Speaker 1: Brought you by Bank of America Mary Lynch. Investing in
Speaker 1: local communities, economies and a sustainable future. That's the power
Speaker 1: of global connections, Mary Lynch, Pierce Fenner, and Smith Incorporated
Speaker 1: member s I p C. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best in economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and
Speaker 1: of course on the Bloomberg First Billy joined us here
Speaker 1: in our Bloomberg eleven FIE Studios in New York, managing
Speaker 1: director and head of North American Economics at City. Give
Speaker 1: us a sense of how you've processed all of the
Speaker 1: FED speak this week, all of the comments from various
Speaker 1: meapories of of the Federal Reserve. You know, I think
Speaker 1: that's probably the best example of the success of FED Talk, right.
Speaker 1: I mean, they were out of the picture with probabilities
Speaker 1: of like twenty thirty it's just about a week or
Speaker 1: two weeks ago, and now with this chorus of people
Speaker 1: talking things up. Um. And what's remarkable about is that
Speaker 1: doing it without hard data, right, that they're basing almost
Speaker 1: all of this up upbeat stuff on the prospect of
Speaker 1: physical policy, which we learned nothing about their in speech, right,
Speaker 1: and the fact that sentiment data is on a high
Speaker 1: and we have a divergence between sentiment data and real data.
Speaker 1: So my real question is has the FED changes policy rule?
Speaker 1: Is it really basing monstrey policy now on sentiment data
Speaker 1: or putting at least putting more weight on it, and
Speaker 1: somehow deep saying that sediment data is a good predictor
Speaker 1: of real data. That's a whole new economy model. And
Speaker 1: if that's the case, they should start to show us
Speaker 1: some research that says, you know, the world should look
Speaker 1: at sentiment data and that I have yet to see.
Speaker 1: What did you make of that speech on on Tuesday night,
Speaker 1: our colleague Michael McKee uh saying, when we look at
Speaker 1: the markets, when you look at what's happening here with
Speaker 1: with FED funds features, you can attribute all of that
Speaker 1: to what's been happening with with these FED policy makers,
Speaker 1: not with what the press and had to say. You
Speaker 1: agree with that. I think that what the President showed
Speaker 1: was a very thematic speech and that was great for
Speaker 1: his audience. But what scared me as an analyst and
Speaker 1: as an economist, is where are the plans that we're
Speaker 1: supposed to get for corporate tax rate maybe fift What
Speaker 1: what are you gonna do to pay for it? Those
Speaker 1: details are not appropriate for that kind of sweech, but
Speaker 1: at least a hint to say, here's the framework that
Speaker 1: we're gonna try to sell you coming up. I think
Speaker 1: what it shows that there's a lot of dissensions within
Speaker 1: Republican Party and that makes me worried that the timetable
Speaker 1: for corporate tax reform and all of the so called
Speaker 1: fiscal reforms may actually be pushed back to even beyond
Speaker 1: um And that's what scares me. If I'm a FED
Speaker 1: policy maker, I'm looking at the buffet of economic data
Speaker 1: before me. What's missing, what's not on the table? What,
Speaker 1: what's what could possibly keep them from raising grades here March?
Speaker 1: How about inflation? All right? I mean you're supposed to
Speaker 1: say I'm worried about inflation, but the latest PC reading
Speaker 1: was what exactly one point seven year on year, and
Speaker 1: has that changed. It's been the same one point seven
Speaker 1: for the last six months. So so to say, wow,
Speaker 1: we are behind a curvel worried that we should normalize
Speaker 1: policy on a at a at at least a more
Speaker 1: accelerated pace than what the market thought just a few
Speaker 1: few weeks ago. Then you gotta say, what has changed
Speaker 1: in my mind? What has changed my assessment? And the
Speaker 1: hard data are not giving it to help young Gera.
Speaker 1: And I'll put this chart out, folks, billy, help young Gera.
Speaker 1: Within the era where all we ever said was measured,
Speaker 1: we were measured, we were safe, we were measured. Alan
Speaker 1: Greenspan said we were measured. Boy, that got us in trouble.
Speaker 1: Why can't we just do one and done? I Arthur
Speaker 1: Burns would have done one and done. Now we're measured.
Speaker 1: We have vector's help because we we went to the
Speaker 1: bad place. Um and and yes we had to get
Speaker 1: to a bad place. Means zero rates because of the crisis.
Speaker 1: But now how much how much? How long has it
Speaker 1: been since the crisis? A decade and we're still at
Speaker 1: near zero rates. That's why we can't do one and done.
Speaker 1: So we should be at two, maybe even two and
Speaker 1: a half to three. So you're saying five and well
Speaker 1: we should, we should be at a higher place, but
Speaker 1: we can't get there because of the way the measure
Speaker 1: pace that they've taken. And they told us we're data dependent,
Speaker 1: So now how do we get from here to there?
Speaker 1: And the review for our pop quiz here At the
Speaker 1: end of the show, Bill Lee of City Group just
Speaker 1: told us they have soft data but not hard data,
Speaker 1: right exactly. I know that the employment data we're gonna
Speaker 1: get here comes to you don't have to take you
Speaker 1: don't have to take that scribble my notes here to
Speaker 1: to get that. All fats get out of it. Really,
Speaker 1: I know we get this this jobs report perilously close
Speaker 1: to when we're gonna get this FED decision. Does that matter?
Speaker 1: How much does it matter the proximity of these two,
Speaker 1: these two events, and and well it's because in the
Speaker 1: quiet period they can't talk about it, right, But let's
Speaker 1: face it, if you let one data point push you around,
Speaker 1: that's not the FED that I know, that's not the
Speaker 1: FED that has the credibility to say that we're we're
Speaker 1: analyzing the data and looking at the trends and not
Speaker 1: the noise. And and besides, the data in the labor
Speaker 1: market has actually been very good. We'll be getting much
Speaker 1: higher employment number that would be consistent with a low
Speaker 1: growth regime, which says, what we've got crappy productivity, right
Speaker 1: and and so so in that world, right we we
Speaker 1: we can't just start moving markets because of sentiment and
Speaker 1: feelings data. It really has been based on what has
Speaker 1: changed in our our projection of inflation trajectory to justify
Speaker 1: pulling forward to But even at the level of PC
Speaker 1: is nowhere near Cleveland CPI. We showed that chart yesterday, folks,
Speaker 1: I promise I'll do it tomorrow on television and I
Speaker 1: will get it out on Twitter. It's a great CPI chart.
