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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Lee.

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Speaker 1: We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. There's

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Speaker 1: definitely a question here are we going to see more

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Speaker 1: inflation next year? Are we going to see a resurgence

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Speaker 1: of growth, or are we going to see a dampening

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Speaker 1: of some of the high hopes that we have priced

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Speaker 1: into stocks. Joining us now, John Riding, chief Economic advisor

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Speaker 1: to breen A Capital, joining us here in our Living

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Speaker 1: three oh studios with his party head on, ready for

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Speaker 1: the new year's celebration. Um, what do you think? Do

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Speaker 1: you think that we're going to see an accelerating or

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Speaker 1: re accelerating economy next year or or the opposite? You know,

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Speaker 1: at least I find it very interesting chim re accelerating

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Speaker 1: economy because if you look over the last ten and

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Speaker 1: a half years of this expansion, economic growth has averaged

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Speaker 1: two point three percent, and it has been the most

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Speaker 1: stable period of economic growth on record. And this year

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Speaker 1: that we are ending today, we'll see growth in line

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Speaker 1: with that ten year trends of growth hasn't gone anywhere.

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Speaker 1: What has changed is perceptions of where growth is going

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Speaker 1: to go. And we came into twenty nine on this

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Speaker 1: tremendous fear of recession and the yield curve was inverted.

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Speaker 1: And you know, even thee you go to a gas

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Speaker 1: station and maybe people that you the gas standard talking

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Speaker 1: about inverted deal care foods. There probably no idea when

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Speaker 1: but that's not true that actually go to a gas

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Speaker 1: station and hear people talking about absolutely true, absolutely true.

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Speaker 1: You had people people talk about cocktail party conversation. You know,

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Speaker 1: you just just overhear people talking about it and did

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Speaker 1: you new Jersey all the time. And we are now

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Speaker 1: entering into where there's no fears of recession. Um, there's

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Speaker 1: no fears for the market. We remember the debacle on

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Speaker 1: Christmas Eve setting the you know, the end of a

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Speaker 1: almost a bear market. It was really a very valid

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Speaker 1: correction in stocks. So where are we now as we

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Speaker 1: going to go into I mean, our growth numbers are

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Speaker 1: around two and a quarter percent. May an acceleration we

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Speaker 1: two and a half percent. A bit acceleration is very

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Speaker 1: difficult because we don't have the people to employ to

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Speaker 1: three and a half percent unemployment. Right, there's a story

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Speaker 1: out this morning that about slowing population growth, and just

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Speaker 1: had the slowest population growth in the centery in the US,

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Speaker 1: and that continues for a while, and we haven't yet

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Speaker 1: seen the big pickup in productivity growth. So pencil in

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Speaker 1: another year of two and a quarter percent or so

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Speaker 1: economic growth, maybe two and a half, two and three

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Speaker 1: quarter percent on the on the high end um. The

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Speaker 1: risk is to the downside if we don't get profit

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Speaker 1: growth going again, and that's a really big issue for

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Speaker 1: the US. John, can you put in the context for

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Speaker 1: our listeners, what a ten or eleven percent I'm sorry,

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Speaker 1: ten or eleven year expansion economy? How unusual is that? Well,

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Speaker 1: it's unprecedented, so I guess unprecedented would make it pretty unusual.

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Speaker 1: So what so, how do we think about that? Is that?

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Speaker 1: Is that good? Is that the new normal? Is that?

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Speaker 1: I mean? Are we poised for some significant correction in

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Speaker 1: the economy. Well, if you step back and you look

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Speaker 1: at all of the recessions and expansions since the uh

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Speaker 1: in the post war period, so you have seen in

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Speaker 1: the last two or three decades expansions become longer recessions

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Speaker 1: were becoming short and then of course we had the

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Speaker 1: Great Recession. Though not quite sure what's so great about it,

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Speaker 1: but nevertheless we had the Great Recession. But now the

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Speaker 1: Great Recession I set the stage for a ten and

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Speaker 1: a half year economic expansion, with expansion expected to continue through. So,

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Speaker 1: whether it's the new norm or not, it's the environment

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Speaker 1: in which we are in. Well, here here's the thing.

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Speaker 1: I mean. If you talk about the fact that we're

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Speaker 1: probably in for more of the same, we're not in

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Speaker 1: for re acceleration. We're not in for a big decline

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Speaker 1: or recession. As the people in the gas station we're

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Speaker 1: talking about the inverted yield curve six months ago are

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Speaker 1: no longer doing so. Evidently I'm wondering, you know, is

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Speaker 1: that consistent with valuations where they are in equities? That

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Speaker 1: is great question, and my fear is not. Let me explain.

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Speaker 1: If you look at the we use very simple model.

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Speaker 1: We take level profits and we discounted by the level

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Speaker 1: of corporate bond deals and bondials are very low. But

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Speaker 1: even on that calculation, the market looks a little bit overvalued. Now,

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Speaker 1: what's the major problem for the market. Wage growth has

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Speaker 1: been exceeding the sum of profit growth certain the sum

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Speaker 1: of price gains plus productivity gains, and so profit margins

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Speaker 1: have been squeezed, and they have been squeezed now for

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Speaker 1: about five years. We need to get profit growth to

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Speaker 1: pick up because we can't simply have a risk on

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Speaker 1: rally from here. What we can for a while, but

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Speaker 1: it would end badly because in an environment where the

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Speaker 1: trade deals have done, the risk is off the table

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Speaker 1: and we just run the market higher because we are

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Speaker 1: at risk on um and we don't have the profit gains.

