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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. Along

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Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jay Leye. We bring

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Speaker 1: you insight from the best and economics, finance, investment, and

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Speaker 1: international relations. Find Bloomberg Surveillance, an Apple podcast, SoundCloud, Bloomberg

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Speaker 1: dot Com, and of course on the Bloomberg Terminent. Joining

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Speaker 1: us now, a man who needs no introduction nobody please

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Speaker 1: decide that with us is Mohammed al Arian. Mohammed, let's

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Speaker 1: start that same transitory. How much of a challenge are

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Speaker 1: they getting from the recent incoming data? Massive? Drawn and

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Speaker 1: thank you for having me a massive challenge. I think

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Speaker 1: anybody who looks at what's going on will tell you

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Speaker 1: that unless you embrace the analytically meaningless phase of persistently transitory,

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Speaker 1: which I've heard persistently transitory, this inflation around is not transitor.

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Speaker 1: We should take it seriously and central banks should move

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Speaker 1: quickly to contain what could be something that ends up

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Speaker 1: being more than just an inflation problem, but a growth problem. Mom.

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Speaker 1: It's how small is that window to wact to make

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Speaker 1: that change? Is it there? John? But it's getting smaller.

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Speaker 1: You've heard me say this for the last five months. Um.

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Speaker 1: The longer you wait, the harder it is to deliver

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Speaker 1: a orderly adjustment. I think this notion that Andy Heldane

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Speaker 1: introduced last July of a handwake you turn what you

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Speaker 1: want to avoid central banks doing this handwake you turn

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Speaker 1: um is a risk that we should factor in, and

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Speaker 1: indeed is being factored in away from the from the

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Speaker 1: Fed right now. Mohamed. One of the more interesting aspects

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Speaker 1: of the price action we talked about the lift in

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Speaker 1: markets following people bringing forward their expectations for rate hikes

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Speaker 1: for the end of asset purchases in the middle of

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Speaker 1: next year. Now we are praising in potentially to rate

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Speaker 1: hikes by the end of next year. Is this basically

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Speaker 1: a market endorsement of a more hawkish FED that has

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Speaker 1: previously been communicated. Yes. I mean the market is telling

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Speaker 1: the feed two things. One is get going with tapering,

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Speaker 1: we can take it. And two is you're not going

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Speaker 1: to be able to separate cleanly tapering from waight hikes.

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Speaker 1: And again, look at the numbers today, look at p

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Speaker 1: PI in China. This is a very hot inflation environment.

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Speaker 1: And the longer the central banks wait, the greater the

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Speaker 1: risk and the market realizes this, and it's starting slowly

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Speaker 1: in the fixed income space to price that in. Mohammed,

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Speaker 1: what do we What would you say to people who

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Speaker 1: argue that there is a self correcting mechanism here, that

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Speaker 1: higher prices will slow growth, will slow demand, and that

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Speaker 1: you'll actually right size without the FED interfering and curtailing

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Speaker 1: growth that needs to hit some sort of acceleration pace

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Speaker 1: so we can get out of the hole. I will

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Speaker 1: tell them that in theory you're right. In practice, we

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Speaker 1: haven't seen it work too well. Um, it's a very

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Speaker 1: finely balanced because this is about demand destruction. That argument

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Speaker 1: is about demand destruction, and when you destroyed them on

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Speaker 1: there's a lot of collateral damage at unintended consequences. So

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Speaker 1: in theory, in a textbook, it works fine. In practice

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Speaker 1: we often overshoot and end buck in a recession. So

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Speaker 1: this is not something that I would like to try

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Speaker 1: as someone who cares about the well being of Americans

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Speaker 1: and especially those who are lower income, because they get

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Speaker 1: hurt the most in that sort of world. Mohammed, you

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Speaker 1: joined the International Monetary Fund in three This is back, folks,

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Speaker 1: when the New York Jets are actually good and you

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Speaker 1: spent a good fifteen years there, Dr l Arion, you

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Speaker 1: saw all of the revolution and the different crises, but

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Speaker 1: nonelikely oddity. Now, how important is it for the I

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Speaker 1: MF to distance across the nineteenth Street northwest? Does the

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Speaker 1: I m F need to dialogue breakaway from the World

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Speaker 1: Bank in the coming weeks and years? No, On the contrary, um,

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Speaker 1: you need really good I m F World Bank collaboration

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Speaker 1: going forward. We have a structural issue. The development countries

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Speaker 1: are particularly vulnerable and the two institutions working together can

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Speaker 1: have a huge impact. What the IMF has to make

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Speaker 1: clear and has been making clear, is that the data

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Speaker 1: integrity issues aren't about the IMF. No one has raised

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Speaker 1: questions about the I m S data integrity. This is

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Speaker 1: an issue that relates to doing business report at the

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Speaker 1: World Bank, and the IMF data integrity is as high

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Speaker 1: as it can be. Right within this crisis, are we

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Speaker 1: at the point where marginally we finally give way voting

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Speaker 1: and governance power from the European nations of Breton Woods

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Speaker 1: over to selected emerging markets per two, really an Asia.

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Speaker 1: So we have had this governance issues repeatedly, Tom, You

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Speaker 1: and I have been talking about it for decades um.

