Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Lee.
Speaker 1: We bring you insight from the best in economics, finance, investment,
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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. There's
Speaker 1: definitely a question here are we going to see more
Speaker 1: inflation next year? Are we going to see a resurgence
Speaker 1: of growth, or are we going to see a dampening
Speaker 1: of some of the high hopes that we have priced
Speaker 1: into stocks. Joining us now, John Riding, chief Economic advisor
Speaker 1: to breen A Capital, joining us here in our Living
Speaker 1: three oh studios with his party head on, ready for
Speaker 1: the new year's celebration. Um, what do you think? Do
Speaker 1: you think that we're going to see an accelerating or
Speaker 1: re accelerating economy next year or or the opposite? You know,
Speaker 1: at least I find it very interesting chim re accelerating
Speaker 1: economy because if you look over the last ten and
Speaker 1: a half years of this expansion, economic growth has averaged
Speaker 1: two point three percent, and it has been the most
Speaker 1: stable period of economic growth on record. And this year
Speaker 1: that we are ending today, we'll see growth in line
Speaker 1: with that ten year trends of growth hasn't gone anywhere.
Speaker 1: What has changed is perceptions of where growth is going
Speaker 1: to go. And we came into twenty nine on this
Speaker 1: tremendous fear of recession and the yield curve was inverted.
Speaker 1: And you know, even thee you go to a gas
Speaker 1: station and maybe people that you the gas standard talking
Speaker 1: about inverted deal care foods. There probably no idea when
Speaker 1: but that's not true that actually go to a gas
Speaker 1: station and hear people talking about absolutely true, absolutely true.
Speaker 1: You had people people talk about cocktail party conversation. You know,
Speaker 1: you just just overhear people talking about it and did
Speaker 1: you new Jersey all the time. And we are now
Speaker 1: entering into where there's no fears of recession. Um, there's
Speaker 1: no fears for the market. We remember the debacle on
Speaker 1: Christmas Eve setting the you know, the end of a
Speaker 1: almost a bear market. It was really a very valid
Speaker 1: correction in stocks. So where are we now as we
Speaker 1: going to go into I mean, our growth numbers are
Speaker 1: around two and a quarter percent. May an acceleration we
Speaker 1: two and a half percent. A bit acceleration is very
Speaker 1: difficult because we don't have the people to employ to
Speaker 1: three and a half percent unemployment. Right, there's a story
Speaker 1: out this morning that about slowing population growth, and just
Speaker 1: had the slowest population growth in the centery in the US,
Speaker 1: and that continues for a while, and we haven't yet
Speaker 1: seen the big pickup in productivity growth. So pencil in
Speaker 1: another year of two and a quarter percent or so
Speaker 1: economic growth, maybe two and a half, two and three
Speaker 1: quarter percent on the on the high end um. The
Speaker 1: risk is to the downside if we don't get profit
Speaker 1: growth going again, and that's a really big issue for
Speaker 1: the US. John, can you put in the context for
Speaker 1: our listeners, what a ten or eleven percent I'm sorry,
Speaker 1: ten or eleven year expansion economy? How unusual is that? Well,
Speaker 1: it's unprecedented, so I guess unprecedented would make it pretty unusual.
Speaker 1: So what so, how do we think about that? Is that?
Speaker 1: Is that good? Is that the new normal? Is that?
Speaker 1: I mean? Are we poised for some significant correction in
Speaker 1: the economy. Well, if you step back and you look
Speaker 1: at all of the recessions and expansions since the uh
Speaker 1: in the post war period, so you have seen in
Speaker 1: the last two or three decades expansions become longer recessions
Speaker 1: were becoming short and then of course we had the
Speaker 1: Great Recession. Though not quite sure what's so great about it,
Speaker 1: but nevertheless we had the Great Recession. But now the
Speaker 1: Great Recession I set the stage for a ten and
Speaker 1: a half year economic expansion, with expansion expected to continue through. So,
Speaker 1: whether it's the new norm or not, it's the environment
Speaker 1: in which we are in. Well, here here's the thing.
