Speaker 1: Who you put your trust in matters. Investors have put
Speaker 1: their trust and independent registered investment advisors to the two
Speaker 1: and four trillion dollars. Why learn more and find your
Speaker 1: independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best in economics, finance, investment and international relations.
Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and
Speaker 1: of course, on the Bloomberg News. This morning, out of
Speaker 1: London judges ruling there that there has to be a
Speaker 1: vote in Parliament before the UK government can begin the
Speaker 1: two day countdown to your countdown to bregsit. The country's
Speaker 1: Supreme Court has already made room for a December appeal
Speaker 1: on its doc at. Stephanie Flanders of JP Morgan Asset
Speaker 1: Management will join us in just a moment as we
Speaker 1: wait the results of a monetary policy review and new
Speaker 1: inflation projections from the Bank and England. We expect that
Speaker 1: at eight o'clock Wall Street time will bring you bo
Speaker 1: E Governor Mark Carney's comments. Shortly thereafter. In Washington, it
Speaker 1: was as expected, a dead meeting yesterday. The Federal Open
Speaker 1: Market Committee left rates unchanged, hinting they could rise in December.
Speaker 1: Let's get to the latest done Brexit. I want to
Speaker 1: bring in Stephanie Flander's chief market strategist for the UK
Speaker 1: and Europe at JP Morgan Asset Management. Good morning, Stephanie. Morning,
Speaker 1: good to him. Let's let's start with the ruling itself here,
Speaker 1: a panel of judges designing there has to be a vote.
Speaker 1: How big a blow is this to the UK government. Well,
Speaker 1: I think it's it's a blow to the Prime Minister
Speaker 1: Theresa May, who had said very clearly and loudly that
Speaker 1: she didn't want to have this vote. So in that
Speaker 1: sense it's obviously a jolt to her standing and her authority.
Speaker 1: But I would caution those who are sort of seeing
Speaker 1: this as a sign that somehow the UK is not
Speaker 1: going to have not going to leave the EU or
Speaker 1: something that that Article fifty is not going to get
Speaker 1: triggered for member. This is a vote of members of Parliament,
Speaker 1: many of whom have constituencies that voted to leave the
Speaker 1: EU um and certainly even if they didn't, they will
Speaker 1: not want to be seen to be kind of not
Speaker 1: respecting the people's will. We had a majority vote to leave,
Speaker 1: so I think we should be cautious of suggesting that
Speaker 1: this is somehow a sign that we're going to have
Speaker 1: a softer form of Brexit, or that maybe even that
Speaker 1: the UK won't leave the European Union. I think if
Speaker 1: there is a vote, it will be a vote in
Speaker 1: favor of triggering Article fifty, so we may get a
Speaker 1: bit more debate about what, what you know, life outside
Speaker 1: the EU will actually look like for the UK, and
Speaker 1: that would be good perhaps for transparency. Put this in
Speaker 1: some context for us if you would a few days
Speaker 1: ago at a Northern Irish judge rejecting a pair of
Speaker 1: challenges to to the to the Brexit process, how does
Speaker 1: this fit into the panoply of legal challenges we've had. Well,
Speaker 1: as you say we've had, there are lots of different challenges.
Speaker 1: I think this was always the strongest one because there
Speaker 1: was a feeling even among some people who voted for Brexit.
Speaker 1: I think even one of the lawyers involved in this
Speaker 1: challenge of the government that has one today had voted
Speaker 1: for Brexit and just had quite a strong feeling that
Speaker 1: parliament sovereignty should be respected. I think some of the
Speaker 1: other ones that question whether or not the referendum has
Speaker 1: any binding power any of those things. I think they're
Speaker 1: less likely to go anywhere. But this is this is
Speaker 1: always a serious one because many people when they voted
Speaker 1: for to leave that you were actually voting to put
Speaker 1: Parliament back in charge and to give British institutions power
Speaker 1: that some say that they had lost to European institution.
Speaker 1: So it was always a bit odd to say, well,
Speaker 1: we're going to do this, but we're not going to
Speaker 1: let parliament have a say. Remind us who who brought
Speaker 1: this case here? An investor in a hairdresser. Yes, although
Speaker 1: actually it ended up having quite a collection of people
Speaker 1: attached to as I say, because it was considered to
Speaker 1: be quite a good have quite a strong case. Um.
Speaker 1: But as the judges themselves said, it was you know,
Speaker 1: they were very specifically saying, this is not a judgment
Speaker 1: about the rights and wrongs of Brexit or a particular
Speaker 1: model of brexit. This is about the legal process. And
Speaker 1: what they judged was, once you trigger Article fifty, because
Speaker 1: Article fifty says that you have two years then to
Speaker 1: leave the EU and that's going to happen, come what may.
Speaker 1: The view was that that was overriding Parliament's power, because
Speaker 1: even if you had a parliamentary vote somewhere down the way,
Speaker 1: if you were definitely going to leave, you'd never given
Speaker 1: Parliament a choice to say whether they wanted that to happen.
