Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. Well,
Speaker 1: it is now my pleasure to introduce Kim Shoon Halt.
Speaker 1: He is ny U Professor and director of the Center
Speaker 1: for Global Economy and Business, and he joins us here
Speaker 1: in our eleven at three of studios. Thank you, professor,
Speaker 1: great to have you here. Happy holidays, my pleasure. Are
Speaker 1: they really happy holidays for business? Based on what you
Speaker 1: know out of the tax overhaul bill and what you
Speaker 1: see as in terms of changes in any financial regulations
Speaker 1: for businesses, Well, let's see leave the financial regulations aside
Speaker 1: for the moment, but and even the tax changes aside,
Speaker 1: business is doing pretty well. Profits are high as a
Speaker 1: share of GDP, so this is a pretty strong period
Speaker 1: of the economy. Growth is above the level that we
Speaker 1: can sustain over the long run. So UH and unemployments
Speaker 1: down to the lowest level we've seen in more than
Speaker 1: a decade. We may hit the lowest we've seen since
Speaker 1: the nineteen sixties during eighteen So this is a strong
Speaker 1: period for the economy. What to what do you attest this? Uh,
Speaker 1: this strength in the economy. Is it government policy? Is
Speaker 1: it natural? Business cycle? Credit cycle? Look, this is the
Speaker 1: ninth year of expansion and so UH, this has been
Speaker 1: a disappointing expansion for most of its history. But we're
Speaker 1: finally getting to a point where we're approached. We're very
Speaker 1: close to full utilization of labor resources. UH, and that's
Speaker 1: exactly when you would expect businesses to be looking for
Speaker 1: other ways to expand. Investment picks up. UH. And in addition,
Speaker 1: profitability has been high for some time. So if anything,
Speaker 1: investment has lagged profits. I guess, okay, but I guess
Speaker 1: one of what what in your mind based on your analysis,
Speaker 1: what accounts for this strength and corporate profits? What accounts
Speaker 1: for the low level of unemployment? Is it a policy?
Speaker 1: Is it political? Is it natural? What is it that
Speaker 1: you believe accounts for all this? The single most important
Speaker 1: thing has been a very stimulative monetary policy over the
Speaker 1: last seven or eight years. That has taken a long
Speaker 1: time to have its impact. But UH, central bank policy
Speaker 1: in the US has been very accommodative. We've stimulated financial conditions,
Speaker 1: so stock prices are high, bond prices are high, meaning
Speaker 1: bond yields are low. All of that eventually has had
Speaker 1: an impact on stimulating aggregate demand in the economy. All right,
Speaker 1: So I gotta jump in here, um kim, because we
Speaker 1: were talking a bunch on TV. But I'm just curious,
Speaker 1: why does it not feel terrific and why? And I
Speaker 1: guess most importantly is we've talked about the gap between
Speaker 1: the folks that are wealthy getting wealthier and those who
Speaker 1: are not. Does anything and better in terms of reducing
Speaker 1: that gap, Well, let's take the two parts separately. First,
Speaker 1: wise have been so disappointing. Um, I think there are
Speaker 1: a variety of reasons. One is that long run growth
Speaker 1: appears to have slowed, and we were observing that during
Speaker 1: the recovery, So productivity growth has slowed a lot. That's
Speaker 1: really hurt us over time, and that's really a problem
Speaker 1: for for our long run living standards. Uh. Second reason
Speaker 1: is that the in the after effects of the financial
Speaker 1: crisis were just enormous in reducing the ability of our
Speaker 1: financial sector to provide support for the economy and and
Speaker 1: and also of the ability of non financial firms to
Speaker 1: manage their expansion. So and households were severely damaged. And
Speaker 1: think of how much damage there was the household wealth
Speaker 1: for an extended period of time. So this is this
Speaker 1: has been a disappointing recovery. It's amazing that we're in
Speaker 1: the ninth year and do see so few imbalances. It's
Speaker 1: partly it's taken so long to get here, but we're
Speaker 1: now here. And that's why given that we're at this stage,
Speaker 1: this is when you'd expect investment to pick up. So
Speaker 1: what worries you? Then, well, let me just respond to
Speaker 1: your other question of that income equality. Um, Frankly, I
Speaker 1: don't see that getting better without government action. And if anything,
Speaker 1: government action has worked the other way. Um So, Uh,
Speaker 1: you know, we've been in this long transition period in which, um,
Speaker 1: there are benefits to people with higher incomes and higher
Speaker 1: skills and uh, and that's still there. There. There's a
Speaker 1: huge premium for getting a college education today. UM, so
Speaker 1: people with more skills get higher earnings, and that differentials
Speaker 1: not going away quickly. So I don't think that gets
Speaker 1: corrected without government changes. Probably for me to introduce the
Speaker 1: actual answer, but I'm just going to pose something and Carol,
Speaker 1: you know, you bring this up, this idea that people
Speaker 1: do not feel as if the economy has entered this
Speaker 1: strong position, and Professor I would just wonder it hasn't.
Speaker 1: Is it possible that a lot of this has to
Speaker 1: do with security, and I mean physical security, because physical
Speaker 1: security has created let's say, time constraints on everything from
Speaker 1: going to the airport to going on a train. In
Speaker 1: other words, the in the Sekey apparatus, the security apparatus
Speaker 1: in the country is vastly different than it was and
Speaker 1: let's say previous recoveries. And as a result, you're being
Speaker 1: required as an individual to have more patients, to set
Speaker 1: aside more time for things that you don't necessarily like
Speaker 1: to do, such as standing in a line. Also, you
Speaker 1: see around you the effects of lack of spending on infrastructure,
Speaker 1: so that can make you feel terrible when you hit
Speaker 1: a pothole or when you're you know, being forced into
Speaker 1: one lane and driving, you know, circles to try to
Speaker 1: get to the airport departure gates. Is that part of
Speaker 1: what makes us feel this way? Him, I can't say
Speaker 1: with certainty that that's making such a that's why. That's
Speaker 1: why I offer. But but here's I would give you
Speaker 1: a simpler hypothesis. Because we started from such a very
Speaker 1: high unemployment rate. In this expansion, we've had very low
Speaker 1: wage growth, and so people's incomes just haven't expanded until recently.