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Speaker 1: Then then bond heels rights and that actually reduces the

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Speaker 1: sort of fair value of the equity market, so that

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Speaker 1: everything hangs on price increases and on productivity gains and

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Speaker 1: on rekindling capital spending. So that's the key thing I

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Speaker 1: would like. Do we start to see signs that we're

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Speaker 1: going to see vigorous growth in capital spending because that

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Speaker 1: was the most disappointing part of the economy When looking

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Speaker 1: for part of the economy that did crater and does

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Speaker 1: need to re accelerate its capex. We need to move

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Speaker 1: to an economy which is more capital spending to support

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Speaker 1: stronger productivity gains, to boost the economy. How much of John,

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Speaker 1: do you think the take extent we've had a contraction

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Speaker 1: or just a a pairing back of capital investment, How

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Speaker 1: much of that is due to just the cycle or

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Speaker 1: in any economy versus the uncertainty associated with all the

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Speaker 1: trade issues. I think it's the latter. I don't just

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Speaker 1: think it's trade. Look December, we had corporate tax reform.

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Speaker 1: We had the corporate tax cut. The US was no

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Speaker 1: longer uncompetitive from a tax perspective. We had a number

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Speaker 1: of tax incentives in place, and we started to have

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Speaker 1: a pickup in capital spending. And then in the middle

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Speaker 1: of eighteen it just just stopped and we haven't had growth.

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Speaker 1: The one area we've had growth in is an intellectual product.

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Speaker 1: That has been the strong area of capital spending, but

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Speaker 1: in terms of plant equipment buildings, it's been very very weak.

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Speaker 1: Um so I you know, we're going to have a

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Speaker 1: test trade on certainty is reduced. Are people not going

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Speaker 1: to commit or are they going to say twenties an

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Speaker 1: election year. Let's wait till after the election, and then

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Speaker 1: we have another year of black capital spending. And I'm hopeful,

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Speaker 1: but it's a very difficult thing to forecast. That we

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Speaker 1: do start to see a pickup, but it's not there

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Speaker 1: in the numbers yet. John writing, thank you so much

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Speaker 1: for being with us in Happy New Year. Trying writing,

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Speaker 1: chief Economic advisor to Breen Capital or do you plan

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Speaker 1: on going to Times Square? Um? No, but Breen Capital's

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Speaker 1: offices are at three Times Square? So does that mean

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Speaker 1: you're going to be avoiding them or heading there? Um? Well,

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Speaker 1: I decided not to have the opportunity to watch the

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Speaker 1: ball drop, but I think I'm gonna stawn home. My

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Speaker 1: mom's over from England. She's ninety and I think she

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Speaker 1: deserves me to be there. Well, cheers, cheers to your mom,

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Speaker 1: and happy New Year. What do you plan on doing, Paul, uh,

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Speaker 1: staying close to home, which is not Time Square? Yeah,

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Speaker 1: I know, I know. We've heard lots about the new

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Speaker 1: Jersey cross ways right now. One of the more interesting

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Speaker 1: stories when we woke up this morning is the story

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Speaker 1: about Carlos Gone, the fallen automotive Titan. He's facing trial

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Speaker 1: for financial crimes. He fled the Lebanon to escape what

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Speaker 1: he called Japan's rigged justice system. To get the latest,

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Speaker 1: we welcome Donna cra She is a reporter for Bloomberg

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Speaker 1: News based in the Middle East. Donna, thanks so much

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Speaker 1: for joining us. What do we know about Mr ghones

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Speaker 1: whereabouts right now? Hi? So we know he is in

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Speaker 1: the Lebanon. We don't know exactly where he is. Um.

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Speaker 1: I went to his house in Beirut earlier in the day,

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Speaker 1: like in the early hours of the morning when we

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Speaker 1: heard the news, and um, there were no security and

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Speaker 1: it wasn't clear if gold was at the house. Um

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Speaker 1: some of the window or the windows were opened, some

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Speaker 1: of them were closed, so it doesn't seem that he

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Speaker 1: was inside or anything. Um, we know that. Also one

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Speaker 1: of the Lebanese ministers said that he entered Lebanon legally

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Speaker 1: through his French passports and a Lebanese I d um

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Speaker 1: and he also said this minister said that he tried

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Speaker 1: to convince Japanese officials to send him to Lebanon to

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Speaker 1: be tried here, but you know, he wasn't very successful.

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Speaker 1: So we know he's in Lebanon, but we don't know

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Speaker 1: exactly where he's staying. And just to sort of set

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Speaker 1: this up, so Carlos gone Uh said that he Uh

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Speaker 1: is fleeing Japan's quote rigged justice system, that he was

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Speaker 1: not fleeing justice but rather injustice, and he of course

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Speaker 1: has been accused of financial misconduct. Meanwhile, there is a

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Speaker 1: question Lebanon, where he did grow up and has citizenship.