Speaker 1: Theresa made the Prime Minister saying she will appeal this decision,
Speaker 1: and the Supreme Court already has carved out some time
Speaker 1: on the December darket. Yes, and that's obviously an accelerated timetable,
Speaker 1: both you know here and in the US, there's usually
Speaker 1: takes a lot longer for these kind of appeals to
Speaker 1: work through the courts. But they're clearly understand that this
Speaker 1: is something that has to be resolved and they would
Speaker 1: certainly the lawyers involved in the case have said they
Speaker 1: expect this to be resolved one way or another by
Speaker 1: the beginning of the year, So that would clear the
Speaker 1: way for or the Prime Minister to stick to the
Speaker 1: schedule that she suggested, which is to trigger this Article
Speaker 1: fifty process notify the European Union that the UK wants
Speaker 1: to leave formally by February or March. Looking at sterling
Speaker 1: here against the dollar, it's at one forty one a
Speaker 1: three week a three week hi against the dollar. How
Speaker 1: is the market reacted to this, the legal maneuvering that
Speaker 1: this waiting game here to get some clearly on the
Speaker 1: process well to this. This decision obviously was was genuine news,
Speaker 1: and there was a big bounce to sterling that came
Speaker 1: from that, which is largely continued the The equity market
Speaker 1: initially had a positive bounce and then has come back.
Speaker 1: But of course we've seen over the last few months
Speaker 1: that often the pound and the equity market have moved
Speaker 1: in opposite directions because the equity market is so dominated
Speaker 1: by companies with foreign earnings that are that are helped
Speaker 1: by a falling pound. So I wouldn't read too much
Speaker 1: into that. I think the pound move is the most
Speaker 1: significant one. Whether it will last, though, I think it's
Speaker 1: a question mark because, as I say, there's this kind
Speaker 1: of initial a jeep knee jerk reaction to this, which
Speaker 1: is if it's anti treason May and if it's anti government,
Speaker 1: it must be kind of anti Brexit. Um. I'm not
Speaker 1: sure that it does put into into question, you know,
Speaker 1: that fundamental direction of the UK, and if that's that
Speaker 1: leaving of Brexit that's brought the pound down, I think
Speaker 1: the pan could go back down quite easily. Yeah, I am.
Speaker 1: I wonder sort of here in the US, when there's
Speaker 1: a Supreme Court challenge like this, often there will be
Speaker 1: other parties who will sign on. What do we know
Speaker 1: of who might join this case and what it might
Speaker 1: look like. Give us such a sense of how this
Speaker 1: will play out here in December, Yeah, I mean there's not.
Speaker 1: It is a slightly different process, uh, and a lot
Speaker 1: more wigs involved than in the US, So it doesn't
Speaker 1: end up doesn't tend to be the same kind of
Speaker 1: bandwagon that you might see in this kind of very
Speaker 1: politically charged case in in the US. Now that the
Speaker 1: government has actually said they will appeal this decision, there
Speaker 1: was some question about whether they would, but they are
Speaker 1: now going to appeal. Um, it'll be a fairly I
Speaker 1: think the actual legal process will be quite orderly. Of course,
Speaker 1: what you will have and you're already seeing I'm looking
Speaker 1: at my Twitter feed and just the order of the
Speaker 1: comments and the reactions by politicians coming into this vote.
Speaker 1: You will have a battle over the interpretation of this
Speaker 1: ruling and what kind of what that vote would look
Speaker 1: like once we do, if we do indeed have a
Speaker 1: vote in parliament, So all that. There'll be a lot
Speaker 1: of political debate around this, but it won't largely be
Speaker 1: in the in the sort of hallowed courtroom. It will
Speaker 1: be on the airwaves of Bloomberg and everywhere else. What
Speaker 1: did the focus has a lot of other news today
Speaker 1: and out of the United Kingdom a good p M number.
Speaker 1: Stephanie Flair is, what does it signal this resiliency post Brexit. Well,
Speaker 1: I'd be inclined to say partly its signals that we
Speaker 1: haven't left the European Union yet. So all the things
Speaker 1: that one might be worried about in terms of the
Speaker 1: impact of the economy, you know, nothing has actually changed.
Speaker 1: So any effect that you were ever going to see
Speaker 1: was to do with expectations and uncertainty. That hasn't flat
Speaker 1: translated into a falling tumor confidence, which you might have
Speaker 1: thought it might have done. So that's that's showing strength.
Speaker 1: But we've certainly seen it translate into weaker investment intentions
Speaker 1: and concerns around what the trade outlook in the next
Speaker 1: few years is going to be. So, you know, the
Speaker 1: resilience tells us that we haven't had the short term
Speaker 1: hit the confidence we might have had, but we are
Speaker 1: going to have a big hit to consumers coming down
Speaker 1: the track from higher inflation, from the fall in the pound.
Speaker 1: That matters in the economy that is completely dependent at
Speaker 1: the moment for its growth on consumer spending. So watch
Speaker 1: this space. I really don't think that this this the
Speaker 1: impact is going to play out over a long time, Stephanie.
Speaker 1: Thank you so much, Stephanie. Playing as a GP more
Speaker 1: going to set management and most beneficial they've ever run.
Speaker 1: As we got to Charles dooma TSL Research, United Kingdom
Speaker 1: ten year guilts that's their note yield rises six basis
Speaker 1: points to a one point to level. Charles Duma. The
Speaker 1: inflation jump by the BOE. Are you surprised at a
Speaker 1: two point seven percent statistic? Well, I mean, you know
Speaker 1: they have no they have totally poor forecasting record, but
Speaker 1: there's nothing wrong with that number. The latest quarterly, I
Speaker 1: mean just the latest three months, I've seen an annual
Speaker 1: rate of inflation around two and there's very little doubt
Speaker 1: that the target, which is to percent, will be exceeded
Speaker 1: significantly by next year. If you're not by the end
Speaker 1: of this year. So um so that you know they've
Speaker 1: done the right thing. I mean, we're looking at a
Speaker 1: country with a growth rate that's been about potential for
Speaker 1: a while, with full employment, and with a huge devaluation
Speaker 1: and inflation at or above targets. I mean, the only
Speaker 1: thing they can do sooner or later is tighten, not loosen.