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Speaker 1: The governance and representation of the IMF, while it has evolved,

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Speaker 1: still represents the world of yesterday and not the world

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Speaker 1: of today and tomorrow. And what we're seeing is little

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Speaker 1: pipes being built around the I m F and the

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Speaker 1: World Bank because other institutions are deemed to be more representative.

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Speaker 1: So so that is an urgent issue and Europe has

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Speaker 1: to take the lead on this issue. Mohammed. We talked

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Speaker 1: about this great divergence this week because of the I

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Speaker 1: m F. Let's talk about that a little bit more

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Speaker 1: from a central bank perspective. We've had interest rate hikes

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Speaker 1: from Chile, a big one in the last twenty four hours,

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Speaker 1: I think a hundred and twenty five basis points, Colombia, Mexico, Brazil,

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Speaker 1: South Korea. Mahamm. Do you think something biggest building care

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Speaker 1: from emerging markets that could spread to d M from

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Speaker 1: e M. So funny you say that because I'm drafting

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Speaker 1: my next ft op ed and it will be on that.

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Speaker 1: I think that there's a risk for developing countries that

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Speaker 1: they have the perfect store and that means massive cost

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Speaker 1: push inflation imported, especially for commodity importers, lower global growth

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Speaker 1: as China and as the US slow, and then on

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Speaker 1: top of that the risk of reversal in financial flows,

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Speaker 1: and that's why you're seeing the central banks tightened way

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Speaker 1: before the FED Titan. So that risk is there, and

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Speaker 1: it's meaningful because I go back not just your word dispersion, John,

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Speaker 1: but to what Peter Governors, the head of research, called

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Speaker 1: dangerous dispersion. You do not want to enter a world

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Speaker 1: in which the low income countries risk being knocked off

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Speaker 1: the convergence process. So yes, there is that risk, and

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Speaker 1: it's something that we should be keeping an eye on,

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Speaker 1: and it's one of the unfortunately underdeveloped themes so far

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Speaker 1: at the FUND. I think that the IMF did a

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Speaker 1: great service by introducing this notion of dangerous dispersion, and

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Speaker 1: we should pursue it further. So have it. Let's pursue

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Speaker 1: it further a little bit more. Right now, it's one

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Speaker 1: thing to be focused on the spillover risk. You know

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Speaker 1: how this works. Often DM doesn't care until it effects

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Speaker 1: d M. What's the one big thing you focused on

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Speaker 1: right now? So I'm focused on how capital is responding.

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Speaker 1: Because the good thing for markets, and you're seeing it

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Speaker 1: again today, is that the behavioral conditioning of the marketplace

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Speaker 1: has been to buy the dip. It has been incredibly

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Speaker 1: successful strategy, and we still see residual buying the deep inclination.

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Speaker 1: And the one thing I'm really focusing on is can

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Speaker 1: we understand the behavioral conditioning of the marketplace and how

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Speaker 1: that's going to evolve. We know the economy. I don't

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Speaker 1: think anybody can doubt that we have an inflation issue,

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Speaker 1: that the Fed in particular is late to this issue,

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Speaker 1: and that we risk a disorderly tightening of policy. I

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Speaker 1: think most people see that as a risk. What we

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Speaker 1: haven't yet understood fully is how the conditioning of markets,

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Speaker 1: the behavior conditions of market can change Mohammed. If the

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Speaker 1: Federal Reserve does, in fact hike twice come next year,

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Speaker 1: what does that do to emerging markets? How much more

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Speaker 1: pressure does this put on them, given how much they've

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Speaker 1: already had the high rates to compete. It depends which one, Lisa,

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Speaker 1: and that's why we're going to see massive differentiation. Some

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Speaker 1: countries have the financial resilience to cope with it and

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Speaker 1: have the policy flexibilities. Others don't. And that's that's a

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Speaker 1: very important message for emerjoring market investors. So far, they

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Speaker 1: have benefited enormously from simply writing the liquidity wave. We've

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Speaker 1: entered a phase right now where you need a lot

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Speaker 1: more granular analyzes and you need to be the old

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Speaker 1: type emerging market investor, understanding that ultimately you do get contagion,

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Speaker 1: and you've got to be able to differentiate between those

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Speaker 1: who recover quickly and those who constitute nonrecoverable mistakes. Mohammed,

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Speaker 1: we miss you, we miss you. We want you back

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Speaker 1: in America. I understand there might be a free seat

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Speaker 1: at the Federal Reserve soon, so maybe we can work

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Speaker 1: something out. I'm joking, you don't work work. Tom said

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Speaker 1: about mom Mike. I'm in the UK and I love

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Speaker 1: my momake, do you I do? I love momake. It

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Speaker 1: is an acquired taste you're not. Thank you very much

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Speaker 1: for being with us. Muhammadalarian, Thank you very much. John.

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Speaker 1: I understand you understand how sensitive and woke Adam posing is.