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Speaker 1: He was formerly the head of Nissan and Renault UH.

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Speaker 1: There is a question about extradition and the fact that

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Speaker 1: they cannot, that Japan cannot extradite him from Lebanon. What

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Speaker 1: have the authorities in Lebanon set up to this point? Um,

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Speaker 1: They have been a little bit tight lipped about this,

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Speaker 1: but the Lebanese officials, ever since um Going was arrested,

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Speaker 1: Lebanese officials have said that they will support him and

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Speaker 1: they will extend as much help as UH as needed

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Speaker 1: for foregone. As you know, Going is seen as a

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Speaker 1: national hero here. Um. When he was first detained, billboards

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Speaker 1: in support of him sprung up across the nation with

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Speaker 1: his with his pictures everywhere. People see him as one

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Speaker 1: of the immigrants that you know, made it big outside

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Speaker 1: of Lebanon. So he's he's a national hero. And they've

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Speaker 1: repeatedly said that they will support and help him, but

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Speaker 1: they weren't very specific about how this support would materialize.

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Speaker 1: Donna any sense of what Mr Going might do next?

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Speaker 1: I mean we some said that he will hold a

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Speaker 1: press conference, but did not specify when that will be. UM.

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Speaker 1: Given that UM, his his word about are unknown still

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Speaker 1: in Lebanon, it's hard to tell. UM. Some reports that

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Speaker 1: said that he met the president upon arrival, but we

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Speaker 1: later had some people denying this to us. So he

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Speaker 1: hasn't seen anyone. We We talked to a friend of his,

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Speaker 1: a longtime friend friend of his, earlier in the morning,

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Speaker 1: and he said that he didn't know that Going had arrived,

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Speaker 1: but that um, he was happy he was here with

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Speaker 1: his family home for a new year. So just to

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Speaker 1: sort of give some perspective. In news reports this morning,

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Speaker 1: a lot of people were saying, uh, go and will

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Speaker 1: probably never return to Japan because he would simply be

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Speaker 1: re arrested if he were to do so. Given the

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Speaker 1: fact that you actually went to his house in Beirut,

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Speaker 1: can you give us a sense of what it's like.

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Speaker 1: I mean, basically, is he living in the lap of

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Speaker 1: luxury by moving to Beirut and never returning to Japan. Um.

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Speaker 1: The house is in one of the capital's most posh areas.

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Speaker 1: It's very known. UM it's like a light pink house

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Speaker 1: to painting is light pink with light blue windows. It

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Speaker 1: looks like an old house that's been recently renovated. Um,

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Speaker 1: you know there are some small shops around. Everyone knows

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Speaker 1: that's Scarletts Ghn's house. Um, if you just drive through

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Speaker 1: the street, there are all these bally posh buildings around.

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Speaker 1: So the area is really nice and um, everybody knows

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Speaker 1: that that's Ghn's house. Danna, thanks so much, or Donna,

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Speaker 1: thanks so much for joining us. We appreciate your your

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Speaker 1: reporting from Beirut. Donna Bloomberg News reporting from Beirut about

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Speaker 1: this really just amazing story. It's kind of a James

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Speaker 1: Bond Jason Bourne type of situation, kind of escaping from

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Speaker 1: Japan uh to return to Lebanon. Fairness, he didn't necessarily

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Speaker 1: tunnel his way exactly. It's unclear. Yeah, it's unclear how

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Speaker 1: he actually made the trip from Japan. I mean obviously

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Speaker 1: on a private jet, but how that all came about,

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Speaker 1: given that he was out on bail. I'm trying to

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Speaker 1: get a too. Is he right? Is it injustice what

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Speaker 1: Japan is doing to him? I mean, I don't think

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Speaker 1: people think he is completely clean when it comes to

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Speaker 1: financial malfeasance, but there's a question about whether the potential

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Speaker 1: penalty and the way that the Japan is going about it.

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Speaker 1: It has been fair. What a year to look back

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Speaker 1: on for Yeah, and we were asking the question how

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Speaker 1: long can the rally in both bonds that are considered

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Speaker 1: safe and stocks continue And it seems like there is

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Speaker 1: a profound inconsistency here. Julian Emmanuel just graced the door.

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Speaker 1: The door. Tom Kane would say, VT I g chief

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Speaker 1: equity and derivative strategist who has gotten it right with

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Speaker 1: the stock rally for years. And you called me out.

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Speaker 1: I remember what I was once talking about how cash

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Speaker 1: was looking better, and you're like, you're crazy, you were right.

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Speaker 1: I was wrong. Um, what do you think for next year?

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Speaker 1: Is one of the acid class is going to emerge superior?

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Speaker 1: But you still couldn't get Tom Keen to get out

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Speaker 1: of his triple leverage, right, No, but occasionally he'll he'll

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Speaker 1: jack it up to quadruple leverage if you feel really risky.

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Speaker 1: So so when we look at next year, it's not

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Speaker 1: a continuation of the same because this year was, you know,

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Speaker 1: very dramatic. Obviously it was not looking great in January.