Speaker 1: And if you're asking me as an economist, what would
Speaker 1: I focus on first? That's what i'd focus Why is
Speaker 1: that not happening? Considering we talk about the improvements in
Speaker 1: corporate profits. Revenues are growing, um, you look at some
Speaker 1: of the CEO pay packages and they're doing just fine.
Speaker 1: Why has it not trickled down? Is it just that
Speaker 1: companies have not had to pay to get workers until
Speaker 1: relatively recently, there's been an abundance of labor supply relative
Speaker 1: to demand, and I think we're in that period precisely
Speaker 1: when that's changed. We're in the sweet spot where the
Speaker 1: economy is operating with nearly full employment, and that changes
Speaker 1: the way firms behave. It means that they're willing to
Speaker 1: pay more for workers. It means they're willing to invest more.
Speaker 1: This is when we benefit from the expansion. Usually in
Speaker 1: most expansions, that will happen a lot earlier. The Phillips curve. Sorry,
Speaker 1: the Phillips curve actually works. It's not clear that I
Speaker 1: would want to rely on that for policy, but I
Speaker 1: think it's probably the case that when the labor market
Speaker 1: gets tighter, that causes firms to bid for labor. It
Speaker 1: just takes time. Uh. And remember, you know, we're in
Speaker 1: a different labor market structure that we used to be
Speaker 1: far less unionization, so there's uh less threat of strike. Um,
Speaker 1: but from time to time we will see strikes precisely
Speaker 1: because labor is less abundant than it was when you
Speaker 1: mentioned corporate profits. I just want to follow up on
Speaker 1: what Carol said about that translating into higher wages. If
Speaker 1: the corporate profits are do indeed exists, they must exist somewhere.
Speaker 1: They either exist in forms and dividends, share buy backs,
Speaker 1: or just cash on a company's balance sheet. Uh. If
Speaker 1: that's the case, is it really just because workers will
Speaker 1: spend the money that the economy will benefit because the
Speaker 1: money is there, it just isn't being spent. Is that
Speaker 1: which are Well? You know, the fact if firms get
Speaker 1: profits doesn't mean it automatically gets spent. It does mean
Speaker 1: it does raise the question are they doing the investment?
Speaker 1: Is someone who has greater wealth willing to spend more.
Speaker 1: People may want to accumulate wealth without spending more, especially
Speaker 1: when they live in a period of uncertainty. But what
Speaker 1: we're seeing now is the personal savings ratio is going down, right,
Speaker 1: and that's telling you people aren't spending more. That has
Speaker 1: begun to change. We went through a period early in
Speaker 1: this recovery where the savings ratio went up. I was
Speaker 1: telling you they were really nervous about the environment in
Speaker 1: which they operated. So uh, I think we're finally getting
Speaker 1: to the point where in most recoveries we would have
Speaker 1: been at this stage five or six years ago. See Carol,
Speaker 1: it really just oil ball boils down to making more money.
Speaker 1: If you make more money, you're gonna feel a lot better.
Speaker 1: Works for me exactly. We're waiting, right, We are waiting.
Speaker 1: We'll have to start to see if we do see
Speaker 1: more wage pressures. Certainly the stats, the statistics, the monthly
Speaker 1: labor reports haven't necessarily bore that out, but that will
Speaker 1: be keeping a track of it. Joining us with our
Speaker 1: continuing conversation is Kim Shoon Haltze, n y U, Professor
Speaker 1: and director of the Center for Global Economy and Business
Speaker 1: and I guess I would be remiss in this century
Speaker 1: if I did not mention that bitcoin has increased about
Speaker 1: nine and a half percent in values, trading at about
Speaker 1: fifteen thousand, eighty three dollars a theoryum also a little
Speaker 1: bit higher light coin other cryptocurrency gaining three percent. And
Speaker 1: Professor Schoenheltz, you were saying just during the break that
Speaker 1: you know that things are getting into a bubble if
Speaker 1: you get a lot of questions about bitcoin. Did you
Speaker 1: receive a lot of questions about bitcoin over the last
Speaker 1: week or so? Yeah, I think that one of the hallmarks,
Speaker 1: one of the hallmarks of a bubble is that it
Speaker 1: becomes the topic of conversation. And uh, I think partly
Speaker 1: because of the enormous press attention that it's getting, and
Speaker 1: that's reflecting the price action in the markets. We're seeing
Speaker 1: a lot of people who have very limited knowledge about
Speaker 1: this asking questions. It's fine to be asking questions. The
Speaker 1: danger is that the price movements sell themselves, induce people
Speaker 1: to buy. And when you start to see that, that's
Speaker 1: that's what you worry about a bubble. Was that you
Speaker 1: talked earlier on TV about Bloomberg surveillance, about fomo fear
Speaker 1: of missing out, or maybe it was another even someone else,
Speaker 1: But it's a pretty common fear that people think that
Speaker 1: they have to get involved in something. Is that when
Speaker 1: it's on the way up, and um, that's worrisome. We've
Speaker 1: seen that with many other assets. This is not unusual. Fortunately,
Speaker 1: it's not so big that it will affect the economy
Speaker 1: at large if the bubble bursts. But um, but it
Speaker 1: is worrisome for the investors themselves. Was that an investment conference?
Speaker 1: Michael Lewis gave a big keynote. You know, best selling
Speaker 1: author um Liars, Poker, Flashboys, The Big Short and uh
Speaker 1: and knows a lot about the financial industry. And someone
Speaker 1: asked him, you know, why haven't you written about bitcoin.
Speaker 1: He talked about being in a gathering with other folks
Speaker 1: who were in the know about bitcoin, and he said, well,
Speaker 1: can I buy anything with bitcoin? They're like, yeah, you
Speaker 1: can buy a cup of coffee. We'll take you to
Speaker 1: the corner. They went to the corner that he had
Speaker 1: some bitcoin. He couldn't do it, they couldn't actually make
Speaker 1: the process happen. He finally throughout some dollars and did it.