Speaker 1: I mean. If you talk about the fact that we're
Speaker 1: probably in for more of the same, we're not in
Speaker 1: for re acceleration. We're not in for a big decline
Speaker 1: or recession. As the people in the gas station we're
Speaker 1: talking about the inverted yield curve six months ago are
Speaker 1: no longer doing so. Evidently I'm wondering, you know, is
Speaker 1: that consistent with valuations where they are in equities? That
Speaker 1: is great question, and my fear is not. Let me explain.
Speaker 1: If you look at the we use very simple model.
Speaker 1: We take level profits and we discounted by the level
Speaker 1: of corporate bond deals and bondials are very low. But
Speaker 1: even on that calculation, the market looks a little bit overvalued. Now,
Speaker 1: what's the major problem for the market. Wage growth has
Speaker 1: been exceeding the sum of profit growth certain the sum
Speaker 1: of price gains plus productivity gains, and so profit margins
Speaker 1: have been squeezed, and they have been squeezed now for
Speaker 1: about five years. We need to get profit growth to
Speaker 1: pick up because we can't simply have a risk on
Speaker 1: rally from here. What we can for a while, but
Speaker 1: it would end badly because in an environment where the
Speaker 1: trade deals have done, the risk is off the table
Speaker 1: and we just run the market higher because we are
Speaker 1: at risk on um and we don't have the profit gains.
Speaker 1: Then then bond heels rights and that actually reduces the
Speaker 1: sort of fair value of the equity market, so that
Speaker 1: everything hangs on price increases and on productivity gains and
Speaker 1: on rekindling capital spending. So that's the key thing I
Speaker 1: would like. Do we start to see signs that we're
Speaker 1: going to see vigorous growth in capital spending because that
Speaker 1: was the most disappointing part of the economy When looking
Speaker 1: for part of the economy that did crater and does
Speaker 1: need to re accelerate its capex. We need to move
Speaker 1: to an economy which is more capital spending to support
Speaker 1: stronger productivity gains, to boost the economy. How much of John,
Speaker 1: do you think the take extent we've had a contraction
Speaker 1: or just a a pairing back of capital investment, How
Speaker 1: much of that is due to just the cycle or
Speaker 1: in any economy versus the uncertainty associated with all the
Speaker 1: trade issues. I think it's the latter. I don't just
Speaker 1: think it's trade. Look December, we had corporate tax reform.
Speaker 1: We had the corporate tax cut. The US was no
Speaker 1: longer uncompetitive from a tax perspective. We had a number
Speaker 1: of tax incentives in place, and we started to have
Speaker 1: a pickup in capital spending. And then in the middle
Speaker 1: of eighteen it just just stopped and we haven't had growth.
Speaker 1: The one area we've had growth in is an intellectual product.
Speaker 1: That has been the strong area of capital spending, but
Speaker 1: in terms of plant equipment buildings, it's been very very weak.
Speaker 1: Um so I you know, we're going to have a
Speaker 1: test trade on certainty is reduced. Are people not going
Speaker 1: to commit or are they going to say twenties an
Speaker 1: election year. Let's wait till after the election, and then
Speaker 1: we have another year of black capital spending. And I'm hopeful,
Speaker 1: but it's a very difficult thing to forecast. That we
Speaker 1: do start to see a pickup, but it's not there
Speaker 1: in the numbers yet. John writing, thank you so much
Speaker 1: for being with us in Happy New Year. Trying writing,
Speaker 1: chief Economic advisor to Breen Capital or do you plan
Speaker 1: on going to Times Square? Um? No, but Breen Capital's
Speaker 1: offices are at three Times Square? So does that mean
Speaker 1: you're going to be avoiding them or heading there? Um? Well,
Speaker 1: I decided not to have the opportunity to watch the
Speaker 1: ball drop, but I think I'm gonna stawn home. My
Speaker 1: mom's over from England. She's ninety and I think she
Speaker 1: deserves me to be there. Well, cheers, cheers to your mom,
Speaker 1: and happy New Year. What do you plan on doing, Paul, uh,
Speaker 1: staying close to home, which is not Time Square? Yeah,
Speaker 1: I know, I know. We've heard lots about the new
Speaker 1: Jersey cross ways right now. One of the more interesting
Speaker 1: stories when we woke up this morning is the story
Speaker 1: about Carlos Gone, the fallen automotive Titan. He's facing trial
Speaker 1: for financial crimes. He fled the Lebanon to escape what
Speaker 1: he called Japan's rigged justice system. To get the latest,
Speaker 1: we welcome Donna cra She is a reporter for Bloomberg
Speaker 1: News based in the Middle East. Donna, thanks so much
Speaker 1: for joining us. What do we know about Mr ghones
Speaker 1: whereabouts right now? Hi? So we know he is in
Speaker 1: the Lebanon. We don't know exactly where he is. Um.