Speaker 1: But do these people manage to the data point, the
Speaker 1: present data point, or do they manage to the vector
Speaker 1: the inertial force of inflation? You like this physics statement
Speaker 1: physics Thursday and and and you can't get a nerdy
Speaker 1: engineer like me started on this talk. But but if
Speaker 1: you start managing to the data point, then you have
Speaker 1: to be moved around by the data. You have to
Speaker 1: manage the underlying process. You've gotta manage to the process
Speaker 1: and the and what has happened to the process. Nothing. Yes,
Speaker 1: we have improvements, Yes we have more confidence. We're going
Speaker 1: to get there, But are we going to get there faster?
Speaker 1: What's your run rate on GDP right now, frame that
Speaker 1: forces we got a wide dispersion here. Right now the
Speaker 1: GDP now accounting estimates are showing first quarter at below two. Yeah,
Speaker 1: but what about twelve months forward? We we are at
Speaker 1: the two and a quarter to a quarter gloomy day. Well,
Speaker 1: that's pretty good considering we where we don't have a
Speaker 1: one handle right, but certainly for next year we're anticipating
Speaker 1: a two six to seven because we're expected anticipating a
Speaker 1: half point pop from fiscal policy. Now, as we said earlier,
Speaker 1: given the speech that we just heard and no plan inside,
Speaker 1: that timing may actually be pushed back. Now, what are
Speaker 1: the markets reacting to? That's what I'm curious about. Why
Speaker 1: is the stock market at historic new highs? Well, they
Speaker 1: see the regulation, I see that too, right, And they
Speaker 1: see the prospect of corporate text reform, the timing of
Speaker 1: which is uncertain. But is it gonna result in capex
Speaker 1: investment or is it gonna be dividend stuff? Back? So
Speaker 1: I think it's dividends to interrupt David, but I'm gonna
Speaker 1: but do they also see new animal spirits and a
Speaker 1: higher nominal GDP than the gloomsters at City Group? Look Hey,
Speaker 1: you know, the gloomsters are looking at the real data.
Speaker 1: And if I wear a sentiment kind of guy, I'd say, Wow,
Speaker 1: my animal spirits are gonna be pushing things up, and
Speaker 1: I'd be raised my forecast. But lesson learn from modeling
Speaker 1: too for too long the sentiment data or not could
Speaker 1: predictors of real data and the economy itself. I mean,
Speaker 1: I would love to be you know, I think my
Speaker 1: sentiment says I want to be rich and thin. I'm
Speaker 1: neither right, and I can't spend radio we're all rich,
Speaker 1: and I can't spend unless I have a paycheck to
Speaker 1: meet my expenses. So so that's that's the key. We'll
Speaker 1: come back, we'll talk about tax from we'll talk about
Speaker 1: the regulation. But let me ask you just about your
Speaker 1: your purview here is North America, but fold this into
Speaker 1: a global context. I really intended to watch the webcast
Speaker 1: if Governor Branard yesterday, but I crashed hard after staying
Speaker 1: up so late to watch the president speech the night before.
Speaker 1: Read the read the remarks though, and she talks about
Speaker 1: how she's happy with what's happening in Japan and Europe.
Speaker 1: What's your sense of how that folds into into your
Speaker 1: Let me put back my I m F had where
Speaker 1: I did have a global perspective. You know, the global
Speaker 1: economy is improving. Even the emerging markets have have pushed
Speaker 1: up the growth rates. But half the increasing emerging market
Speaker 1: growth is coming about because of the of of two
Speaker 1: countries Russia and Brazil coming out of recession. The rest
Speaker 1: of emerging markets, it's kind of me Andrey along and
Speaker 1: when we look at Europe and say, oh my god,
Speaker 1: Europe has improved so much, we're still talking one handles.
Speaker 1: We're talking one as opposed to one point two percent
Speaker 1: or maybe zero point nine. Now that's a massive improvement, yes,
Speaker 1: but by my books, that's not the kind of growth
Speaker 1: that it spurs us or anybody. That's how we love
Speaker 1: to have you on state that again. The e M
Speaker 1: enthusiasm now, the dr BRAINERD sees and others is mostly
Speaker 1: from Brazil and Russia's cyclical recovery. They're coming out of
Speaker 1: recession and so emerging markets. But the rest of the
Speaker 1: emergint it's not the Philippines, it's not in Mexico, it's
Speaker 1: not They are along in the same pace slightly better
Speaker 1: because because the commodity world has come back a little
Speaker 1: bit right, but really the key there is China. Where
Speaker 1: are you gonna get this? Folks? The inside of Bill
Speaker 1: Lee is sitting group that was brilliant Brazil and Russia
Speaker 1: plus physics Thursday. I mean it's just David. It's enough
Speaker 1: to put David. It's enough to run back to my
Speaker 1: desk and get the calculator. You know why A you
Speaker 1: Yen's in there producing and I think he's not nonfer
Speaker 1: sleep right now with us is William Lee for years
Speaker 1: at the International Monetary Fund. Now it's City Group. And Bill,
Speaker 1: you've done six pages on the border tax. What's your
Speaker 1: value add in the executive summary? What part of the
Speaker 1: debate is what we need to focus on so that
Speaker 1: we can determine the value of an import tax. I'm
Speaker 1: trying to take the debate out of the academic pinhead
Speaker 1: world of instantaneous adjustments. Because the border type has been
Speaker 1: sold as a good source of revenue for paying for
Speaker 1: tax for tax cuts and and tax reform in general.
