: we need to bring better information system in Italy. One

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Speaker 1: of the problems with the non performing loan is when

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Speaker 1: you try to get the information behind it is not

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Speaker 1: properly account for, it is not easy to observe via computer,

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Speaker 1: and so once, so forth. So I think that cost

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Speaker 1: boarder mergers will bring better technology and and better banks. Legally,

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Speaker 1: there's something and Tom, I don't know if you know this,

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Speaker 1: but you talk a lot, we talk a lot about

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Speaker 1: the fact that Italian households are sitting out out of

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Speaker 1: the subordinated bonds lugally. You have to make me understand

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Speaker 1: because I had, you know, even members of my family

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Speaker 1: being called up by their bank that they trusted as

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Speaker 1: as you know, eighteen months ago, saying you should buy

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Speaker 1: this stuff because it's good stuff. How is that even

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Speaker 1: possible From a regulation point of view, I think that

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Speaker 1: there was a benign neglect to say that, to be

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Speaker 1: very charitable and benign neglect of the regulators who saw

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Speaker 1: this as a way to rescue the banking sector in

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Speaker 1: a difficult situation. So after the two thousand and eight

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Speaker 1: financial crisis, the Italian banks were relatively resilient, precisely because

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Speaker 1: that access to uh individual investors. When when the commercial

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Speaker 1: paper market in the United States shut down, banks that

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Speaker 1: who are funding themselves in the in that market started

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Speaker 1: to find themselves with retail investors, and the regulators said

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Speaker 1: this is the lass of two evils, without realizing that

429
00:23:13,560 --> 00:23:15,920
Speaker 1: it will create a lot of problems down the line.

430
00:23:16,160 --> 00:23:18,879
Speaker 1: And I think that the biggest mistake. Honestly, that was

431
00:23:18,920 --> 00:23:21,719
Speaker 1: a big mistake. But the biggest mistake is not fully

432
00:23:21,800 --> 00:23:27,280
Speaker 1: understand when the bailing rule was initially proposed what would

433
00:23:27,320 --> 00:23:31,000
Speaker 1: be the consequences for Italy and trying to sort of

434
00:23:31,000 --> 00:23:35,560
Speaker 1: either negotiate a delay or introduction in Italy or do

435
00:23:35,800 --> 00:23:40,520
Speaker 1: a major of campaign of awareness changing the system and

436
00:23:40,640 --> 00:23:45,200
Speaker 1: preparing for this moment. So we arrived to this completely imprepared. Okay,

437
00:23:45,240 --> 00:23:48,840
Speaker 1: we're completely unprepared. You're one of the world's experts on this.

438
00:23:49,520 --> 00:23:53,880
Speaker 1: Whether it's a baling abla, this word crammed down where

439
00:23:53,920 --> 00:23:57,640
Speaker 1: they force it in it least case on the retail investors.

440
00:23:58,160 --> 00:24:01,760
Speaker 1: Where is the institute and it's going to do the

441
00:24:01,840 --> 00:24:06,240
Speaker 1: Zingals plan. I don't see it evident, no one the

442
00:24:06,280 --> 00:24:10,520
Speaker 1: elites of Europe don't want to clear the market? Am

443
00:24:10,520 --> 00:24:12,879
Speaker 1: I right on that? I'm not so sure that the

444
00:24:12,920 --> 00:24:16,520
Speaker 1: elite of Europe don't want I think that if Rensy

445
00:24:16,560 --> 00:24:22,000
Speaker 1: tomorrow were to call uh the SF Fund, the European

446
00:24:22,040 --> 00:24:25,320
Speaker 1: Fund and say you should re capitalize the Italian banks.