Speaker 1: The b he's saying it has a limited tolerance of
Speaker 1: above target inflation. A shift in tone here, saying monetary
Speaker 1: policy can respond quote in either direction to changes in
Speaker 1: the economic outlock. What does that What does that response
Speaker 1: look like? That response looks like softening people up for
Speaker 1: the fact the next move is going to be tightening,
Speaker 1: not not easing. The weight of this court decision, of
Speaker 1: course not not felt in the minutes directly, but it's
Speaker 1: certainly the backdrop to them. The BOE saying there is
Speaker 1: still persistent uncertainty about that EU deal that's going to
Speaker 1: weigh on on the UK economy. I know you've just
Speaker 1: been pouring over the minutes as we are, as we
Speaker 1: have been here, but talk about that weight, how heavy
Speaker 1: that weight is, and how much how long that's going
Speaker 1: to continue to drag on the UK economy. Well, the
Speaker 1: real question is how seriously people choose to take it,
Speaker 1: Because you know, the external carriers as the EU. I've
Speaker 1: seen some people say it's averages sleeps in others that
Speaker 1: is average six whichever that is. The devaluation of vastly
Speaker 1: exceeds at an so that the access have written to
Speaker 1: the to the main markets in the Arizone will will
Speaker 1: be better than it was before Brexit, before the Brexit votes.
Speaker 1: So in that sense, um, it's it's it's not a
Speaker 1: major material factor. But of course as people think it's
Speaker 1: a major material factor, then um, then people will be
Speaker 1: sensitive to the progressive negotiations which are going to take years.
Speaker 1: Well that's the key phrase here, Charles, and this is
Speaker 1: something you've been so good at in your research, is
Speaker 1: the phrase it will take years. The media and David
Speaker 1: and I are is guilty of anybody is trying to
Speaker 1: get to Friday and the US jobs report. You get
Speaker 1: to look you get to look out longer. What is
Speaker 1: the linkage of these market actions to a statistic is simple?
Speaker 1: Is real GDP in the United Kingdom? Are they linked
Speaker 1: or is it over over overweight? Well, I frankly no,
Speaker 1: I think they linked to a view about about Brexit
Speaker 1: which is wrong, name that it's going to be a
Speaker 1: disaster for the British economy um. In fact, my main
Speaker 1: concern is that the British economy actually needs a significantly
Speaker 1: low exchange which is now got um. But of course
Speaker 1: that could easily get unwound if if people reach a
Speaker 1: conclusion that actually things aren't about Yeah, well let's get
Speaker 1: back in. Let's have you be the first one to comment.
Speaker 1: Then Robert sind Jammer's Pierpont completely goes the other way
Speaker 1: from consensus and says, look, I since says I don't
Speaker 1: see bad data, and he doesn't single point forecast, but
Speaker 1: he models a vector to a one thirties sterling. You
Speaker 1: don't think that's outlandish, do you? No, not at all? No, no, no,
Speaker 1: I mean it was one thirty a month ago or so.
Speaker 1: And I'm not sure that they were so wrong. Then So,
Speaker 1: if if we are overestimating here the effects of of
Speaker 1: the brexits, is it because we's because the trading relationship
Speaker 1: is relatively small. And if that is the case, if
Speaker 1: we're Overstan, how long until we get past the psychological
Speaker 1: weight of the vote? Well, I think the trading relationship
Speaker 1: actually is big. It's just that the change in the
Speaker 1: pricing of British goods as a result of that being
Speaker 1: outside rather than inside the EU is relatively small and
Speaker 1: therefore a large quantity of people will be exactly where
Speaker 1: they were before, and in fact some people are better
Speaker 1: off because of the devaluation, which is so it's not
Speaker 1: so much that the training relationship isn't important, it's just
Speaker 1: that the effect on his odd Brexit is being exaggerated.
Speaker 1: To answer your question, how long it will take people,
Speaker 1: you know, I don't think it'll take all that much
Speaker 1: longer of the lack of disastrous numbers for people to
Speaker 1: start saying We'll wait a second. You know, that's unwind
Speaker 1: some of this over excitement. Stephanie Flanders from JP JP
Speaker 1: Morgan asked management at the top of the show, was
Speaker 1: saying the reason the numbers have been good is because
Speaker 1: the UK is still in the European Union. You don't
Speaker 1: you don't buy that argument that that, you know, I
Speaker 1: think things will change once the trigger is pulled. No,
Speaker 1: I don't. I don't think that's relevant at all. I
Speaker 1: think that the relevant point is that is that the
Speaker 1: pound has gone down by much more than the external
Speaker 1: European tariff and so um, you know, in trading terms
Speaker 1: of it not seriously disadvantaged Charles, I want to get
Speaker 1: this and we'll come back and talk about a greater
Speaker 1: US economics in Europe as well, Charles Duma. When you
Speaker 1: look at the current account deficit, that's certainly where everybody
Speaker 1: circles back to. Is the question the level of the
Speaker 1: current account in a hope for a lesser deficit, or
Speaker 1: is the issue the length of time of a substantial deficit?