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Speaker 1: Will find out how boke Adam posting is in just

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Speaker 1: a moment. Larry Summers, the former Treasury Secretary Lawrence Summers

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Speaker 1: saying in the last twenty four hours the following, Adam

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Speaker 1: help us out with this one. I'd love you reaction. Quote,

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Speaker 1: we have a generation of central bankers who are defining

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Speaker 1: themselves by their wokeness. Goes on to say they're defining

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Speaker 1: themselves by how socially concerned they are. Adam open one

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Speaker 1: for you. What's your reaction to that. I don't think

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Speaker 1: that's fair. Um, if you want to worry about wokeness, yeah,

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Speaker 1: there's universities you can worry about. There's various individuals. But

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Speaker 1: the central bank is not stomping on alternative voices. It

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Speaker 1: is not saying you can't worry about inflation because we're

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Speaker 1: too worried about unemployment. There's open debate. I just hosted

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Speaker 1: Raphael Bostic, Federal Reserve Bank of Atlanta President, at Peterson

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Speaker 1: Institute earlier this week. He gave a speech that sounded

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Speaker 1: relatively hawkish. He talked about inflation expectations, and at the

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Speaker 1: very end I asked him about inequality, and he gave

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Speaker 1: the same answer than most members of the f O

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Speaker 1: m C would. It's entirely right for the Federal Reserve

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Speaker 1: to do research and draw attention to the inequities in

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Speaker 1: the society. Monetary policy has to be focused on the

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Speaker 1: aggregate output, aggregate inflation. The really important point that Adam.

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Speaker 1: Whether they have the souls or not to address it

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Speaker 1: or not, it sounds like President Bostick doesn't think they do.

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Speaker 1: Do you think they're Are some on the FED the

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Speaker 1: belief they do and ultimately want to do something about it.

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Speaker 1: I think those on the FED who care about these

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Speaker 1: things deeply, and that's most FED people. But if you

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Speaker 1: think of the various FED presidents, there's a lot they

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Speaker 1: can do in their districts. There's issues of bank supervision.

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Speaker 1: There's issues of redlining and housing where the FED played

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Speaker 1: a huge role first and ignoring it and then drawing

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Speaker 1: attention to it. There's issues of education, there's issues of

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Speaker 1: documenting and putting out there what are the disparities. But no,

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Speaker 1: I don't see anybody on the FED Committee who thinks

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Speaker 1: that you're going to use monetary policy to solve inequality problems.

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Speaker 1: And the point is you can worry about inflation and

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Speaker 1: argue about whether or not inflation is getting out of

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Speaker 1: hand without talking about people's motivations and assuming some kind

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Speaker 1: of soft headed dr pos and you have the enjoy

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Speaker 1: every day of working with Olivia Blanchardi wrote about the

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Speaker 1: unlikely but not impossible the modern inflation dynamics were in

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Speaker 1: He made worldwide headlines eleven years ago talking of a

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Speaker 1: four scent inflation. We're there, but this is very different,

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Speaker 1: isn't it? Yes? And no, Tom, I mean Olivier and

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Speaker 1: his co authors made headlines a gad ago calling for

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Speaker 1: a four percent inflation target because the two percent inflation

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Speaker 1: target for Nankee, Michigan lau Bak and I and others

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Speaker 1: had pushed didn't take into account enough the zero lower

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Speaker 1: bound and us not having effective monage. So have we

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Speaker 1: committed the experiment? Professor Bluntchard talked about, no, because the

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Speaker 1: Federal Reserve and the Congress have not said, hey, inflations up,

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Speaker 1: let's rat let's grab that and say, now that we're here,

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Speaker 1: let's raise the target. Myself, Joe Gagnon at Peterson Institute,

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Speaker 1: we've been out there saying three plus now is the time.

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Speaker 1: Just like you said, So, do we need to resume shame?

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Speaker 1: Do we need a bullet regime change right now to

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Speaker 1: rephrase our generational belief and two percent inflation and say hey,

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Speaker 1: this is the new normal? I perly think yes, because

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Speaker 1: it's not a regime change, it's a resetting of the target.

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Speaker 1: One of the problems that we didn't foresee when we

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Speaker 1: put in place inflation targets was we assumed It's in

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Speaker 1: the books that we wrote. We assumed that you would

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Speaker 1: be able to reset the target as economic knowledge and

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Speaker 1: circumstances change. We've never seen targets get raised for inflation targets.

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Speaker 1: It's like an exchange rate. Once you said it, you're

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Speaker 1: scared to move it. And so, as I've said to you,

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Speaker 1: I think before Tom, but I'm glad we're talking about

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Speaker 1: this right now. We should be opportunistically reflating. We should

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Speaker 1: be saying, okay, inflation is now above three percent, let's

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Speaker 1: re anchor it there. So what do you say to

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Speaker 1: people who argue, maybe not stagflation, maybe slugflation, that basically

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Speaker 1: this will slow growth and that prices will come back

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Speaker 1: down naturally. Why do you say that that is not

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Speaker 1: the case, that we're in a regime change, and what

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Speaker 1: data are you pointing to? Well, just to be clear,

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Speaker 1: I'm saying we're not yet in a regime change. A

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Speaker 1: regime change would be either a fundamental structure shift or

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Speaker 1: the Federal Reserve upping the target. What I do think

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Speaker 1: is happening is we've got so much accumulated weight from

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Speaker 1: these generations of central bankers who were hardly woke and

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Speaker 1: paid too little intention to unemployment that you see the

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Speaker 1: ten year bond. No matter what fiscal and inflation happens,

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Speaker 1: inflation expectations don't go up. And we saw this in

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Speaker 1: Japan and we've seen this in the Euro Area. It

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Speaker 1: should be a two way bet that there's some variability

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Speaker 1: and inflation expectations, and that gives you the flexibility to

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Speaker 1: cope with the kind of destruction. I'm got to jump in.