447
00:24:25,359 --> 00:24:29,000
Speaker 1: I think this this would be possible, but for whence

448
00:24:29,040 --> 00:24:31,280
Speaker 1: it would be a big political cost. So it's trying

449
00:24:31,320 --> 00:24:35,760
Speaker 1: to delay that and at least until past the referendum

450
00:24:36,040 --> 00:24:39,000
Speaker 1: and the question whether sort of the banks will leave

451
00:24:39,040 --> 00:24:42,680
Speaker 1: him enough time. There is always a tension between the

452
00:24:42,920 --> 00:24:46,840
Speaker 1: political timing and the financial timing. What about the financial

453
00:24:46,840 --> 00:24:49,560
Speaker 1: timing of some of the German banks? Are they even

454
00:24:49,600 --> 00:24:53,320
Speaker 1: in a worse position than the Italians? You know, I

455
00:24:53,400 --> 00:24:55,480
Speaker 1: don't know. In a sense if you look at the

456
00:24:55,520 --> 00:24:59,879
Speaker 1: stock market, clearly Deutsche trades at very low value. The

457
00:25:00,600 --> 00:25:04,800
Speaker 1: basically implies that liabilities are bigger than assets. It trades

458
00:25:05,080 --> 00:25:08,560
Speaker 1: adoption values. I don't know enough about what they have

459
00:25:08,800 --> 00:25:12,640
Speaker 1: inside to to determine the rathori in Italy is that

460
00:25:12,680 --> 00:25:16,679
Speaker 1: they are in much war shape than the Italian banks. Um,

461
00:25:16,720 --> 00:25:19,719
Speaker 1: I don't know, and honestly I don't really care, because

462
00:25:20,760 --> 00:25:23,480
Speaker 1: it is possible to do a bailin of Doutsche Bank

463
00:25:23,680 --> 00:25:27,000
Speaker 1: is not is possible, but much more politically costly to

464
00:25:27,040 --> 00:25:31,000
Speaker 1: do a bailing or Montepascue or some other Italian banks.

465
00:25:31,119 --> 00:25:34,600
Speaker 1: G thank you so much, greatly appreciated. This morning school Chicago,

466
00:25:44,560 --> 00:25:47,719
Speaker 1: Francy LaQuan London. I'm John Keen, New York. Robert sent

467
00:25:47,800 --> 00:25:50,000
Speaker 1: you with this with the Emirates pure put. Part of

468
00:25:50,040 --> 00:25:53,600
Speaker 1: the reason Francine have an ornery today is after popular

469
00:25:53,760 --> 00:25:56,000
Speaker 1: claim one of my children said, dead, You're gonna die.

470
00:25:56,720 --> 00:26:00,520
Speaker 1: So I'm on a diet and my first thing, Francy,

471
00:26:00,520 --> 00:26:02,840
Speaker 1: and I know it's on a Tailian. I'm cutting out bread,

472
00:26:03,440 --> 00:26:07,399
Speaker 1: which I know, well, I'm miserable. I'm eating vegetables. And

473
00:26:07,440 --> 00:26:10,720
Speaker 1: thank you to Bloomberg for their great choice of vegetables.

474
00:26:11,040 --> 00:26:13,240
Speaker 1: The reason I am is because Bob Sinch is cut

475
00:26:13,240 --> 00:26:18,119
Speaker 1: and chiseled. How many miles a week? Do you bicycle between?

476
00:26:19,240 --> 00:26:24,560
Speaker 1: Fifty miles? Not kilometers? Miles? That's that's amazing. Do you

477
00:26:24,640 --> 00:26:27,560
Speaker 1: go with a raging debate this weekend up in western

478
00:26:27,800 --> 00:26:31,000
Speaker 1: New England? Do you bicycle with the traffic or against

479
00:26:31,000 --> 00:26:33,800
Speaker 1: the traffic? I want to see them. I bicycle with

480
00:26:33,880 --> 00:26:38,040
Speaker 1: the traffic, actually, and you're not worried about that. So far,

481
00:26:38,160 --> 00:26:40,480
Speaker 1: so good, Francy. And what do they do in Europe?