Speaker 1: I went to his house in Beirut earlier in the day,
Speaker 1: like in the early hours of the morning when we
Speaker 1: heard the news, and um, there were no security and
Speaker 1: it wasn't clear if gold was at the house. Um
Speaker 1: some of the window or the windows were opened, some
Speaker 1: of them were closed, so it doesn't seem that he
Speaker 1: was inside or anything. Um, we know that. Also one
Speaker 1: of the Lebanese ministers said that he entered Lebanon legally
Speaker 1: through his French passports and a Lebanese I d um
Speaker 1: and he also said this minister said that he tried
Speaker 1: to convince Japanese officials to send him to Lebanon to
Speaker 1: be tried here, but you know, he wasn't very successful.
Speaker 1: So we know he's in Lebanon, but we don't know
Speaker 1: exactly where he's staying. And just to sort of set
Speaker 1: this up, so Carlos gone Uh said that he Uh
Speaker 1: is fleeing Japan's quote rigged justice system, that he was
Speaker 1: not fleeing justice but rather injustice, and he of course
Speaker 1: has been accused of financial misconduct. Meanwhile, there is a
Speaker 1: question Lebanon, where he did grow up and has citizenship.
Speaker 1: He was formerly the head of Nissan and Renault UH.
Speaker 1: There is a question about extradition and the fact that
Speaker 1: they cannot, that Japan cannot extradite him from Lebanon. What
Speaker 1: have the authorities in Lebanon set up to this point? Um,
Speaker 1: They have been a little bit tight lipped about this,
Speaker 1: but the Lebanese officials, ever since um Going was arrested,
Speaker 1: Lebanese officials have said that they will support him and
Speaker 1: they will extend as much help as UH as needed
Speaker 1: for foregone. As you know, Going is seen as a
Speaker 1: national hero here. Um. When he was first detained, billboards
Speaker 1: in support of him sprung up across the nation with
Speaker 1: his with his pictures everywhere. People see him as one
Speaker 1: of the immigrants that you know, made it big outside
Speaker 1: of Lebanon. So he's he's a national hero. And they've
Speaker 1: repeatedly said that they will support and help him, but
Speaker 1: they weren't very specific about how this support would materialize.
Speaker 1: Donna any sense of what Mr Going might do next?
Speaker 1: I mean we some said that he will hold a
Speaker 1: press conference, but did not specify when that will be. UM.
Speaker 1: Given that UM, his his word about are unknown still
Speaker 1: in Lebanon, it's hard to tell. UM. Some reports that
Speaker 1: said that he met the president upon arrival, but we
Speaker 1: later had some people denying this to us. So he
Speaker 1: hasn't seen anyone. We We talked to a friend of his,
Speaker 1: a longtime friend friend of his, earlier in the morning,
Speaker 1: and he said that he didn't know that Going had arrived,
Speaker 1: but that um, he was happy he was here with
Speaker 1: his family home for a new year. So just to
Speaker 1: sort of give some perspective. In news reports this morning,
Speaker 1: a lot of people were saying, uh, go and will
Speaker 1: probably never return to Japan because he would simply be
Speaker 1: re arrested if he were to do so. Given the
Speaker 1: fact that you actually went to his house in Beirut,
Speaker 1: can you give us a sense of what it's like.
Speaker 1: I mean, basically, is he living in the lap of
Speaker 1: luxury by moving to Beirut and never returning to Japan. Um.
Speaker 1: The house is in one of the capital's most posh areas.