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Speaker 1: What you're saying is so so important. You think that

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Speaker 1: the way they should communicate this is not by making

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Speaker 1: up excuses for it, just by saying this is what

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Speaker 1: we want to see. Is that right? Yeah, we're fortunate

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Speaker 1: enough to now have a bit more headroom from the

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Speaker 1: zero lower bound. We're fortunate enough to have enough inflation

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Speaker 1: space that the economic adjustments to the labor market need

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Speaker 1: to be done. There was a great paper at Jackson

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Speaker 1: Hole this summer talking about how you get better labor

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Speaker 1: market adjustment when you have loose policy, which is what

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Speaker 1: I said back in ninety eight on Japan. You should

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Speaker 1: be opportunistically reflating and raising the inflation target and consolidating

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Speaker 1: what we got, and then if that means the ten

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Speaker 1: years up a little bit, the yield curve steepens a

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Speaker 1: little bit, and there's two way risk on inflation expectations.

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Speaker 1: That is a win for the economy. That is a

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Speaker 1: win for the Fed, except that the bills are getting

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Speaker 1: bigger and we have to refinance debt. How much is

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Speaker 1: this a concern? What is the threshold for the ten

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Speaker 1: year treasure yield that the US economy can tolerate given

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Speaker 1: the deficit? It's the ten year yield doesn't have a

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Speaker 1: single threshold. I'm sorry to be pedantic about this, but

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Speaker 1: this goes back to blanch Yard, right and others. It

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Speaker 1: what's counts as our minus g the differential between what

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Speaker 1: interest rate you're paying and how much the economy is growing.

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Speaker 1: And if the economy is growing at the rate it's

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Speaker 1: now growing, the interest rate is going to be lower

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Speaker 1: than that. I'm not gonna worry about it. And if

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Speaker 1: the interest rate starts moving up a lot and looks

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Speaker 1: like it's going to stay up, then I worry about it.

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Speaker 1: I do not ink a lasting multi year shift the

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Speaker 1: three percent is going to ruin the Yelker, so let's

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Speaker 1: let's conflate this. Blanchard and other sticklets has mentioned it

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Speaker 1: often our minus gs k that interest rate as it's

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Speaker 1: related to growth. If the growth there, everything's okay. Do

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Speaker 1: you believe that what we're misjudging is a technological overlay

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Speaker 1: which is going to give us better productivity, better growth,

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Speaker 1: so we don't have to sweat our minus g No.

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Speaker 1: I think we're misjudging the extent of the R risk,

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Speaker 1: the extent to which our can jump. I'd love to

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Speaker 1: have G jumping. I'd love to see a product. Do

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Speaker 1: you model and with all your work at Peterson, do

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Speaker 1: you model G jumping or do the inflation nest is

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Speaker 1: completely underestimate the our dynamics. I'm not quite following Tom.

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Speaker 1: What we what I think what we've seen is that

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Speaker 1: over you look back at the data, if you've got

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Speaker 1: a large economy with a stable government and issuing that

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Speaker 1: in its own currency, are states below gene most of

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Speaker 1: the time if you look at US or Western European

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Speaker 1: or Japanese history, you get are jumping usually when there's

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Speaker 1: a political problem, and that's where I worry about the US.

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Speaker 1: Not some thresholders was being mentioned you worry about it

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Speaker 1: because when it stops being critical credible you're here in Washington,

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Speaker 1: stops being credible that we can pass debt, that we

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Speaker 1: can pass, excuse me, a budget that we can raise

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Speaker 1: taxes if necessary, that we can get out of from

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Speaker 1: the stupid debt limit. When that stops being incredible, that's

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Speaker 1: when our jumps. So won't you speak to Secretary Yella

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Speaker 1: now and everybody else managing this in real time? To

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Speaker 1: Lesa's important question before, you don't have a concern about

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Speaker 1: the combined the some of our debts right now and

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Speaker 1: the trajectory of them. In response to Lisa and that question,

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Speaker 1: what I always say is it matters a hell of

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Speaker 1: a lot more what you spend it on and how

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Speaker 1: fast you spend it over time than the level of

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Speaker 1: how are you doing at that what? How are we

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Speaker 1: doing it constructively? The January package was was overshooting. That's

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Speaker 1: a place where I agree with Umbers and Blanchard. The

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Speaker 1: January package was too much handouts. But what's in the

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Speaker 1: investment packages that are now under consideration of Congress would

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Speaker 1: be well smith. That was the argument that Larry was making,

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Speaker 1: though that pushing that forward would take all the oxygen

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Speaker 1: out of the room to enable us to push this

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Speaker 1: one forward. And ultimately that's what we're bumping up against

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Speaker 1: right now. And I'm what's amazing about this moment for

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Speaker 1: me and for people that love this material and love

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Speaker 1: this content they're students of it is to hair from

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Speaker 1: someone equally as talented. Muhammada Ain earlier in the morning,

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Speaker 1: taking the other view on all of this. On inflation, Adam,

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Speaker 1: the question I often ask people, it's what's the towel?