482
00:26:40,480 --> 00:26:43,320
Speaker 1: Do they bicycle with the traffic? I mean they It

483
00:26:43,320 --> 00:26:46,080
Speaker 1: feels like the whole of London is just a huge

484
00:26:46,119 --> 00:26:49,679
Speaker 1: bicycle lane because our previous mayor, one Boris Johnson, actually

485
00:26:49,680 --> 00:26:53,080
Speaker 1: put in so many bicycle lanes that there's traffic everywhere.

486
00:26:53,119 --> 00:26:55,520
Speaker 1: I think they bicycle with the traffic. They go with

487
00:26:55,840 --> 00:26:58,000
Speaker 1: you And you do that, Bob said, seriously, as a

488
00:26:58,000 --> 00:27:01,639
Speaker 1: pro bicycle guy. Yeah, I do. And uh, you know

489
00:27:01,800 --> 00:27:04,280
Speaker 1: you you you just hope that. Look, these are pretty

490
00:27:04,359 --> 00:27:09,760
Speaker 1: rural roads up in northern Connecticut into lower New York State. So, um,

491
00:27:09,840 --> 00:27:12,520
Speaker 1: usually people are pretty good. Okay, well, let's so it's

492
00:27:12,520 --> 00:27:15,400
Speaker 1: get the economics finding Bob Cinch with your bicycling tip.

493
00:27:15,640 --> 00:27:19,080
Speaker 1: And by the way, seriously, all the national studies say

494
00:27:19,119 --> 00:27:22,800
Speaker 1: that Mr Cinch is correct about I think there's actually

495
00:27:23,160 --> 00:27:26,600
Speaker 1: serious laws about it as well. Bob. There is a

496
00:27:26,680 --> 00:27:29,959
Speaker 1: law also that this is the craziest August since time began.

497
00:27:30,359 --> 00:27:32,520
Speaker 1: When you walk in and you look at your Bloomberg,

498
00:27:32,840 --> 00:27:34,800
Speaker 1: what's the first thing you look at in the Bob

499
00:27:34,880 --> 00:27:38,880
Speaker 1: Sinch world? You know, I think it's this continued skepticism

500
00:27:38,880 --> 00:27:41,920
Speaker 1: about the FED. Um. You know, these are some pretty

501
00:27:41,960 --> 00:27:45,560
Speaker 1: solid employment numbers. Um. You know, I I kind of

502
00:27:45,560 --> 00:27:47,640
Speaker 1: think about levels every now and then. If you if

503
00:27:47,680 --> 00:27:51,440
Speaker 1: you went to to you know, monetary economists economists in general,

504
00:27:51,440 --> 00:27:55,160
Speaker 1: and said, okay, so the unemployment rates down below five percent. Uh,

505
00:27:55,200 --> 00:27:59,359
Speaker 1: the economy is performing reasonably well. Um, where do you

506
00:27:59,400 --> 00:28:01,520
Speaker 1: think the real old Fed funds rate should be? And

507
00:28:01,760 --> 00:28:03,760
Speaker 1: I would guess most people would say it should be

508
00:28:03,920 --> 00:28:08,240
Speaker 1: zero or slightly positive after adjustment for inflation. Instead, we

509
00:28:08,280 --> 00:28:10,880
Speaker 1: have a real Fed funds rate that's somewhere around minus

510
00:28:10,920 --> 00:28:13,880
Speaker 1: one percent, give or take a little. So I think

511
00:28:13,920 --> 00:28:18,080
Speaker 1: the Fed would really like to get interest rates higher. Um,

512
00:28:18,240 --> 00:28:22,480
Speaker 1: they're just afraid of getting from here or there. And uh,

513
00:28:22,520 --> 00:28:25,440
Speaker 1: I'm wondering whether they actually might be more inclined to

514
00:28:25,480 --> 00:28:27,480
Speaker 1: go in September, because you know, they keep wanting to

515
00:28:27,560 --> 00:28:30,080
Speaker 1: hike rates and then they get a bad piece of

516
00:28:30,119 --> 00:28:33,480
Speaker 1: information and they back away. But but you mentioned in

517
00:28:33,520 --> 00:28:37,240
Speaker 1: your research, not with amor pier Punt, the Atlanta g

518
00:28:37,400 --> 00:28:41,040
Speaker 1: d P now crystal Ball. I'm sorry, Bob. It's a

519
00:28:41,120 --> 00:28:45,720
Speaker 1: jump condition. It is of optimism. It has jumped now.