Speaker 1: It's very known. UM it's like a light pink house
Speaker 1: to painting is light pink with light blue windows. It
Speaker 1: looks like an old house that's been recently renovated. Um,
Speaker 1: you know there are some small shops around. Everyone knows
Speaker 1: that's Scarletts Ghn's house. Um, if you just drive through
Speaker 1: the street, there are all these bally posh buildings around.
Speaker 1: So the area is really nice and um, everybody knows
Speaker 1: that that's Ghn's house. Danna, thanks so much, or Donna,
Speaker 1: thanks so much for joining us. We appreciate your your
Speaker 1: reporting from Beirut. Donna Bloomberg News reporting from Beirut about
Speaker 1: this really just amazing story. It's kind of a James
Speaker 1: Bond Jason Bourne type of situation, kind of escaping from
Speaker 1: Japan uh to return to Lebanon. Fairness, he didn't necessarily
Speaker 1: tunnel his way exactly. It's unclear. Yeah, it's unclear how
Speaker 1: he actually made the trip from Japan. I mean obviously
Speaker 1: on a private jet, but how that all came about,
Speaker 1: given that he was out on bail. I'm trying to
Speaker 1: get a too. Is he right? Is it injustice what
Speaker 1: Japan is doing to him? I mean, I don't think
Speaker 1: people think he is completely clean when it comes to
Speaker 1: financial malfeasance, but there's a question about whether the potential
Speaker 1: penalty and the way that the Japan is going about it.
Speaker 1: It has been fair. What a year to look back
Speaker 1: on for Yeah, and we were asking the question how
Speaker 1: long can the rally in both bonds that are considered
Speaker 1: safe and stocks continue And it seems like there is
Speaker 1: a profound inconsistency here. Julian Emmanuel just graced the door.
Speaker 1: The door. Tom Kane would say, VT I g chief
Speaker 1: equity and derivative strategist who has gotten it right with
Speaker 1: the stock rally for years. And you called me out.
Speaker 1: I remember what I was once talking about how cash
Speaker 1: was looking better, and you're like, you're crazy, you were right.
Speaker 1: I was wrong. Um, what do you think for next year?
Speaker 1: Is one of the acid class is going to emerge superior?
Speaker 1: But you still couldn't get Tom Keen to get out
Speaker 1: of his triple leverage, right, No, but occasionally he'll he'll
Speaker 1: jack it up to quadruple leverage if you feel really risky.
Speaker 1: So so when we look at next year, it's not
Speaker 1: a continuation of the same because this year was, you know,
Speaker 1: very dramatic. Obviously it was not looking great in January.
Speaker 1: It was difficult to stick to our guns. Our view
Speaker 1: was that the FED was going to help out. They
Speaker 1: helped out a lot. We also didn't see recession. We
Speaker 1: don't see a recession in the biggest difference coming into
Speaker 1: into this next year is we think the bond market
Speaker 1: really really did turn back in September, probably a very
Speaker 1: significant bottom in global yields, and in fact this is
Speaker 1: the point in the cycle where higher yields are likely
Speaker 1: to feed into more optimism with regard to equities. Certainly
Speaker 1: we saw that in the fourth quarter UM But for us,
Speaker 1: the the challenge, the interesting thing will be after ten
Speaker 1: years of a bull market that has been fought sort
Speaker 1: of tooth and nail. You've seen it in terms of
Speaker 1: the lack of flows into equities for the last five years,
Speaker 1: does the public finally get a little bit more interested
Speaker 1: in stocks and start committing funds. We think the answers yes,
Speaker 1: and we think that drives bond yields higher. So as
Speaker 1: we think about the market the performance in twenty nineteen,
Speaker 1: I would argue, more than most people were anticipating, is
Speaker 1: it primarily the Fed? Is that the primary thing in
Speaker 1: that investor should focus on. Well, Actually, the FED would
Speaker 1: prefer that you don't focus on them at all, and
Speaker 1: they've been successful. Actually, for the past few meetings, they've
Speaker 1: been incredibly boring and and J. Powe would love it
Speaker 1: to be that way for the entire rest of the year,
Speaker 1: which is why we also think that they were very,
Speaker 1: very forthright in getting front of of this turn of
Speaker 1: the year UH liquidity UM in the repo markets, given
Speaker 1: the spike we had in September, we think they've done
Speaker 1: a great job of managing it. We think they'll do
Speaker 1: a great job over the next several weeks. For us,
Speaker 1: it's very much um can confidence, which is turned, can
Speaker 1: the yield curve continue to steep in, which props confidence?