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Speaker 1: It was difficult to stick to our guns. Our view

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Speaker 1: was that the FED was going to help out. They

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Speaker 1: helped out a lot. We also didn't see recession. We

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Speaker 1: don't see a recession in the biggest difference coming into

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Speaker 1: into this next year is we think the bond market

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Speaker 1: really really did turn back in September, probably a very

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Speaker 1: significant bottom in global yields, and in fact this is

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Speaker 1: the point in the cycle where higher yields are likely

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Speaker 1: to feed into more optimism with regard to equities. Certainly

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Speaker 1: we saw that in the fourth quarter UM But for us,

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Speaker 1: the the challenge, the interesting thing will be after ten

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Speaker 1: years of a bull market that has been fought sort

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Speaker 1: of tooth and nail. You've seen it in terms of

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Speaker 1: the lack of flows into equities for the last five years,

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Speaker 1: does the public finally get a little bit more interested

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Speaker 1: in stocks and start committing funds. We think the answers yes,

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Speaker 1: and we think that drives bond yields higher. So as

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Speaker 1: we think about the market the performance in twenty nineteen,

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Speaker 1: I would argue, more than most people were anticipating, is

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Speaker 1: it primarily the Fed? Is that the primary thing in

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Speaker 1: that investor should focus on. Well, Actually, the FED would

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Speaker 1: prefer that you don't focus on them at all, and

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Speaker 1: they've been successful. Actually, for the past few meetings, they've

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Speaker 1: been incredibly boring and and J. Powe would love it

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Speaker 1: to be that way for the entire rest of the year,

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Speaker 1: which is why we also think that they were very,

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Speaker 1: very forthright in getting front of of this turn of

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Speaker 1: the year UH liquidity UM in the repo markets, given

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Speaker 1: the spike we had in September, we think they've done

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Speaker 1: a great job of managing it. We think they'll do

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Speaker 1: a great job over the next several weeks. For us,

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Speaker 1: it's very much um can confidence, which is turned, can

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Speaker 1: the yield curve continue to steep in, which props confidence?

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Speaker 1: And is their fear of valuations, which we think, you know,

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Speaker 1: really they're expensive slightly but not overly. So you said

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Speaker 1: something that piques my interest dramatically, which is the idea

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Speaker 1: that treasure yields can rise and that that will be

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Speaker 1: looked at is a good thing for stocks. That has

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Speaker 1: not been the case for a while, or there is

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Speaker 1: a threshold for how high treasure yields can go before

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Speaker 1: it's considered a bad thing when it comes to valuing equities.

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Speaker 1: What's that tipping point? Well, so if you look at

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Speaker 1: the last several years, the tipping point had had been

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Speaker 1: ten year yields in the US going over three percent. Obviously,

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Speaker 1: we're a very long way away from that. UM. We

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Speaker 1: happen to have a higher yield forecast than most. We're

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Speaker 1: looking for two point three nine right now, right right,

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Speaker 1: which if you think about it, isn't terribly aggressive if

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Speaker 1: we're if in in into an election year and you

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Speaker 1: think about politicians being incentivized to create upside risk to

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Speaker 1: economic performance, which at you know, sort of one eight

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Speaker 1: one nine is a rather subdued number UM for US.

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Speaker 1: The tipping point in terms of where bonds become problematic

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Speaker 1: is quite a ways a way in our view, likely

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Speaker 1: north of two and a half percent UM, and that

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Speaker 1: would require a material re emergence of inflation, which we think,

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Speaker 1: you know, we'll sort of peek its head through, but

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Speaker 1: not become problematic. Julian, you mentioned earlier evaluation. I think

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Speaker 1: about twenty nineteen again, a percent move up in SMP

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Speaker 1: with little to no earnings growth in where are invaluation

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Speaker 1: just feels like the market should be at the higher

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Speaker 1: higher end and I should be concerned about valuation well

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Speaker 1: on metrics such as price to sell. As you are

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Speaker 1: at the higher end, we sort of tend to keep

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Speaker 1: it simple. Um, it's obviously worked in terms of the

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Speaker 1: story on on Pe. You really are only at the

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Speaker 1: midpoint slightly above the range of the last thirty years.

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Speaker 1: And if if our earnings estimates hundred and seventy five

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Speaker 1: for twenty are realized, um, and that growth rate slightly

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Speaker 1: under seven percent is very consistent with an economy chugging

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Speaker 1: along and margins not necessarily being pressured anymore. Um, thirty

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Speaker 1: four fifty are your end target basically gets you around

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Speaker 1: nineteen points six times, which is perfectly reasonable. What about tech,

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Speaker 1: big tech? And how much longer I can kind of

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Speaker 1: drive the gains that we're seeing in the US. It

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Speaker 1: certainly has been quite a month for tech, hasn't it. Yes,

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Speaker 1: it has I think for certain box uh in in

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Speaker 1: the fan group, it's been quite a decade in the

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Speaker 1: course of one year along point. Yeah, well, I know,

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Speaker 1: I mean, like, is fang really appropriate here? Facebook, Apple, Amazon, Netflix,