Speaker 1: So why don't we use it? Well, it's because it's
Speaker 1: the storting. It's gonna mess up the the imports and exports,
Speaker 1: subsidizing exports, uh, shutting off imports, But the the advocates
Speaker 1: like Feldstein, our Back and Holds It can say, don't
Speaker 1: worry because that dollar is just gonna pop up just
Speaker 1: like that and offset the distortion, and we're gonna cut
Speaker 1: the same world that we have. Now, what an awful
Speaker 1: way to sell something to the President Trump instead should
Speaker 1: tell him in the real world that exchange rate takes
Speaker 1: about four to five years to adjust. And even if
Speaker 1: you hold Montrey policy unchanged, that's still we're gonna take
Speaker 1: three years to adjust. So for three to five years,
Speaker 1: you've got a situation where you can actually shut down
Speaker 1: imports a bid, promote exports, concentrate production here in the US,
Speaker 1: get the jobs you want that make America better again. Now,
Speaker 1: isn't that the line you should be using our President
Speaker 1: Trump instead of the hour Back holds Its lines. That's saying, no,
Speaker 1: nothing's gonna change, but you get to get more money.
Speaker 1: But and President Trump says, I don't love it because
Speaker 1: it's way too complex. No, Kidden, Not only is it complex,
Speaker 1: it doesn't work that way. It works in a textbook.
Speaker 1: And when I used teacher Columbia, I talked about incipient
Speaker 1: increases in the in the balance of payments that cause
Speaker 1: an instantaneously stagery jump. We no longer have that. We
Speaker 1: have FX desks, we have importers, we have exporters. We
Speaker 1: have not one good, but a lot of goods with
Speaker 1: different price elasticities. What on earth makes you think that
Speaker 1: that textbook model is the one you should be used
Speaker 1: to sell the president on a very important policy move
Speaker 1: like this. How integral to tax reform is this borderjustment tax?
Speaker 1: We didn't here to mention in the speech last night.
Speaker 1: When you look at how you might pay for all
Speaker 1: this stuff, it seems so important. Could you get tax
Speaker 1: reform without having it involved? We at City actually have
Speaker 1: our forecast um going into without a border tax. But
Speaker 1: in order to do that and not let the budget
Speaker 1: blow out to like two, three or four or five
Speaker 1: percent of GDP, we had to assume that the tax
Speaker 1: cuts on the corporate side will go down to maybe
Speaker 1: not twenty, not fifteen. And we had to go to
Speaker 1: every cat and dog expense and and and deduction we
Speaker 1: could find to shut things down because quite frankly, that
Speaker 1: that tax going down to fift will cost about one
Speaker 1: point a trillion dollars. The border tax gives you more
Speaker 1: than a chillion, and almost pays for all of that.
Speaker 1: Let's take two different businesses. Mark Fields has a small
Speaker 1: car shop called Ford Motor Company. There's a guy named
Speaker 1: Michael Dell in Austin. I what's he doing? Is he
Speaker 1: gonna buy the Rangers this year? I don't know what
Speaker 1: Michael Dell is doing. Two different worlds. They're all affected
Speaker 1: by the border tax. What is the price elasticity? What
Speaker 1: is the responsive thing they should focus on in the
Speaker 1: next two years? Of course, for the one thing about
Speaker 1: autists who know is that they they make stuff and
Speaker 1: they export stuff in order to get to the final
Speaker 1: product of that car. That final product maybe here located
Speaker 1: here in the US, or maybe located in Mexico. But
Speaker 1: there's a lot of interest insity trade. How on earth
Speaker 1: are you going to be taxing and subsidizing that imports
Speaker 1: and exports of these of these firms, Right, So they're
Speaker 1: gonna have a nightmare of an accounting about now. Now
Speaker 1: Michael Dell, Right, I used to buy his Dell computers
Speaker 1: when I was in college. I don't know what he's
Speaker 1: got into now, but he certainly is in the high
Speaker 1: tech industry, which is very very important intensive for parts. Right,
Speaker 1: and Mexico, but Asia, Asia, and and and export intensive
Speaker 1: or intellectual property. So so we're gonna subsidize this intellectual property,
Speaker 1: which kind of means that even by the way, a
Speaker 1: law firm, every law firm is gonna have a server
Speaker 1: in Denmark because they're gonna say, I'm an exporting industry,
Speaker 1: I shouldn't have to pay for my legal services, even
Speaker 1: though you can get stuff here in the well said,
Speaker 1: but on Michael Dell, the assumption is he can raise prices.
Speaker 1: I don't think he got that memo. Can he can?
Speaker 1: Can a Michael Dell raise price? If he does, his
Speaker 1: competitor called the you know, the Taiwanese and and and
Speaker 1: even the Chinese manufacturers are gonna say, we're gonna sell
Speaker 1: things and undercut you. So don't you even dare raised
Speaker 1: David his competitors Wayne Last from another complies my my
Speaker 1: wish that prevent me. Billy, thank you so much. With
Speaker 1: City Group UM this morning on the border text, we
Speaker 1: protect the copyright of all of our guests. We're not
Speaker 1: going to send you out his um lovely, lovely six
Speaker 1: page dissertation in the Border tex Get that through your
Speaker 1: city bank representative as well. We were doing physics earlier.
Speaker 1: David Gura, it's very good to do Thursday physics. We're
Speaker 1: doing vectors in inertial momentum, so let's do something more boring.