520
00:28:45,720 --> 00:28:47,800
Speaker 1: I think part of that is, as my colleagues Steve

521
00:28:47,880 --> 00:28:51,280
Speaker 1: Stanley would point out, was the last GDP report which

522
00:28:51,280 --> 00:28:54,240
Speaker 1: showed such a big drop in inventories, and so you

523
00:28:54,360 --> 00:28:57,320
Speaker 1: had such a big inventory draw down in the second quarter.

524
00:28:57,680 --> 00:29:00,880
Speaker 1: I think that's a big part of why the now cast,

525
00:29:00,960 --> 00:29:05,280
Speaker 1: as the GDP forecast from the Atlanta Fed, has jumped

526
00:29:05,280 --> 00:29:07,640
Speaker 1: so much. But nonetheless, it does suggest that there's the

527
00:29:07,720 --> 00:29:10,160
Speaker 1: potential that when the year is done, we're going to

528
00:29:10,240 --> 00:29:13,400
Speaker 1: have another two percent year or so. And with potential

529
00:29:13,440 --> 00:29:16,240
Speaker 1: GDP growth, I think sub one and a half percent,

530
00:29:17,040 --> 00:29:19,360
Speaker 1: that's not bad. And again I think the FED needs

531
00:29:19,400 --> 00:29:22,600
Speaker 1: to get back to having a real Fed funds rate

532
00:29:22,640 --> 00:29:25,560
Speaker 1: at least at zero, which would imply something around one

533
00:29:25,600 --> 00:29:27,840
Speaker 1: and a half percent for the funds. Right. But but

534
00:29:28,000 --> 00:29:30,520
Speaker 1: would they actually surprise the market? So let's say they

535
00:29:30,600 --> 00:29:33,160
Speaker 1: move in September, but the markets aren't pricing, and a

536
00:29:33,240 --> 00:29:37,000
Speaker 1: move in September, would they, you know, surprise the market

537
00:29:37,080 --> 00:29:39,400
Speaker 1: or is that too dangerous? Well, the markets not pricing

538
00:29:39,400 --> 00:29:42,120
Speaker 1: in a move until you know, probably I retire, but

539
00:29:43,120 --> 00:29:48,280
Speaker 1: I get back off people diet. But but I think that,

540
00:29:48,320 --> 00:29:50,840
Speaker 1: you know, from the Fed's point of view, they've been saying, look,

541
00:29:51,160 --> 00:29:54,400
Speaker 1: September is not off the table. You know, granted, as

542
00:29:54,440 --> 00:29:56,200
Speaker 1: my colleagues se would say, they have to run the

543
00:29:56,200 --> 00:30:00,360
Speaker 1: table on good data, but you know they for them

544
00:30:00,360 --> 00:30:03,320
Speaker 1: to wait until December. The odds it's something bad or

545
00:30:03,360 --> 00:30:05,760
Speaker 1: something is going to go wrong between now in December

546
00:30:06,320 --> 00:30:08,560
Speaker 1: is pretty high, just on a random event. And I'm

547
00:30:08,600 --> 00:30:11,040
Speaker 1: wondering whether if they get the chance, you know, if

548
00:30:11,040 --> 00:30:13,200
Speaker 1: you get a to say, you get a payroll gain

549
00:30:13,320 --> 00:30:16,200
Speaker 1: of a hundred thousand or or or so, even in August,

550
00:30:16,240 --> 00:30:18,720
Speaker 1: you've got a three month moving average over two hundred thousand,

551
00:30:19,320 --> 00:30:21,480
Speaker 1: that they just say, Look, we need to get rates higher.