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Speaker 1: What they need to see to say, you know what,

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Speaker 1: maybe I'm wrong about this. What would the towel be

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Speaker 1: for you, Adam? For me, the tell would be one

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Speaker 1: of two things. Either that we get no real wage

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Speaker 1: growth over the cycle, meaning that we keep having inflation

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Speaker 1: outplace wage growth. That would say, okay, this is all

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Speaker 1: for not and so you might as well just go

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Speaker 1: with this harder money as possible. The other tell would

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Speaker 1: be a large jump in real rates excuse me, a

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Speaker 1: large jump in long rates. Now, I think, what's going

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Speaker 1: on with my friend Mohammed and others sister already missing

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Speaker 1: the tell that should have told them to reconsider look

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Speaker 1: at Japan, look at us. Their views do not explain

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Speaker 1: and cannot comprehend why rates stayed so low for the

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Speaker 1: last fifteen years. Next time we need to get you

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Speaker 1: one together. Anamuscrites to catch ups as always Adam Poston

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Speaker 1: of the Peterson Institute. A bit off our radar in

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Speaker 1: this week of international economics, but now we dive full

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Speaker 1: into it, and it is good that we can do it.

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Speaker 1: VIDR Gaspar he has Fiscal Affairs Department Director at the

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Speaker 1: i m F, but that fancy title barely describes the

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Speaker 1: respect for the balance sheet worldwide that world leaders have.

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Speaker 1: For the gentleman from Portugal. We're thrilled you could join

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Speaker 1: us in our studios. Welcome a Bloomberg reader for having me.

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Speaker 1: I want to go to the issue at hand, and

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Speaker 1: I know you do not speak for the managing director

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Speaker 1: that would be inappropriate. But to your fiscal model. You

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Speaker 1: talk about strengthening the uncertainties that are out there within

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Speaker 1: our fiscal process. How does your I m F prove

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Speaker 1: through your department, your pH d s it's data integrity

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Speaker 1: in the coming weeks and months. How do you show,

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Speaker 1: not tell data integrity and analysis integrity is absolutely core

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Speaker 1: for us. I'm very proud of my colleagues in the

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Speaker 1: Fiscal Affair Department, and we have a very robust process

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Speaker 1: to ensure data integrity and the soundness of our analysis.

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Speaker 1: It involves both our department but also other departments that

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Speaker 1: in the review process vet our data, vet our forecasts,

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Speaker 1: vet our analysis. I think that we have one of

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Speaker 1: the most robust processes of vetting in the world, and

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Speaker 1: we're always striving to improve. For example, the Independent Evaluation

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Speaker 1: Office reviews how we conduct our business, makes recommendations those

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Speaker 1: are addressed to management, their analyzing the board, and we

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Speaker 1: make constant progress in the way that we produce data

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Speaker 1: and analysis. The joy of what we do here is

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Speaker 1: we just said, Adam, pose it on from the Peterson

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Speaker 1: Institute with the spirited conversation of our fears of inflation,

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Speaker 1: and that devolves right over to fiscal affairs. In the

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Speaker 1: balance sheet, Can we have a normal discussion of inflation

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Speaker 1: given the excess balance sheets we have from this terrible pandemic.

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Speaker 1: The uncertainty that we're facing has exactly to do with

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Speaker 1: the pandemic. As you put it. The fact that we

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Speaker 1: have these locations in the balance between supply and demand

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Speaker 1: is creating bottlenecks in specific sectors and price spikes that

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Speaker 1: may last for a while while the economy rebalances and

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Speaker 1: makes its transition to a new growth path. In a

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Speaker 1: situation like that, central banks, if inflation and inflation expectations

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Speaker 1: are well anchored for the medium to long term, should

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Speaker 1: look through these transitory price spike and conduct monetary policy

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Speaker 1: with a steady hand with fiscal affairs. The leaders of

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Speaker 1: these institutions, and frankly, world leaders are going to turn

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Speaker 1: to you with the overarching question, can emerging markets do

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Speaker 1: better in crisis now because they have better fiscal affairs?

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Speaker 1: And it does fall back into the governance of the

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Speaker 1: I m F and the World Bank and other institutions.

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Speaker 1: G Seven twenty is well, can you report through your

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Speaker 1: research that emerging markets are more fiscally sound now than

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Speaker 1: they've ever been. Emerging markets, like all country groups, are

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Speaker 1: very etro genious. Inside We point out two risks of

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Speaker 1: divergencies into recovery and inside the country groups. Probably the

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Speaker 1: most ectro genious of all country groups is the emerging markets.

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Speaker 1: We emphasize very much in the fiscal money sor that

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Speaker 1: you just quoted the importance of strengthening the credibility of

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Speaker 1: public finances. We recommend to all countries that they should

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Speaker 1: maintain or build the credibility of their physical frameworks because

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Speaker 1: it pays off. How does it pay off. It pays

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Speaker 1: off in terms of better financing conditions for the treasury.

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Speaker 1: It pays off in more flexibility to get financing when

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Speaker 1: it's needed. It's therefore a precious insurance mechanism to have

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Speaker 1: in times of stress like COVID nineteen. Then there's China.

