1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 2 00:00:09,240 --> 00:00:13,080 Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jay Ley, we bring 3 00:00:13,119 --> 00:00:17,159 Speaker 1: you insight from the best and economics, finance, investment, and 4 00:00:17,280 --> 00:00:23,280 Speaker 1: international relations. Find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg 5 00:00:23,360 --> 00:00:30,160 Speaker 1: dot com, and of course on the Bloomberg terminal. Michael 6 00:00:30,200 --> 00:00:32,720 Speaker 1: Gapman joins us now the chief US economist a bad lease, 7 00:00:32,800 --> 00:00:35,440 Speaker 1: and Mike, you've pointed out let's go in March. My 8 00:00:35,520 --> 00:00:37,479 Speaker 1: question would be what would stop him? That's wait now 9 00:00:37,560 --> 00:00:40,800 Speaker 1: and then, well, really not much. I mean you would 10 00:00:40,800 --> 00:00:43,479 Speaker 1: need a major shift in terms of saying, oh Macron 11 00:00:43,560 --> 00:00:47,360 Speaker 1: effect on the economy, geopolitical event that that would somehow 12 00:00:47,479 --> 00:00:50,919 Speaker 1: disrupt um the economy, or risk taking sentiment. But in 13 00:00:51,000 --> 00:00:53,520 Speaker 1: terms of where the feed is on their on their 14 00:00:53,640 --> 00:00:57,720 Speaker 1: dual mandate inflation in the labor market, they're basically there. 15 00:00:58,560 --> 00:01:00,960 Speaker 1: So coming out of the last employment report with the 16 00:01:01,000 --> 00:01:05,039 Speaker 1: unemployment rated three point nine, another month of solid employment 17 00:01:05,080 --> 00:01:08,800 Speaker 1: gains six tenths rise in average hourly earnings, that pretty 18 00:01:08,880 --> 00:01:11,560 Speaker 1: much meets their bar. So I think in January, at 19 00:01:11,560 --> 00:01:13,240 Speaker 1: the January meeting at the end of this month, they 20 00:01:13,240 --> 00:01:17,080 Speaker 1: could very well declare we're at full employment. Yesterday Powell said, 21 00:01:17,480 --> 00:01:20,880 Speaker 1: we are at or very close to full employment. They've 22 00:01:20,880 --> 00:01:23,360 Speaker 1: already told us they're they're on the inflation side. So 23 00:01:23,480 --> 00:01:26,720 Speaker 1: I don't really think anything stops them from going in 24 00:01:26,800 --> 00:01:29,440 Speaker 1: March except one of these kind of outlier events. I 25 00:01:29,440 --> 00:01:31,480 Speaker 1: think they're ready, Michael Gaping, You and I are the 26 00:01:31,520 --> 00:01:34,280 Speaker 1: only ones that will understand. In two, I have the 27 00:01:34,319 --> 00:01:39,360 Speaker 1: tiger reigns supreme. So inflations rising up back on the street. 28 00:01:39,640 --> 00:01:45,280 Speaker 1: Is this the same inflation? Is two? No? Um? So 29 00:01:45,360 --> 00:01:49,880 Speaker 1: that was rocky three? Right? So yeah, So the the 30 00:01:49,880 --> 00:01:53,640 Speaker 1: age of the seventies and eighties inflation was a multidecade 31 00:01:53,760 --> 00:01:58,760 Speaker 1: period of demand exceeding supply, creating wage price spirals, higher 32 00:01:58,800 --> 00:02:02,120 Speaker 1: inflation expectation. It was very much a demand driven story, 33 00:02:02,120 --> 00:02:05,600 Speaker 1: although there were certainly supply shock components to it, with 34 00:02:05,600 --> 00:02:08,360 Speaker 1: with the oil market at the time. This is is 35 00:02:08,400 --> 00:02:13,120 Speaker 1: a very different outcome. It's not necessarily from persistently easy 36 00:02:13,200 --> 00:02:17,240 Speaker 1: policy over previous decades and expansionary fiscal policy. Obviously we 37 00:02:17,360 --> 00:02:20,359 Speaker 1: have some of that in the response to the pandemic. 38 00:02:20,600 --> 00:02:24,240 Speaker 1: We think it's still primarily a pandemic driven story that 39 00:02:24,480 --> 00:02:27,359 Speaker 1: is likely to ease over time, And as you mentioned 40 00:02:27,360 --> 00:02:29,840 Speaker 1: in the last segment, what can the FED do about that? 41 00:02:29,919 --> 00:02:33,200 Speaker 1: I think a lot of this risk management positioning is 42 00:02:33,240 --> 00:02:37,880 Speaker 1: about preventing second round effects, right, preventing those the impulse 43 00:02:37,919 --> 00:02:40,519 Speaker 1: today from showing up in a lot higher longer run 44 00:02:40,560 --> 00:02:44,840 Speaker 1: inflation expectation. So I do think it's a very different inflation. 45 00:02:44,880 --> 00:02:46,919 Speaker 1: So how the FED responds to it should be different. 46 00:02:47,080 --> 00:02:49,359 Speaker 1: And Michael, what's so important here is just a president 47 00:02:49,440 --> 00:02:52,200 Speaker 1: and his will to survive. What does President Biden do 48 00:02:52,360 --> 00:02:57,200 Speaker 1: with seven percent inflation? In part talk about that you 49 00:02:57,200 --> 00:02:59,360 Speaker 1: you get it, you see it, you get it, you 50 00:02:59,440 --> 00:03:04,160 Speaker 1: understand problem. It crimps real incomes. Households are very sensitive 51 00:03:04,200 --> 00:03:08,640 Speaker 1: to changes in energy prices and food prices um. And 52 00:03:08,639 --> 00:03:11,040 Speaker 1: then you also want to take some steps perhaps to 53 00:03:11,240 --> 00:03:14,240 Speaker 1: help solve it. Make sure that your Federal Reserve chairman 54 00:03:14,240 --> 00:03:17,320 Speaker 1: that you're appointing understands the issue and the importance of 55 00:03:17,320 --> 00:03:21,040 Speaker 1: getting inflation lower. Uh, they unlock some of the strategic reserve. 56 00:03:21,120 --> 00:03:24,320 Speaker 1: In terms of oil supplies, there's discussions around do you 57 00:03:24,440 --> 00:03:27,920 Speaker 1: do you reverse tariffs on imports from China? So what 58 00:03:27,960 --> 00:03:31,240 Speaker 1: can you do to help bring inflation down and stabilize 59 00:03:31,280 --> 00:03:33,960 Speaker 1: the situation. But certainly he has to say, we get it, 60 00:03:34,000 --> 00:03:37,200 Speaker 1: and we understand it, and we're taking corrective measures. How 61 00:03:37,240 --> 00:03:39,360 Speaker 1: do you get the wrong kind of inflation down while 62 00:03:39,440 --> 00:03:41,840 Speaker 1: keeping the inflation that they want to see. As we've 63 00:03:41,840 --> 00:03:45,280 Speaker 1: been hearing from John this morning, the administration perhaps going 64 00:03:45,320 --> 00:03:47,800 Speaker 1: to be a looking much more at the wage increases 65 00:03:47,840 --> 00:03:50,960 Speaker 1: and how this is possibly a good thing for the worker. 66 00:03:51,440 --> 00:03:54,960 Speaker 1: Paint a picture of negative two point four percent real 67 00:03:55,320 --> 00:03:58,720 Speaker 1: year over year hourly wages. What does that mean in 68 00:03:58,840 --> 00:04:01,800 Speaker 1: terms of the wage increases we can expect going forward 69 00:04:02,120 --> 00:04:06,360 Speaker 1: and the trajectory of economic momentum. Well, certainly, I think 70 00:04:06,360 --> 00:04:09,040 Speaker 1: conditions in the labor market are are type. We still 71 00:04:09,080 --> 00:04:12,960 Speaker 1: have roughly four million people sitting sitting on the sideline. 