Speaker 1: And is their fear of valuations, which we think, you know,
Speaker 1: really they're expensive slightly but not overly. So you said
Speaker 1: something that piques my interest dramatically, which is the idea
Speaker 1: that treasure yields can rise and that that will be
Speaker 1: looked at is a good thing for stocks. That has
Speaker 1: not been the case for a while, or there is
Speaker 1: a threshold for how high treasure yields can go before
Speaker 1: it's considered a bad thing when it comes to valuing equities.
Speaker 1: What's that tipping point? Well, so if you look at
Speaker 1: the last several years, the tipping point had had been
Speaker 1: ten year yields in the US going over three percent. Obviously,
Speaker 1: we're a very long way away from that. UM. We
Speaker 1: happen to have a higher yield forecast than most. We're
Speaker 1: looking for two point three nine right now, right right,
Speaker 1: which if you think about it, isn't terribly aggressive if
Speaker 1: we're if in in into an election year and you
Speaker 1: think about politicians being incentivized to create upside risk to
Speaker 1: economic performance, which at you know, sort of one eight
Speaker 1: one nine is a rather subdued number UM for US.
Speaker 1: The tipping point in terms of where bonds become problematic
Speaker 1: is quite a ways a way in our view, likely
Speaker 1: north of two and a half percent UM, and that
Speaker 1: would require a material re emergence of inflation, which we think,
Speaker 1: you know, we'll sort of peek its head through, but
Speaker 1: not become problematic. Julian, you mentioned earlier evaluation. I think
Speaker 1: about twenty nineteen again, a percent move up in SMP
Speaker 1: with little to no earnings growth in where are invaluation
Speaker 1: just feels like the market should be at the higher
Speaker 1: higher end and I should be concerned about valuation well
Speaker 1: on metrics such as price to sell. As you are
Speaker 1: at the higher end, we sort of tend to keep
Speaker 1: it simple. Um, it's obviously worked in terms of the
Speaker 1: story on on Pe. You really are only at the
Speaker 1: midpoint slightly above the range of the last thirty years.
Speaker 1: And if if our earnings estimates hundred and seventy five
Speaker 1: for twenty are realized, um, and that growth rate slightly
Speaker 1: under seven percent is very consistent with an economy chugging
Speaker 1: along and margins not necessarily being pressured anymore. Um, thirty
Speaker 1: four fifty are your end target basically gets you around
Speaker 1: nineteen points six times, which is perfectly reasonable. What about tech,
Speaker 1: big tech? And how much longer I can kind of
Speaker 1: drive the gains that we're seeing in the US. It
Speaker 1: certainly has been quite a month for tech, hasn't it. Yes,
Speaker 1: it has I think for certain box uh in in
Speaker 1: the fan group, it's been quite a decade in the
Speaker 1: course of one year along point. Yeah, well, I know,
Speaker 1: I mean, like, is fang really appropriate here? Facebook, Apple, Amazon, Netflix,
Speaker 1: and Google? Shouldn't it be like Microsoft Oracle? Well we
Speaker 1: can you know acronym them all day, fam G and
Speaker 1: so on and so forth. But uh, look, the long
Speaker 1: run drivers of growth in those names is absolutely intact,
Speaker 1: is likely to be intact even if the government uh
Speaker 1: really gets more intense coming into an election year in
Speaker 1: terms of regulatory scrutiny, data privacy issues. The long term
Speaker 1: story is intact. That keeps us neutral um in. In
Speaker 1: the medium term, however, what we would say is that
Speaker 1: if we're right in our view that you have a
Speaker 1: shift out of bonds and into stocks led by more
Speaker 1: public interest, the public will end up being a buyer
Speaker 1: of technology. The public is comfortable with technology, understands it,
Speaker 1: and is likely to be a buyer. Lisa is also
Speaker 1: comfortable with technology. Doubling down, I'm more valuation sensitive. Do
Speaker 1: I dip my toe in? Yes? You are okay? In energy? Um,
Speaker 1: you know some of the sectors that maybe healthcare, that
Speaker 1: have lagged and might suggest kind of we have a
Speaker 1: valuation call here. What we do think it's valid to
Speaker 1: look at at some of those laggards. Um again going
Speaker 1: back to this psychological turning point in confidence in bond
Speaker 1: yields sort of triggering uh. You know this this potential