Speaker 1: Fanny Freddy, wouldn't that be good? Why don't you bring
Speaker 1: in our esteem guest, Yeah, spring Jim Milstein, here's the
Speaker 1: chief of former Chief Restructuring Officer at the U S
Speaker 1: Department of the Treasury, and joins us here in our
Speaker 1: bloomboog lemon studios. Go ahead, what the hell is the
Speaker 1: chief We're gonna get that last out of there's one
Speaker 1: of my house. Yeah, on personal retainer. Describe briefly what
Speaker 1: you did what that role does within the Treasury Department. Well,
Speaker 1: during the financial crisis, the Treasury was responsible for the
Speaker 1: administration of the TARP program and we made a number
Speaker 1: of significant investments in various institutions in the financial sector
Speaker 1: to make sure that it didn't collapse. And when we
Speaker 1: after those investments were made, somebody had to figure out
Speaker 1: a way to get out of them. And the short
Speaker 1: straw was drawn by and I had there was a
Speaker 1: meeting the Treasury in the Secretary's office and uh, and
Speaker 1: somebody somebody has to do with A I G. And
Speaker 1: the guys who had been there like three days longer
Speaker 1: than need all took a step back, and I was
Speaker 1: left in the front room. I've got six jokes to make.
Speaker 1: Steve Rattner was with this yesterday, but forget about the jokes.
Speaker 1: A I G. Showed up and the tone in the
Speaker 1: room changed. There were all these issues. I mean, I
Speaker 1: get it. You had to buy a building in New
Speaker 1: York City to get Jamie Diamond to take up. You know,
Speaker 1: we all know the history, but the key thing for
Speaker 1: guys like you is A I G. Walked in the
Speaker 1: room and it was a different conversation. What was that
Speaker 1: like the you know, the difference with I mean the
Speaker 1: Lehman Brothers file for bankruptcy on you know, Monday, Monday,
Speaker 1: September fift I think A I G was downgraded that
Speaker 1: day and as a consequence, um all of its derivatives
Speaker 1: book changed in its character overnight because they have been
Speaker 1: relying on the credit rating of the parent company to
Speaker 1: provide their collateral for their derivatives, and so when the
Speaker 1: downgrade occurred, they had a massive cash call, a cash
Speaker 1: call that you know, really no institution, uh their size,
Speaker 1: with their size derivative book could meet without help from
Speaker 1: their friends, and their friends were all reeling. Uh. So
Speaker 1: a private credit facility couldn't of the size needed, couldn't
Speaker 1: be put together. And there was really two choices. Uh.
Speaker 1: The Fed could have uh said I don't know who
Speaker 1: you are, don't darken my door. Uh, you're on your own,
Speaker 1: or the Fed did could do what it did, which
Speaker 1: has stepped in with an emergency loan to en sure
Speaker 1: that they could perform their obligations in the ordinary course
Speaker 1: of business. Tom brings up g SCS. Have we heard
Speaker 1: much in the way of a plan for what the
Speaker 1: government plans to do with the Fanny and Freddy? Um?
Speaker 1: You know there were hints of it, uh during right
Speaker 1: after Munition was nominated. I think one of the first
Speaker 1: things he said was we're going to think about recapitalizing
Speaker 1: Fannie and Freddy and ending the Conservatives ships. He dialed
Speaker 1: that back a little bit during his confirmation hearings Um
Speaker 1: and said he wants to work with the Senate in
Speaker 1: the House on on reform. But you know, the Senate
Speaker 1: in the House tried this three years ago. UH, serious
Speaker 1: effort led by the you know, with the Treasury Department.
Speaker 1: Then Obama Treasury Department, and the topic just proved too
Speaker 1: complicated because there are lots of puts and takes. Right there,
Speaker 1: there's a the implied government guarantee, and you know, if
Speaker 1: you're gonna make that explicit, so it was to ensure
Speaker 1: that we're actually paid for the privilege of guaranteeing all
Speaker 1: of that mortgage debt um. Then you know, the quid
Speaker 1: o quo is that, well, if the government's involved and
Speaker 1: putting its balance sheet behind the credit of various homeowner mortgages,
Speaker 1: then that's a program that should be made widely available
Speaker 1: to all homeowners. It shouldn't just be rich people with
Speaker 1: great credit. Uh. And so you're constantly in a tug
Speaker 1: of war between the affordable housing folks who say, hey,
Speaker 1: if we're using the balance sheet to the federal government,
Speaker 1: there should be a program with public benefit. Because of
Speaker 1: time and we could talk with Mr Milstein folks four
Speaker 1: to five hours and just alone to wander through Pan
Speaker 1: American Airlines, the Disney restructuring of of of euro Disney
Speaker 1: and all that. Your worker clearly gotlie but Lazard, et cetera.
Speaker 1: But I gotta jump forward to how you interpret the
Speaker 1: regulatory and restructuring zeal of this new administration. I mean,
Speaker 1: I mean, you're you're not a constitutional law guy. You're
Speaker 1: you're more in the regulation realm, but interpret force what
Speaker 1: you presume is to come. Yeah. So, UM, you know,
Speaker 1: there's a playbook that UM. The Heritage Foundation, funded by
Speaker 1: the Koch brothers, has um published that many of the
Speaker 1: bills coming out of the House, whether it's the Choice
Speaker 1: Act from Hencer Lank, the tax reform proposals, and healthcare
Speaker 1: proposals pushed by Speaker Ryan are following and it is
Speaker 1: a you know it, it's a it's a limited government
Speaker 1: libertarian philosophy. UM. And the real question is, you know,
Speaker 1: in a much more complicated economy than we had in
Speaker 1: the nineteenth century. I found it interesting that President Trump
Speaker 1: and his speech to Other Night cited Lincoln defending for
Speaker 1: protectionist policies. It's defending a protectionist policy. We were an
Speaker 1: agricultural society back in the nineteenth century. You know, it wasn't.
Speaker 1: It wasn't. Number one of the Chicago Convention was no.
Speaker 1: But but we were. We were running a merkel untilist policy.
Speaker 1: We were in a global power. Then we're a small
Speaker 1: little you should paint the pictures, folks. I'm sitting in
Speaker 1: our studio here. It's fifty nine in Lexington, and I'm
Speaker 1: in my usual turret. David sits across from me. Mr
Speaker 1: Milstein is sitting to my right. David's left in the
Speaker 1: chair to my left sat one of the major hitters
Speaker 1: of your world. The day they renigged on the agreements
Speaker 1: on Chrysler, you were directly involved in those transactions. Moving
Speaker 1: forward with the Trump administration, are we going to get
Speaker 1: the rule of law in the rule of contract or
Speaker 1: are we going to get some form of Chrysler like chaos. Well, listen,
Speaker 1: you know, the government of the United States, the Congress
Speaker 1: of the United States, and the President have the power
Speaker 1: to change the law, uh, and to alter the playing field. UH.