552
00:30:21,520 --> 00:30:23,600
Speaker 1: We want the market. We wanted to raise rates at

553
00:30:23,640 --> 00:30:26,480
Speaker 1: least once this year. Why not do it when the

554
00:30:26,520 --> 00:30:29,560
Speaker 1: markets are enabling you to do it, as opposed to

555
00:30:29,600 --> 00:30:31,360
Speaker 1: taking the risk that you wait till the end of

556
00:30:31,360 --> 00:30:34,000
Speaker 1: the year. Now that's the case for hiking in September

557
00:30:34,040 --> 00:30:36,280
Speaker 1: the hike. The case against it is this is the

558
00:30:36,280 --> 00:30:39,600
Speaker 1: most doublish fed in the history of mankind. So um,

559
00:30:39,680 --> 00:30:42,840
Speaker 1: they like to back away whenever they can. But I'm

560
00:30:42,840 --> 00:30:46,360
Speaker 1: wondering whether they But Bob, there's also the presidential election.

561
00:30:46,440 --> 00:30:48,760
Speaker 1: So here in the UK, you know we're looking through inflation.

562
00:30:49,040 --> 00:30:51,440
Speaker 1: Does it mean that Joanna Yellen looks through the risks

563
00:30:51,600 --> 00:30:55,960
Speaker 1: of a Donald Trump presidency. Well, I think most people

564
00:30:55,960 --> 00:30:58,600
Speaker 1: seem to be looking through that risk these days. Look,

565
00:30:58,640 --> 00:31:02,440
Speaker 1: I think September fair game for the for the FED

566
00:31:02,480 --> 00:31:05,000
Speaker 1: to do something, you know, waiting closer to the election.

567
00:31:05,440 --> 00:31:07,520
Speaker 1: But but I think a lot of this this uh,

568
00:31:07,640 --> 00:31:11,080
Speaker 1: this thought process about elections in FED action. You know,

569
00:31:11,680 --> 00:31:14,640
Speaker 1: it's thirty or forty years old. We gotta let it go. Granted,

570
00:31:14,640 --> 00:31:17,120
Speaker 1: they won't do anything in the month of the election

571
00:31:17,200 --> 00:31:20,280
Speaker 1: or right before the election, but I think September um

572
00:31:20,480 --> 00:31:23,000
Speaker 1: is plenty of time, particularly when when the level of

573
00:31:23,120 --> 00:31:26,880
Speaker 1: rates is so low. Bob, I look at the currency pairs.

574
00:31:26,960 --> 00:31:33,080
Speaker 1: You've done brilliant work and sterling away from the conventional analysis.

575
00:31:33,560 --> 00:31:36,000
Speaker 1: How do you analyze sterling right now? Do you go

576
00:31:36,080 --> 00:31:40,320
Speaker 1: to Swissy or to Young Redmond as you have Well,

577
00:31:40,320 --> 00:31:42,480
Speaker 1: you know, the Bank of England puts out a whole

578
00:31:42,480 --> 00:31:46,040
Speaker 1: set of currency indexes and and they have one that's

579
00:31:46,080 --> 00:31:49,600
Speaker 1: called the Broad Trade Weighted Index for Sterling UM and

580
00:31:49,640 --> 00:31:52,640
Speaker 1: that includes Sterling against on a trade weighted basis against

581
00:31:52,680 --> 00:31:56,560
Speaker 1: the whole variety of currencies, including emerging currencies, and that's

582
00:31:56,640 --> 00:32:00,840
Speaker 1: down you know, about seven or eight percent UH since Brexit,

583
00:32:01,400 --> 00:32:04,760
Speaker 1: and that's a that's a pretty sharp easing of monetary