Speaker 1: But his point was, tell me when I can actually
Speaker 1: do something with it, then then I think there's a story.
Speaker 1: There's something much more productive here. That's a great way
Speaker 1: to respond. By the way, I like Michael Lewis's books,
Speaker 1: so I'm not surprised. Um. The question is what are
Speaker 1: the fundamental values of a bitcoin. It can't be a
Speaker 1: dividend that will get paid because bitcoin doesn't have any earnings,
Speaker 1: So it has to be from the use, the widespread
Speaker 1: use of that as a means of exchange. In fact,
Speaker 1: over the last year, the use has collapsed. Percent of
Speaker 1: trading in bitcoin is gone over the last year because
Speaker 1: the Chinese authorities shut down the exchanges the dominator, So
Speaker 1: most of the trading in two thousands sixteen in bitcoin
Speaker 1: was in on the Chinese exchanges. That's gone. Having having
Speaker 1: said all that, the very concept though of a should
Speaker 1: we call it maybe an ultracurrency or an ultra means
Speaker 1: of exchange. It is not part of the financial system
Speaker 1: as we know it. Do you think that there's any
Speaker 1: possibility that that the digital world will come up with
Speaker 1: an answer for that? Look, there are central banks that
Speaker 1: are exploring now whether they want to create their own
Speaker 1: digital currencies, and you can see why there's an incentive
Speaker 1: because governments look at currency issue as a good way
Speaker 1: of financing themselves. It's low cost compared to issuing interest
Speaker 1: paying debt um. But even in that area, there are
Speaker 1: worries about having digital currencies that are run by governments,
Speaker 1: because the question is will people eventually prefer that to having, say,
Speaker 1: a deposited a bank, And if they do, will will
Speaker 1: the banks be able to raise their liabilities with which
Speaker 1: to provide the credit in the economy. If at some
Speaker 1: point in the future we end up depending on the
Speaker 1: central banks as digital currency issuers to be providing credit,
Speaker 1: we will have replaced the private intermediation mechanism. That's a
Speaker 1: worry that I have about any digital currency form. And
Speaker 1: the if it's state run, isn't that happening already to
Speaker 1: a certain extent, that that middle person, that middleman, whether
Speaker 1: it's in the banking industry or the financial service, this industry,
Speaker 1: really any industry is getting crushed because the margins are
Speaker 1: just getting so thin. Well, we have to look at
Speaker 1: the statistics. I think when you were asking the question,
Speaker 1: I was thinking you're right to an excellent extent, because
Speaker 1: the balance sheets of most of the central banks have
Speaker 1: gotten a lot bigger, and during the crisis, some of
Speaker 1: them were purposely acting to replace intermediate private intermediation that
Speaker 1: was no longer providing the services that we needed. But
Speaker 1: in a normal expansion, I think it's really worrisome to
Speaker 1: have the central bank replace the private sector as the
Speaker 1: supplier of credit. Eventually, that raises the question whether credit
Speaker 1: will get politicized whether sorry, no, no, no, forgive me
Speaker 1: what I mean to interrupt? All right, So we're all
Speaker 1: gonna have to try and figure out what ultimately bitcoin
Speaker 1: is all about, right, and the financial system system is
Speaker 1: trying to figure that out, Kim. In the meantime, you
Speaker 1: wrote something over the summer which I want to just
Speaker 1: quickly get to. We've got about forty five second. You
Speaker 1: wrote about the U. S. Treasuries missed opportunity. There are
Speaker 1: things within our financial system as it exists that we
Speaker 1: should be paying a tech too. If you could just
Speaker 1: quickly you know the we're in a better place than
Speaker 1: we were a decade ago. The finance the banking system
Speaker 1: is far better capitalized than it was a decade ago,
Speaker 1: but that's because it was pitifully capitalized a decade ago,
Speaker 1: and we're in a better position now, but there's a
Speaker 1: lot we could do both to make our financial system
Speaker 1: more efficient and safer at the same time, which tells
Speaker 1: you we're not running an efficient set of regulations. Unfortunately,
Speaker 1: I thought the Treasury's proposals fall short in a variety
Speaker 1: of ways. If anything, they're not supporting greater capital requirements
Speaker 1: for banks, which I think would make our systems safer,
Speaker 1: and they have fallen short of being willing to impose
Speaker 1: efficiency rules that would help us advance. We have to
Speaker 1: be watching what's coming out of Washington, because certainly there
Speaker 1: could be some changes. Kim John Hilped of n Y.
Speaker 1: You joining us here on Bloomberg's aveillance. Carol Master, Pim Fox,
Speaker 1: This is Bloomberg. Now. I want to bring in our
Speaker 1: next guest. Sharon O'Halleran is the George Blumenthal Professor of
Speaker 1: Political Economy and Professor of International and Public Affairs at
Speaker 1: Columbia University, the author of the book entitled Politics, Process
Speaker 1: and American Trade Policy, and she joins us here in
Speaker 1: our eleven Trio Studios. Professor how halleran, thank you very
Speaker 1: much for being with us. Maybe just begin by giving
Speaker 1: us your thoughts about the tax overhaul plan. And the
Speaker 1: effects that you believe it will have on the economy,
Speaker 1: warranteed even on consumers. So first of all, we know
Speaker 1: that it reduces the corporate tax, and it brings it
Speaker 1: in line with many of our trading peers. And we
Speaker 1: saw other countries doing the same, such as France and
Speaker 1: even Germany who reduced their corporate tax even below ours.
Speaker 1: And we see in addition that many of the individual
Speaker 1: tax were cut substantially, and that was they were significant.