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Speaker 1: Explain to us from your chair the transparency of China

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Speaker 1: and your observation on the speculation and real estate in

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Speaker 1: China and what it does to their fiscal structure, both

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Speaker 1: government and private. Let me focus on the issue of

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Speaker 1: public finance transparency in China. We have published preliminary estimates

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Speaker 1: on the base of the Global Debt database that covers

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Speaker 1: public debt, nonfinancial corporate debt, and household debt. And one

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Speaker 1: of the challenges that we face in the case of

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Speaker 1: China is looking at what is exactly public sector debt,

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Speaker 1: what is non financial corporate debt, that is private debt

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Speaker 1: Given the role that state owned enterprises, given the role

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Speaker 1: that local government's financial vasia, you're confident in that trend

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Speaker 1: parency right now or at least a trend to improving transparency.

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Speaker 1: I believe that the Chinese authorities have been improving transparency

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Speaker 1: and they have very committed to improving it further, and

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Speaker 1: we look forward to work together with the Chinese authorities

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Speaker 1: to do just that. We are out of time. We

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Speaker 1: have an exceptionally busy day in New York with bank

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Speaker 1: earnings and such. I'm pleased to report to you, sir,

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Speaker 1: the American banks are profitable. I hope that will make

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Speaker 1: make the day better at the I m F. Peter

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Speaker 1: gaspar whether us he is with the I m F

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Speaker 1: and truly has changed our worldwide debate on the balance

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Speaker 1: sheet and on fiscal affairs. Kenna Lean is with us,

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Speaker 1: and Kenn I want to go to the power point,

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Speaker 1: the Fraser power point, and I want to make real clear.

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Speaker 1: What sticks out to me is the challenge to narrow

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Speaker 1: the return gap. What does that mean in English? What means?

431
00:25:57,720 --> 00:26:01,479
Speaker 1: First of all, City Group shares are still trading lowest

432
00:26:01,600 --> 00:26:04,600
Speaker 1: in terms of price to that tangible book value at

433
00:26:04,600 --> 00:26:07,720
Speaker 1: a discount. So the market is looking for catalysts. It's

434
00:26:07,760 --> 00:26:12,320
Speaker 1: not necessarily just uh normal operations, but what do you

435
00:26:12,400 --> 00:26:16,240
Speaker 1: do with disparaged businesses around the world? Particularly in Latin

436
00:26:16,280 --> 00:26:20,000
Speaker 1: America and Southeast Asia. They did a bit of that

437
00:26:20,359 --> 00:26:23,800
Speaker 1: two quarters ago, but the market or even Mike Mayo

438
00:26:23,920 --> 00:26:27,480
Speaker 1: is looking for some bigger catalysts, which is really, how

439
00:26:27,520 --> 00:26:33,040
Speaker 1: do you streamline this bank? Uh? Jane Fraser's management consultant

440
00:26:33,040 --> 00:26:37,000
Speaker 1: background no different than James Gorman. So the wheels are spinning,

441
00:26:37,119 --> 00:26:39,760
Speaker 1: but you know, I think it may have to wait

442
00:26:39,800 --> 00:26:42,879
Speaker 1: for investor day later in the year. It's not gonna

443
00:26:42,920 --> 00:26:46,680
Speaker 1: happen today on the earnings call. But City again is

444
00:26:46,720 --> 00:26:50,600
Speaker 1: a lagger to the other banks which have a much

445
00:26:50,680 --> 00:26:55,160
Speaker 1: bigger focus in North America. That's the big difference. Ken.

446
00:26:55,200 --> 00:26:58,240
Speaker 1: I want to dig a little bit into this increase

447
00:26:58,359 --> 00:27:02,920
Speaker 1: year over year in equity trading revenue, far beating estimates

448
00:27:02,920 --> 00:27:04,800
Speaker 1: when it comes in at one point to three billion

449
00:27:04,920 --> 00:27:09,120
Speaker 1: versus million dollars. John was saying earlier that analysts were

450
00:27:09,200 --> 00:27:11,920
Speaker 1: expecting what do you make of this at a time

451
00:27:12,080 --> 00:27:15,119
Speaker 1: when banks are trying to tow the line between taking

452
00:27:15,119 --> 00:27:19,119
Speaker 1: on more risk, appealing to regulators, and at least showing

453
00:27:19,200 --> 00:27:22,760
Speaker 1: that shareholders that they can drive revenue going forward. Well,

454
00:27:22,760 --> 00:27:24,639
Speaker 1: there's two parts that. First of all, we don't like

455
00:27:24,720 --> 00:27:27,760
Speaker 1: to look back, but it was a week quarter last year.

456
00:27:28,359 --> 00:27:31,680
Speaker 1: City has been actually hiring like crazy last year into

457
00:27:31,720 --> 00:27:34,880
Speaker 1: this year in equity trading, so I think that speaks

458
00:27:34,920 --> 00:27:40,840
Speaker 1: to thetent um in terms of regulation. We're fine, you know.

459
00:27:41,080 --> 00:27:46,879
Speaker 1: It's the risk measure that banks are taking was telegraph

460
00:27:46,960 --> 00:27:50,400
Speaker 1: of course with the June FED stress tests, and they

461
00:27:50,440 --> 00:27:54,000
Speaker 1: came through and flying colors. Um. So I'm not too

462
00:27:54,040 --> 00:27:57,560
Speaker 1: concerned about equity trading. But the key here is what

463
00:27:57,760 --> 00:28:01,840
Speaker 1: moves these stocks is recurring revenue you and return of capital.