Speaker 1: And so you know, one man's one man's abdication of
Speaker 1: the rule of law is another man's reform. And so
Speaker 1: you know, I think that you always have to understand
Speaker 1: which side of that argument people are on, because there's
Speaker 1: behind that argument is usually an economic interest that's being
Speaker 1: or promoted or gored. Uh. You went from from Lazard
Speaker 1: to government, and as we talk about this moment, and
Speaker 1: we talked with numerous guests within government, who have been
Speaker 1: in government about the deficit when it comes to personnel
Speaker 1: at the deputy level at a lot of these institutions,
Speaker 1: at Treasury, at State. Has it become harder for the
Speaker 1: government to entice people like you from the private sector
Speaker 1: to work for them. Is there's something particular to this
Speaker 1: administration or is it something more endemic that that that
Speaker 1: it's it's it's harder to make that case when it
Speaker 1: comes to doing the confirmation hearing is making the move.
Speaker 1: Is it less attractive to move from the private sector
Speaker 1: to the public sector? Yeah, So if you're if you're
Speaker 1: up for a position for confirmation, which constitutes you know,
Speaker 1: the top three levels of every cabinet department. UM. You know,
Speaker 1: you're you have to be willing to expose your entire life,
Speaker 1: your financial situation, your affiliation to your associations, the things
Speaker 1: you've written to public scrutiny, and UM. The process has
Speaker 1: become quite uncivil because of the partisanship on the hill. Uh.
Speaker 1: You know, often an individual's candidacy is sacrificed on some
Speaker 1: pet peeve between two senators that they had nothing to
Speaker 1: do with. UM. And I think that process of confirm,
Speaker 1: the confirmation procedent is clearly broken and needs to be
Speaker 1: fixed if we're going to get high quality people to
Speaker 1: go back into the government. So I think that's one
Speaker 1: of the problems. I think the other problem is I
Speaker 1: think the president has been it's very unclear what the
Speaker 1: president stands for. Um, there are a couple of things
Speaker 1: that he stands for that, you know, some people find troubling,
Speaker 1: some people find um, you know, worthy of support. But
Speaker 1: you know he's stands for, you know, titaned immigration. He
Speaker 1: stands for more protection to straight policy to promote manufacturing
Speaker 1: a very relatively small part of the U. S economy today. Um,
Speaker 1: you know, he stands for tax cuts, you know, to
Speaker 1: whom distributed unclear. So with the lack of clarity and policy,
Speaker 1: very hard to know what you're signing up for, right.
Speaker 1: So I think that's the other problem. I think until
Speaker 1: the administration really lays its cards on the table and
Speaker 1: announce his clear policy directions and how they want to
Speaker 1: implement him, it's very hard to get the soldiers to
Speaker 1: carry the water. We are out of time. We beg
Speaker 1: you to come back. There's so much we didn't even
Speaker 1: get to Puerto Rico, and it's and it's happening right now,
Speaker 1: and really it's being a restructure and it's and it's
Speaker 1: happening in real time. Jim Millstone, thank you so much,
Speaker 1: greatly appreciate it most any company this morning with his
Speaker 1: work on Wall Street in public service for years, brought
Speaker 1: you by Bank of America, Mary Lynch. Dedicated to bringing
Speaker 1: our clients insights and solutions to meet the challenges of
Speaker 1: a transforming world. That's the power of global connections. Mary Lynch, Pierce,
Speaker 1: Feeder and Smith Incorporated member s I p C. You know,
Speaker 1: joining us Michael Mayo's securities analysts. For those of you
Speaker 1: not up to speed, Mr Mayo is an esteemed seal
Speaker 1: side bank analysts. He's been doing it for a few
Speaker 1: years and he was let go by his firm the
Speaker 1: other day. There was no ill will there. You didn't like,
Speaker 1: steal the the whiskey or something out of the time.
Speaker 1: There was no like, you know, Mike, you destinately person. Right,
Speaker 1: that's correct. Okay, here's the here's the history here, folks,
Speaker 1: and we're gonna talk about the state of global Wall
Speaker 1: Street and securities and analysts right now. In our next section,
Speaker 1: Mr Mayo, we'll talk about the banks your office now
Speaker 1: is eleven seventeen Lexington Avenue, the Starbucks up there. Mrs
Speaker 1: Mayo has seen this a few times. I remember the
Speaker 1: day you were fired at Credit Suites and the entire
Speaker 1: industry was outraged that you were shown, uh the door.
Speaker 1: This is a recurring habit. Can you explain to us
Speaker 1: the state of the securities analysis business now and where
Speaker 1: it's going to be in two years? Well, well, Tom,
Speaker 1: I think I'm ahead of the game. I've been fired
Speaker 1: about three times, but I've resigned five times, so I'm
Speaker 1: a little above you know. But are your kid's gonna
Speaker 1: be in this Are my kids gonna be in this business?
Speaker 1: I don't want my kids to be in this business.
Speaker 1: They don't want to be in this business, So that
Speaker 1: part's fine surprising. When I was fired in two thousand
Speaker 1: is you know, you know, I had a huge negative
Speaker 1: call on the bank stocks. The bank stocks went down,
Speaker 1: and I was fired. Anyway, The difference this time is,
Speaker 1: I thought, I think we've had the most bullish call
Speaker 1: on the banks over the last year, and the banks
Speaker 1: have led the stock market to record highs, and I
Speaker 1: get fired along with the US Research Group. But back
Speaker 1: in two thousand, the silver lining was I could hang
Speaker 1: out with my then infant daughter, I'd go to mommy
Speaker 1: and me classes. But my wife has seen this movie
Speaker 1: before seventeen years ago. She's like, um, well, we went
Speaker 1: to coffee bars in the East Village in the afternoon
Speaker 1: and saw movies. So she read me the Riot Act
Speaker 1: yesterday saying I'm not going to coffee bars, I'm not
Speaker 1: going to movie. I'm not going to take a walk
Speaker 1: around in Central Park at lunchtime with you. I have
Speaker 1: my own life and circle and process. Okay, but but
Speaker 1: within this is the tumult in the United Kingdom over
Speaker 1: how securities UH sell side analysts are gonna get paid.