Speaker 1: I think I think the size is the most important thing,
Speaker 1: and and also the direction, which has been upward. Of course,
Speaker 1: the current account deficit and current account deficits have been
Speaker 1: coming into their own as determinants of foreign exchange. I mean,
Speaker 1: the the end for the last year has been very strong,
Speaker 1: at least partly because the current accounts in large scepters
Speaker 1: and people have lost conviction in RODA in the Bank
Speaker 1: of Japan. Similarly, the Eurozone has a huge current account
Speaker 1: surplus UM and as a result, the hero has failed
Speaker 1: to go down when Mr Drag eases yet more and
Speaker 1: yet more um, contrary to popular expectations. Because the capital
Speaker 1: account is important, but it's no longer quite as important
Speaker 1: as it used to be, because you know, it's entirely
Speaker 1: based on on one's belief in central banks and that
Speaker 1: is weakening. Charles Duma with optimism on the United Kingdom
Speaker 1: economic and I might say political economic experiment with to yourself, Charles,
Speaker 1: do you share the same enthusiasm for the United States
Speaker 1: And is this a fair that is grievously behind? Yes,
Speaker 1: I think so in a way the fits further behind
Speaker 1: than the UK UM and I mean you've got you've
Speaker 1: got an economy. I mean it's not as far behind
Speaker 1: in a way as as the Eurozone, where where they've
Speaker 1: got an economy growing acts and above trend, and it's
Speaker 1: on trend. The inflation rates is very fun it's not
Speaker 1: very far from the target. And they've got massive negative
Speaker 1: interest rates UM, you know, and q E. In the
Speaker 1: US you've got interest rated half percent UM in core
Speaker 1: inflation rate of two percent. The actual inflation rate early
Speaker 1: next year is going to be over two percent because
Speaker 1: the oil price is up from early and you know,
Speaker 1: the economy is going at sort of about two two
Speaker 1: and a half percent, when unfortunately is the trend growth
Speaker 1: rags only one and a half percent. The trouble is
Speaker 1: that that trend growth is so much lower because productivity
Speaker 1: growth is much less than it was and we'll be
Speaker 1: hearing a little bit this afternoon about that. But and
Speaker 1: that this afternoon our time, that is spawning your time.
Speaker 1: What do you make of the growth forecast the revisions
Speaker 1: there again the two se GDP forecasts one point four
Speaker 1: percent versus point eight percent and the cut to one
Speaker 1: point five percent from one in in Britain, yes exactly,
Speaker 1: I mean, yeah, yeah, well, I mean, frankly, these forecasts
Speaker 1: are almost impossible to make. But one the sort the
Speaker 1: sort of numbers are in fact probably at or above
Speaker 1: potential in Britain um. You know, the the labor force,
Speaker 1: certainly if we're going to restrict immigration, is not going
Speaker 1: to be going up as much as in the past,
Speaker 1: and the and and productivity growth has been very small.
Speaker 1: So so I've got to say, you know, it means
Speaker 1: there's more if anything, whatever degree of overheating there is increases.
Speaker 1: And on top of that you get you've got the
Speaker 1: inflation effect of the devaluation. So it all heads towards
Speaker 1: tightening in Britain um. And you know in the US,
Speaker 1: I think the same is true. What's the effect ben
Speaker 1: thus far of of of lower Stirling Again, we've we've
Speaker 1: seen the uptick today, but to what extent is currency
Speaker 1: playing on all of this, Well, I mean it is,
Speaker 1: it is important. The pound is. Sorry, the the inflation
Speaker 1: rate reached one percent in September from much lower levels earlier.
Speaker 1: I slightly exaggerated earlier on when I said it could
Speaker 1: be above the tooth cent target by the end of
Speaker 1: this year, but it should be much closer to that
Speaker 1: too cent target, and it'll be above the top cent
Speaker 1: target pretty early on next year. But you see, until
Speaker 1: until June we were looking at inflation rates about a
Speaker 1: quarter to a half percent. So it's it's it's way out. Well,
Speaker 1: let me circle back then, and to finish up here,
Speaker 1: Charles Duma with what we see from bo E today,
Speaker 1: which is a two two point seven run rate on
Speaker 1: inflation twenty four months. What's where will that inf Asian
Speaker 1: statistic for the United Kingdom? Is it above three percent? No,
Speaker 1: I think that it'll go. It'll go about two on
Speaker 1: an impact effect of the devaluation and that and once
Speaker 1: that moves out of the data, which will be sometime
Speaker 1: late this year, the twelve months data, that is the
Speaker 1: the the growth data, prices will probably start to ease
Speaker 1: back quite quickly because there probably won't be a complete
Speaker 1: follow through in wages, unless, of course they carry on
Speaker 1: staying easy. But it seems more likely than not that
Speaker 1: certainly if the government goes towards an easier fiscal policy
Speaker 1: we talk about that that that the bank thing is
Speaker 1: going to be tightening quite soon. This has been wonderful, Charles,
Speaker 1: I thank you so much. Just the news flaw this
Speaker 1: morning extraordinary and it's great to get his perspective. And again, folks,
Speaker 1: what we try to do on surveillance, David, We've heard
Speaker 1: this all morning. Two starkly different views to star in
Speaker 1: the future of the United Kingdom. Just stunning. Yeah, and
Speaker 1: great to to contrast them with each other. And again
Speaker 1: the new Slat of London in particular today particularly strong
Speaker 1: with that court decision out just before the show kicked
Speaker 1: off this morning that the Parliament would have to vote
Speaker 1: on whether the Government could trigger Article fifty and and
Speaker 1: the reactions subject yes, subject to appeal headed to the
Speaker 1: Supreme Court in the UK in early December. Who you
Speaker 1: put your trust in matters. Investors have put their trust
Speaker 1: in independent registered investment advisors to the two and of
Speaker 1: four trillion dollars. Why they see their roles to serve
Speaker 1: not sell, that's right. Charles Schwab is committed to the
Speaker 1: success over seven thousand independent financial advisors who passionately dedicate
Speaker 1: themselves to helping people achieve their financial goals. Learn more
Speaker 1: and find your independent advisor dot com. David blanche Flower
Speaker 1: joins us now. He was kind enough to be with
Speaker 1: us yesterday for the FED and joins us today with
Speaker 1: the most British perspective as well. David, what you are
Speaker 1: so good at and this goes back to your wage curve.