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Speaker 1: and Google? Shouldn't it be like Microsoft Oracle? Well we

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Speaker 1: can you know acronym them all day, fam G and

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Speaker 1: so on and so forth. But uh, look, the long

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Speaker 1: run drivers of growth in those names is absolutely intact,

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Speaker 1: is likely to be intact even if the government uh

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Speaker 1: really gets more intense coming into an election year in

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Speaker 1: terms of regulatory scrutiny, data privacy issues. The long term

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Speaker 1: story is intact. That keeps us neutral um in. In

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Speaker 1: the medium term, however, what we would say is that

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Speaker 1: if we're right in our view that you have a

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Speaker 1: shift out of bonds and into stocks led by more

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Speaker 1: public interest, the public will end up being a buyer

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Speaker 1: of technology. The public is comfortable with technology, understands it,

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Speaker 1: and is likely to be a buyer. Lisa is also

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Speaker 1: comfortable with technology. Doubling down, I'm more valuation sensitive. Do

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Speaker 1: I dip my toe in? Yes? You are okay? In energy? Um,

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Speaker 1: you know some of the sectors that maybe healthcare, that

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Speaker 1: have lagged and might suggest kind of we have a

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Speaker 1: valuation call here. What we do think it's valid to

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Speaker 1: look at at some of those laggards. Um again going

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Speaker 1: back to this psychological turning point in confidence in bond

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Speaker 1: yields sort of triggering uh. You know this this potential

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Speaker 1: move towards more value and and and when you look

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Speaker 1: at it again, Look, we're very sympathetic to the idea

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Speaker 1: that over the long term UH, the move towards E

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Speaker 1: S G investing and move towards a uh you know,

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Speaker 1: the green initiative is likely to continue to pressure energy

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Speaker 1: share ownership. But again end over the last several years,

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Speaker 1: nothing moves in a straight line, and we think it's

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Speaker 1: basically time that people are going to look at an

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Speaker 1: area where you know, it's you're under five percent of

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Speaker 1: the weight in the S and P five all right,

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Speaker 1: what could go wrong that would make you inaccurate in

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Speaker 1: your forecast that keeps you up at night. To us,

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Speaker 1: the lynchpin of of the you know, particularly late cycle

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Speaker 1: is confidence. It was very important that not only consumer confidence,

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Speaker 1: which is utmost because I think we'd all acknowledge that

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Speaker 1: the consumer has been the driving force of the last

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Speaker 1: number of years. We do not expect that to change.

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Speaker 1: But importantly, after a year and a half of sort

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Speaker 1: of you know, being in the trenches on the trade war,

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Speaker 1: CEO confidence turned um over this last quarter as well.

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Speaker 1: To us, confidence needs to keep continuing to move forward

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Speaker 1: if there are geopolitical upsets, if they're our domestic US

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Speaker 1: political upsets, and certainly the risk it does exist for

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Speaker 1: for both of those um, that's you know, you look

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Speaker 1: back at this time last year and the government shut

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Speaker 1: down at the same time you're fed was hiking rates

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Speaker 1: at the same time the markets were cratering and confidence

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Speaker 1: took a hit. We you know, we don't want to

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Speaker 1: see that happen again, not a do we. Julian Emmanuel B.

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Speaker 1: T i G, Chief Equity and Derivative Strategy, Thanks so

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Speaker 1: much for joining us coming here in our Bloomberg Interactive

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Speaker 1: Broker studio. Right now, Paul has gone to the corner

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Speaker 1: and is practicing his lunges ahead of going skiing, because

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Speaker 1: that is what he is interested in, rather than talking

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Speaker 1: about the REP market, which I've got to say, is

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Speaker 1: it really interesting to me? In heading into your end?

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Speaker 1: It was supposed to be potentially volatile, the sort of

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Speaker 1: storm that few people were expecting. The storm turned out

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Speaker 1: not to be. At least there is a storm in

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Speaker 1: the Midwest that's heading toward these but it's not in

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Speaker 1: the REPO market. Alex Harris has been covering this all

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Speaker 1: year for us super well. She was talking about how

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Speaker 1: there are potential nodes of contagion. Yesterday here she is.

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Speaker 1: She comes into the office and she says, nothing's happening

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Speaker 1: now we know. We gotta looked at each other and said, oh,

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Speaker 1: things look relatively calm. You know, the rates sort of normalized.

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Speaker 1: It's bouncing around a little bit, but well within the

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Speaker 1: target range that you know the FED is laid out

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Speaker 1: for short term rates. So I think everyone's feeling like, Okay,

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Speaker 1: we're here, we can close the chapter on your end.

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Speaker 1: Let's turn the calendar to and a whole new set

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Speaker 1: of problems for the market. And mainly it's if you're

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Speaker 1: the Federal Reserve, how do you extract yourself from the

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Speaker 1: repo market? Because I think at the end of the day,

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Speaker 1: they don't want to have this big of a footprint.