584
00:32:04,800 --> 00:32:07,440
Speaker 1: conditions as we would analyze those things. So I think

585
00:32:07,440 --> 00:32:10,920
Speaker 1: that that they've gotten a significant easing from the from

586
00:32:10,920 --> 00:32:13,680
Speaker 1: the external side. They have now gotten a significant easing

587
00:32:13,680 --> 00:32:17,479
Speaker 1: from the internal side. UM. I think the economy may

588
00:32:17,520 --> 00:32:20,600
Speaker 1: hold up better than people think as we go through

589
00:32:20,640 --> 00:32:22,840
Speaker 1: the course of this year, and we're starting that that's

590
00:32:22,840 --> 00:32:25,400
Speaker 1: starting to filter into a few dollar cable looking at

591
00:32:25,440 --> 00:32:30,320
Speaker 1: consensus and going maybe not emerging markets. It's been percolating.

592
00:32:30,360 --> 00:32:32,959
Speaker 1: I would say the last two weeks in surveillance, are

593
00:32:33,000 --> 00:32:39,080
Speaker 1: there emerging market currencies that show true e M strength? Well,

594
00:32:39,120 --> 00:32:41,800
Speaker 1: you know, I think, um, you know, Mexican peso is

595
00:32:41,840 --> 00:32:45,720
Speaker 1: still very much tied to oil, but that's starting to stabilize,

596
00:32:46,840 --> 00:32:52,080
Speaker 1: Brazilian currency starting to stabilize. There are some some modest signs.

597
00:32:52,120 --> 00:32:54,280
Speaker 1: But again I think that that there are two things

598
00:32:54,360 --> 00:32:58,240
Speaker 1: operating here. One um signs that global growth might be

599
00:32:58,320 --> 00:33:00,920
Speaker 1: picking up as helping commodity of the prices, and that's

600
00:33:01,000 --> 00:33:03,880
Speaker 1: very important for emerging currencies. The other side of that

601
00:33:04,040 --> 00:33:06,320
Speaker 1: is the potential for a FED rate hike later this year,

602
00:33:06,360 --> 00:33:09,360
Speaker 1: which is I think creating a little bit of tentative

603
00:33:09,400 --> 00:33:13,880
Speaker 1: activity in those markets. So I think in general we

604
00:33:13,920 --> 00:33:17,800
Speaker 1: would expect the dollar to move higher as we go forward, UM.

605
00:33:17,840 --> 00:33:19,560
Speaker 1: And if that's the case, I think it will creep

606
00:33:19,600 --> 00:33:27,520
Speaker 1: up against emerging currencies. Also Bob Sinch with this on currencies, commodities, bicycles, diets,

607
00:33:28,480 --> 00:33:32,320
Speaker 1: any any other wisdom and staying cutting chisels know those

608
00:33:32,320 --> 00:33:35,080
Speaker 1: fifty miles a week will do it, that will do it,

609
00:33:35,200 --> 00:33:38,680
Speaker 1: will help, it won't do it, it'll help, but yeah,

610
00:33:38,760 --> 00:33:42,040
Speaker 1: cutting chisel were a few decades ago. Bob Sinch with

611
00:33:42,080 --> 00:33:48,800
Speaker 1: amorous Pierre Punt. Thanks for listening to the Bloomberg Surveillance podcast.

612
00:33:49,160 --> 00:33:54,240
Speaker 1: Subscribe and listen to interviews on iTunes, SoundCloud, or whichever

613
00:33:54,400 --> 00:33:58,320
Speaker 1: podcast platform you prefer. I'm on Twitter at Tom Keane,

614
00:33:58,720 --> 00:34:02,680
Speaker 1: Michael McKee is at Economy Before the podcast, you can

615
00:34:02,720 --> 00:34:05,960
Speaker 1: always catch us worldwide. I'm Bloomberg Radio