Speaker 1: Classic is the idea of a nation in the partition
Speaker 1: of its labor. Is London so buoyant, so unique, so
Speaker 1: world class, that the buoyancy of London can support all
Speaker 1: of the United Kingdom towards a lesser inflation, better economic
Speaker 1: growth compared to the gloom, and to a better, stronger sterling. Well,
Speaker 1: obviously it's a big positive and a big help, but
Speaker 1: it can't compensate for what's going on outside London. And
Speaker 1: you only have to look at that house prices. So
Speaker 1: the answer is it clearly helps, but it doesn't help enough.
Speaker 1: And what we've seen this morning are forecasts from the
Speaker 1: MPC which are better in the in two thousands sixteen
Speaker 1: and somewhat worse later. But actually what we're seeing is
Speaker 1: very slow growth, arise in unemployment um and actually quite
Speaker 1: a big pick up in inflation. So the story is
Speaker 1: despite the strength and the resilience of London, it's not
Speaker 1: being able to really kind of deal with the the
Speaker 1: oncoming shock of Brexit. And I always want people to
Speaker 1: keep in their minds that the business cycle rolls, and
Speaker 1: it rolls eight to ten years. We went into recession
Speaker 1: in two thousand and eight, where you canna add eight
Speaker 1: to two thousand and eight, So presumably there's a Brexit shock,
Speaker 1: but also there's a there's a presumably a recession shot
Speaker 1: coming at economies around the world, especially to the UK.
Speaker 1: So these are very tough times. And in some sense
Speaker 1: the ruling in the court this morning, which suggests that
Speaker 1: perhaps the Brexit shop will be less than have been suggested,
Speaker 1: had very positive impact on the pound. So this, I
Speaker 1: think this is big uncertainty. But London ain't enough. Okay, David,
Speaker 1: would you inform the good professor from the Dartmouth bubble
Speaker 1: that I cannot add two thousand eight and just understands
Speaker 1: where you're watching that basic you got that rat baseball
Speaker 1: that baseball game. You know, I don't come on, I
Speaker 1: don't give you grief about Premier Football. Don't give me
Speaker 1: grief about Indians clubs. Danny, you mentioned that court case.
Speaker 1: Mark Karney was just asked about it. He said he
Speaker 1: can't comment on it, but he said it's an example
Speaker 1: of the uncertainty that will characterize this process. What happens
Speaker 1: in this vacuum, the short term vacuum now between now
Speaker 1: and when the Supreme Court takes up this case. The
Speaker 1: bigger vacuum between now and March, when Thereason May says
Speaker 1: she's going to pull the trigger on Brexitt. What happens
Speaker 1: politically and what happens in the monetary policy space. Well,
Speaker 1: obviously the big deal I wrote about it in the
Speaker 1: Guardian this week. The big deal was with the attack
Speaker 1: acts on the independence of the Bank of England this
Speaker 1: week eventually resolved itself by Mark Carney saying yes he'd
Speaker 1: extended by one year, not three. Um. Now what happens
Speaker 1: is the pressure turns to the fiscal authorities and the
Speaker 1: Brexiteers actually started to attack um Hammond. So that's a
Speaker 1: big part of it. UM a great uncertainty. The central
Speaker 1: banks are trying to stand and be stabilizing. I think
Speaker 1: the vote today actually your commentators earlier talked about what
Speaker 1: the decision to day did. I think actually it does
Speaker 1: one thing. It forces the government to actually make much
Speaker 1: more clear what their position is actually going to be,
Speaker 1: what their bargaining position is. They sort of said they're
Speaker 1: not going to tell anybody because that would make it
Speaker 1: be a mistake. I think that was a huge mistake,
Speaker 1: and I think Parliament's going to force them to say, well,
Speaker 1: what is it that you want? So maybe maybe this
Speaker 1: decision will actually force some clarity. But I think the
Speaker 1: really big word is uncertainty. Mark carn clearly would not
Speaker 1: have known the decision because they made the decision in
Speaker 1: the last few days and did their format. So this
Speaker 1: so this move perhaps slows Breaxit perhaps makes the move
Speaker 1: to hard breaksit less, which the markets will like. But
Speaker 1: I don't think it really resolves anything. I just think
Speaker 1: this is a self inflicted wound, an economic tsunami. We're
Speaker 1: looking at the biggest three year overshoot this bank has
Speaker 1: ever predicted when it comes to inflation. Mark Carne acknowledging
Speaker 1: that a few moments ago, what does his acknowledgement of
Speaker 1: that say about Mark Arney, about the Mark Carni bo Well.
Speaker 1: I think what it says is that they've been trying
Speaker 1: to do their job. They've been trying to ride the
Speaker 1: political storm that's been coming at them um and they
Speaker 1: don't have an easy task. I mean, the big thing
Speaker 1: that I look at is that in two thousand and seventeen,
Speaker 1: three months ago, they were forecasting CPI have two. Today
Speaker 1: they're forecasting two point seven. And there's an overshoot in
Speaker 1: two thousand and eighteen as well. So these are tough day.
Speaker 1: These long memories of the great moderation. This is a
Speaker 1: great moderation disappeared. This is a great confusion, I think, Danny,
Speaker 1: I've had the privilege of being in your lectures at
Speaker 1: Dartmouth to watch a room silent as you go on.