72 00:04:13,000 --> 00:04:17,200 Speaker 1: Demand for labor is strong. I suspect labor market conditions 73 00:04:17,200 --> 00:04:20,479 Speaker 1: will remain robust, and average hourly earnings will continue to 74 00:04:20,640 --> 00:04:23,920 Speaker 1: take hire and then you would hope that some of 75 00:04:23,960 --> 00:04:26,400 Speaker 1: the inflation comes down on on the other side. But 76 00:04:26,600 --> 00:04:28,400 Speaker 1: in the moment, of course, what it means is it 77 00:04:28,520 --> 00:04:32,719 Speaker 1: bites and crimps real real purchasing power. So disposable income 78 00:04:32,800 --> 00:04:35,120 Speaker 1: was kind of all the story last year about government 79 00:04:35,120 --> 00:04:39,200 Speaker 1: transfer payment supporting income. If you start to adjust for inflation. Now, 80 00:04:39,200 --> 00:04:42,000 Speaker 1: disposable income the last few months has been taking lower, 81 00:04:42,080 --> 00:04:44,919 Speaker 1: so it might feed in to a little less demand. 82 00:04:45,040 --> 00:04:47,880 Speaker 1: And this is where the Fed's messaging has shifted. It 83 00:04:48,040 --> 00:04:51,400 Speaker 1: used to be we need accommodative policy to keep labor 84 00:04:51,480 --> 00:04:54,800 Speaker 1: market momentum going. Now what we need to do is 85 00:04:54,880 --> 00:04:59,479 Speaker 1: stabilize inflation to keep labor markets going and income and 86 00:04:59,520 --> 00:05:02,920 Speaker 1: purchase power elevated. So it has shifted the narrative from 87 00:05:02,920 --> 00:05:04,800 Speaker 1: the Fed. Mike. Part of that effort is not just 88 00:05:04,880 --> 00:05:07,800 Speaker 1: right highs this balance sheet reduction as well informing the analysis. 89 00:05:07,839 --> 00:05:09,640 Speaker 1: At the moment, it's just a FED speak. Where on 90 00:05:09,640 --> 00:05:11,440 Speaker 1: earth is this gummy? We have a balance sheet pushing 91 00:05:11,520 --> 00:05:13,880 Speaker 1: nine trillion. We're all trying to work on the work 92 00:05:13,880 --> 00:05:16,840 Speaker 1: out the month on month reduction. Mike, Have you've got 93 00:05:16,839 --> 00:05:18,680 Speaker 1: any idea what that looks like through the back half 94 00:05:18,680 --> 00:05:20,320 Speaker 1: of this year if they start this summer, what it 95 00:05:20,320 --> 00:05:23,359 Speaker 1: looks like into next year? Sure? I think if you 96 00:05:23,520 --> 00:05:25,680 Speaker 1: if most of us think the balance sheet run el 97 00:05:25,720 --> 00:05:27,560 Speaker 1: is going to start in the second half of the year, 98 00:05:27,600 --> 00:05:30,320 Speaker 1: we're in July. You can empower seem to say later 99 00:05:30,440 --> 00:05:32,479 Speaker 1: this year. So if you if you look at the 100 00:05:32,480 --> 00:05:36,039 Speaker 1: mature maturity schedule of the Fed's balance sheet roughly over 101 00:05:36,080 --> 00:05:39,760 Speaker 1: the year. After that point, you're looking at let's let's 102 00:05:39,800 --> 00:05:42,400 Speaker 1: call it about a trillion, and treasuries running off and 103 00:05:42,560 --> 00:05:46,159 Speaker 1: prepay estimates on on MBS portfolios will give you somewhere 104 00:05:46,160 --> 00:05:49,159 Speaker 1: around another three hundred billion, So I think you could 105 00:05:49,160 --> 00:05:52,120 Speaker 1: have at least half of that fifty billion, maybe up 106 00:05:52,160 --> 00:05:54,000 Speaker 1: to a trillion in terms of how much the FED 107 00:05:54,080 --> 00:05:56,600 Speaker 1: wants to take out of the balance sheet over kind 108 00:05:56,640 --> 00:05:59,040 Speaker 1: of the first twelve months, so let's call it six 109 00:05:59,680 --> 00:06:01,800 Speaker 1: billion a month. They may need to ratch it up 110 00:06:01,839 --> 00:06:04,839 Speaker 1: to that level over time, start with their cap that's lower, 111 00:06:04,839 --> 00:06:07,440 Speaker 1: and move higher. But I do think that they want 112 00:06:07,480 --> 00:06:10,400 Speaker 1: to get to the balance sheet sooner than later, and 113 00:06:10,480 --> 00:06:13,080 Speaker 1: with the trillion and a half sitting in the reverse 114 00:06:13,080 --> 00:06:15,359 Speaker 1: repo facility, I think they feel they can do a 115 00:06:15,360 --> 00:06:18,359 Speaker 1: lot of draining of reserves without having, you know, a 116 00:06:18,480 --> 00:06:22,960 Speaker 1: negative effect on on front end financing conditions. So I 117 00:06:23,000 --> 00:06:25,719 Speaker 1: think they may try to get a fairly fast pace 118 00:06:25,800 --> 00:06:28,000 Speaker 1: of of runoff in the beginning and last point, if 119 00:06:28,000 --> 00:06:30,320 Speaker 1: I can make it, there's about three hundred and twenty 120 00:06:30,320 --> 00:06:33,480 Speaker 1: five billion and T bills on the Fed's balance sheet. 121 00:06:33,560 --> 00:06:36,760 Speaker 1: This time. We had almost zero in the last expansion 122 00:06:36,760 --> 00:06:39,120 Speaker 1: when the FED was doing this, So you may see 123 00:06:39,160 --> 00:06:42,359 Speaker 1: different run operates for the T bills and the remainder 124 00:06:42,640 --> 00:06:46,159 Speaker 1: of the coupon issues or the coupon holdings that they have. 125 00:06:46,320 --> 00:06:48,760 Speaker 1: You could get a lot of runofs every quickly just 126 00:06:48,800 --> 00:06:51,279 Speaker 1: by letting TEA bills go. That's a very interesting point, 127 00:06:51,320 --> 00:06:53,560 Speaker 1: Mike Gape, and thank you Mike Gap, and of Barclay's 128 00:07:00,200 --> 00:07:02,839 Speaker 1: right now this is very important. Stephen Roach joining a 129 00:07:02,920 --> 00:07:05,960 Speaker 1: senior fellow at Yale University. We'll talk about the FED 130 00:07:06,080 --> 00:07:08,200 Speaker 1: here and what we're doing in America. But Steve Roach, 131 00:07:08,279 --> 00:07:10,320 Speaker 1: I've got to go back to the heart of your 132 00:07:10,360 --> 00:07:12,640 Speaker 1: work on Asia, and the fact is you get off 133 00:07:12,760 --> 00:07:16,520 Speaker 1: Cathay Pacific long ago and far away a Terminal one 134 00:07:17,120 --> 00:07:20,760 Speaker 1: Hong Kong International Airport, and there was the big Morgan 135 00:07:20,880 --> 00:07:24,080 Speaker 1: Stanley sign that you personally put up there as you 136 00:07:24,160 --> 00:07:28,440 Speaker 1: came down the ramp at terminal run. Those days are gone. 137 00:07:29,080 --> 00:07:34,960 Speaker 1: Your new view on the new China, well, those were 138 00:07:35,000 --> 00:07:38,000 Speaker 1: the days. Tom. I probably will never go on Cathay 139 00:07:38,080 --> 00:07:45,840 Speaker 1: Pacific again. Sadly, UM look like China is UM. Clearly 140 00:07:46,160 --> 00:07:52,120 Speaker 1: UH embracing a different type of approach to UM. The 141 00:07:52,160 --> 00:07:57,480 Speaker 1: balance between ideology, policy and economic growth than at any 142 00:07:57,560 --> 00:08:02,920 Speaker 1: point since I've been covering the tree. Ideology is the 143 00:08:03,080 --> 00:08:08,360 Speaker 1: dominant force under a Shijin ping Uh. And what has 144 00:08:08,400 --> 00:08:12,400 Speaker 1: really been disturbing and shocking to some of us is 145 00:08:12,440 --> 00:08:16,400 Speaker 1: how he used the ideology to go after what had 146 00:08:16,440 --> 00:08:20,200 Speaker 1: been the most dynamics sectors of the Chinese economy UH, 147 00:08:20,280 --> 00:08:25,200 Speaker 1: the internet platform companies, UH and um UH. At the 148 00:08:25,240 --> 00:08:28,720 Speaker 1: same time he's doing that, he's he's got this income 149 00:08:28,760 --> 00:08:35,720 Speaker 1: redistribution wealth redistribution program called Common Prosperity, and so it's 150 00:08:35,760 --> 00:08:40,640 Speaker 1: a it's a twin pincher movement on the dynamism of China. 