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Speaker 1: What would you say to somebody who looks at the

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Speaker 1: fact that saw the repo operation that the FED has

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Speaker 1: been doing undersubscribed on the final day of the fact

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Speaker 1: that you're seeing nothing exciting going on in the repo

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Speaker 1: market heading into your end despite some of the gloom

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Speaker 1: and doom warnings that we heard. Isn't this a victory

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Speaker 1: for the FED? Can't the FED go out and say

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Speaker 1: we have this? I think you do. But at the

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Speaker 1: end of the day, one of the things that I

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Speaker 1: know Jerome Powell had said back in a post f

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Speaker 1: MC press conference on December eleventh, was you know there

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Speaker 1: should be volatility in the market, that's okay, a short

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Speaker 1: term rates should be volatile. They always have, and I think,

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Speaker 1: you know, it's trying to balance for them. I think,

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Speaker 1: you know, what level of volatility are they comfortable with?

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Speaker 1: How much are they they comfortable with letting the Fed

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Speaker 1: funds rate rise within their target range um and not

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Speaker 1: breaching it and causing some questions about their credibility. And

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Speaker 1: so this is what I think is going to be

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Speaker 1: about for them, is you know, finding, okay, well, what's

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Speaker 1: the appropriate level of intervention in these markets from from

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Speaker 1: letting them become mon ruly. And that also means taking

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Speaker 1: a look, you know, at the regulatory picture and saying,

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Speaker 1: how do we allow these markets to move more efficiently

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Speaker 1: so we don't have to be in there all the time.

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Speaker 1: And these are not questions that are going to be

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Speaker 1: answered in the span of a couple of months. I mean,

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Speaker 1: they've been talking about reserve levels and what the ideal

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Speaker 1: target level reserve level is for like a year and

430
00:25:20,480 --> 00:25:23,640
Speaker 1: they still couldn't get anywhere before this all blew up.

431
00:25:23,920 --> 00:25:26,840
Speaker 1: So there's a lot for them to discuss here, and yes,

432
00:25:27,320 --> 00:25:30,560
Speaker 1: things have calmed down, but do you really does the

433
00:25:30,640 --> 00:25:33,320
Speaker 1: FED really want to be pledging half a trillion dollars

434
00:25:33,320 --> 00:25:35,960
Speaker 1: in overnight or in liquidity for the end of the year.

435
00:25:36,000 --> 00:25:38,240
Speaker 1: Do they want that big of a footprint or any

436
00:25:38,320 --> 00:25:41,840
Speaker 1: sort of idea that this is what they could be providing. So, Alex,

437
00:25:41,840 --> 00:25:43,920
Speaker 1: how did we kind of get here? I want to

438
00:25:43,920 --> 00:25:46,239
Speaker 1: get a sense of what's new about what we've been

439
00:25:46,240 --> 00:25:49,600
Speaker 1: dealing with with the FED and the repo market since September.

440
00:25:49,760 --> 00:25:53,600
Speaker 1: How is that different from what we've historically done? Um, Well,

441
00:25:53,880 --> 00:25:56,320
Speaker 1: you know, it's not even that it's all that different.

442
00:25:56,400 --> 00:25:58,960
Speaker 1: You know what they call these overnight or term repo

443
00:25:59,040 --> 00:26:03,440
Speaker 1: operations or or what the street calls system rps, they've

444
00:26:03,440 --> 00:26:05,760
Speaker 1: been they've done those before, they did those before the

445
00:26:05,800 --> 00:26:09,480
Speaker 1: financial crisis. It was definitely, um it was the way

446
00:26:09,480 --> 00:26:12,680
Speaker 1: in which they actively managed reserves and they actively managed

447
00:26:12,720 --> 00:26:15,560
Speaker 1: the FED funds rate. And then you know, QUEI happened,

448
00:26:15,600 --> 00:26:17,960
Speaker 1: and you know, there was this huge stockpile of reserves

449
00:26:18,160 --> 00:26:19,920
Speaker 1: and they didn't feel like they needed to come in

450
00:26:20,080 --> 00:26:22,879
Speaker 1: and manage the FED funds rate because you know, they

451
00:26:22,920 --> 00:26:26,360
Speaker 1: had such excess reserves that it wasn't necessary. And so

452
00:26:26,440 --> 00:26:29,399
Speaker 1: now what the issue is is the FED has to

453
00:26:29,440 --> 00:26:32,840
Speaker 1: figure out, Okay, what is our ideal level of reserves?

454
00:26:33,119 --> 00:26:35,080
Speaker 1: And if we're under that, are we going to come

455
00:26:35,080 --> 00:26:37,880
Speaker 1: in again and do these repo operations on a more

456
00:26:37,920 --> 00:26:41,040
Speaker 1: regular basis to help manage you know, the FED funds

457
00:26:41,119 --> 00:26:44,080
Speaker 1: rate and manage those reserves. And that's what you know,

458
00:26:44,160 --> 00:26:46,760
Speaker 1: they say they don't want to, but you know, I

459
00:26:46,760 --> 00:26:49,800
Speaker 1: think what everyone's really unsure about and can't get a

460
00:26:49,840 --> 00:26:52,320
Speaker 1: read on from the Fed is okay, well, what's their

461
00:26:52,359 --> 00:26:55,879
Speaker 1: ideal level of reserves? And is it too low? Is

462
00:26:55,880 --> 00:26:57,840
Speaker 1: it too high? I know the market thinks it's more

463
00:26:57,880 --> 00:27:01,080
Speaker 1: like one point seven trillion. You You've had people at

464
00:27:01,080 --> 00:27:03,160
Speaker 1: the FED like New York Fed President John Williams say,

465
00:27:03,200 --> 00:27:05,440
Speaker 1: you know what, it's probably more like one three. Back

466
00:27:05,480 --> 00:27:09,400
Speaker 1: to where we were, we're about one five and and

467
00:27:09,400 --> 00:27:11,480
Speaker 1: it's still I think some people feel like it's a

468
00:27:11,480 --> 00:27:14,720
Speaker 1: little low because again, you know, reserves are very fluid.