464
00:28:02,200 --> 00:28:05,200
Speaker 1: So you don't want to take outsize risk or into

465
00:28:05,240 --> 00:28:09,040
Speaker 1: the level three assets of derivatives because you have to

466
00:28:09,040 --> 00:28:12,800
Speaker 1: put more capital to it. Morgan Stanley understands us. Most

467
00:28:12,840 --> 00:28:15,760
Speaker 1: of the banks understand us, you know. So it's calibrated.

468
00:28:15,800 --> 00:28:17,960
Speaker 1: It's not trying to head it out of the park

469
00:28:18,320 --> 00:28:21,560
Speaker 1: like we saw right before the financial crisis. Can on

470
00:28:21,680 --> 00:28:23,840
Speaker 1: belf of all of us to Team Surveillance. Thank you

471
00:28:23,920 --> 00:28:26,240
Speaker 1: so much for your time commitment here from c f

472
00:28:26,359 --> 00:28:29,560
Speaker 1: R A this morning. It's really world class analysis and

473
00:28:29,640 --> 00:28:37,840
Speaker 1: these important and very large banks. The popular narrative is

474
00:28:37,880 --> 00:28:40,000
Speaker 1: to do the work, and UBS has done the work.

475
00:28:40,080 --> 00:28:43,000
Speaker 1: For some real caution. They have made a how shift

476
00:28:43,360 --> 00:28:46,680
Speaker 1: to optimism not your level continues with us their senior

477
00:28:46,760 --> 00:28:49,719
Speaker 1: US equity strategists, Nady, I want to talk about what

478
00:28:49,800 --> 00:28:53,000
Speaker 1: we see in big tech in those surprise maybe we

479
00:28:53,120 --> 00:28:55,880
Speaker 1: see it in other sectors as well. And that is

480
00:28:55,880 --> 00:28:59,520
Speaker 1: the idea of the issuance of new debt still with

481
00:28:59,720 --> 00:29:03,160
Speaker 1: lower rates, still with low real rates. That moves right

482
00:29:03,240 --> 00:29:05,720
Speaker 1: over to use of cash. We have use of new

483
00:29:05,800 --> 00:29:09,960
Speaker 1: debt to be used in use of cash for shareholder

484
00:29:10,040 --> 00:29:15,000
Speaker 1: by back. Do we underestimate that trend? We do underestimate

485
00:29:15,040 --> 00:29:17,160
Speaker 1: the share of the power of sharehold of buy Box.

486
00:29:17,240 --> 00:29:19,440
Speaker 1: You know, we have seen been a pick up in

487
00:29:19,480 --> 00:29:22,840
Speaker 1: five bucks announcement this year. Actually buybacks announcements are on

488
00:29:23,000 --> 00:29:26,120
Speaker 1: case to be near record level as we saw post

489
00:29:26,160 --> 00:29:30,880
Speaker 1: the last administration UM corporate tax reform or relief, and

490
00:29:30,960 --> 00:29:35,080
Speaker 1: so historically by Box has added about two basis points

491
00:29:35,080 --> 00:29:37,360
Speaker 1: to EPs growth and so that could be a real

492
00:29:37,400 --> 00:29:41,120
Speaker 1: tail one as we get into two and corporation return

493
00:29:41,200 --> 00:29:45,880
Speaker 1: more cash and shareholders. Madame Leguard spoke today in Washington

494
00:29:45,960 --> 00:29:49,880
Speaker 1: the years being Central Bank President of the second round effect?

495
00:29:50,560 --> 00:29:54,480
Speaker 1: What is the second round effect for corporate officers right now,

496
00:29:54,880 --> 00:29:59,720
Speaker 1: adapting to the economic cards they've been given. I think

497
00:29:59,760 --> 00:30:03,320
Speaker 1: that corporations have to continue to manage at the expense side.

498
00:30:03,360 --> 00:30:05,160
Speaker 1: I mean, we saw some of that coming through the

499
00:30:05,200 --> 00:30:08,680
Speaker 1: banks um this this morning and yesterday, and in terms

500
00:30:08,720 --> 00:30:10,880
Speaker 1: of concerns around to pick up an interest rate and

501
00:30:11,040 --> 00:30:14,040
Speaker 1: just give me an expenses um. We also have to

502
00:30:14,040 --> 00:30:17,040
Speaker 1: watch that from a wage road standpoint, we're seeing a

503
00:30:17,080 --> 00:30:19,440
Speaker 1: pickup in wage wrote. That is something that we're closely

504
00:30:19,440 --> 00:30:21,520
Speaker 1: watching because that that does tends to be a lot

505
00:30:21,560 --> 00:30:24,040
Speaker 1: stick year, and we know a lot of people are

506
00:30:24,080 --> 00:30:27,800
Speaker 1: sitting out of the job market for potential increase in wages.

507
00:30:28,120 --> 00:30:30,640
Speaker 1: One of the most interesting aspects of the optimism that

508
00:30:30,680 --> 00:30:32,840
Speaker 1: we're feeling this week is that it comes in tandem

509
00:30:32,920 --> 00:30:36,440
Speaker 1: with pricing in rate hike sooner rather than later. Right now,

510
00:30:36,720 --> 00:30:39,600
Speaker 1: the expectation is for at least one rate hike next year,

511
00:30:39,840 --> 00:30:43,000
Speaker 1: and potentially two or more in two thousand twenty three.