151 00:08:41,160 --> 00:08:44,280 Speaker 1: We all know the growth rate is slowed. I'm not 152 00:08:44,320 --> 00:08:48,240 Speaker 1: concerned about evergrand I think they can definitely manage that. 153 00:08:48,920 --> 00:08:53,960 Speaker 1: There's zero COVID policy is also very restrictive on a 154 00:08:54,000 --> 00:08:56,080 Speaker 1: short term basis, but I think they can get through 155 00:08:56,120 --> 00:08:58,880 Speaker 1: that as well. I'm more concerned about the medium, the 156 00:08:58,960 --> 00:09:03,280 Speaker 1: longer term of Jina. I've been positive for decades and 157 00:09:03,320 --> 00:09:06,160 Speaker 1: I'm much less so today. Stephen, you helped build the 158 00:09:06,200 --> 00:09:08,920 Speaker 1: modern of Hong Kong. What should be the Western bank 159 00:09:09,000 --> 00:09:12,240 Speaker 1: response to all this? How does the Western banks adapt 160 00:09:12,280 --> 00:09:17,199 Speaker 1: and adjust in Hong Kong. Well, being in Hong Kong 161 00:09:17,360 --> 00:09:21,200 Speaker 1: now UH and in the future is just like being 162 00:09:21,280 --> 00:09:25,760 Speaker 1: in UM mainland China. There's there's really no functional difference 163 00:09:25,800 --> 00:09:30,720 Speaker 1: between UH, you know, Hong Kong as a Chinese city 164 00:09:30,840 --> 00:09:35,600 Speaker 1: and UH operating in Shanghai or Beijing. So to the 165 00:09:35,640 --> 00:09:40,480 Speaker 1: extent that Western banks are comfortable operating in Greater China, UH, 166 00:09:40,520 --> 00:09:42,360 Speaker 1: you know, Hong Kong still has a good deal of 167 00:09:42,400 --> 00:09:46,040 Speaker 1: attraction to them. I understand that, UM, you know, there's 168 00:09:46,040 --> 00:09:49,760 Speaker 1: a lot of concern because of the traumatic shift from 169 00:09:49,800 --> 00:09:52,280 Speaker 1: what Hong Kong had been to what it is right now, 170 00:09:52,800 --> 00:09:54,439 Speaker 1: but you just have to look at it as another 171 00:09:54,440 --> 00:09:57,559 Speaker 1: big Chinese city. Stephen, you said you are much less 172 00:09:57,600 --> 00:10:01,719 Speaker 1: optimistic right now about China as trajectory going forward, and 173 00:10:01,840 --> 00:10:04,320 Speaker 1: you have been in decades. Can you play out what 174 00:10:04,360 --> 00:10:07,480 Speaker 1: the ramifications are at a time when you see inflation 175 00:10:07,600 --> 00:10:10,320 Speaker 1: is becoming more intriged, that we see supply chains that 176 00:10:10,400 --> 00:10:15,920 Speaker 1: originate in China becoming more and more disrupted. Well, the 177 00:10:16,040 --> 00:10:23,520 Speaker 1: supply chain issue, LISA is clearly critical to UH the 178 00:10:23,559 --> 00:10:26,400 Speaker 1: inflation outlook, and so much of the global supply chains 179 00:10:27,200 --> 00:10:31,320 Speaker 1: run through through China that any disruptions there as we've 180 00:10:31,360 --> 00:10:36,600 Speaker 1: seen have a critical bearing on the supply side of 181 00:10:37,840 --> 00:10:41,480 Speaker 1: you know, most large goods producing markets around the world. 182 00:10:42,240 --> 00:10:44,520 Speaker 1: But you know, and I wrote about this, you know 183 00:10:44,559 --> 00:10:48,079 Speaker 1: a few years ago when I first warned of stagflation. 184 00:10:48,160 --> 00:10:50,080 Speaker 1: But little did I know what was going to happen 185 00:10:50,080 --> 00:10:54,520 Speaker 1: on the demand side. UM. The supply supply side was 186 00:10:54,600 --> 00:10:57,640 Speaker 1: very fragile, to be sure, but the demand side went 187 00:10:57,679 --> 00:11:01,040 Speaker 1: into lockdown. And then the post low down snap back, 188 00:11:01,640 --> 00:11:05,920 Speaker 1: fueled by the FED, who was now desperately behind the curve, UH, 189 00:11:06,320 --> 00:11:10,880 Speaker 1: really over over strip stripped UH what a limited supply 190 00:11:10,960 --> 00:11:14,520 Speaker 1: side could produce. So the result is UM, you know, 191 00:11:14,679 --> 00:11:18,600 Speaker 1: very high inflation rate UM and the lowest FED real 192 00:11:18,840 --> 00:11:22,400 Speaker 1: federal funds rate in recorded history of federal funds rate 193 00:11:22,440 --> 00:11:26,760 Speaker 1: today that is further into negative territory than it was 194 00:11:26,840 --> 00:11:31,480 Speaker 1: in the nineteen mid nineteen seventies, in early nineteen eighties, 195 00:11:31,840 --> 00:11:35,959 Speaker 1: when we had a terrific or a should I should say, 196 00:11:35,960 --> 00:11:39,960 Speaker 1: a horrific UH inflation problem. So to say the FEDS 197 00:11:40,000 --> 00:11:44,040 Speaker 1: behind the curve is putting it very kindly, well Steven, 198 00:11:44,360 --> 00:11:45,959 Speaker 1: to build on that, and to go back to the 199 00:11:46,120 --> 00:11:49,800 Speaker 1: idea where you said the demand side was rather unexpected 200 00:11:49,800 --> 00:11:52,240 Speaker 1: in its plays to this elegant maya culpa that you 201 00:11:52,280 --> 00:11:55,640 Speaker 1: wrote last year in August in Project Syndicate, where you 202 00:11:55,679 --> 00:11:57,720 Speaker 1: talked about how your call for a double dip recession 203 00:11:58,160 --> 00:12:01,280 Speaker 1: didn't come to fruition because of this, How do you 204 00:12:01,440 --> 00:12:05,040 Speaker 1: gauge the forecasting the potential for forecasting errors at such 205 00:12:05,080 --> 00:12:08,320 Speaker 1: an unprecedented time, which the FED is grappling with as well, 206 00:12:10,320 --> 00:12:15,120 Speaker 1: fair point um. Look, you can't even forecast the forecasting errors, Lisa, 207 00:12:15,240 --> 00:12:18,559 Speaker 1: they're so far off the map. I was just reading 208 00:12:18,559 --> 00:12:21,520 Speaker 1: an article a few minutes ago about, you know how 209 00:12:21,600 --> 00:12:26,080 Speaker 1: some of the best uh A of real time high 210 00:12:26,120 --> 00:12:31,560 Speaker 1: frequency forecasters missed the employment UM numbers last Friday by 211 00:12:31,600 --> 00:12:35,760 Speaker 1: a factor of two, three and four. You know, forecasting 212 00:12:35,840 --> 00:12:39,160 Speaker 1: is always hazardous, especially as Yogi told us, when it 213 00:12:39,240 --> 00:12:43,280 Speaker 1: involves the future. But this time is ridiculous. Steve Roach 214 00:12:43,559 --> 00:12:47,480 Speaker 1: Alexander became very close to nailing that forecast at Morgan 215 00:12:47,640 --> 00:12:50,560 Speaker 1: Stanley and I want to talk, as Lisa mentions about 216 00:12:50,640 --> 00:12:53,440 Speaker 1: all the miscalls that were made in the pandemic, we 217 00:12:53,559 --> 00:12:57,040 Speaker 1: need to look forward. You own the high ground on 218 00:12:57,120 --> 00:13:01,880 Speaker 1: the macroeconomic analysis of saveings. When you hear people talk 219 00:13:01,920 --> 00:13:05,160 Speaker 1: about we have an abundance of savings, or they talk 220 00:13:05,200 --> 00:13:08,200 Speaker 1: about we're using our savings up too quickly. How do 221 00:13:08,280 --> 00:13:11,160 Speaker 1: you respond to what that means for two thousand and 222 00:13:11,200 --> 00:13:16,199 Speaker 1: twenty four. Well, I'm looking at it again right now, Tom. 223 00:13:16,760 --> 00:13:20,679 Speaker 1: What I prefer to look at is UM, the overall 224 00:13:20,920 --> 00:13:26,400 Speaker 1: domestic savings rate, which is the sum of business, household 225 00:13:26,520 --> 00:13:31,480 Speaker 1: and government dis savings reflecting these large deficits. I look 226 00:13:31,520 --> 00:13:33,360 Speaker 1: at it in net terms because I want to take 227 00:13:33,360 --> 00:13:36,320 Speaker 1: out the depreciation that goes for the wear and tear 228 00:13:36,360 --> 00:13:38,360 Speaker 1: of capital stock, and so I look at the net 229 00:13:38,880 --> 00:13:42,280 Speaker 1: domestic savings rate as a gauge for how we can 230 00:13:42,640 --> 00:13:48,120 Speaker 1: domestically fund economic growth going forward. UH. And you know 231 00:13:48,200 --> 00:13:53,440 Speaker 1: it's exceptionally low. It's about running about two over the 232 00:13:53,520 --> 00:13:58,240 Speaker 1: last year. Ticked up a little bit UH to UH 233 00:13:58,400 --> 00:14:02,760 Speaker 1: slightly above three percent in the third quarter of last year. 234 00:14:03,440 --> 00:14:07,800 Speaker 1: But you know that that's less than half the average 235 00:14:08,160 --> 00:14:11,200 Speaker 1: net domestic savings rate in the final three decades of 236 00:14:11,200 --> 00:14:15,560 Speaker 1: the twentieth century. So lacking and saving UH and wanting 237 00:14:15,600 --> 00:14:18,880 Speaker 1: to invest in grow, we have to import surplus savings 238 00:14:18,920 --> 00:14:23,280 Speaker 1: from abroad. We run these massive current account deficits to 239 00:14:23,400 --> 00:14:28,320 Speaker 1: attract the capital UM and that will eventually not last 240 00:14:28,400 --> 00:14:32,880 Speaker 1: year as I another bad forecast of mine. Uh incorrectly 241 00:14:32,920 --> 00:14:36,800 Speaker 1: felt that the current account would put pressure downward pressure 242 00:14:36,800 --> 00:14:39,440 Speaker 1: on the dollar. But that's coming. Hold on, you will 243 00:14:39,480 --> 00:14:42,440 Speaker 1: see it. Stephen Ruch, we will waite gry to catch up. 244 00:14:42,480 --> 00:14:45,240 Speaker 1: Ass O white A University, Thank you very much said 245 00:14:50,920 --> 00:14:55,560 Speaker 1: what was Monday and Tuesday? Gloom gloomish? Gloomish? I like it. 246 00:14:55,760 --> 00:14:59,040 Speaker 1: That's a I've never heard that gloomish. It was gloomish. 247 00:14:59,320 --> 00:15:02,080 Speaker 1: For those of you the want to push against gloomish, 248 00:15:02,280 --> 00:15:05,000 Speaker 1: what you need is someone who chisels a sixty forty 249 00:15:05,120 --> 00:15:08,720 Speaker 1: portfolio and says climb on board and made me think, 250 00:15:08,840 --> 00:15:14,240 Speaker 1: see that's a concision of the Northern Trust Company. And 251 00:15:14,280 --> 00:15:17,480 Speaker 1: we are thrilled that Jim McDonald can join us and 252 00:15:17,600 --> 00:15:20,920 Speaker 1: this one. Jim, I love, love, love your research. Note 253 00:15:21,440 --> 00:15:23,880 Speaker 1: that says the way you can act in this market 254 00:15:23,960 --> 00:15:26,240 Speaker 1: is to put it down on paper. How do you 255 00:15:26,280 --> 00:15:34,320 Speaker 1: get from sixty to equity? Something else? Short time? Thank 256 00:15:34,320 --> 00:15:37,400 Speaker 1: you for the time this morning. So it really is 257 00:15:37,440 --> 00:15:41,520 Speaker 1: comprised of three primary bets. We like the emerging the 258 00:15:41,600 --> 00:15:45,119 Speaker 1: developed markets over emerging markets. So we want equity exposure 259 00:15:45,200 --> 00:15:49,920 Speaker 1: with robson corporate earnings and relatively steady interest rates. The 260 00:15:50,000 --> 00:15:54,000 Speaker 1: second pieces that we like the credit exposure over duration, 261 00:15:54,120 --> 00:15:57,200 Speaker 1: so we like how you bonds over mcgrade. And then 262 00:15:57,240 --> 00:16:00,680 Speaker 1: the final pieces we like natural resources here for tips 263 00:16:01,040 --> 00:16:03,560 Speaker 1: as an inflation hedge. So you had all those up 264 00:16:03,560 --> 00:16:07,640 Speaker 1: and you get to our belief is that while inflation 265 00:16:07,880 --> 00:16:11,040 Speaker 1: is the biggest risk facing the markets, that people are 266 00:16:11,040 --> 00:16:13,840 Speaker 1: being a little superficial in their analysis, so that what 267 00:16:14,000 --> 00:16:19,320 Speaker 1: really matters is what will inflation lead to earnings problems? 268 00:16:19,600 --> 00:16:21,960 Speaker 1: Where it will lead to interest rate problems, and right 269 00:16:22,000 --> 00:16:26,120 Speaker 1: now we're reasonably comfortable on both fronts. Superficial, Paul is 270 00:16:26,240 --> 00:16:30,560 Speaker 1: cocktail talk for static analysis. I used to be, Jim. 271 00:16:30,680 --> 00:16:34,040 Speaker 1: I had such a beleaguered childhood. My mother was at 272 00:16:34,160 --> 00:16:36,520 Speaker 1: New Trier or one of those schools out there that 273 00:16:36,640 --> 00:16:38,920 Speaker 1: I would be lectured at the dining room table on 274 00:16:39,040 --> 00:16:43,600 Speaker 1: static versus dynamic analysis explains a lot, a lot. That 275 00:16:43,720 --> 00:16:47,160 Speaker 1: was the agony and geek. Hey, Jim, you know, we 276 00:16:47,160 --> 00:16:49,680 Speaker 1: we got that inflation data this morning right kind of 277 00:16:49,720 --> 00:16:53,360 Speaker 1: in line with expectations, but a big headline number. How 278 00:16:53,360 --> 00:16:56,120 Speaker 1: do you think our Federal Reserve is gonna kind of 279 00:16:56,120 --> 00:16:59,760 Speaker 1: interpret the data we saw this morning? Well, in some 280 00:17:00,000 --> 00:17:03,880 Speaker 1: respects they're probably a little bit happy in that it 281 00:17:04,000 --> 00:17:07,280 Speaker 1: really makes their job very simple. In the March meeting, 282 00:17:07,880 --> 00:17:11,160 Speaker 1: there is a very very high likelihood that they're going 283 00:17:11,200 --> 00:17:14,480 Speaker 1: to raise rates and that they're going to take what 284 00:17:14,560 --> 00:17:17,120 Speaker 1: the market gives them. We think that that's a critical 285 00:17:17,200 --> 00:17:19,800 Speaker 1: part of analyzing what the Fed's gonna do is realizing 286 00:17:19,840 --> 00:17:23,840 Speaker 1: the market does have some constraining impact on them. And 287 00:17:24,160 --> 00:17:26,440 Speaker 1: I think that actually they're probably pretty happy right now 288 00:17:26,480 --> 00:17:28,760 Speaker 1: with where rates are because it's so relarly clearing the 289 00:17:28,800 --> 00:17:32,520 Speaker 1: path for them to start their hip cycle. We're gonna 290 00:17:32,560 --> 00:17:35,840 Speaker 1: get some earnings starting up in just a matter of days, Jim, 291 00:17:36,000 --> 00:17:38,880 Speaker 1: I mean, and that kind of brings back into focus 292 00:17:38,920 --> 00:17:42,080 Speaker 1: for some folks evaluation And how do you think evaluation 293 00:17:42,160 --> 00:17:45,000 Speaker 1: in this equity market? Do we need these earnings to 294 00:17:45,240 --> 00:17:51,280 Speaker 1: really blast through expectations to support the evaluation here? Well, 295 00:17:51,280 --> 00:17:53,080 Speaker 1: it's kind of funny. The longer I've been doing this, 296 00:17:53,200 --> 00:17:55,840 Speaker 1: the more I've come to the conclusion that valuations a 297 00:17:55,880 --> 00:17:59,639 Speaker 1: result of people's actions as opposed to a driver of 298 00:17:59,680 --> 00:18:05,280 Speaker 1: people actions. We have found no statistical relationship between valuations 299 00:18:05,400 --> 00:18:08,560 Speaker 1: and one year returns in the equity markets. You've got 300 00:18:08,560 --> 00:18:10,720 Speaker 1: to go out to five years before it starts to 301 00:18:10,760 --> 00:18:13,760 Speaker 1: register in the ten years. It's it's pretty good. The 302 00:18:13,880 --> 00:18:16,560 Speaker 1: interesting thing about the earning season is we're gonna see 303 00:18:16,600 --> 00:18:19,880 Speaker 1: really good revenue growth and margin expansion, and that's really 304 00:18:19,920 --> 00:18:23,719 Speaker 1: what underpens are continued constructive view on the equity markets 305 00:18:23,840 --> 00:18:28,160 Speaker 1: is one percent margin expansion in this inflationary environment is supportive. 306 00:18:28,840 --> 00:18:33,040 Speaker 1: Dial up hundred four points sixteen thousand. Excuse me, thirty 307 00:18:33,119 --> 00:18:35,320 Speaker 1: six thousand. My eyes are failing me, folks. It's because 308 00:18:35,520 --> 00:18:37,680 Speaker 1: I'm the only one in the room that actually remembers 309 00:18:37,680 --> 00:18:41,560 Speaker 1: I have the tiger thirty six thousand, three six on 310 00:18:41,640 --> 00:18:45,440 Speaker 1: the nastack up almost one percent. You know, I look 311 00:18:45,480 --> 00:18:47,840 Speaker 1: at this gym and you allude there to revenues, which 312 00:18:47,880 --> 00:18:52,119 Speaker 1: to me is nominal GDP And David Bianco DWS was 313 00:18:52,200 --> 00:18:54,439 Speaker 1: brilliant on you know, we're trying to get back to 314 00:18:54,440 --> 00:18:57,760 Speaker 1: the golden ratio of one point six percent excuse me, 315 00:18:57,840 --> 00:19:01,240 Speaker 1: one point six ratio real g d P and a 316 00:19:01,320 --> 00:19:04,480 Speaker 1: lesser inflation of one one point six to one, sort 317 00:19:04,520 --> 00:19:08,320 Speaker 1: of a traditional gold ratio of a good economy. What's 318 00:19:08,320 --> 00:19:10,600 Speaker 1: your wedeness on that? When do we get back to 319 00:19:10,880 --> 00:19:14,440 Speaker 1: normal that gives you that revenue impulse in the equity 320 00:19:14,480 --> 00:19:18,520 Speaker 1: markets well, actually, if you go out five years in 321 00:19:18,600 --> 00:19:22,120 Speaker 1: our capital market assumptions, we actually don't have that expectation. 322 00:19:22,520 --> 00:19:25,440 Speaker 1: We think that we're gonna see inflation and nominal GDP 323 00:19:25,560 --> 00:19:29,680 Speaker 1: relatively comparable. And if you look at what's happening today, 324 00:19:29,720 --> 00:19:32,919 Speaker 1: we're gonna we're gonna seecent revenue growth in the fourth quarter. 325 00:19:33,200 --> 00:19:36,919 Speaker 1: That's probably not that that's definitely higher than nominal GDP, 326 00:19:37,320 --> 00:19:39,840 Speaker 1: but as a reflection of the higher inflationary environment. But 327 00:19:39,880 --> 00:19:41,960 Speaker 1: you're talking about four or five years out on an 328 00:19:41,960 --> 00:19:46,000 Speaker 1: institutional basis or paulse Sweeney's lousy four own k the bait. 329 00:19:46,080 --> 00:19:48,879 Speaker 1: Excuse me, I should say, John Tuckers, we haven't had 330 00:19:48,920 --> 00:19:51,639 Speaker 1: the opening of the envelope recently. We have to have 331 00:19:51,720 --> 00:19:55,040 Speaker 1: that ceremony with John Tucker. But to the under investor 332 00:19:55,119 --> 00:19:59,120 Speaker 1: Jim McDonald, this is critical. You're talking about a revenue 333 00:19:59,160 --> 00:20:04,560 Speaker 1: impulse to drive stock market optimism due to an elevated 334 00:20:04,880 --> 00:20:11,800 Speaker 1: nominal GDP. Sure that say, it's absolutely what's driving economics 335 00:20:11,920 --> 00:20:14,920 Speaker 1: right now, and as as we look at over the 336 00:20:15,000 --> 00:20:18,120 Speaker 1: intermediate to longer term rise and that's where the valuations 337 00:20:18,160 --> 00:20:20,960 Speaker 1: that you mentioned definitely do come into play. The only 338 00:20:21,000 --> 00:20:23,720 Speaker 1: thing I will caution and we were similar to others 339 00:20:23,800 --> 00:20:26,320 Speaker 1: five years ago, and we thought that US equities would 340 00:20:26,320 --> 00:20:30,119 Speaker 1: only deliver about a five or six percent return annually 341 00:20:30,119 --> 00:20:34,840 Speaker 1: over the next five years. What did they deliver? Eight? Now? 342 00:20:35,119 --> 00:20:39,080 Speaker 1: Four percent of that annually was pre pandemic, and it's 343 00:20:39,119 --> 00:20:42,639 Speaker 1: because companies did better than expectations and we had some 344 00:20:42,720 --> 00:20:46,080 Speaker 1: valuation expansion. It's unrealistic to think we're gonna get a 345 00:20:46,119 --> 00:20:49,840 Speaker 1: further level of valuation expansion from here though. Hey, Jim, 346 00:20:49,920 --> 00:20:55,960 Speaker 1: in your seventy one percent equities, what's the real core 347 00:20:56,000 --> 00:20:59,600 Speaker 1: of that? Are you kind of along the traditional growth 348 00:20:59,720 --> 00:21:02,200 Speaker 1: names have worked so well for so long, or are 349 00:21:02,240 --> 00:21:04,760 Speaker 1: you in that cyclical camp again that that's a camp 350 00:21:04,840 --> 00:21:06,880 Speaker 1: that's worked really well over the past couple of years. 