469
00:27:14,760 --> 00:27:17,159
Speaker 1: I know the FED only provides a weekly snapshot, but

470
00:27:17,200 --> 00:27:19,680
Speaker 1: they move quite a bit, and and you know they're

471
00:27:19,680 --> 00:27:24,399
Speaker 1: devoted to things for regulatory purposes. So you know, everyone,

472
00:27:24,560 --> 00:27:26,680
Speaker 1: we gotta figure out this year we gotta figure out

473
00:27:26,680 --> 00:27:28,720
Speaker 1: what this ideal level is and then the Fed can

474
00:27:28,760 --> 00:27:31,119
Speaker 1: go from there in terms of setting its policy and

475
00:27:31,160 --> 00:27:33,719
Speaker 1: how it wants to proceed with the front end. All Right,

476
00:27:33,760 --> 00:27:36,880
Speaker 1: it is the final day of trading for twenty nineteen,

477
00:27:36,960 --> 00:27:39,280
Speaker 1: which means it's a perfect time to gaze at our

478
00:27:39,400 --> 00:27:42,760
Speaker 1: navels and and talk in big abstractions. Uh, it's always

479
00:27:42,800 --> 00:27:44,080
Speaker 1: a good time to do that. But why don't we

480
00:27:44,119 --> 00:27:46,359
Speaker 1: do that now? Anyway? Um, could you give us a

481
00:27:46,400 --> 00:27:49,960
Speaker 1: sense of what the big takeaway from twenty nineteen REPO

482
00:27:50,119 --> 00:27:53,520
Speaker 1: disruptions really is? I mean, what is sort of when

483
00:27:53,560 --> 00:27:56,000
Speaker 1: somebody thinks about this other than oh my god, I

484
00:27:56,000 --> 00:27:58,240
Speaker 1: need to go do my stretches. Um, you know what,

485
00:27:58,240 --> 00:28:02,359
Speaker 1: what should they think? You know? I think the takeaway

486
00:28:02,480 --> 00:28:05,960
Speaker 1: is the Central Bank was woefully unprepared for this. I

487
00:28:06,680 --> 00:28:09,240
Speaker 1: think they were completely caught off guard. I think there

488
00:28:09,280 --> 00:28:13,320
Speaker 1: were warning signs as far back as April that there

489
00:28:13,320 --> 00:28:15,879
Speaker 1: were issues and the market was starting to reflect it

490
00:28:15,920 --> 00:28:18,359
Speaker 1: when month ends, every month end started to look like

491
00:28:18,400 --> 00:28:20,880
Speaker 1: a quarter and people are saying something's not right here,

492
00:28:20,920 --> 00:28:25,159
Speaker 1: something's broken, And you know, I it just took like

493
00:28:25,240 --> 00:28:28,639
Speaker 1: was seemingly innocuous day of settlements in the treasury market

494
00:28:28,960 --> 00:28:31,320
Speaker 1: to to really push us over the edge here that

495
00:28:31,720 --> 00:28:34,080
Speaker 1: you know, there was something broken a long time before

496
00:28:34,080 --> 00:28:36,200
Speaker 1: we hit September, and you know there were a few

497
00:28:36,200 --> 00:28:38,840
Speaker 1: people keeping an eye on it and watching it. And

498
00:28:38,880 --> 00:28:40,960
Speaker 1: I think it just comes to show you that the

499
00:28:41,000 --> 00:28:42,880
Speaker 1: federally took a hit here, and you know, people are

500
00:28:42,880 --> 00:28:46,360
Speaker 1: really questioning their ability to see this and what they're

501
00:28:46,400 --> 00:28:49,680
Speaker 1: actually you know, reading and understanding and what the market's

502
00:28:49,800 --> 00:28:52,080
Speaker 1: telling them, what the streets telling them and dealers are

503
00:28:52,080 --> 00:28:54,920
Speaker 1: telling them. But I think they missed. I mean, they've

504
00:28:54,920 --> 00:28:58,640
Speaker 1: recovered and again they've they've made sure that your end

505
00:28:58,760 --> 00:29:02,560
Speaker 1: is gone smoothly, but they really missed here, and they

506
00:29:02,560 --> 00:29:04,680
Speaker 1: think it was just a sign that they were really

507
00:29:04,760 --> 00:29:07,560
Speaker 1: unprepared for what was to come and really underestimated what

508
00:29:07,600 --> 00:29:09,840
Speaker 1: the what the big issues were here. When do we

509
00:29:09,920 --> 00:29:13,120
Speaker 1: expect to get some type of longer term I guess

510
00:29:13,160 --> 00:29:15,960
Speaker 1: fix from the Fed? It's been a while, right, are we?