512
00:30:43,120 --> 00:30:45,680
Speaker 1: How much does that fly in the face of this

513
00:30:45,840 --> 00:30:48,040
Speaker 1: five thousand SMP call of years by the end of

514
00:30:48,120 --> 00:30:52,640
Speaker 1: next year, we're looking for rate highs to begin in

515
00:30:52,720 --> 00:30:55,360
Speaker 1: early three. And now, of course a lot of this

516
00:30:55,520 --> 00:30:58,400
Speaker 1: is going to be dated dependent. You know, obviously everyone

517
00:30:58,480 --> 00:31:01,760
Speaker 1: is watching inflation watching and recovery in the job market.

518
00:31:01,800 --> 00:31:06,240
Speaker 1: And also watching for a potential real celebration in economic growth.

519
00:31:06,520 --> 00:31:10,400
Speaker 1: We don't think that the FED will move to preemptively.

520
00:31:10,440 --> 00:31:12,960
Speaker 1: We think that the FED will people are cautious obviously,

521
00:31:12,960 --> 00:31:16,640
Speaker 1: will get tapering up asset purchasing program later this year.

522
00:31:16,760 --> 00:31:19,560
Speaker 1: But we are looking for ray tipes in three. Even

523
00:31:19,600 --> 00:31:22,960
Speaker 1: if rate tip gets full forward by one one high

524
00:31:22,960 --> 00:31:24,800
Speaker 1: in twenty twenty two, we still don't think that that

525
00:31:25,080 --> 00:31:27,840
Speaker 1: drills the equity market store ry. What about two and

526
00:31:27,880 --> 00:31:31,680
Speaker 1: what's the breaking point here? I think that if you

527
00:31:31,680 --> 00:31:33,720
Speaker 1: start to see two or three ray tipes in twenty

528
00:31:33,840 --> 00:31:36,280
Speaker 1: twenty two, that will be a cause for the market

529
00:31:36,320 --> 00:31:39,480
Speaker 1: to take cause. Obviously, then people will become concerned that

530
00:31:39,520 --> 00:31:42,239
Speaker 1: the FED might be moving to aggressively. As we know,

531
00:31:42,400 --> 00:31:46,240
Speaker 1: like historically I said of the most recent procession, most

532
00:31:46,240 --> 00:31:49,200
Speaker 1: recessions have been caused by any sort of FED, a

533
00:31:49,280 --> 00:31:52,040
Speaker 1: FED mistake, and so that would give us some pause

534
00:31:52,160 --> 00:31:56,360
Speaker 1: think that policy error here. Not even well, we see

535
00:31:56,440 --> 00:32:01,800
Speaker 1: combinations transactions that are simply about the drell did word synergy.

536
00:32:01,880 --> 00:32:04,160
Speaker 1: It's been sort of quiet this year. I would suggest,

537
00:32:04,200 --> 00:32:06,880
Speaker 1: as we come out of this pandemic, is everybody going

538
00:32:06,960 --> 00:32:09,800
Speaker 1: to get the urge to merge? I think so you

539
00:32:09,840 --> 00:32:12,480
Speaker 1: could see a potential pickup and M and A activity.

540
00:32:12,640 --> 00:32:15,880
Speaker 1: I think that companies have been more on black because

541
00:32:15,880 --> 00:32:18,200
Speaker 1: there are is a lot going on in Washington around

542
00:32:18,200 --> 00:32:21,560
Speaker 1: corporate towns. Form what does that really look like? Hopefully

543
00:32:21,560 --> 00:32:23,840
Speaker 1: we'll get more details in the next month or so,

544
00:32:24,160 --> 00:32:26,720
Speaker 1: and I think that will have a better position companies

545
00:32:26,760 --> 00:32:29,880
Speaker 1: to look to do M and A in twenty twenty two.

546
00:32:30,000 --> 00:32:33,840
Speaker 1: Companies are flush with cash. Valuations have moved up as

547
00:32:33,880 --> 00:32:37,200
Speaker 1: well as companies share prices, and so companies might also

548
00:32:37,360 --> 00:32:41,920
Speaker 1: use that as a way to acquire the companies. And Nadia,

549
00:32:41,920 --> 00:32:43,719
Speaker 1: I love catching up with you tonight. Now different it's

550
00:32:43,760 --> 00:32:46,280
Speaker 1: going to hear from you. UBSA is Nadia level. They're

551
00:32:46,320 --> 00:32:49,800
Speaker 1: on a security market. This is the Bloomberg Surveillance Podcast.

552
00:32:50,080 --> 00:32:53,440
Speaker 1: Thanks for listening. Join us live weekdays from seven to

553
00:32:53,520 --> 00:32:57,000
Speaker 1: ten a m. Eastern on Bloomberg Radio and on Bloomberg

554
00:32:57,040 --> 00:33:00,800
Speaker 1: Television each day from six to nine a m. For

555
00:33:01,040 --> 00:33:05,959
Speaker 1: insight from the best in economics, finance, investment, and international relations.

556
00:33:06,440 --> 00:33:11,120
Speaker 1: And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,

557
00:33:11,280 --> 00:33:14,840
Speaker 1: Bloomberg dot com, and of course on the terminal. I'm

558
00:33:14,920 --> 00:33:17,560
Speaker 1: Tom Keene and this is Bloomberg,