351 00:21:06,880 --> 00:21:12,200 Speaker 1: How do you think about that as we start up here? Sure? So, 352 00:21:12,240 --> 00:21:15,800 Speaker 1: I would definitely be much more balanced in two And 353 00:21:15,800 --> 00:21:18,520 Speaker 1: the reason for that is, well, it seems like value 354 00:21:18,520 --> 00:21:22,600 Speaker 1: should have another good year because we're having higher interest 355 00:21:22,720 --> 00:21:26,160 Speaker 1: rates and a cyclical recovery, et cetera. The Russell one 356 00:21:26,200 --> 00:21:32,760 Speaker 1: thousand growth earnings expectations are at Russell Value at just 357 00:21:32,960 --> 00:21:36,480 Speaker 1: seven Now. Part of that's artificial because it's being held 358 00:21:36,520 --> 00:21:40,320 Speaker 1: back by very strong earnings from reserve releases out of 359 00:21:40,320 --> 00:21:44,080 Speaker 1: the banks in the market will look through that. So 360 00:21:44,200 --> 00:21:48,000 Speaker 1: the fourteen versus seven is exaggerated, but it does point 361 00:21:48,040 --> 00:21:50,480 Speaker 1: out that the big earnings games on the value stocks 362 00:21:50,480 --> 00:21:52,919 Speaker 1: are probably behind us. Jim McDonald, thank you so much, 363 00:21:52,960 --> 00:21:55,320 Speaker 1: State Warm in Chicago, Jim McDonald with a Northern Trust 364 00:21:55,359 --> 00:22:04,480 Speaker 1: their chief investment strategist BACTI, and Saudi with a snow 365 00:22:04,480 --> 00:22:09,639 Speaker 1: on this pandemic. Associate Professor Emergency Medicine at Johns Hopkins University. 366 00:22:09,800 --> 00:22:12,439 Speaker 1: Back to a completely unfair question, but it came up, 367 00:22:12,480 --> 00:22:17,159 Speaker 1: I think three times yesterday. What is your timeline of 368 00:22:17,280 --> 00:22:22,320 Speaker 1: when amacron ends? Is it weeks? Is it months? Is 369 00:22:22,359 --> 00:22:25,360 Speaker 1: it all of two thousand twenty? What's your what's your 370 00:22:25,440 --> 00:22:30,480 Speaker 1: scope of the the X axis of a macron? Absolutely 371 00:22:30,520 --> 00:22:32,560 Speaker 1: so if you look at South Africa, I would have 372 00:22:32,560 --> 00:22:36,080 Speaker 1: said thirty days. However, we've peaked much higher and our 373 00:22:36,160 --> 00:22:40,520 Speaker 1: population is inherently different, So I'm really thinking months. I 374 00:22:40,520 --> 00:22:42,240 Speaker 1: am not thinking that this is going to affect my 375 00:22:42,280 --> 00:22:45,439 Speaker 1: summer plans um so I remain hopeful. Right then we're 376 00:22:45,440 --> 00:22:48,600 Speaker 1: gonna get past this peak soon. So seriously, you think 377 00:22:48,600 --> 00:22:52,880 Speaker 1: I'm acron will be wiped away by the fourth of July. Absolutely, 378 00:22:53,760 --> 00:22:55,560 Speaker 1: Why do you say absolutely? How do you get to 379 00:22:55,680 --> 00:22:58,560 Speaker 1: that certitude? So? I think the fact is that when 380 00:22:58,560 --> 00:23:01,560 Speaker 1: it peaks so quick clear, we expect the full to 381 00:23:01,640 --> 00:23:04,640 Speaker 1: be just as significant. Um, we're already seen in New 382 00:23:04,720 --> 00:23:07,760 Speaker 1: York and in Washington, d C. That there is now 383 00:23:07,800 --> 00:23:10,760 Speaker 1: a reduction in cases, which you know, it's very very early, 384 00:23:11,160 --> 00:23:13,680 Speaker 1: but it makes me hopeful. Plus, you know, again we're 385 00:23:13,680 --> 00:23:17,400 Speaker 1: looking at South Africa and United Kingdom. So United Kingdom 386 00:23:17,440 --> 00:23:20,719 Speaker 1: of started seeing a tape South Africa from the first 387 00:23:20,960 --> 00:23:24,600 Speaker 1: rise in the peak to the end was around thirty days. Um, 388 00:23:24,640 --> 00:23:27,480 Speaker 1: you know, so the viral transmission cycle here is smaller, 389 00:23:27,520 --> 00:23:31,600 Speaker 1: which makes us more hopeful that this will end sooner. 390 00:23:31,840 --> 00:23:34,640 Speaker 1: As we are more hopeful that the pandemic will end 391 00:23:34,720 --> 00:23:37,720 Speaker 1: more broadly and become endemic. We're left with a health 392 00:23:37,720 --> 00:23:41,159 Speaker 1: care system that has been transformed. I'm struck by the 393 00:23:41,240 --> 00:23:44,359 Speaker 1: number of employees who have left the profession about the 394 00:23:44,400 --> 00:23:47,359 Speaker 1: wage increases that they're demanding in order to stay there. 395 00:23:47,680 --> 00:23:51,479 Speaker 1: How much does this healthcare sector look completely different than 396 00:23:51,520 --> 00:23:55,119 Speaker 1: what we saw two years ago. So I think like 397 00:23:55,200 --> 00:23:58,240 Speaker 1: the healthcare workforce is just one piece of this puzzle. 398 00:23:58,320 --> 00:24:01,240 Speaker 1: The health system here in the United States extremely complicated 399 00:24:01,680 --> 00:24:04,160 Speaker 1: with what is the role of insurers right and how 400 00:24:04,160 --> 00:24:07,480 Speaker 1: have they supported the COVID ninating response UM. Now we're 401 00:24:07,520 --> 00:24:10,000 Speaker 1: also hearing that some insurance are going to start covering 402 00:24:10,359 --> 00:24:13,760 Speaker 1: COVID tests UM, which I think is helpful right for 403 00:24:13,880 --> 00:24:16,480 Speaker 1: future pandemics, but it is not going to be the norm. 404 00:24:16,560 --> 00:24:19,120 Speaker 1: And how will they set up in the future. And 405 00:24:19,160 --> 00:24:21,399 Speaker 1: what is the power of the health system versus the 406 00:24:21,480 --> 00:24:26,360 Speaker 1: state versus the individual hospitals in developing your search preparedness plans. 407 00:24:26,640 --> 00:24:28,600 Speaker 1: I think there is a lot of learning to be 408 00:24:28,680 --> 00:24:31,840 Speaker 1: done UM. I think we've talked about series after action 409 00:24:31,920 --> 00:24:34,760 Speaker 1: reports UM, and hopefully there's a new way of us 410 00:24:34,800 --> 00:24:36,880 Speaker 1: thinking about how do we how does the health system 411 00:24:37,200 --> 00:24:40,840 Speaker 1: support in a more unified, utalitarian manner. What's the answer 412 00:24:41,200 --> 00:24:44,359 Speaker 1: to getting people in the doors at hospitals at a 413 00:24:44,440 --> 00:24:48,000 Speaker 1: time when we see massive numbers of vacancies that frankly 414 00:24:48,240 --> 00:24:52,159 Speaker 1: a lot of health executives have said are unprecedented. You know, 415 00:24:52,200 --> 00:24:54,440 Speaker 1: I don't think money is the only answer. It's very 416 00:24:54,440 --> 00:24:56,600 Speaker 1: easy to say, we'll just pay you more, but you 417 00:24:56,680 --> 00:24:59,960 Speaker 1: need to make this work environment kind of right. Healthcare 418 00:25:00,040 --> 00:25:03,159 Speaker 1: workers are also human beings. We have the same needs. 