Speaker 1: And we also see that this was rather a retrogressive
Speaker 1: tax in the sense that those folks at the higher
Speaker 1: end of the income distribution, we're gonna get disproportionately more
Speaker 1: than those at the lower ends. So for example, if
Speaker 1: you make ten thousand dollars, you're going to get about
Speaker 1: ten dollars of BANG, and if you're making over a million,
Speaker 1: you're gonna get about seventy dollars of bang. And if
Speaker 1: you think that, in fact, the this is a stimulus
Speaker 1: to the economy, the impact of people at at those brackets,
Speaker 1: if they spend usually the lower incomes spend dollar per dollar,
Speaker 1: then that's going to have a less impact than somewhat
Speaker 1: the higher end, who will tend to either save or
Speaker 1: put that in a less save dollar for dollar impact.
Speaker 1: So so okay, so that makes okay, get it that. Obviously,
Speaker 1: if you're making a lot more money um in terms
Speaker 1: of the possible benefits to taxes and tax cuts, you're
Speaker 1: going to see bigger, a bigger bang. Having said that,
Speaker 1: those folks at the lower end of the income scale,
Speaker 1: as you said, tend to spend more rather than save
Speaker 1: it or invest it. Will that have much of an
Speaker 1: economic impact? Will that make a difference in their lives too?
Speaker 1: So there will be very little difference at the lower
Speaker 1: end of the impact. I mean they at the lower
Speaker 1: end of the scale. Clearly, they'll most everybody will see
Speaker 1: some cut. Again, it's not going to have a substantial
Speaker 1: impact at that at that area. The places where there
Speaker 1: will be significant impact is what you will see is
Speaker 1: one they have reduce teach of the scales down and
Speaker 1: they've closed some of the loopholes, which is good. They've
Speaker 1: increased the individual um credits and that's important. So they've
Speaker 1: attempted to simplify those that the different types of schedules.
Speaker 1: I think it's been not aspective as they had hoped,
Speaker 1: but that I think is going to be the effect.
Speaker 1: In addition, these rates are not permanent. In fact, they
Speaker 1: fade off by and so in fact we're going to
Speaker 1: kick back to the old rates. You know, one of
Speaker 1: one thing I wanted to ask you though about the
Speaker 1: process having to do this. I understand the idea of
Speaker 1: trying to align the corporate tax rate and make it
Speaker 1: more harmonious with the rest of the world so that
Speaker 1: we are not at a disadvantage. All right, So, having
Speaker 1: said that, is there on the personal side? Is there
Speaker 1: an economic benefit to the reduction of state and local
Speaker 1: tax deductions? Is there? Sorry, obviously there's an economic bench
Speaker 1: to state and local But but we didn't reduce state
Speaker 1: and local tax deductions. We reduced the federal income tax.
Speaker 1: That is true. We are actually making it that you
Speaker 1: cannot re deduced or take out you can deduct, you cannot.
Speaker 1: So my point of the states where that that exists,
Speaker 1: where you're not going to be able to reduce cut,
Speaker 1: you know, deductor state and local taxes, won't those states
Speaker 1: just have to increase taxes in order to make up
Speaker 1: for that budget uh shortfall, Because I mean it's still
Speaker 1: as if that things have to be paid for. Well,
Speaker 1: that's not clear that they're going to be able to
Speaker 1: because the high tax states already going to be at
Speaker 1: a significant disadvantage to the low tax states such as Florida,
Speaker 1: and it's going to be very difficult for New Jersey,
Speaker 1: New York, Connecticut to raise the state and local tex is.
Speaker 1: So all of a sudden, there's going to be enormous
Speaker 1: amount of competition, and therefore the way in which they're
Speaker 1: not gonna be able to raise what's called the mill rates, right,
Speaker 1: So the way in which they're going to have to
Speaker 1: do that is going to be almost through surcharges of
Speaker 1: sales tax. Okay. The point I'm trying to make though,
Speaker 1: is that if the United States is lowering corporate tax
Speaker 1: rates to be more consistent with the rest of the world,
Speaker 1: we're doing just the opposite when it comes to state
Speaker 1: and local taxes. We're making it as if they're all
Speaker 1: different foreign countries competing with each other and it's a
Speaker 1: race to the bottom. Right. So one corporate text is
Speaker 1: the effective corporate text if you look at what ge
Speaker 1: Spent was paid, was because they they have the best
Speaker 1: accountants in the world. Okay, that's really their comparative advantage.
Speaker 1: So that let's sit it straight, So we're just harmonizing
Speaker 1: that and cutting cutting out the loopholes. Second, it's already
Speaker 1: it's we've always had competition between the states over tax
Speaker 1: and tax structure, and there's been advantages to being in
Speaker 1: these high tax areas, either because of locality you're in
Speaker 1: New York, you're in the north Northeast, there's good school districts,
Speaker 1: so forth, and so on. The way you move to
Speaker 1: that when you no longer can use your state local
Speaker 1: taxes is that you use sales tax, you use different
Speaker 1: types of excise taxes, use toll roles. Those are the
Speaker 1: ways in which you get the money to pay for
Speaker 1: the schools, their highways, the other types of infrastructure that
Speaker 1: the local communities need. So, Sharon, and just going back
Speaker 1: to economic impact that your research says that it's unclear
Speaker 1: what the long term effects will be ultimately from this
Speaker 1: tax overhaul package, what it will be on the economy,
Speaker 1: we just kind of don't know. Well, that's correct. I mean,
Speaker 1: in the end, in ten years out, about sixty of
Speaker 1: Americans will be paying more, right, because the individual tax
Speaker 1: rates are going to be going well, be will be
Speaker 1: phased out. And consequently, it's not clear whether in fact,
Speaker 1: this is going to be an overall stimulus to the
Speaker 1: economy and lead to greater growth. Moreover, you don't know
Speaker 1: if at the higher ends that there's going to be
Speaker 1: greater investment, greater consumption, if it's going to have the
Speaker 1: trickle down effects that they're all thinking that it will,
Speaker 1: especially when you're in a scenario where you have very
Speaker 1: low employment, unemployment, you have basically low inflation, so you're
Speaker 1: not in the area of the era of the Reagan
Speaker 1: economics where that did have a stimulating effect. So it's
Speaker 1: not clear that this is the environment where a tax
Speaker 1: cut is going to have a lot of traction. Would
Speaker 1: you have crafted at tax overhaul with great differences than
Speaker 1: than what we saw so I would do the corporate tax.
Speaker 1: I do think that's that is something that has to
Speaker 1: have had and be become efficient. I would have put
Speaker 1: in sentence in place to repatriate a lot of the
Speaker 1: funds I would have done. I think that's something that
Speaker 1: makes a lot of sense. Uh, there are different there
Speaker 1: are inefficiencies within our tax structure. I think I would
Speaker 1: have tried to simplify first and foremost before I would
Speaker 1: have focused on the individual cuts because I think just
Speaker 1: simplifying and closing loopholes would have done a lot for us.
Speaker 1: Without getting into the nitty gritty. I definitely wouldn't have
Speaker 1: gone after the the the education. Sharon O'Halloran is with us.
Speaker 1: She is the George Bluementhal Professor of Political Economy and
Speaker 1: Professor of International in Public Affairs at Columbia University in
Speaker 1: New York, New York. Author also of the book Politics Process,
Speaker 1: an American Trade Policy. I sounded like a New Yorker
Speaker 1: for a moment. Hey, Sharon, you guys recently held a
Speaker 1: conference up at columb Yeah, you had folks like Jack
Speaker 1: lou former Treasury Secretary, Nobel Laurie, Joseph Stiglitz, Barney Frank
Speaker 1: uh many others, and you were taking a look at
Speaker 1: ten years after the financial crisis, um, and what do
Speaker 1: you guys find? So we found that, in fact, there's
Speaker 1: a lot of really retrospective looking at where we are
Speaker 1: now by everyone across the political spectrum. And there's a
Speaker 1: sense that, uh, while the we've the different regulations that
Speaker 1: we put in place have actually addressed the issues that
Speaker 1: they meant to address, such as recapitalizing the banks and
Speaker 1: making them strong and safe, for the next financial crisis
Speaker 1: that we sort of the ones that we experienced, their
Speaker 1: new sets of risks that are emerging. The well known
Speaker 1: ones such as we've seen, is pushing a lot of
Speaker 1: the riskier activities out into the shadow banking areas or
Speaker 1: the non regulating sectors. And those areas are not just
Speaker 1: hedge funds anymore. There they're they're sort of banks or
Speaker 1: bank like entities that are even happening online, and so
Speaker 1: they're completely unfamiliar than what we saw ten years ago
Speaker 1: and completely under the radar and can be missed absolutely.
Speaker 1: So those other areas that are taking place that are
Speaker 1: becoming problematic are mutual funds. That is another area that
Speaker 1: people are concerned because that's a huge part of the market,
Speaker 1: and that's not there's so much lack of transparency in
Speaker 1: that market. So that's another area. The other areas that
Speaker 1: we've seen that's creating bubbles of risk, if you will,
Speaker 1: are the push to move all of the different derivatives
Speaker 1: and swaps and all of those different types of financial
Speaker 1: instruments that many said that caused the financial crisis onto
Speaker 1: clearing houses or you think that's good because that stand
Speaker 1: dedizes the products process that those products, puts them on
Speaker 1: a common contracts and so forth. However, what that does
Speaker 1: is it centralizes the risk, and so what's happening is
Speaker 1: that you have a single point of failure, and so
Speaker 1: that actually may the increasing systemic risk. So while we've
Speaker 1: seen increases in the safety and soundness of institutional banks,
Speaker 1: banks and capital and capital absorbing shock absorbing capital, we're
Speaker 1: seeing growing systemic risk at various points taking place. So
Speaker 1: that those are some of the areas that we that
Speaker 1: we're coming up within the discussion. You know what, just
Speaker 1: to follow up on your comment about derivatives and centralized
Speaker 1: risk having to do with clearing houses, have have we
Speaker 1: done anything to change the compensation structure so that these
Speaker 1: kinds of deals that would potentially produce problems are not profitable.
Speaker 1: I mean, I would imagine that the reason people do
Speaker 1: deals or create certain products is they know they can
Speaker 1: make money at it. And if you can't make money
Speaker 1: at it, you're not gonna do it. So is it
Speaker 1: an issue of the sales compensation programs that need changing.
Speaker 1: So when we think about Dodd Frank, and we go
Speaker 1: back and look at Dodd Frank and we ask whatever
Speaker 1: happened to the executive compensation provisions, and we see that
Speaker 1: it was really the top executives, that top paid executives
Speaker 1: that were actually going to be monitored and going to
Speaker 1: have to disclose and you're gonna have to pay attention
Speaker 1: to their bonuses and so forth. But as was noted,
Speaker 1: it's usually not the general counsel that's making risky bets.
Speaker 1: It's the traders, and they are not regulated and the
Speaker 1: in the sense that they don't they're not disclosing their
Speaker 1: different types of salaries, so in many ways, their incentive
Speaker 1: structures haven't fundamentally changed. Now many would argue that, oh no,
Speaker 1: there's disclosure. No, oh no, there isn't that clawbacks. There
Speaker 1: are other types of mechanisms in place. We are they
Speaker 1: are much more they are much more regulated. They have
Speaker 1: to have different types of compliance procedures, So they would
Speaker 1: people in the banking industry would cite all of those
Speaker 1: different types of checks, and those are all true. But
Speaker 1: if you ask the individual what types of incentives are
Speaker 1: in place, they have many of the same. So if
Speaker 1: you have many of the same incentives to do much
Speaker 1: of the same behavior, right, the question is is the
Speaker 1: compliance And that's part of all you know, everybody getting
Speaker 1: a Series fourteen. I mean that's great, But I mean
Speaker 1: if the incentive is to sell whatever it is you
Speaker 1: have to sell, well, you know, why would you expect
Speaker 1: a different result eventually? So, the way that regulations of
Speaker 1: the Dodd Frank work was to put in more capital, right,
Speaker 1: to limit the types of risky activities that could it
Speaker 1: could take, right like in the vocal rule, move out
Speaker 1: the proprietary trading. Right. But what's happened is most of
Speaker 1: that risky activity again has moved outside of the regulated areas.
Speaker 1: So you can ask, Okay, so the banks and the
Speaker 1: investment banks, the significantly important financial institutions, they may not
Speaker 1: be taking those tail end extreme bets, but doesn't mean
Speaker 1: that they're not happening within this system. So in the
Speaker 1: current environment, in the current White House, President Trump has
Speaker 1: laid out seven core principles for regulating the US financial system. Right,
Speaker 1: it was an executive order. So based on that, we're
Speaker 1: not going to get more oversight, right, We're gonna get
Speaker 1: less oversight right. In and in in the discussions, it
Speaker 1: was clear that a lot of the substantive issues that
Speaker 1: were in Dodd Frank were more or less correct. They
Speaker 1: were trying to do the right things to to make
Speaker 1: the banks safe and sound and the system safe and town.
Speaker 1: It was how they were doing it. Now that the
Speaker 1: question is in the implementation of those principles, have they
Speaker 1: got that right or the question was were these regulations
Speaker 1: in particular, like in particular Voker with those fit for
Speaker 1: the purpose at hand, or other other regulations that would
Speaker 1: be more appropriate. And so that was some of the discussion.
Speaker 1: And here that is what the Trump regulations are the
Speaker 1: Trump executive ors are really thinking of. One is their
Speaker 1: way to make these regulations more efficient, less complex, because
Speaker 1: they are very complex. When you have regulations like the
Speaker 1: Vocal Rule that are what four pages long? At that point,
Speaker 1: good luck everybody, exactly. The only people who really know
Speaker 1: them are the bankers, the lawyers of the bankers actually,
Speaker 1: and they're the only ones who can tell you how
Speaker 1: to manipulate them. So at that point it's very difficult
Speaker 1: to not only oversee them, but to understand whether you're
Speaker 1: in compliance or not. So that's that's Those are some
Speaker 1: of the issues at hand. In addition, there are other
Speaker 1: principles about eliminating that. Uh. They want to get rid
Speaker 1: of the consumer financial protection which is what we saw right,
Speaker 1: and it was put in place. Um, a baby of
Speaker 1: Elizabeth Warren, if you will to really kind of watch
Speaker 1: out for consumers, Um, Sharon, we're gonna have to continue
Speaker 1: this conversation another time. There's certainly a lot of moving
Speaker 1: parts whenever we talk about the financial regulatory environment. Sharon O'Halleran,
Speaker 1: thank you so much, Professor Sharon O'Halleran. Uh. George Bloementhal,
Speaker 1: Professor of Political economy and Professor of International and Public
Speaker 1: Affairs at Columbia University in New York City. Well, as
Speaker 1: we've reported early your Saudi Arabia expects oil revenue to
Speaker 1: jump by by three. That would put oil at about
Speaker 1: seventy five dollars a barrel. Here to help us understand
Speaker 1: this is Stephen Short. He is the editor of the
Speaker 1: Short Report. He joins us now on the phone. Stephen,
Speaker 1: thanks very much for being with us. So seventy a
Speaker 1: barrel by three? What kind of percentage do you give? That?
Speaker 1: A very low percentage of PIM. We have to keep
Speaker 1: in mind that the only reason why we have a
Speaker 1: long term economic forecasting is to make astrology look respectable.
Speaker 1: So that said, I do think the market is challenged
Speaker 1: from a number of standpoints. Um most importantly, of course,
Speaker 1: is the rapid growth of shale production predominantly here in
Speaker 1: North America, but certainly that technology will expand to other
Speaker 1: markets around the globe. So, but we recently had an
Speaker 1: announcement by Saudi Aramco that they were making in some
Speaker 1: corners who thought it was a very peculiar move to
Speaker 1: expand beyond their borders and purchase assets, a lot of
Speaker 1: assets based on shell here in North America. So we're
Speaker 1: starting to see the Aramco game plan come into focus
Speaker 1: right now. And that game plan is based on two phases.
Speaker 1: First and foremost, as I said, the acquisition of assets
Speaker 1: beyond its borders. But also we have the announcement that
Speaker 1: they were going to wean that is, Saudi Radio Government's
Speaker 1: going to wean their power generation off of crude oil.
Speaker 1: They burn a significant amount of crude oil in the
Speaker 1: summer in their power plants to keep those a C
Speaker 1: s running in that hot Saudi uh summer. So they're
Speaker 1: going to make the transition over into natural gas, which
Speaker 1: again helps explain their acquisition. And they're growing important needs
Speaker 1: for l en J, so that is going to open
Speaker 1: up tens of millions of more barrels of crudel that
Speaker 1: will be able to at the export market, because when
Speaker 1: you think about it, every barrel crudal that's burned to
Speaker 1: keeping a c on and SETI is not a barrel
Speaker 1: you're earning export income on. So Aramco does seem to
Speaker 1: be making the steps to boost their bottom line. But
Speaker 1: as I said, given two things, first and foremost the
Speaker 1: growth of access to supply. But we also have to
Speaker 1: keep in mind, guys, that the entire economics of crudal
Speaker 1: have changed over the last ten years. You have to
Speaker 1: keep two things in line. With regard to factors that
Speaker 1: that impact consumer behavior. We've always had the first variable,
Speaker 1: that is the price shock going back. We've had our
Speaker 1: our troughs and our peaks going back to the Arab
Speaker 1: oil embargo in the early nineteen seventies. But we have
Speaker 1: never until recently had that second component, and that's the substitute.
Speaker 1: So the substitute being, of course the growth of hybrid
Speaker 1: technology evs and so forth, the genies out of the
Speaker 1: barrel right there. So I don't expect demand to have
Speaker 1: that commence impact that has had in previous rallies. Include all,
Speaker 1: given that consumer behavior has indeed changed. So that's seventy
Speaker 1: five dollar oil. It's a long way off on that prediction. Uh.
Speaker 1: And I do think it is going to have its
Speaker 1: roadblocks in the years ahead. Well, especially when you've got
Speaker 1: China coming out and they're saying they're going to, you know,
Speaker 1: plan to ban sales of fossil fuel cars entirely. That
Speaker 1: huge market has got to make anybody and everybody in
Speaker 1: the energy market, you know, sit up and take notice. Oh, absolutely, Carol.
Speaker 1: And it's it's not just in China, of course, there
Speaker 1: are headlines over in California. We've recently had a couple
Speaker 1: of months ago the announcement by Volvo that they are
Speaker 1: completely going over to two E d s and so forth. So, yes,
Speaker 1: whether it is commercially successful, whether it's being ordered by
Speaker 1: government FIAT, uh, certainly. And and this is why you
Speaker 1: are seeing the major did the dps, the shelves and
Speaker 1: so forth. Did they are rebranding themselves as a gas
Speaker 1: natural gas companies. They're they're getting away from that oil.
Speaker 1: I was recently at a conference over this summer where
Speaker 1: a major car manufacturer is um beginning to brand itself
Speaker 1: as a transportation company. So then when we start the
Speaker 1: factor in the growth of the potential growth of driverless technology. Uh.
Speaker 1: It gets to the point where, look, I I have
Speaker 1: a car for myself, My wife has a car, we have.
Speaker 1: We have a clunker car for for our older kids.
Speaker 1: That's three cars in a generation. You know, conceivably we
Speaker 1: not we might not have to own any car. If
Speaker 1: I can call up a lift or an uber and
Speaker 1: have a driverless car come and pick me up or
Speaker 1: take the kids to the school, why do I need
Speaker 1: to own a car. So these are certainly factors that
Speaker 1: are going to play in hand. And again it's going
Speaker 1: to keep a lid I believe on crudle prices in
Speaker 1: the foreseeable future economy. Maybe I'm asking the obvious, but
Speaker 1: I'm gonna go ahead and do it anyway. With Saudi
Speaker 1: Aramco getting ready to do its IPO or hopefully do
Speaker 1: it's IPO this year, there's been some questions about the
Speaker 1: valuation to truly and one truly and what what might
Speaker 1: it be? Our headlines like this, this is again a
Speaker 1: story about where they expect oil revenue, you know increasing. Bye,
Speaker 1: it's a few years off here according to people in
Speaker 1: the know. I mean, is this just about boosting the
Speaker 1: value of that I p O. I'm gonna put my
Speaker 1: skeptical hat on and say, yes, I do believe that
Speaker 1: is a lot of jaw owning to attempt to keep
Speaker 1: the price higher. Because obviously you're an oil producer, uh
Speaker 1: you go for evaluation, you're going for an IPO. You
Speaker 1: want that your your your product that you sell as
Speaker 1: high as possible. And that's why I do think that
Speaker 1: this was the announcement that they're going to take all that.
Speaker 1: You know, that transition of moving oil from their power
Speaker 1: generation to the export market certainly will boost the bottom line.
Speaker 1: And Wall Street has taken notice. If if we look
Speaker 1: at the bets that trade oil traders are taking on
Speaker 1: with higher oil prices, they've gone you know, once again,
Speaker 1: they went all in last November after the first OPEC
Speaker 1: announcement to cut. They got burned terribly in the first quarter.
Speaker 1: But they're they're at it again. While she's sitting on
Speaker 1: record lunch in the Brent Crudel market, sitting on a
Speaker 1: four year high length shipping UH in thenamics wt I contract.
Speaker 1: So they're the ones a lot having buying this market.
Speaker 1: We are speaking with. Stephen Shorty is the editor of
Speaker 1: the short report all about energy markets. Stephen, you mentioned
Speaker 1: natural gas earlier and how many oil companies are rebranding
Speaker 1: themselves as natural gas companies, such as BP and Shell.
Speaker 1: What's the best way to profit from this uh rebranding
Speaker 1: effort from the desire to use more natural gas rather
Speaker 1: than oil. Well, absolutely, Tim, and first and foremost it
Speaker 1: would be in the petrochemical industries that at these are
Speaker 1: industries that are highly dependent on natural gas, and we
Speaker 1: do have an access uh to uh to a m
Speaker 1: you know, pun intended a boatload of of natural gas.
Speaker 1: So I always like to and I always go for
Speaker 1: the levi Strous's method him look at the guys who
Speaker 1: are supplying the material, uh, the infrastructure. That is to say,
Speaker 1: we're now in a tremendous UH period where the industry
Speaker 1: is turning on a dime. Uh. Fifteen years ago, you
Speaker 1: had natural gas that supplied nearly the lower forty eight
Speaker 1: or the contiguous United States gas needs UH and hence,
Speaker 1: when you've got a Hurricane Harvey or Hurricane Hermor, for example,
Speaker 1: natural cast prices with double, triple, quadruple UH. This time around,
Speaker 1: they haven't. And that's because now nearly a third comes
Speaker 1: from the Appalachian basin, So we're in the process now
Speaker 1: deglutting that market. So infrastructure place, pipeline plays plays that
Speaker 1: will will benefit from the growth of l engine export markets.
Speaker 1: So it's the place that are can take the gas
Speaker 1: from where it is in the producing area and get
Speaker 1: it to where it needs to be. Pipelines up to
Speaker 1: eastern Ontario, pipelines down to the southeast to get to
Speaker 1: the export market, Pipelines to get to the East coast
Speaker 1: to the export market. Mexico has made a you know,
Speaker 1: you know, has made a tremendous investment, and Mexican demand
Speaker 1: for for natural gas coming out of the Southwest is
Speaker 1: robust right now, is only going to grow over the
Speaker 1: years ahead. So so look at where the growth in
Speaker 1: demand is going to be and plan accordingly. And this
Speaker 1: comes even as natural gas prices remain below three dollars
Speaker 1: per million BTU. Correcting me right now, where two sixty
Speaker 1: seven do you see the actual price of natural gas
Speaker 1: moving higher? Or as you said, just sell the pics
Speaker 1: and the shovels. Yeah, well, I again, I think the
Speaker 1: pics and the shovels are are are of every safe
Speaker 1: bet and if you are investing in companies that do
Speaker 1: have a tremendous uh need for natural gas. Part of
Speaker 1: the speed stock being in petrochemical, being in power, uh,
Speaker 1: being in steel heavy manufacturer, and so forth. Um, if
Speaker 1: you if you're investing in one of these companies, you
Speaker 1: you want to make sure that they are doing everything
Speaker 1: and their power to lock in natural gas prices at
Speaker 1: these levels, because, as I said, as these infrastructure plays grow,
Speaker 1: the demand will grow, and natural gas prices are are
Speaker 1: historically at very very low levels, record levels if you
Speaker 1: take inflation into account. So if you have a company
Speaker 1: that has a tremendous consumption of natural gas, before you
Speaker 1: invest in that company, make sure go back to their
Speaker 1: annual ports, go back to their investor meetings, make sure
Speaker 1: they are locking in natural gas prices at these levels.
Speaker 1: Because in the short term, PIM, we're an extreme bear
Speaker 1: market and I'm not going to rule out natural gas
Speaker 1: prices through this winter falling lower. But in the years ahead,
Speaker 1: you can these companies can go out and find a
Speaker 1: swap deal that will sell them uh the oil. Excuse me,
Speaker 1: guest natural gas at these levels five six, seven years out.
Speaker 1: If these companies are not locking in natural gas prices
Speaker 1: at these levels. I think they're doing their investors a
Speaker 1: tremendous disservice. All right, So in other words, I know
Speaker 1: your investment. Speaking of knowing your investment, we kidded before
Speaker 1: bringing you in UM about talking about bitcoin, and I
Speaker 1: thought I was going to go there and loan, Behold,
Speaker 1: I'm reading on the Bloomberg terminal, checking out the top
Speaker 1: energy menu, and it says how China has used made
Speaker 1: the first ever purchase of Middle East oil using blockchain technology,
Speaker 1: so not necessarily using bitcoin, but talking about blockchain technology,
Speaker 1: do you, Stephen, you have been following the energy world
Speaker 1: for a long time. Do you see either digital currency
Speaker 1: or blockchain the backbone, the digital ledger that supports digital
Speaker 1: currencies ultimately being used in the commodity universe and specifically
Speaker 1: in the energy universe. Uh. The answer is yes. But
Speaker 1: I want to put the caveat out there that I
Speaker 1: don't possess nearly the amount of great matter to understand
Speaker 1: these cryptocurrencies, uh, and and the bid that's going into them,
Speaker 1: and what I perceived to be a just historic bubble.
Speaker 1: But that said, Carol, over the past ten years, there
Speaker 1: has been um an effort by Iran, by Russia. Uh,
Speaker 1: to wean the world off of the petro dollar, and
Speaker 1: and and Americans really have to consider, you know what
Speaker 1: a benefit uh, the US dollar being the world's invoicing
Speaker 1: currency has has been because yeah, those dollars go out
Speaker 1: to purchase the soil, but they always come back in
Speaker 1: the United States, uh, to invest back into the United States.
Speaker 1: So I do think, um, whether it is the viable option. Uh,
Speaker 1: you know countries you know, for example Venezuela, which we
Speaker 1: do have sanctions on uh, and it is putting a
Speaker 1: strain on the Madua government. It has talked about moving
Speaker 1: towards the cryptocurrency and and weaning themselves off the dependence
Speaker 1: of having to own dollars or or for that hard currency.
Speaker 1: So yes, I do think that is the potential. Although
Speaker 1: again once again the caveat here is that is a
Speaker 1: market that it reminds me of and run Carol Fit
Speaker 1: sixteen years ago. Everybody thought they were the smartest guys
Speaker 1: in the book, but everyone is afraid to admit that
Speaker 1: they didn't understand what the heck these guys were doing.
Speaker 1: And of course they were a bunch of crooks. So
Speaker 1: I'm not calling bitcoin crooks or anything, but there's a
Speaker 1: lot of people I think investing in it and then
Speaker 1: and and they're afraid to admit they really don't understand
Speaker 1: what's going on. I don't understand what's going on. I'm
Speaker 1: staying away from it. But that's not to say, as
Speaker 1: you rightfully pointed out the move by China, We've seen
Speaker 1: the move by Venezuela. There's been moves over the years
Speaker 1: from Iran and then excuse me, Russia to wean themselves
Speaker 1: off of the dollar. And I do think cryptocurrencies will
Speaker 1: help uh speed that along. Stephen Short, anytime someone puts
Speaker 1: a picture of Bill Murray in their research report, a
Speaker 1: flag it and ask you what does omnium gathering? What
Speaker 1: does that mean for investors? And a picture of Bill
Speaker 1: Murray and the Short Report right or r O G.
Speaker 1: I'm the gathering is our take, our commentary, our observations
Speaker 1: in our in the daily issues of the Short Report
Speaker 1: on things that have an immediate impact on the energy industry.
Speaker 1: And to your point, if anyone the Bill Murray fan,
Speaker 1: specifically the movie Meatballs, when he's trying to rally the
Speaker 1: troops playing against that that superior camp across the lake,
Speaker 1: he's saying, look, they're better than us, but we can
Speaker 1: beat him because the fact that they're better than us,
Speaker 1: it just doesn't matter. And so when I look at it,
Speaker 1: and this was a proposed the natural gas market that
Speaker 1: we have industrial demands, UH is back and that's been
Speaker 1: the one UH driver in natural gas prices over the
Speaker 1: last eight years. UH that that has kept the lid
Speaker 1: on natural gas prices UM. And so look, and we
Speaker 1: have to keep in mind at the end, it wasn't
Speaker 1: just the oil market that crashed. The industrial metals complex
Speaker 1: crashed the industrial metal and not your that is your
Speaker 1: your tell tale of an economy that was sputtering. Stephen,
Speaker 1: we gotta run. Thank you so much so for talking
Speaker 1: with us on this Tuesday, Stephen Shark of the Shork Report.
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 Keane before
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Speaker 1: Radio