Speaker 1: Villain Bowder gave us the great privilege yesterday of a
Speaker 1: dissertation on I S. L M. Hicksie and economics. I
Speaker 1: put the chart out on Twitter. Let me have you
Speaker 1: way in here. Bowder is adamant that we have a
Speaker 1: near horizontal LM curve, which means it's non responsive to
Speaker 1: interest rates. That's not good for chair yelling, and we
Speaker 1: have a vertical near vertical I S curve, which means
Speaker 1: the best we do with our monetary policy, we can't
Speaker 1: goose output and make GDP better. Do you agree with
Speaker 1: Professor Bowder that fiscal is the only solution to slam
Speaker 1: the I S curve to the right? Is that the
Speaker 1: only outlet we have? Well, it's probably not the only one,
Speaker 1: and he's not saying there is nothing that can be done,
Speaker 1: but I I certainly took the view that the greatest
Speaker 1: macro era we've met that was made since two thousands
Speaker 1: nine was actually this dreadful, reckless thing called austerity. And
Speaker 1: I think the reality now is with the interest rates
Speaker 1: so low, with such high levels of asset purchases, and
Speaker 1: shocks coming along, the reality is that the fiscal authority
Speaker 1: is going to have to do something. And it's certainly
Speaker 1: clear in the U in the UK because the next
Speaker 1: three weeks the chance is going to have to move.
Speaker 1: But it's a reality in the United States as well,
Speaker 1: because remember there's a shock coming, you're going to have
Speaker 1: to deal with that. So I do think that the
Speaker 1: fiscal authorities have learned their lesson. Hopefully, I mean I
Speaker 1: hopefully today William and I can clear austerity is dead
Speaker 1: and it's now time for the fiscal folks to take
Speaker 1: over because the central banks have been the only show
Speaker 1: in town and they can't do much anymore. And William's
Speaker 1: right very quickly here, Professor. The critics of David blanche
Speaker 1: Flower will say, we don't trust the government to pull
Speaker 1: back on the fiscal excess when needed. Do you have
Speaker 1: a confidence that, with all we've learned in the last
Speaker 1: eight years, we can be responsible with our fiscal excess
Speaker 1: if we need to provide immediate fiscal stimulus. Well, I
Speaker 1: think that. Obviously the concern would be do you take
Speaker 1: the punch bowl away the appropriate time? But the problem
Speaker 1: has been the punch bowl should have had stuff in it,
Speaker 1: So I think that's really rather the wrong question. Now
Speaker 1: the question is how quickly can they act? Where does
Speaker 1: this go? What's the best way to do? So? Um,
Speaker 1: that's the way to think, and we will we will
Speaker 1: think about what to do to take it away, But
Speaker 1: taking it away with that problems in the first place. David,
Speaker 1: thank you so much for being with us on short notice.
Speaker 1: I promise the next time you and I get together
Speaker 1: we will discuss Ernie Banks Professor Blanche Flower from England.
Speaker 1: From Hanover, this is Bloomberg. David Durry here with Tom Keene.
Speaker 1: A great pleasure to have with us. The pioneer of
Speaker 1: index investing, Jack Bogel, founder of the Vanguard Group, a
Speaker 1: former CEO of Van Guards. Thanks so much for being here.
Speaker 1: Is Mr Bogel old enough to remember the last time
Speaker 1: I'll let you ask that questions? I'll let you ask
Speaker 1: remember like it was yesterday. Good morning, sir. We hope
Speaker 1: you are healthy and proper David to begin to begin
Speaker 1: to chat with I watched the whole Dorn thing last night.
Speaker 1: This morning, there you go. Let me ask you. First
Speaker 1: of all, we we've we've just heard from the Bank
Speaker 1: of England, we heard from the Fed yesterday. As you're investing,
Speaker 1: as you're thinking about investment today, to what degree are
Speaker 1: you weighing what central banks are doing? Well? You have
Speaker 1: to take that obviously, have to take it into account
Speaker 1: as a background for what you're doing. But those, some
Speaker 1: of those, the market is very much to me, the
Speaker 1: financial markets at least are very much on their own.
Speaker 1: The central bank is only part of it. They're a
Speaker 1: good indicator of inter national policy in both cases, Um
Speaker 1: but small changes. I think we should just ignore it.
Speaker 1: To be honest with you, what what to what degree
Speaker 1: do you think they're cognizant what's happening in the in
Speaker 1: the financial markets. Are they paying attention? Are they making
Speaker 1: decisions based on the fear or awareness of reactions in
Speaker 1: the markets. Well, certainly of the Greenspan FED was very
Speaker 1: sensitive to market fluctuations, and I would say that the
Speaker 1: new FED Federal Reserve Board and chairman are somewhat sensitive
Speaker 1: to that. But you almost have to be because the
Speaker 1: stock market, for all its fool foolishness, and the Lord
Speaker 1: knows that there's plenty of That is a one way
Speaker 1: of taking the temperature of how investors feel about the future. Jack,
Speaker 1: We all know the trends of passive verse of active.
Speaker 1: It is. There's no other thing discussed, frankly that I
Speaker 1: can tell the mutual fund business and what it means
Speaker 1: for our listeners and their retirement accounts. Where is the
Speaker 1: world that you invented? Where is it in ten years?
Speaker 1: Where is it in twenty years when the Cubs win again?