Speaker 1: You've got Abby Abbey, not not Abbie, Joseph Cohlan, Addie Johnson.
Speaker 1: Its fidelity going to four dollars portrayed she's doing a
Speaker 1: massive layoff of fossils like you and me within a fidelity.
Speaker 1: Where is the business in twenty four months, because it
Speaker 1: appears to me with c ls A, nobody's making money. Well,
Speaker 1: I think the twenty rule always applies. So you know,
Speaker 1: of the top performers provide eight percent of the value.
Speaker 1: So I think there's always room for those who are
Speaker 1: good at their job, And so what what I've been
Speaker 1: proud of is holding truth to power, you know, holding
Speaker 1: managements accountable, especially now that you're pulling back regulation regulation
Speaker 1: overall market, especially in the banking industry that's going to transpire.
Speaker 1: Then we collectively, especially investors, need to hold corporations there
Speaker 1: may edgements and their boards of directors more accountable. So
Speaker 1: there will always be a need for what I do.
Speaker 1: Does anybody care anymore that you've got a fireplace mantle
Speaker 1: of i I awards or is that just you and
Speaker 1: me waxing philosophical about the year two thousand? People absolutely care.
Speaker 1: I've gotten tons of you know, emails and phone calls.
Speaker 1: You want to announce a new company you're working for today,
Speaker 1: it only takes you like twenty four hours. Well I
Speaker 1: got a new job. I think the right perspective is
Speaker 1: I will listen to anything. This is. Look, but this
Speaker 1: is a reminder about how Wall Street works. I mean,
Speaker 1: you're in one day and literally over the course of
Speaker 1: three hours, you're out. So the rough and tumble world
Speaker 1: of Wall Street remains. David, what's charming about Mike as
Speaker 1: he still uses an HP twelve scene both of you guys,
Speaker 1: Has it gotten more difficult to speak truth, pout in
Speaker 1: the way that you do, to be a reverend, to
Speaker 1: to to to go to these meetings and make the
Speaker 1: cases that you make. I don't really think it's changed.
Speaker 1: I'm proud of being the only analyst who testified to Congress,
Speaker 1: and too and two as part of the star Bans
Speaker 1: actually talked about conflicts of interest on Wall Street and
Speaker 1: the retribution for being aggressive with managements and holding them accountable.
Speaker 1: And if you're nice to the companies, you get all
Speaker 1: sorts of perks. They return your phone calls and they
Speaker 1: you know, they go on the road with you and
Speaker 1: you're there like bff um. And if you're aggressive with them,
Speaker 1: sometimes they don't return phone calls, you don't have meetings,
Speaker 1: they aren't nice to you. So I think it's hasn't
Speaker 1: really changed as much as it should have. But we
Speaker 1: should learn a lesson for the financial crisis. The issue
Speaker 1: then is nobody was mining the store. The regulators weren't
Speaker 1: doing their job, and investors weren't doing their job. And
Speaker 1: since that time, regulation has come very heavy handed. If
Speaker 1: you're gonna pull that back, investors need to step up
Speaker 1: and hold them account On the Bloomberg there are thirty
Speaker 1: analysts covering City group. I'll ask you the same question
Speaker 1: I want to ask you in two thousands. Do we
Speaker 1: need thirty opinions on Fortress Corbett rule? So I agree
Speaker 1: that I mean so, I mean in any industry, you're
Speaker 1: gonna have those who do a good job, and then
Speaker 1: there's gonna be fro dead weight. Are you gonna be
Speaker 1: up at the Starbucks on Alex Engineer at about you know?
Speaker 1: When are we off? David ten Oclock, can we get
Speaker 1: an orange mocha frappuccino with you? I'm going to check
Speaker 1: with my wife and assuming I don't actually I think
Speaker 1: she's busy. So I'm opening this little The former vice
Speaker 1: chairman of the Federal Reserve System with Princeton University, Alan Blinder,
Speaker 1: joining us in our studios Michael McKee, Professor Blinder. I'm
Speaker 1: gonna ask a question and Michael will jump in here.
Speaker 1: The perspective is the capitulation of those uh saying that
Speaker 1: a FED will wait. Ellen Zentner Morgan Stanley shifts her
Speaker 1: call to march right now, do you agree that a
Speaker 1: FED should consider three rate hikes this year and then
Speaker 1: four in two thousand eighteen? Well, that's a little specific.
Speaker 1: First of all, I do think they're gonna go up soon,
Speaker 1: and soon probably means this month, UM three verse. I
Speaker 1: think of the three versus four questions, and that's the
Speaker 1: right place to put it. Now, you know, it wasn't
Speaker 1: that long ago people were debating one to three. I
Speaker 1: think three verses four, given the state of the economy,
Speaker 1: is the right place to put the debate. I put
Speaker 1: the question this year, UM three or four. This year,
Speaker 1: who knows about next year? The economy is looking very strong.
Speaker 1: We're staring in the face although it looks to be
Speaker 1: delayed of a large fiscal stimulus to a country, to
Speaker 1: an economy that doesn't need a fiscal stimulus, and the
Speaker 1: FED is going to have to offset some of it. Well,
Speaker 1: that there's a dynamics, Michael McKee, that you're so good
Speaker 1: at in your different interviews, including James Bullard and the
Speaker 1: idea of a regime change. Michael McKee jump in here
Speaker 1: with Professor Blinder. Well, the thing that struck me Alan,
Speaker 1: and I've been saying this for a while is we've
Speaker 1: criticized the FED a lot over the last couple of
Speaker 1: years for missing an opportunity when they had a chance
Speaker 1: to raise rates, and you've got the potential of a
Speaker 1: government shutdown on April, You've got the French presidential vote
Speaker 1: out there, and I'm just wondering if a lot of
Speaker 1: what might be going on in these FEDE officials minds
Speaker 1: is we've got a shot in March. Why not do it?