511
00:29:16,560 --> 00:29:18,280
Speaker 1: I mean in order for them to kind of rehability,

512
00:29:18,400 --> 00:29:20,600
Speaker 1: maybe their reputation in the marketplace, do they need to

513
00:29:20,600 --> 00:29:23,320
Speaker 1: come up with a longer term fix? Oh, Paul, that's

514
00:29:23,360 --> 00:29:26,480
Speaker 1: the million dollar question or a trillion dollar question. Really,

515
00:29:26,600 --> 00:29:28,680
Speaker 1: I mean That's what everyone wants to know is that

516
00:29:28,720 --> 00:29:31,320
Speaker 1: they really don't have a long term plan in place,

517
00:29:31,360 --> 00:29:33,560
Speaker 1: and that includes, you know, they need to figure out

518
00:29:33,560 --> 00:29:36,200
Speaker 1: what their ideal level of reserves is and then they

519
00:29:36,200 --> 00:29:38,480
Speaker 1: need to figure out, okay, how are they going to

520
00:29:38,560 --> 00:29:41,280
Speaker 1: extract themselves from the repo market? You know, what's their

521
00:29:41,360 --> 00:29:43,840
Speaker 1: role in this going forward? Are they going to put

522
00:29:43,840 --> 00:29:46,160
Speaker 1: a more permanent facility in place or are they just

523
00:29:46,200 --> 00:29:48,640
Speaker 1: content doing these or do they feel like they have

524
00:29:48,720 --> 00:29:50,640
Speaker 1: to do nothing because they're going to have be at

525
00:29:50,640 --> 00:29:53,520
Speaker 1: this perfect level of reserves and we're going to be okay.

526
00:29:53,840 --> 00:29:58,000
Speaker 1: So there's really a lot that they need to clear

527
00:29:58,040 --> 00:30:01,760
Speaker 1: out regulatory as well, which you know, same to someone,

528
00:30:01,800 --> 00:30:04,040
Speaker 1: I'm like, what are the chances that we get anything

529
00:30:04,080 --> 00:30:06,320
Speaker 1: from the Fed this year? You know, that could help

530
00:30:06,400 --> 00:30:09,680
Speaker 1: make the plumbing run a little bit smoother, because Jeron

531
00:30:09,760 --> 00:30:12,040
Speaker 1: Powell at his press conference was saying, oh, well, we

532
00:30:12,040 --> 00:30:14,920
Speaker 1: can implement things, but it's going to require you know,

533
00:30:16,040 --> 00:30:18,800
Speaker 1: sending out comment and like waiting for the common period

534
00:30:18,800 --> 00:30:21,000
Speaker 1: to close and getting that feedback and then you know,

535
00:30:21,040 --> 00:30:25,280
Speaker 1: sort of calibrating according to the comment, and you know

536
00:30:25,360 --> 00:30:27,120
Speaker 1: that could take a year, Like we could still be

537
00:30:27,160 --> 00:30:30,080
Speaker 1: in this situation talking about regulatory It is a year

538
00:30:30,120 --> 00:30:32,640
Speaker 1: from now and I won't be surprised. So there's just

539
00:30:32,800 --> 00:30:34,640
Speaker 1: there's a lot on their plate they need to work through.

540
00:30:34,960 --> 00:30:37,800
Speaker 1: And you know, minutes from the December meeting are out

541
00:30:37,840 --> 00:30:40,360
Speaker 1: on Friday, and I don't even think that's going to

542
00:30:40,440 --> 00:30:42,720
Speaker 1: give us much of a sign of anything. I think

543
00:30:42,760 --> 00:30:44,360
Speaker 1: they're just they tend to be a little bit more

544
00:30:44,360 --> 00:30:47,280
Speaker 1: methodical and a little slower to act on things. Also

545
00:30:47,320 --> 00:30:49,440
Speaker 1: at the end of the year, and why would they

546
00:30:49,480 --> 00:30:52,360
Speaker 1: give us anything to talk about Alex Harris, I mean really,

547
00:30:52,400 --> 00:30:55,200
Speaker 1: I mean this isn't hypothetical. I mean honestly, they want

548
00:30:55,240 --> 00:30:57,640
Speaker 1: to be boring. They will be boring. Alex Harris, who

549
00:30:57,640 --> 00:31:00,320
Speaker 1: covers all things rates and Repose for us year at

550
00:31:00,360 --> 00:31:02,400
Speaker 1: Bloomberg News. Thank you so much for being with us.

551
00:31:02,840 --> 00:31:07,040
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and

552
00:31:07,120 --> 00:31:12,440
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast

553
00:31:12,480 --> 00:31:16,719
Speaker 1: platform you prefer. I'm on Twitter at Tom Keene before

554
00:31:16,720 --> 00:31:20,600
Speaker 1: the podcast. You can always catch us worldwide. I'm Bloomberg

555
00:31:20,680 --> 00:31:20,960
Speaker 1: Radio