Speaker 1: What is the what is the what is the impact
Speaker 1: of what you wrought? Not now, sir, but two decades
Speaker 1: out well, you know, it's it's hard to look ahead,
Speaker 1: but it seems to me that this is a very
Speaker 1: enduring trend. And when people say that that the indexing
Speaker 1: a phenomenon, and the phenomenon, indeed it is is just
Speaker 1: a passing fancy, I say, it's just I think we
Speaker 1: can be certainly using your number, Tom, the twenty years
Speaker 1: from now that we have more cell phones than youth
Speaker 1: around the world than there are today, there will be
Speaker 1: more indexing and youth around the world than twenty years
Speaker 1: from now. It's a very powerful trend. It's built on,
Speaker 1: as you know, and sound economics, and we all have
Speaker 1: finally come to recognize that the market total stock market,
Speaker 1: the value of the market is a is a finite number.
Speaker 1: And the key thing, the returns are generated by businesses
Speaker 1: who earn money, pay dividends, reinvest the rest for growth
Speaker 1: and efficiency. They're competitive and they're efficient, they're innovative, their
Speaker 1: technology oriented, and we we accepted we access that those
Speaker 1: returns through the stock market. It then becomes a question
Speaker 1: of how are the stock market return shared among investors
Speaker 1: and among Wall Wall Street itself, or or maybe how
Speaker 1: are those in return shared between Wall Street and Main
Speaker 1: Street so getting a larger share for the investor is
Speaker 1: clearly good for investors. There's no way around that. And
Speaker 1: it's equally clearly going to make some dramatic changes in
Speaker 1: Wall Street because because the revenues look at down, relative
Speaker 1: revenues are certain to get down. David I just put
Speaker 1: out on Twitter a Bloomberg chart that I'd recalled from
Speaker 1: a year ago, and it is stunning post crisis, the shift.
Speaker 1: It's just just no one would have predicted it, except
Speaker 1: maybe Mr Bold. Jack. Let me ask you about risks
Speaker 1: I've I've read that you like, you like risks that
Speaker 1: you're able to understand when you're looking at the world today.
Speaker 1: What's a risk or what are some risks that you
Speaker 1: have trouble getting your head around? Well, the risk that
Speaker 1: I just don't know how they're going to come out,
Speaker 1: I mean I can understand them pretty well. And tremendous
Speaker 1: uncertainty about the coming administration in in the United States,
Speaker 1: about our coming election. You know, it's pretty clear um
Speaker 1: that there may well be, depending on who wins, greater
Speaker 1: uncertainty about the federal government's role in our economy and
Speaker 1: policies that are out there, that that are proposed to
Speaker 1: impede fair trade, of free trade among nations. That's a
Speaker 1: big negative. Um tax policies that increase through the inequality
Speaker 1: we have in our society, and you know, the lack
Speaker 1: of diminution or a word of NATO and the European
Speaker 1: economic policies increase racial tensions. We can see all that
Speaker 1: in one of the candidates, and every one of these
Speaker 1: major negatives, our major negatives for our society, for our economy,
Speaker 1: and for our financial markets. Sort of sensitive time now.
Speaker 1: That said, and my fellow Princetonian Donald rumset Fell was
Speaker 1: noted for saying, and you know, how how are those
Speaker 1: known unknown is going to be resolved? But what about
Speaker 1: the unknown unknown? And that's a very wise statement. There's
Speaker 1: always something going on that you don't know about out
Speaker 1: there nobody's thinking about. But I I think the markets
Speaker 1: are highly valued, and I don't think substantially so. And
Speaker 1: these things that I just talked about, trade, role of
Speaker 1: the government, income in inequality, racial distentions and those kind
Speaker 1: of things will just make those uncertainties into into real
Speaker 1: problems for our economy and our financial markets. David Grey
Speaker 1: here with Tom King, Jack Bogel joining us, the founder
Speaker 1: of the Vanguard Group former CEO of the Vanguard Group,
Speaker 1: and and Jack bring some comfort to a dad of
Speaker 1: two young kids who's trying so hard not to think
Speaker 1: about college more than more than a decade out here,
Speaker 1: looking at returns, looking at this uh long search for
Speaker 1: yield wherever it may be. What's it gonna look like
Speaker 1: for folks like me ten years out well, you know,
Speaker 1: looking at ten years and and probably beyond, returns will
Speaker 1: be lower than they had on a historical basis and
Speaker 1: not very complicated. You know, the dividend yield in the
Speaker 1: last sixty five years I've been in this business has
Speaker 1: been around four and a half percent. Today it's two,
Speaker 1: and that's a two and a half percent deadweight loss.
Speaker 1: Earnings growth in that period was pretty close to five.
Speaker 1: And with GDP growing at the rate you mentioned earlier,
Speaker 1: something like one or two percent this year, earnings growth
Speaker 1: is not going to be as high. And the market
Speaker 1: is robably highly valued at making a twenty three times
Speaker 1: earnings compared to a norm of seventeen. So I think
Speaker 1: if you're lucky in an equity program, you might be
Speaker 1: able to get five in a balanced program, maybe because
Speaker 1: bondi eiels are also low, so you just have to
Speaker 1: plan for that, and you're saving and not to commercialize.
Speaker 1: You're wonderfully independent program. But by far when you look
Speaker 1: at those returns, you really want to kick across the
Speaker 1: heck out of the equation because those are gross returns
Speaker 1: at the market delivers and investment don't get those gross.
Speaker 1: I would like I would like Mr Gourd to continue
Speaker 1: this naive, serious discussion, and Mr Bogel, you're gonna say
Speaker 1: for not. Look, David, the way you do college planning
Speaker 1: is to go to Blair Academy oh S five. And
Speaker 1: the way you do it you do the college spending beforehand,
Speaker 1: so that you arrive at college broke and Blair Academy,
Speaker 1: where Mr Bogel went a few years ago. It was
Speaker 1: a good place to start for the baseball that's that's
Speaker 1: an even better place to start now. But I should
Speaker 1: say I had scholarships and jobs there we knew not
Speaker 1: student loans, and my family had no money, so I
Speaker 1: got a long way on all I could do together myself,
Speaker 1: but the generosity of others. But seriously, Jack, those days
Speaker 1: are over the idea of working your way through school today?
Speaker 1: Has that become a fiction? No? I don't think sell mean,
Speaker 1: I meet a lot of children, young young men and women,
Speaker 1: but I have done I think a hundred and three
Speaker 1: hundred scholarships and Blair and at Princeton, and they are
Speaker 1: terrific people. I mean, they're very hard working, very international
Speaker 1: in their focus, very unselfish in their focus, very anxious
Speaker 1: to contributes to the community, as smart as all get out.
Speaker 1: And there are hope for the future. And and and
Speaker 1: your kids are the hard hope for the future too, David,
Speaker 1: I appreciate that. Let let me ask you that it's
Speaker 1: getting worried. It may not seem like it now makes
Speaker 1: a while to grow even took me a while to
Speaker 1: grow out. For me. We've seen changes in the in
Speaker 1: the fee structures at hedge funds. Are we going to
Speaker 1: begin to see changes with mutual funds as well? As
Speaker 1: the is the appetite is the acceptance of of fees
Speaker 1: going to start to erode across the board? Well, you
Speaker 1: know the typical active fund manager, and that's what dominates
Speaker 1: the only mutual company in this business, of the course,
Speaker 1: of Vanguard and the rest of them are run for
Speaker 1: their inside shareholders or their public shareholders, or the financial
Speaker 1: conglomerates that own them, and they're gonna they're going to
Speaker 1: hold the line on fees as long as they can.
Speaker 1: You know, when you can operate this place, it maybe
Speaker 1: twelve basis points in the industry is operating at a
Speaker 1: hundred and thirteen. Uh. You know, if if they were
Speaker 1: to cut it their fees in half, take it from
Speaker 1: a hundred and thirteen to say sixty, they'd still be
Speaker 1: five times as expensive. See, you wonder what the utility
Speaker 1: is that so that they're and they're they're they're leaking,
Speaker 1: they're losing money. Active funds lost and in the last
Speaker 1: twelve months over a hundred billion dollars twenty billion dollars,
Speaker 1: and it got even worse in September. Apparently that was
Speaker 1: those last twelve months were Sue, August, and September was
Speaker 1: about apparently a terrible months for them, and I should
Speaker 1: say October was apparently a terrible month for them. And
Speaker 1: so you know, they bet they're enjoying what they've got.
Speaker 1: Now it's gonna be unlikely for the mutual funds to
Speaker 1: cut costs. They couldn't sell a new fund at the
Speaker 1: old cost, so that if they bring out a new one,
Speaker 1: that will be maybe a little a little lower cost, Jack,
Speaker 1: would you look at investing as David said, with those
Speaker 1: serious questions on you know, the actual assumption that were
Speaker 1: add a lot of this is predicated on corporate officers
Speaker 1: behaving in the same way. Do you just assume out
Speaker 1: one year, five years, again, twenty years, as we spoke
Speaker 1: of before, that there will be this religion of deploying
Speaker 1: cash to shareholders and that buybacks and dividend growth will
Speaker 1: still be the backbone of of return. I think of
Speaker 1: the buy back thing is kind of mysterious. Number one
Speaker 1: which people I don't think understand very well come up
Speaker 1: is a large number of those buybacks. We don't have
Speaker 1: good data on this, but a large number is because
Speaker 1: they issue all these options to their executives which dilute
Speaker 1: their earnings, and they buy back to balance the books.
Speaker 1: It's so that so that doesn't do it, That doesn't
Speaker 1: that doesn't improve the earnings per share at all. Just
Speaker 1: hold your word otherwise would have been so. I I
Speaker 1: guess the buy back is kind of a passing fancy
Speaker 1: and there ought to be times. One wonders why these
Speaker 1: companies don't have can't find better opportunities to use their
Speaker 1: cash than buying back their own stuff. But your experience
Speaker 1: a Time Warner and Telephone is a kind of merger
Speaker 1: that can work out. I think bigness is one of
Speaker 1: the curses of our society. And you know, companies lose
Speaker 1: their traditional roots, they lose their interests in human beings
Speaker 1: and go to bureaucracy. They get bigger and bigger, grander
Speaker 1: and grander, and in a cynical way that is, and
Speaker 1: more and more self important. The chief executives are and
Speaker 1: I I don't see much I like in the East
Speaker 1: griant mergers. And the government has traditionally been much more
Speaker 1: kind to what we call horizontal mergers companies entering new businesses. Um, sorry,
Speaker 1: vertical mergers, companies entering new businesses that horizontal buying up
Speaker 1: your competitors. So I think that the Time Warner thing
Speaker 1: may go through with a T and T getting us
Speaker 1: right back to where we are in about nineteen and
Speaker 1: I guess the year A T and T spun off
Speaker 1: originally with maybe um nineteen eighty something like that, and
Speaker 1: we've we've all those telephone companies are now back as
Speaker 1: One's an amazing story. It is an amazing story. Thank
Speaker 1: you so much for being at this wisdom from Jack
Speaker 1: Bold and someone. Whether you are with Van Guard or
Speaker 1: not of Van Guard, he has touched every life within
Speaker 1: the investment community. Thanks for listening to the Bloomberg Surveillance podcast.
Speaker 1: Subscribe and listen to interviews on iTunes, SoundCloud, or whichever
Speaker 1: podcast platform you prefer. I'm out on Twitter at Tom Keene.
Speaker 1: David Gura is at David Gura. Before the podcast, you
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