Speaker 1: move towards more value and and and when you look
Speaker 1: at it again, Look, we're very sympathetic to the idea
Speaker 1: that over the long term UH, the move towards E
Speaker 1: S G investing and move towards a uh you know,
Speaker 1: the green initiative is likely to continue to pressure energy
Speaker 1: share ownership. But again end over the last several years,
Speaker 1: nothing moves in a straight line, and we think it's
Speaker 1: basically time that people are going to look at an
Speaker 1: area where you know, it's you're under five percent of
Speaker 1: the weight in the S and P five all right,
Speaker 1: what could go wrong that would make you inaccurate in
Speaker 1: your forecast that keeps you up at night. To us,
Speaker 1: the lynchpin of of the you know, particularly late cycle
Speaker 1: is confidence. It was very important that not only consumer confidence,
Speaker 1: which is utmost because I think we'd all acknowledge that
Speaker 1: the consumer has been the driving force of the last
Speaker 1: number of years. We do not expect that to change.
Speaker 1: But importantly, after a year and a half of sort
Speaker 1: of you know, being in the trenches on the trade war,
Speaker 1: CEO confidence turned um over this last quarter as well.
Speaker 1: To us, confidence needs to keep continuing to move forward
Speaker 1: if there are geopolitical upsets, if they're our domestic US
Speaker 1: political upsets, and certainly the risk it does exist for
Speaker 1: for both of those um, that's you know, you look
Speaker 1: back at this time last year and the government shut
Speaker 1: down at the same time you're fed was hiking rates
Speaker 1: at the same time the markets were cratering and confidence
Speaker 1: took a hit. We you know, we don't want to
Speaker 1: see that happen again, not a do we. Julian Emmanuel B.
Speaker 1: T i G, Chief Equity and Derivative Strategy, Thanks so
Speaker 1: much for joining us coming here in our Bloomberg Interactive
Speaker 1: Broker studio. Right now, Paul has gone to the corner
Speaker 1: and is practicing his lunges ahead of going skiing, because
Speaker 1: that is what he is interested in, rather than talking
Speaker 1: about the REP market, which I've got to say, is
Speaker 1: it really interesting to me? In heading into your end?
Speaker 1: It was supposed to be potentially volatile, the sort of
Speaker 1: storm that few people were expecting. The storm turned out
Speaker 1: not to be. At least there is a storm in
Speaker 1: the Midwest that's heading toward these but it's not in
Speaker 1: the REPO market. Alex Harris has been covering this all
Speaker 1: year for us super well. She was talking about how
Speaker 1: there are potential nodes of contagion. Yesterday here she is.
Speaker 1: She comes into the office and she says, nothing's happening
Speaker 1: now we know. We gotta looked at each other and said, oh,
Speaker 1: things look relatively calm. You know, the rates sort of normalized.
Speaker 1: It's bouncing around a little bit, but well within the
Speaker 1: target range that you know the FED is laid out
Speaker 1: for short term rates. So I think everyone's feeling like, Okay,
Speaker 1: we're here, we can close the chapter on your end.
Speaker 1: Let's turn the calendar to and a whole new set
Speaker 1: of problems for the market. And mainly it's if you're
Speaker 1: the Federal Reserve, how do you extract yourself from the
Speaker 1: repo market? Because I think at the end of the day,
Speaker 1: they don't want to have this big of a footprint.
Speaker 1: What would you say to somebody who looks at the
Speaker 1: fact that saw the repo operation that the FED has
Speaker 1: been doing undersubscribed on the final day of the fact
Speaker 1: that you're seeing nothing exciting going on in the repo
Speaker 1: market heading into your end despite some of the gloom
Speaker 1: and doom warnings that we heard. Isn't this a victory
Speaker 1: for the FED? Can't the FED go out and say
Speaker 1: we have this? I think you do. But at the
Speaker 1: end of the day, one of the things that I
Speaker 1: know Jerome Powell had said back in a post f
Speaker 1: MC press conference on December eleventh, was you know there
Speaker 1: should be volatility in the market, that's okay, a short
Speaker 1: term rates should be volatile. They always have, and I think,
Speaker 1: you know, it's trying to balance for them. I think,
Speaker 1: you know, what level of volatility are they comfortable with?
Speaker 1: How much are they they comfortable with letting the Fed
Speaker 1: funds rate rise within their target range um and not
Speaker 1: breaching it and causing some questions about their credibility. And
Speaker 1: so this is what I think is going to be
Speaker 1: about for them, is you know, finding, okay, well, what's
Speaker 1: the appropriate level of intervention in these markets from from
Speaker 1: letting them become mon ruly. And that also means taking
Speaker 1: a look, you know, at the regulatory picture and saying,
Speaker 1: how do we allow these markets to move more efficiently
Speaker 1: so we don't have to be in there all the time.
Speaker 1: And these are not questions that are going to be
Speaker 1: answered in the span of a couple of months. I mean,
Speaker 1: they've been talking about reserve levels and what the ideal
Speaker 1: target level reserve level is for like a year and
Speaker 1: they still couldn't get anywhere before this all blew up.
Speaker 1: So there's a lot for them to discuss here, and yes,
Speaker 1: things have calmed down, but do you really does the
Speaker 1: FED really want to be pledging half a trillion dollars
Speaker 1: in overnight or in liquidity for the end of the year.
Speaker 1: Do they want that big of a footprint or any
Speaker 1: sort of idea that this is what they could be providing. So, Alex,
Speaker 1: how did we kind of get here? I want to
Speaker 1: get a sense of what's new about what we've been
Speaker 1: dealing with with the FED and the repo market since September.
Speaker 1: How is that different from what we've historically done? Um, Well,
Speaker 1: you know, it's not even that it's all that different.
Speaker 1: You know what they call these overnight or term repo
Speaker 1: operations or or what the street calls system rps, they've
Speaker 1: been they've done those before, they did those before the
Speaker 1: financial crisis. It was definitely, um it was the way
Speaker 1: in which they actively managed reserves and they actively managed
Speaker 1: the FED funds rate. And then you know, QUEI happened,
Speaker 1: and you know, there was this huge stockpile of reserves
Speaker 1: and they didn't feel like they needed to come in
Speaker 1: and manage the FED funds rate because you know, they
Speaker 1: had such excess reserves that it wasn't necessary. And so
Speaker 1: now what the issue is is the FED has to
Speaker 1: figure out, Okay, what is our ideal level of reserves?
Speaker 1: And if we're under that, are we going to come
Speaker 1: in again and do these repo operations on a more
Speaker 1: regular basis to help manage you know, the FED funds
Speaker 1: rate and manage those reserves. And that's what you know,
Speaker 1: they say they don't want to, but you know, I
Speaker 1: think what everyone's really unsure about and can't get a
Speaker 1: read on from the Fed is okay, well, what's their
Speaker 1: ideal level of reserves? And is it too low? Is
Speaker 1: it too high? I know the market thinks it's more
Speaker 1: like one point seven trillion. You You've had people at
Speaker 1: the FED like New York Fed President John Williams say,
Speaker 1: you know what, it's probably more like one three. Back
Speaker 1: to where we were, we're about one five and and
Speaker 1: it's still I think some people feel like it's a
Speaker 1: little low because again, you know, reserves are very fluid.
Speaker 1: I know the FED only provides a weekly snapshot, but
Speaker 1: they move quite a bit, and and you know they're
Speaker 1: devoted to things for regulatory purposes. So you know, everyone,
Speaker 1: we gotta figure out this year we gotta figure out
Speaker 1: what this ideal level is and then the Fed can
Speaker 1: go from there in terms of setting its policy and
Speaker 1: how it wants to proceed with the front end. All Right,
Speaker 1: it is the final day of trading for twenty nineteen,
Speaker 1: which means it's a perfect time to gaze at our
Speaker 1: navels and and talk in big abstractions. Uh, it's always
Speaker 1: a good time to do that. But why don't we
Speaker 1: do that now? Anyway? Um, could you give us a
Speaker 1: sense of what the big takeaway from twenty nineteen REPO
Speaker 1: disruptions really is? I mean, what is sort of when
Speaker 1: somebody thinks about this other than oh my god, I
Speaker 1: need to go do my stretches. Um, you know what,
Speaker 1: what should they think? You know? I think the takeaway
Speaker 1: is the Central Bank was woefully unprepared for this. I
Speaker 1: think they were completely caught off guard. I think there
Speaker 1: were warning signs as far back as April that there
Speaker 1: were issues and the market was starting to reflect it
Speaker 1: when month ends, every month end started to look like
Speaker 1: a quarter and people are saying something's not right here,
Speaker 1: something's broken, And you know, I it just took like
Speaker 1: was seemingly innocuous day of settlements in the treasury market
Speaker 1: to to really push us over the edge here that
Speaker 1: you know, there was something broken a long time before
Speaker 1: we hit September, and you know there were a few
Speaker 1: people keeping an eye on it and watching it. And
Speaker 1: I think it just comes to show you that the
Speaker 1: federally took a hit here, and you know, people are
Speaker 1: really questioning their ability to see this and what they're
Speaker 1: actually you know, reading and understanding and what the market's
Speaker 1: telling them, what the streets telling them and dealers are
Speaker 1: telling them. But I think they missed. I mean, they've
Speaker 1: recovered and again they've they've made sure that your end
Speaker 1: is gone smoothly, but they really missed here, and they
Speaker 1: think it was just a sign that they were really
Speaker 1: unprepared for what was to come and really underestimated what
Speaker 1: the what the big issues were here. When do we
Speaker 1: expect to get some type of longer term I guess
Speaker 1: fix from the Fed? It's been a while, right, are we?
Speaker 1: I mean in order for them to kind of rehability,
Speaker 1: maybe their reputation in the marketplace, do they need to
Speaker 1: come up with a longer term fix? Oh, Paul, that's
Speaker 1: the million dollar question or a trillion dollar question. Really,
Speaker 1: I mean That's what everyone wants to know is that
Speaker 1: they really don't have a long term plan in place,
Speaker 1: and that includes, you know, they need to figure out
Speaker 1: what their ideal level of reserves is and then they
Speaker 1: need to figure out, okay, how are they going to
Speaker 1: extract themselves from the repo market? You know, what's their
Speaker 1: role in this going forward? Are they going to put
Speaker 1: a more permanent facility in place or are they just
Speaker 1: content doing these or do they feel like they have
Speaker 1: to do nothing because they're going to have be at
Speaker 1: this perfect level of reserves and we're going to be okay.
Speaker 1: So there's really a lot that they need to clear
Speaker 1: out regulatory as well, which you know, same to someone,
Speaker 1: I'm like, what are the chances that we get anything
Speaker 1: from the Fed this year? You know, that could help
Speaker 1: make the plumbing run a little bit smoother, because Jeron
Speaker 1: Powell at his press conference was saying, oh, well, we
Speaker 1: can implement things, but it's going to require you know,
Speaker 1: sending out comment and like waiting for the common period
Speaker 1: to close and getting that feedback and then you know,
Speaker 1: sort of calibrating according to the comment, and you know
Speaker 1: that could take a year, Like we could still be
Speaker 1: in this situation talking about regulatory It is a year
Speaker 1: from now and I won't be surprised. So there's just
Speaker 1: there's a lot on their plate they need to work through.
Speaker 1: And you know, minutes from the December meeting are out
Speaker 1: on Friday, and I don't even think that's going to
Speaker 1: give us much of a sign of anything. I think
Speaker 1: they're just they tend to be a little bit more
Speaker 1: methodical and a little slower to act on things. Also
Speaker 1: at the end of the year, and why would they
Speaker 1: give us anything to talk about Alex Harris, I mean really,
Speaker 1: I mean this isn't hypothetical. I mean honestly, they want
Speaker 1: to be boring. They will be boring. Alex Harris, who
Speaker 1: covers all things rates and Repose for us year at
Speaker 1: Bloomberg News. Thank you so much for being with us.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keene before
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