Speaker 1: Why not avoid things that could complicate our lives? If
Speaker 1: we feel the level of economic activity is such that
Speaker 1: it justifies a rate increase anyway, Yeah, no, I agree
Speaker 1: with I think the level of activity definitely justifies a
Speaker 1: rate increase more than one uh in fact. And furthermore,
Speaker 1: what I did, I don't think the FEDS are all
Speaker 1: worried about at least they shouldn't be worried about a
Speaker 1: government shutdown. Republicans only do that when a Democrat as
Speaker 1: the president. Have No, I put a zero probability on that.
Speaker 1: But what's happened recently, so to speak, is that the
Speaker 1: likely date when we're gonna know the size of the
Speaker 1: fiscal stimulus has been pushed back, so that I think
Speaker 1: it was rational for the Fed to wait a bit
Speaker 1: for the clouds to disappear. And let's get a view
Speaker 1: of what the Trump fiscal policies accident. It will look
Speaker 1: like at this point, if you're sitting on the Fed,
Speaker 1: you're saying, how long do we have to wait for this?
Speaker 1: We know it's going to be there. We don't know
Speaker 1: the size, we don't know the qualitative dimensions, but we
Speaker 1: know it's going to be there, and uh, and we
Speaker 1: don't need it, and we are to stop waiting. David,
Speaker 1: what are you going to be listening for tomorrow from
Speaker 1: the FED chair when she speaks in Chicago and light
Speaker 1: of the groundwork we've seen late here by Dudley and
Speaker 1: Brainerd in caplan this week, Well, I don't actually expect
Speaker 1: her to to move the ball very much. I think
Speaker 1: given what Janet Yellen has already said and what Dudley
Speaker 1: and others have said, they have succeeded in moving the
Speaker 1: market expectation in favor of, you know, to well over
Speaker 1: fifty odds of a rate hike in March. They don't
Speaker 1: like to rate raise rates when the market probability is
Speaker 1: like and shocked the markets, but they have to be
Speaker 1: pretty content with the market thinking is right now, they
Speaker 1: still got a couple of weeks to go. We could,
Speaker 1: for example, have a catastrophically bad jobs report of for
Speaker 1: February coming out in before the f MC meeting. I
Speaker 1: don't expect I certainly don't expect that, but if that
Speaker 1: would happen, they probably want to postpone. Define catastrophically bad
Speaker 1: for us here, pardon me, define catastrophically bad? What what
Speaker 1: would be? Something five thous No, No, I'd say, well
Speaker 1: under well under a hundred thousand, like fifty thou jobs
Speaker 1: or something like that. I don't expect to see a
Speaker 1: number like that. Neither do they, But I think they
Speaker 1: want to leave enough flexibility that if something wild happens, uh,
Speaker 1: they don't go. So I don't think she wants to
Speaker 1: say anything that won't basically lock the FED in. The
Speaker 1: big question is surrounding all this is what's happening with inflation.
Speaker 1: And we did see PC rise the last month and
Speaker 1: we're just under two right now, but a lot of
Speaker 1: that is because energy prices went back up, and there's
Speaker 1: always the dispute about how much weight you put on that.
Speaker 1: So it we've talked a lot about the path the
Speaker 1: fact there seems to be an underlying difference to the
Speaker 1: dynamic of inflation. Is there enough inflation danger that they
Speaker 1: feel like they have to move. I think there is
Speaker 1: now the key thing Mike is moved, how much there's
Speaker 1: not so much inflation danger that the Fed fields we
Speaker 1: get to get this fund right up a hundred a
Speaker 1: hundred fifty basis pointing quickly. It's nothing like that. They're
Speaker 1: still into gradualism, which is but Janet the Ellen's mantra
Speaker 1: for a long time now. But there is an inflation danger. Uh,
Speaker 1: you know a small you know, I used the word danger,
Speaker 1: and well you use this. Let's do that. Let's let's
Speaker 1: put words in the vice chair. We'll come back with
Speaker 1: Professor Blinder. Michael McKee, why don't you pick it up
Speaker 1: with Alan Blinder. And of course the backdrop here is
Speaker 1: a September crowd shifts to March. And we just saw
Speaker 1: that with Morgan Stanley an hour ago. Yeah, Ellen set
Speaker 1: there and Matt hornback from Morgan Stanley shifting their call
Speaker 1: major change for them. One of the things Alan, that
Speaker 1: they suggest will will be a result of a faster
Speaker 1: FED tightening cycle is more quick they will get to
Speaker 1: bringing the balance sheet down, addressing the balance sheet more
Speaker 1: quick Lea. They think the beginning of two thousand eighteen,
Speaker 1: there's a lot of debate about how important that is
Speaker 1: going to be and how much market disruption there's going
Speaker 1: to come from addressing the balance sheet. What do you think.
Speaker 1: I think it's importance is easy to exaggerate. And the
Speaker 1: thing I'm most sure about is there will be minimal
Speaker 1: market disruption. And the reason for that is really simple.
Speaker 1: The Fed is going to do handstands not to pull
Speaker 1: any surprises on anybody. This balance sheet, when they're ready,
Speaker 1: is going to be drawn down on a regular, preannounced
Speaker 1: schedule that everybody in the market knows about. They'll know
Speaker 1: it's coming, so to speak, auction by auction UH and
Speaker 1: markets are pretty good at digesting things like that, even
Speaker 1: if the sums are large. These are huge markets. Remember,
Speaker 1: the key thing is not to surprise anybody, and that's
Speaker 1: the last thing the FED is going to want to do.
Speaker 1: Interesting point that Ellen and Matt made in an earlier
Speaker 1: note a week or so ago they don't think the
Speaker 1: Fed has to do anything to the treasury part of
Speaker 1: the balance sheet because there if you once you take
Speaker 1: out the mortgages and the stuff that expires right away,
Speaker 1: you're not that much bigger than what a normal balance
Speaker 1: sheet size would be. For this size of the economy
Speaker 1: that you would grow into it very quickly. Do you
Speaker 1: agree with that? Yeah, I think that could be right.
Speaker 1: I mean the FED has still not unless they're they've
Speaker 1: actually made a decision. They're keeping it under wraps, but
Speaker 1: I think they still have not come close to deciding
Speaker 1: how large the balance sheet they want to wind up with.
Speaker 1: You may recalled Ben Burnank blogged the other day for
Speaker 1: the other week about you know, a pretty big balance
Speaker 1: sheet at the end, much bigger than it was before
Speaker 1: Lehman Brothers crashed. So so yes, the the draw down
Speaker 1: may not be that huge. We're still probably talking about
Speaker 1: a couple of trillion, but this is a very big
Speaker 1: market and it will happen slowly, not rapidly. Well, Brennard
Speaker 1: saying that yesterday at Harvard near term risks to United
Speaker 1: States who have brought appear to have diminished full what
Speaker 1: we're seeing here in the US into the global context
Speaker 1: for us. If you would, Professor the blinder, how much
Speaker 1: is this FED paying attention to what's going on overseas
Speaker 1: at this point? Well, they always pay attention, but frankly,
Speaker 1: we elite UH usually exaggerate how important the rest of
Speaker 1: the world is. To the Federal reserves decisions. I mean
Speaker 1: it does. If it's a big deal coming from abroad,
Speaker 1: then of course it's a consideration in the Fed's policy.
Speaker 1: But things are happening in other countries all the time
Speaker 1: just as they are here, and for the most part,
Speaker 1: their impact on the US economy and therefore on what
Speaker 1: the FED wants to with monetary policy is quite small.
Speaker 1: So I don't think there's anything right now that's a big,
Speaker 1: big deal on the friends on the FEDS radar screen.
Speaker 1: When we get closer to the date, they're gonna be
Speaker 1: watching the French election the way they were watching the
Speaker 1: Brexit vote. And the Brexit vote turned out to be
Speaker 1: no big deal for the FIT, a very big deal
Speaker 1: for England, but no big deal for the FITS. Uh.
Speaker 1: Something like that could easily happen again with France. For example,
Speaker 1: if if Janet Yellen were here, she would probably be
Speaker 1: boxing our ears. She would be saying and this, and
Speaker 1: I would include you ll that you guys are focusing
Speaker 1: on when you're gonna we're gonna raise rates, and we
Speaker 1: should be focusing on when we're gonna stop what the
Speaker 1: terminal rate is. Do you think the idea that you
Speaker 1: know they want to go in March. Uh, and the
Speaker 1: level of economic activity we have seen indicates any real
Speaker 1: steeper trajectory or higher terminal rate, higher neutral rate, or
Speaker 1: is it just a question of this is the time
Speaker 1: that's available for them to act. I think it's more
Speaker 1: a steeper trajectory than a higher neutral rate. I don't
Speaker 1: know if defendn't seen anything in recent months suggesting that
Speaker 1: the neutral rate is higher than they thought two months ago.
Speaker 1: I'm not aware of it, and I don't know what
Speaker 1: it would be. So I don't think the so called
Speaker 1: terminal rate we don't want to call it, has moved
Speaker 1: very much. But I think the speed, the likely speed,
Speaker 1: has uh change because of the strength of the economy,
Speaker 1: and as I said before, because of the prospects for
Speaker 1: fiscal stimulus. Look, we went through something like this in
Speaker 1: a grand, grand scale with Reagan and Vulker. You guys
Speaker 1: may remember that couples you know, young people don't, but
Speaker 1: a serious collide. That was a really serious collision with
Speaker 1: monetary and fiscal policy. I think we're looking at a
Speaker 1: smaller scale version of that, Okay, but within the model
Speaker 1: that's in blind your Bamba blinder, in your classic textbook.
Speaker 1: Where we are right now? Is that I s l
Speaker 1: M aggregate supplied demand Euclidean model. Is that in place
Speaker 1: right now? Or are you guys flying blind? Theoretically? I
Speaker 1: think frankly that model has done decently. I think it's
Speaker 1: done least well on inflation. I think according to that,
Speaker 1: if I may call a textbook model, we should probably
Speaker 1: be looking at higher inflation rates now, not super high,
Speaker 1: but higher than they are now. But inflation is rising,
Speaker 1: wage inflation is especially rising, and uh, you know, just
Speaker 1: in general, I think as a at not as a
Speaker 1: literal description, but as a framework for thinking about things.
Speaker 1: I think that model has survived, uh this recovery modestly. Well, okay, Uh, professor,
Speaker 1: thank you so much for being with us today. He
Speaker 1: is a former vice chairman of the Photo Reserve System,
Speaker 1: Alan Blinder of Princeton. And for those union need to
Speaker 1: pick up a textbook, was it like eight other pages? Michael?
Speaker 1: The four thousandth edition of It's sort of like the
Speaker 1: hap Bible. Thanks for listening to the Bloomberg Surveillance podcast.
Speaker 1: Subscribe and listen to interviews on iTunes, SoundCloud, or whichever
Speaker 1: podcast platform you prefer. I'm out on Twitter at Tom Keene.
Speaker 1: David Gura is at David Gura. Before the podcast, you
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio, brought you
Speaker 1: by Bank of America Mary Lynch. Dedicated to bringing our
Speaker 1: clients insights and solutions to meet the challenges of a
Speaker 1: transforming world. That's the power of global connections. Mary Lynch, Pierce,
Speaker 1: Fenner and Smith Incorporated, Member s I p C