419 00:25:03,440 --> 00:25:05,920 Speaker 1: So let's talk about what it means to be able 420 00:25:05,960 --> 00:25:09,000 Speaker 1: to have children when you're a healthcare worker looking after 421 00:25:09,040 --> 00:25:12,560 Speaker 1: patients who are infected. How do we manage sickly, how 422 00:25:12,560 --> 00:25:15,640 Speaker 1: do we give people time to recover? What psychosocial supports 423 00:25:15,680 --> 00:25:19,679 Speaker 1: services are available? So it's really not just more money 424 00:25:19,720 --> 00:25:21,640 Speaker 1: that is a stop gap measure. We need to look 425 00:25:21,640 --> 00:25:25,320 Speaker 1: at the healthcare workforce as a whole and think how 426 00:25:25,400 --> 00:25:27,920 Speaker 1: does this become a place that people want to work 427 00:25:27,960 --> 00:25:30,960 Speaker 1: and how do we bring back the passion of medicine. Doctor, 428 00:25:31,000 --> 00:25:32,879 Speaker 1: Can I just squeeze in a final question and go 429 00:25:33,000 --> 00:25:36,080 Speaker 1: to the statement from Novak Djokovic, the tennis star who 430 00:25:36,080 --> 00:25:39,360 Speaker 1: tested positive with a PCR test and the following day, 431 00:25:39,400 --> 00:25:41,639 Speaker 1: on December eighteenth, he went to his tennis center in 432 00:25:41,640 --> 00:25:44,159 Speaker 1: Bowl Grade fulfill a longstanding commitment for an interview and 433 00:25:44,160 --> 00:25:47,320 Speaker 1: photo shoot. He found obliged to go ahead and conduct 434 00:25:47,320 --> 00:25:50,439 Speaker 1: the interview. He did ensure he was socially distance and 435 00:25:50,440 --> 00:25:53,760 Speaker 1: war masks except from when his photograph was taken. Doctor, 436 00:25:53,840 --> 00:25:56,439 Speaker 1: for someone in your industry, right now, how do you 437 00:25:56,480 --> 00:25:59,679 Speaker 1: react when you hear something like that? You know, I 438 00:26:00,119 --> 00:26:03,800 Speaker 1: thing there's cognitive dissonance, right? They haven't seen the worst 439 00:26:03,840 --> 00:26:06,119 Speaker 1: of the pandemic, the worst of the pandemics. That's a 440 00:26:06,240 --> 00:26:09,720 Speaker 1: nice us behind closed doors. So you know, he treats 441 00:26:09,720 --> 00:26:12,119 Speaker 1: it like a common cold. And that is why we 442 00:26:12,160 --> 00:26:15,159 Speaker 1: are here where we are right because of individuals that 443 00:26:15,200 --> 00:26:20,160 Speaker 1: make decisions like that. Um. I think my eyes roll over, 444 00:26:20,600 --> 00:26:22,840 Speaker 1: you know, to be honest, um, and I think, oh, 445 00:26:22,880 --> 00:26:24,560 Speaker 1: I hope you just don't come to the most problem 446 00:26:24,680 --> 00:26:28,080 Speaker 1: protest dor good luck, thank you for being with us. 447 00:26:28,119 --> 00:26:30,600 Speaker 1: We appreciate it. Dr Batty and Sati there of John's 448 00:26:30,600 --> 00:26:39,840 Speaker 1: Helpkins University, Melody, I'm sent of Chicago and Aerial Investments, 449 00:26:39,840 --> 00:26:42,240 Speaker 1: a co chief executive office there, and of course many 450 00:26:42,280 --> 00:26:46,840 Speaker 1: other werethy items for her Princeton University and around this nation. 451 00:26:47,000 --> 00:26:50,920 Speaker 1: A philanthropist, of course, I should note with Bloomberg philanthropies 452 00:26:51,040 --> 00:26:53,840 Speaker 1: as well. But there is a different story. It's a 453 00:26:53,880 --> 00:26:57,600 Speaker 1: story that David Rubinstein dives into. And this is the 454 00:26:57,680 --> 00:27:01,840 Speaker 1: youngest kid of a single mom in Chicago, who, among 455 00:27:01,880 --> 00:27:04,720 Speaker 1: the struggle of painting apartment wall, said I want my 456 00:27:04,800 --> 00:27:08,240 Speaker 1: daughter to go to better schools. Melody, I think more 457 00:27:08,280 --> 00:27:13,560 Speaker 1: than anyone I know in the game, his excelled people 458 00:27:13,720 --> 00:27:16,919 Speaker 1: have forgotten about her past. Did you explore that with 459 00:27:17,000 --> 00:27:19,520 Speaker 1: Melody Hobson. I did now, of course, she has not 460 00:27:19,640 --> 00:27:22,679 Speaker 1: forgotten her past. The youngest of six children, and she 461 00:27:22,840 --> 00:27:25,840 Speaker 1: was frequently finding their parents. Her mother was being evicted 462 00:27:25,840 --> 00:27:27,879 Speaker 1: and they had to basically worry about where the food 463 00:27:27,920 --> 00:27:31,280 Speaker 1: was coming from. She got a Princeton degree, She became 464 00:27:31,359 --> 00:27:34,160 Speaker 1: a co CEO, as you pointed, out of arial investments. 465 00:27:34,160 --> 00:27:38,240 Speaker 1: I'm man already owned investment firm in Chicago, married George Lucas. 466 00:27:38,600 --> 00:27:41,720 Speaker 1: Now she's actively involved in philanthropy, but also she's the 467 00:27:41,800 --> 00:27:43,960 Speaker 1: co the co chairman or the chairman i should say, 468 00:27:44,040 --> 00:27:46,960 Speaker 1: of Starbucks, and is the co CEO of her firm. 469 00:27:47,080 --> 00:27:49,679 Speaker 1: I take immense issue with people that say, well, it's 470 00:27:49,720 --> 00:27:53,960 Speaker 1: George Lucas or whatever Princeton. It's about a character set 471 00:27:54,040 --> 00:27:57,119 Speaker 1: from her childhood. What did you discuss with her about 472 00:27:57,160 --> 00:28:01,800 Speaker 1: the best practices she learned enjoying of action in Chicago, Well, 473 00:28:01,800 --> 00:28:03,800 Speaker 1: among other things, she learned how to work hard, and 474 00:28:03,840 --> 00:28:07,160 Speaker 1: study and be very loyal. She joined Ariel right out 475 00:28:07,160 --> 00:28:09,439 Speaker 1: of college and she's been there ever since. She's the 476 00:28:09,480 --> 00:28:11,920 Speaker 1: only person her class at Princeton who has the same 477 00:28:11,960 --> 00:28:16,359 Speaker 1: telephone number they had upon graduation. She hasn't changed jobs. 478 00:28:16,400 --> 00:28:19,200 Speaker 1: The only person in her class, she said, hasn't changed jobs. David, 479 00:28:19,480 --> 00:28:22,800 Speaker 1: how is that view from her perspective? Growing up from 480 00:28:23,040 --> 00:28:27,600 Speaker 1: uh much less beneficial or less wealthy past into where 481 00:28:27,640 --> 00:28:31,080 Speaker 1: she is now color her view on how companies should 482 00:28:31,080 --> 00:28:34,520 Speaker 1: operate themselves, on how they should pay their employees. Well, 483 00:28:34,600 --> 00:28:36,720 Speaker 1: she believes that the companies need to do a much 484 00:28:36,720 --> 00:28:39,200 Speaker 1: better job of getting minorities on their board and also 485 00:28:39,360 --> 00:28:41,959 Speaker 1: minorities in their executive suites. And that's one of her 486 00:28:42,000 --> 00:28:44,680 Speaker 1: areas of focus. She's also on the JP Morgan board 487 00:28:44,920 --> 00:28:46,920 Speaker 1: and she with JP Morgan have been making a major 488 00:28:46,960 --> 00:28:50,480 Speaker 1: effort to have investments made a minority owned firms. But 489 00:28:50,560 --> 00:28:54,000 Speaker 1: she hasn't forgotten her past. Although she can go out 490 00:28:54,040 --> 00:28:56,240 Speaker 1: and see anybody in the world today back because she's 491 00:28:56,280 --> 00:28:58,840 Speaker 1: so well known, and she she did this interview with 492 00:28:58,880 --> 00:29:01,920 Speaker 1: me when she just flew in from a conference in Dubai, 493 00:29:02,080 --> 00:29:05,880 Speaker 1: got off the plane, cleaned up, and then did the interview. Um, 494 00:29:05,920 --> 00:29:07,720 Speaker 1: then she was off to I think the West Coast. 495 00:29:07,840 --> 00:29:11,160 Speaker 1: So she's an incredible person. But she hasn't forgotten her pass. 496 00:29:11,240 --> 00:29:15,320 Speaker 1: Many people who come from or circumstances sometimes they forget 497 00:29:15,400 --> 00:29:17,720 Speaker 1: their pass, but she does not. She's very close to 498 00:29:17,720 --> 00:29:20,200 Speaker 1: her family, and she's also very close to giving back 499 00:29:20,240 --> 00:29:24,040 Speaker 1: to a lot of uh parts of Chicago where she's based, 500 00:29:24,400 --> 00:29:26,600 Speaker 1: in terms of making certain that people there have better 501 00:29:26,680 --> 00:29:29,280 Speaker 1: chances than maybe she hadn't as a young person. David, 502 00:29:29,320 --> 00:29:31,760 Speaker 1: it's a fascinating time to speak with her, especially as 503 00:29:31,760 --> 00:29:33,840 Speaker 1: we do seem to be at a pivot point in 504 00:29:33,880 --> 00:29:37,520 Speaker 1: the economy with a change landscape for inflation. We just 505 00:29:37,520 --> 00:29:41,840 Speaker 1: get that inflation read and real wages still negative deeply, 506 00:29:41,920 --> 00:29:44,360 Speaker 1: so some of the most negative reads and real wages 507 00:29:44,440 --> 00:29:48,000 Speaker 1: year over year going back decades. What's her view on 508 00:29:48,080 --> 00:29:51,960 Speaker 1: how to invest in such an uncertain economy. Well, her 509 00:29:52,000 --> 00:29:54,560 Speaker 1: firm has been a what's called a value investment firm, 510 00:29:54,560 --> 00:29:56,320 Speaker 1: which is to say they look at companies that are 511 00:29:56,360 --> 00:29:59,000 Speaker 1: not the high tech high flyers, but ones that clearly 512 00:29:59,040 --> 00:30:01,600 Speaker 1: are going to do well when the economy is in 513 00:30:01,720 --> 00:30:04,240 Speaker 1: reasonable shape, are not growing so well. That's what they've 514 00:30:04,240 --> 00:30:06,760 Speaker 1: been doing for some twenty plus years that she's been there. 515 00:30:07,040 --> 00:30:09,200 Speaker 1: And her view is you just can't just chase the 516 00:30:09,280 --> 00:30:11,800 Speaker 1: high flyers. But she does think their values out there, 517 00:30:11,800 --> 00:30:14,360 Speaker 1: and and she's a very cautious and very careful investor, 518 00:30:14,600 --> 00:30:18,280 Speaker 1: and she's not somebody who does travels around the world 519 00:30:18,480 --> 00:30:20,800 Speaker 1: and tells people, Look, I'm married to George Lucas. Look, 520 00:30:20,840 --> 00:30:23,400 Speaker 1: I'm very good friends with Bill Bradley. She actually does 521 00:30:23,440 --> 00:30:26,000 Speaker 1: a lot of hard work and she's very very knowledge 522 00:30:26,040 --> 00:30:29,160 Speaker 1: about what she's talking about. Aerial investments faces the challenges 523 00:30:29,200 --> 00:30:31,760 Speaker 1: of active in my management. I remember as clear as 524 00:30:31,800 --> 00:30:34,400 Speaker 1: a bell in the early nineties when John Rodgers launched 525 00:30:34,400 --> 00:30:37,640 Speaker 1: a strange experiment. They have to deal in the new 526 00:30:37,720 --> 00:30:40,480 Speaker 1: financial world. And Mr Rubenstein, we have to have you 527 00:30:40,560 --> 00:30:45,120 Speaker 1: comment a new and fresh investment to Citadel Securities, not 528 00:30:45,200 --> 00:30:48,240 Speaker 1: the hedge fund, but the order flow robin hood part 529 00:30:48,280 --> 00:30:51,680 Speaker 1: of it. Please discuss Sequoia Paradigm and how they have 530 00:30:51,840 --> 00:30:55,120 Speaker 1: chosen to invest in Citadel well. Sequoia is perhaps the 531 00:30:55,240 --> 00:30:57,760 Speaker 1: leading venture firm the United States. In recent years, they've 532 00:30:57,760 --> 00:31:01,600 Speaker 1: done extremely well. Uh they have made day with another firm, 533 00:31:01,680 --> 00:31:04,880 Speaker 1: a one and a half billion dollar investment into the 534 00:31:04,920 --> 00:31:09,080 Speaker 1: Citadel Securities, a company that that was built by a 535 00:31:09,240 --> 00:31:11,800 Speaker 1: very very talented person, Ken Griffin. Ken Griffin has run 536 00:31:12,280 --> 00:31:14,800 Speaker 1: Citadel's hedge fund for a long time. It's about forty 537 00:31:14,800 --> 00:31:17,600 Speaker 1: three billion dollar hedge fund. But a separate business which 538 00:31:17,640 --> 00:31:21,680 Speaker 1: is extremely profitable is Citadel Securities, which trades, uh and 539 00:31:21,760 --> 00:31:25,360 Speaker 1: clear security trading all over the world. Now, it's amazing 540 00:31:25,400 --> 00:31:27,920 Speaker 1: how you finessed this. I'm going to stop the show, folks. 541 00:31:28,000 --> 00:31:31,120 Speaker 1: David Rubinstein here is dropping the the lead line here. 542 00:31:31,480 --> 00:31:35,120 Speaker 1: Federsham came out of Duke University and did paradigm. What 543 00:31:35,280 --> 00:31:38,480 Speaker 1: is it like the Duke University could generate a guy 544 00:31:38,640 --> 00:31:41,680 Speaker 1: like Fred who did coin base, did this, did this 545 00:31:41,760 --> 00:31:45,280 Speaker 1: and now takes part in Citadel. Well, I'm sure the 546 00:31:45,560 --> 00:31:48,400 Speaker 1: development people at Duke will be in touch with him 547 00:31:48,480 --> 00:31:51,800 Speaker 1: very curtly. Um, But obviously we're proud to have people 548 00:31:51,920 --> 00:31:55,240 Speaker 1: like that come from Duke University. Uh. Ken Griffin is 549 00:31:55,240 --> 00:31:58,400 Speaker 1: a gradual Harvard. He came from modest circumstances, did very 550 00:31:58,400 --> 00:32:00,920 Speaker 1: well at Harvard and trading. Ever since send he's become 551 00:32:00,960 --> 00:32:03,160 Speaker 1: one of the most successful people in the financial service world. 552 00:32:03,160 --> 00:32:05,320 Speaker 1: For Shop for Sure, David Show, David join us in 553 00:32:05,400 --> 00:32:08,200 Speaker 1: studio today, David Rubinstein, of course of Carlisle and an 554 00:32:08,200 --> 00:32:11,520 Speaker 1: important interview Melody Hobson, who has lived at board member. 555 00:32:11,560 --> 00:32:15,600 Speaker 1: I should mention for Bloomberg Philanthropies as well. This is 556 00:32:15,640 --> 00:32:19,640 Speaker 1: the Bloomberg Surveillance Podcast. Thanks for listening. Join us live 557 00:32:19,800 --> 00:32:23,560 Speaker 1: weekdays from seven to ten am Eastern on Bloomberg Radio 558 00:32:23,800 --> 00:32:27,400 Speaker 1: and on Bloomberg Television each day from six to nine 559 00:32:27,440 --> 00:32:31,880 Speaker 1: am for insight from the best in economics, finance, investment, 560 00:32:32,000 --> 00:32:37,040 Speaker 1: and international relations. And subscribe to the Surveillance podcast on 561 00:32:37,120 --> 00:32:40,920 Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course, on 562 00:32:41,040 --> 00:32:45,200 Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg