Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane.
Speaker 1: Daily we bring you insight from the best in economics, finance, investment,
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Speaker 1: thought we'd bring in someone truly expert on that short
Speaker 1: term area and it's linkage is to behavior and particularly
Speaker 1: to corporate trust. He is Anthony Krisnsi, a penco working
Speaker 1: with Jerome Schneider. How is Jerome Schneider's week, Ben? I mean,
Speaker 1: you guys are in the short term space. Are you
Speaker 1: guys just watching the long duration guys lather up? Or
Speaker 1: or is a guy like Jerome Schneider had that invests
Speaker 1: and PIMCO broadly invest in short term instruments. Is still
Speaker 1: finding value there because it's still yields to be had.
Speaker 1: Three month librar is still in the twos. It will
Speaker 1: go lower, but it's still higher than these longer term
Speaker 1: interest rates. That's what an inversion is, and so there's
Speaker 1: some value there, especially if you think that the federal
Speaker 1: deserved will deliver a fewer indust rate cuts than the
Speaker 1: market is priced for the markets thinking there's a fifty
Speaker 1: chance of a half point cut in September, and the
Speaker 1: market is priced for one percent policy rate by the
Speaker 1: end of that's down from the current level of two
Speaker 1: and a quarter. And so if you think that these
Speaker 1: these rates will won't be realized, then there's still some boundy. Okay, well,
Speaker 1: what's the value now a little bit away from the
Speaker 1: frenzy of Tuesday, Wednesday, Thursday to an emergency FED cut.
Speaker 1: I mean, what's the so what of waiting for the meeting,
Speaker 1: are actually just saying Okay, we're gonna move this thing
Speaker 1: forward and coming in cut? Tom? But did you look
Speaker 1: at yesterday's retail sales report and the figures in there
Speaker 1: within it, which was so robust and indicating that the
Speaker 1: economy has reasonable momentum going into the third cord. The
Speaker 1: way GDP is calculated, it's looks it looks at the
Speaker 1: the average of one courts activity versus the average of another.
Speaker 1: And so if activity ended a quarter strongly, and it
Speaker 1: did in the second court of June, that means it
Speaker 1: begins the third quarter at a level that's above the
Speaker 1: previous court is average, and so it looks like growth
Speaker 1: will be reasonably good nearly the Fed wants it, which
Speaker 1: is around two percent or so in the third quarter.
Speaker 1: That's not a reason to panic financial conditions. Perhaps if
Speaker 1: they would dire, they would it would be But with
Speaker 1: the SMP five up in the low teens and NASTACK
Speaker 1: up in the high teens, is that a reason to
Speaker 1: put press the panic button, especially when policy related issues
Speaker 1: that can't control are causing the nervousness The panic buttons
Speaker 1: setting plenty of cash into money markets, right, I mean,
Speaker 1: we saw one of the biggest inflows in the week
Speaker 1: and in Wednesday eighteen billion dollars of inflows, so the
Speaker 1: ten year high we're currently at that when it comes
Speaker 1: to money market funds, I want to switch gears a
Speaker 1: little bit. There was a white paper out of black
Speaker 1: Rock basically arguing for helicopter money in the next downturn
Speaker 1: that came out yesterday, and I want to talk about
Speaker 1: this because it's sort of goes to the zeitgeist of today,
Speaker 1: which is this fear that the Federal Reserve is out
Speaker 1: of ammunition, which is what we're seeing in the yield curve,
Speaker 1: and that the next go around is going to have
Speaker 1: to be extreme and very different. Do you buy into
Speaker 1: the idea of some sort of helicopters policy. In fact,
Speaker 1: Marina Eckles echals there's the FED chief. The FED building
Speaker 1: today is named after Echo's called the Echos Building. He
Speaker 1: talked about the FED pushing on a string. One could
Speaker 1: say that the FED is today in other central banks
Speaker 1: pushing on a string, and no matter what they do
Speaker 1: in terms of putting money in the system, it will
Speaker 1: not have impact. One could say that this, this helicopter
Speaker 1: idea was attempted in two thousand nine in the American
Speaker 1: Recovery and Reinvestment Act. How well, it's a different form. Well,
Speaker 1: it was one form. Perhaps it was the first salvo
Speaker 1: um the The US deficit was about ten percent of
Speaker 1: g d P. In that deficit, there was a spending
Speaker 1: agreement to to distribute fifty million checks too Americans, or
Speaker 1: about two fifty dollars. We've forgotten about it because it's
Speaker 1: such a tiny amount of money. So where where is
Speaker 1: that money today? Or in other words, where would that
Speaker 1: money go in the future if they were given. Did
Speaker 1: it go towards maybe a nice movie, dinner, clothing? Who
Speaker 1: knows what it's all gone? It didn't get invested, so
Speaker 1: how could it have any meaningful long term impact. If
Speaker 1: it's meaning if it simply goes towards consumption, letting people
Speaker 1: have some a little bit extra to spend. You're not
Speaker 1: trying helicopter money. I can tell but here, but but
Speaker 1: here's my question. I mean, how important are these questions? Uh?
Speaker 1: In terms of where people's minds are, They're very important,
Speaker 1: But they're moved there. They're they're the wrong questions because
Speaker 1: the too too often, and the President is doing this
Speaker 1: as well as the fingers appointed at the Fed and
Speaker 1: should be at the fiscal Authority, not the monetary authority,
Speaker 1: because they are the ones in control of of the
Speaker 1: way growth is um conducted or produced, not the central Bank.
Speaker 1: They produced one thing money. I want to go back
Speaker 1: to your wheelhouse, which is the short term paper market
Speaker 1: in the indications of trust. The old days, it used
Speaker 1: to be the commercial paper market. That's gone. What do
Speaker 1: you look at now is a measurement of trust, particularly
Speaker 1: in European banking and finance. What's the indicator you look
Speaker 1: at and what does it say? Well? One one of
Speaker 1: pimco's high investor, high conviction investments is to invest in
Speaker 1: European bank capital, not all banks, but many banks. It's
Speaker 1: and this is it's not too complicates. Understand, there's different
Speaker 1: levels of what's called the capital structure. The equity investor
Speaker 1: is the one that gets hurt most because they've directly
Speaker 1: involved in them. But a senior bond holder is senior
Speaker 1: and the first in line if something goes wrong, The
Speaker 1: equity holders last in line, the the bank capital owners
Speaker 1: second in line. One could say it's sliver above equity
Speaker 1: in the bank buddle structure. But we like those securities
Speaker 1: and that's a statement in itself because we wouldn't go there.
Speaker 1: We wouldn't invest in the security we thought the system
Speaker 1: were in in dire Do we go into the weekend
Speaker 1: and end of September frankly with the trust measures that
Speaker 1: you and Jerome Schneider look at intact? Is the system
Speaker 1: functioning in terms of liquidity? No, it SolV Yes, it's intact,
Speaker 1: but there is fragility. The biggest worry of all is
Speaker 1: that the and it's not trade, but that the U. S.
Speaker 1: And China are entering a cold started the starting this
Speaker 1: this start of a new Cold War that could have
Speaker 1: a longer period of implication because the trade story is
Speaker 1: a short term one. But the geopolitical tension, that the
Speaker 1: acidities trapped the named uh for the Graham Alison idea.
Speaker 1: I was going to Graham else that the rising power
Speaker 1: threatens an existing one at least to warfe and you've
Speaker 1: seen Great Dahlia talking about this on a linked video
Speaker 1: this week. In five years have been sixteen changes in
Speaker 1: leaders hedgemons as they're called. Twelve of those changes led
Speaker 1: to actual war. No one is calling for that, but
Speaker 1: we are traversing away from cooperation and short term paper
Speaker 1: to the Greek wars. Well, I mean, but this is
Speaker 1: actually where we're at right this sort of existential question
Speaker 1: of whether growth ever again and whether the state of
Speaker 1: geopolitical uh, geopolitical relations. But I do have to wonder
Speaker 1: going forward, because it does feel like there has been
Speaker 1: a change this week, last week we have tipped a corner.
Speaker 1: Is that an accurate characterists? Let me tell you what
Speaker 1: hasn't changed. Let's go back. Let's think Adam Smith in
Speaker 1: the Sevres the Wealth of Nations. He talked about this.
Speaker 1: I heard him on your show and the radio is listening.
Speaker 1: How is wealth created in the nations by individuals, companies
Speaker 1: all striving to fair bet and full themselves for their companies.
Speaker 1: Has this passion ending because of political uncertainty? No, we
Speaker 1: still will work week up every day. We're here on
Speaker 1: the radio all trying to help others to make money.
Speaker 1: Seven eight am in the morning. I'm done with the esoteric.
Speaker 1: Are we going to revisit an inverted yield curve? Or
Speaker 1: was that a scare? And we've come back to some
Speaker 1: normalcy set at a lower rate. DIO curve is not
Speaker 1: like that would be a lasting condition because the conditions
Speaker 1: that cause it the type that the Central Bank would
Speaker 1: generally respond to and cause it to disinvert. Anthony Cosenzi
Speaker 1: And what's great about Tony Cosenzi is there's a real
Speaker 1: palaty history and society across his discussion of finance. You
Speaker 1: mentioned the Chicago Cubs fan from from Chicago, Richard Taylor,
Speaker 1: the laureate on Behavioral Economic Did you, Lisa, did you
Speaker 1: ever do a course with Taylor? I would not like
Speaker 1: to do a seminar dark of the door with him.
Speaker 1: He's like huge. And of course Taylor talks to pimp
Speaker 1: all the time. And you mentioned Tony that this crazy
Speaker 1: week we've seen old people, which you know, Lisa doesn't
Speaker 1: understand this conversation old people look at the screening, go really,
Speaker 1: I mean there's a lot of that going on, right, Yes,
Speaker 1: And it's this bias that we have to remove. And Richard,
Speaker 1: by the way, I feel like, look at the screen
Speaker 1: not just race, but inflation and growth in the relationship
Speaker 1: to interest rates and economies. M. Richard Taylor's has is
Speaker 1: a Nobel laureate and behavioral economics, and PIMCO employs him.
Speaker 1: And we had one of his former students, Rique Mamendia,
Speaker 1: in attendance at one of our forums in May, and
Speaker 1: we discussed this idea of age having an impact on
Speaker 1: how people think about things, including inflation. And she even
Speaker 1: studied the Federal Reserve and how different members of the
Speaker 1: Fed because of their ages, might think differently about whether
Speaker 1: inflation will pick up. And that's important to investors because
Speaker 1: what the Fed thinks about the future from inflation effects
Speaker 1: when it decides to move on interest rates and how
Speaker 1: by how much stuck in our past? Me fifty plus
Speaker 1: says uh, Well, I saw a CPI at six percent
Speaker 1: in eight nine, so inflation could pick up when growth
Speaker 1: picks up, but it hasn't. It's son and three kids
Speaker 1: will do that preserve you or they'll take you down.
Speaker 1: Let me tell you it's the other way around. I
Speaker 1: don't know. I'm a tony with hair like on Saturday
Speaker 1: night fever. That's that's that's what's causing. But we think
Speaker 1: differently about We think inflation will pick up because we
Speaker 1: observed it, we experienced it, But unfortunately a baby boomer
Speaker 1: like me will ultimately come out of the equation. In surveys,
Speaker 1: you'll see inflation expectations fall over time because at least
Speaker 1: of people like you and other younger individuals will be
Speaker 1: part of that survey more and more and their experiences
Speaker 1: will be biased by their low inflation experience. This is
Speaker 1: this is really tremendous. You guys both are you know
Speaker 1: you're you're younger than I. Therefore care for your towards
Speaker 1: not understanding the I'm the new it's the new crop.
Speaker 1: At least of the new crop of PhDs are the
Speaker 1: ones that are gonna that are going to have the
Speaker 1: future so called Phillips curve models. The most exciting material
Speaker 1: will probably come out in the next decade because I'll
Speaker 1: have experienced things that that that we haven't created these
Speaker 1: other things. You know, I hear both sides of this. Number. One,
Speaker 1: I hear people kind of are are stuck in the
Speaker 1: past and are looking for inflation models that are different.
Speaker 1: And then I hear the other side of the equation,
Speaker 1: which is, if you look at the trading desks on
Speaker 1: Wall Street, they're all under the age of thirty and
Speaker 1: they've never seen a cycle and they don't know how
Speaker 1: to operate. So which is it? Good points, So it's
Speaker 1: it's possible then with their bias towards inflation being low,
Speaker 1: policymakers will come up with an idea that creates more
Speaker 1: inflation and they'll be blindsided. So there's the other side
Speaker 1: of that equation. Good point. I'm not big on like
Speaker 1: viewer questions and all that, but this woman is absolutely brilliant.
Speaker 1: This is some Julius and he's got it in trump
Speaker 1: like all caps. Ask Tony what savers are to do
Speaker 1: in new lower low rate environment? All the blatherer we're
Speaker 1: doing sailor all the rest of it. The fact that
Speaker 1: I mane should forget about it. What do savers? Well,
Speaker 1: we think what to deploy that financial capital? It's it's electronic,
Speaker 1: it's paper. Why not make it something physical? As you know,
Speaker 1: there is a bias toward investments, private equity and real assets,
Speaker 1: including real estate. Owning businesses is also a good idea. Yes,
Speaker 1: we have too few in the amount of savings to
Speaker 1: do all of that, so it is. It is a
Speaker 1: difficult situation, but it depends on one's age. And if Julius,
Speaker 1: you're young enough, don't bet against America. Warren Buffett would
Speaker 1: tell you that, don't bet against capitalists. People worry about populist,
Speaker 1: but what about the capitalist. Isn't it the business owner,
Speaker 1: the individual worthy of some attention, because aren't they the
Speaker 1: true disruptors? That phone you're carrying and perhaps sent tom
Speaker 1: the message on? Do you think that that was made
Speaker 1: by a populist? Some capitalists decided to make it and
Speaker 1: then making a profit, and you could have made a
Speaker 1: profit investing in that individual who made those I wonder
Speaker 1: if he's always as philosophical or if this era unfortunately
Speaker 1: negative yields towards things that I shouldn't be philosophical about.
Speaker 1: Is negatively very quickly, we're gonna run out of time,
Speaker 1: Mr Cosenzi, but our negative yields here to stay. Or
Speaker 1: do you still look at him as a one off?
Speaker 1: Two admiration, negad Adventistrates destroy money, so it is unlikely
Speaker 1: they will be sustained over the long run. They also
Speaker 1: siphon money from the private sector to the government, which
Speaker 1: is an inefficient use of money. So it's improbable that
Speaker 1: the last and it's a bad idea and something that
Speaker 1: federal is unlikely to want to avoid. That's good. It's
Speaker 1: a perfect time, Tony Coni. Thank you so much, Thanks
Speaker 1: so much. Absolutely one thing. This is one of the
Speaker 1: quietest notes of the week, and it's from City Group.
Speaker 1: It's one, two, three, four, five, six paragraphs. Big deal.
Speaker 1: Dana Peterson worked us up in the car going to work.
Speaker 1: Uh this morning, she joins us. Now, Dana, it's a
Speaker 1: it's a note of optimism. I mean, there's a consumption
Speaker 1: driven optimism to the American economy. Does that EBB or
Speaker 1: does that sustain us in the next year? Well, I
Speaker 1: think that. You know, we're definitely seeing this theme of
Speaker 1: of domestic resilience driven by households and government uh and
Speaker 1: external weakness. And certainly when we saw the retail sales,
Speaker 1: with the exception of autos, we saw across the broad strength,
Speaker 1: a board strength and even department stores, which is posted
Speaker 1: a negative string of negative prints were up, Dana. Key
Speaker 1: question for me this month this year, who leads the
Speaker 1: consumer our businesses when it comes to the cycle. Well,
Speaker 1: I think it's going to be It's definitely going to
Speaker 1: be consumers, because what we're seeing is that the US
Speaker 1: is participating in this global trade and manufacturing slump, but
Speaker 1: we're it's still expressing resilience and other sectors and that's
Speaker 1: being certainly helped by the consumer as well as the
Speaker 1: massive amounts of discal stimulus that was implemented last year
Speaker 1: and then will be implemented yet again. So what's your
Speaker 1: GDP called twelve months out? Just to frame the conversation
Speaker 1: is City Group and Dana Peterson and two percent plus?
Speaker 1: Are you below two percent? We still have two percent
Speaker 1: and that's because you have two different drivers going on.
Speaker 1: On the one hand, the downward revisions from the benchmark
Speaker 1: GDP release placed downward pressure on on growth for next year,
Speaker 1: so we might see below two percent. But on the
Speaker 1: other hand, you have upward pressure from the bipart are
Speaker 1: some budgets aft between nineteen So together that's keeping you
Speaker 1: right around supercent Danta. What will be the effect of
Speaker 1: the FED cutting fifty basis points in September, and some
Speaker 1: people are hoping, well, that's a great question. We asked
Speaker 1: our our investors who read our research, and they said,
Speaker 1: it's probably just going to inflate asset prices. That's not
Speaker 1: really going to drive additional consumption or even urge businesses
Speaker 1: to invest. And indeed, businesses are on the sidelines because
Speaker 1: they're concerned about the external environment. They're concerned. They're very
Speaker 1: uncertain with respect to the trade wars between US and China,
Speaker 1: and in that environment, the said, it seems like it's
Speaker 1: more willing to cut clearly, but will it upset all
Speaker 1: the weakness from abroad? Probably not. Yeah, data, I guess
Speaker 1: there's also a sort of angst over markets. Have we shifted?
Speaker 1: Has something materially changed over the past few weeks when
Speaker 1: it comes to sentiment and the direction of markets given
Speaker 1: the fact that businesses aren't spending as much in the
Speaker 1: wake of uncertainty, etcetera. I mean, have we entered a
Speaker 1: new regime, a new paradigm. Well, I think we've been.
Speaker 1: We've been moving in that direction since it earlier this year.
Speaker 1: We've seen that and the FED speak, you know, the
Speaker 1: FED went from being pretty hawkish in December of last
Speaker 1: year to putious native watching and then shifting to an
Speaker 1: actual rate cut and signaling that there could be more. Okay,
Speaker 1: but this is really critical at Lisa brought up as
Speaker 1: the arch theme of the week in the Central Bank,
Speaker 1: and it is we've had a regime shift in bonds inversion,
Speaker 1: distant version, but clearly a lower set on yield. Has
Speaker 1: it been a Bullard like regime shift or is it
Speaker 1: business as usual for Philip's curve structured fed Well, I
Speaker 1: think there has been a regime ship in terms of
Speaker 1: markets viewing this in version of the yield curve psychologically,
Speaker 1: and I think it us have fed a little bit
Speaker 1: more ammunition to go ahead. This is critical, Lisa. I mean,
Speaker 1: I'm glad you brought this up because it really goes
Speaker 1: to the heart of the communication the FEDS speak. We're
Speaker 1: going to get is do they come over to build
Speaker 1: Bullard's important short paper. I'm going to guess three years
Speaker 1: ago where they've got a shift to regimes study versus
Speaker 1: a more theoretical construction. Yeah, and Dana, I do have
Speaker 1: to wonder also we're talking about the Federal Reserve and
Speaker 1: their reaction function. But I do have to wonder whether
Speaker 1: we're past the point of the U. S And China
Speaker 1: coming to some agreement and making this all better. Whether
Speaker 1: we've sort of passed that point at the at a
Speaker 1: time when businesses aren't investing and we've already gotten that
Speaker 1: sort of baked into the economy. Well, I don't know
Speaker 1: that we're past the point for any change, um, meaning
Speaker 1: things can get better. Certainly, President Trump said that he's
Speaker 1: waiting for a phone call from President She and the
Speaker 1: Chinese have been willing to deal with the US on
Speaker 1: the point by point basis, meaning China is not willing
Speaker 1: to go further than the US is. So I think
Speaker 1: there is some time to reverse on this course. Um.
Speaker 1: I mean, are we, you know, headed for a regime
Speaker 1: where there's going to be perpetually weak growth. Probably not.
Speaker 1: I mean, this is just part of the what happens
Speaker 1: when you have a trade war. You know, it's global
Speaker 1: and unless you have some change, it's going to be weak. Dana,
Speaker 1: we've been talking about the yield curve and version the
Speaker 1: gap between twos and tens uh throughout the week. I'm wondering,
Speaker 1: do you think that is an indicator of recession in
Speaker 1: the next six or twelve months in the United States. Well,
Speaker 1: I would suggest that you should never place all your
Speaker 1: ships on one measure um, and we know that there's
Speaker 1: been different activity at both ends of the curve. At
Speaker 1: the shorter end, you do have market signaling that the
Speaker 1: said policies are too tight, the FED needs to cut.
Speaker 1: At the longer end, some of that related to the
Speaker 1: equity market. People are also nervous about second half earnings
Speaker 1: and so they're buying treasuries as a you know, search
Speaker 1: for for equality. Right um, So I would suggest that
Speaker 1: it's not as strong as an indication. And plus you
Speaker 1: have quantitative easing which kind of dampens back into the
Speaker 1: Yolk curve as well. So would look at a multitude
Speaker 1: of indicators. And right now the labor markets doing fine
Speaker 1: um and growth outlook is still healthy. We still have
Speaker 1: another round the fiscal stimulus in the US. I'm not
Speaker 1: sure if at all signals right now, if anything signaling
Speaker 1: a recession in the US. We are seeing signals of
Speaker 1: a potential flowdown or even a recession globally led by
Speaker 1: China and Germany, fueled by the trade wars. Dana, thank
Speaker 1: you so much. Dana Peterson with US with City Group
Speaker 1: this morning on a two percent economy. Two point zero
Speaker 1: percent economy, I believe is where she is. We are
Speaker 1: thrilled to bring in now for two sections, Michael Darta.
Speaker 1: He is at a profound impact on Bloomberg on the
Speaker 1: economy and Bloomberg surveillance synthesizing economics into markets. No one
Speaker 1: on the street uses Bloomberg charts like Michael dart is. Mike,
Speaker 1: what's the most important chart for you on the Bloomberg
Speaker 1: right now? What matters? And the zillions of charts you construct.
Speaker 1: Thanks for having me on, Tom. You know, I'm watching
Speaker 1: these various measures of the of the yield curve, both
Speaker 1: here and overseas, and you know, one thing that's really
Speaker 1: jumped out in the last week. I know, you know
Speaker 1: a lot of journalists have been focusing on the very
Speaker 1: brief inversion in the ten year to two years spread
Speaker 1: uh this week, but we've had other measures of the
Speaker 1: yield curve that certainly have some prominence in the academic literature,
Speaker 1: like the tenure to the T bill rate that have
Speaker 1: been inverted since May uh. And we're even you know,
Speaker 1: we're seeing that inversion intensify. And I think one reason
Speaker 1: for that was this hot CPI inflation report, which sounds
Speaker 1: pretty counterintuitive. If inflation comes in above expectations, why the
Speaker 1: heck would investors you want to buy bonds and invert
Speaker 1: the yield curve. Well, if that hot inflation report creates
Speaker 1: some more of a luctance for the Fed to to
Speaker 1: move in it gingerly fashioned, it could actually increase risks
Speaker 1: of a downturn. And I think that's, you know, part
Speaker 1: of what happened this week, even though it didn't get
Speaker 1: a lot of attention. So, Mike, here's the thing. I'm
Speaker 1: trying to square the sort of concern about recession that
Speaker 1: we saw pervasive throughout the week with the retail sales
Speaker 1: that we saw which were really good, and the fact
Speaker 1: that we saw retailers like Walmart post really good returns
Speaker 1: and results. How do you square those two realities. Yeah,
Speaker 1: that's a great question. So there there's I think been
Speaker 1: a lot of confusion in looking at some of these
Speaker 1: long leading indicators, like the yield curve is a is
Speaker 1: a very long leading indicator with quite a bit of variation. Historically,
Speaker 1: typically an inversion will occur anywhere between seven to twenty
Speaker 1: one months before a recession. So if we were just
Speaker 1: starting to see incipient and versions back in May and June.
Speaker 1: It would likely be way too early to see the
Speaker 1: coincident indicators meaning reach, hail, sales, production, jobs, incomes. Those
Speaker 1: are all coincident. They tell us how the economy did
Speaker 1: last month, but not necessarily how it will do a
Speaker 1: year from now. And all that data looks really strong.
Speaker 1: And that's one reason that historically when the curve inverts,
Speaker 1: the narrative about it being different this time and actually
Speaker 1: quite compelling because it looks different if you're looking to
Speaker 1: the coincident data, which is still healthy. Mike Michael, you
Speaker 1: lead your note with a demand side analysis of what
Speaker 1: the federal do cut rates help demand, etcetera, etcetera. How
Speaker 1: do you take the idea of central bank efficacy at
Speaker 1: the zero bound or even at the negative interest rate bound?
Speaker 1: Can can we have a can we have a trust
Speaker 1: and the outcomes that are traditional? Well, Tom, I think
Speaker 1: it's a question of if the central banks are behind
Speaker 1: the curve or not. So, you know, these falling interest
Speaker 1: rate levels are are one sign of central banks being
Speaker 1: less effective in the sense that you have growth momentum
Speaker 1: slowing and with that weaker momentum the whole structure of equilibrium,
Speaker 1: interest rates comes down, and and so you know, you
Speaker 1: could see a situation, you know, with the Fed, I
Speaker 1: think we're already seeing it where even though they've started
Speaker 1: to cut rates and they're expected to cut rates in
Speaker 1: the future, it may not revive growth because they're simply
Speaker 1: the curve. So we need the central banks to get
Speaker 1: ahead of the curve. What I be looking for is
Speaker 1: the bonds to sell off. I mean, I think if
Speaker 1: you continue to see the long bond yield making new loads,
Speaker 1: I mean, that is not a healthy sign for the
Speaker 1: business cycle. That's not what you would see if growth
Speaker 1: and inflation expectations for the future we're reviving in a
Speaker 1: sufficient fashion, we're gonna come back. But Michael, we got
Speaker 1: to talk about the major, major recession indicator, which is
Speaker 1: a line out the door. It Backdoor Donuts in Oak
Speaker 1: Bluffs and Martha's Vineyard. I mean, what are you seeing
Speaker 1: on the vineyard this year? I mean, you're a regular.
Speaker 1: Everybody knows you spend like six months out there every year.
Speaker 1: I mean at the Artcliff Diner, at Backdoor Donuts. What
Speaker 1: do you indicate you know? I mean, you know, the
Speaker 1: restaurants are full and things are always pretty chipper out here, Tom,
Speaker 1: but this may not be a good reflection of reality.
Speaker 1: Let's put it that way. Really, you think with this,
Speaker 1: Michael Darta of m Camp Partners are thrilled he could
Speaker 1: be with us today, Michael, to fold into the equity
Speaker 1: markets in the long term ramifications for our listeners worldwide.
Speaker 1: James Bevan was just on with a tangible optimism about
Speaker 1: cash flow generation and the ability to buy here in
Speaker 1: the vicinity of here. Do you share that optimism or
Speaker 1: do you link equity performance into the angst of the
Speaker 1: bond market? Tom, I I don't share that optimism at
Speaker 1: the moment, simply because business cycle risks, meaning recession risks,
Speaker 1: I think, have been amplified to the highest level that
Speaker 1: we've seen so far during this economic expansion. And that
Speaker 1: doesn't mean the equity market is going to go straight down.
Speaker 1: But I do think the risk of a recession and
Speaker 1: typically what accompanies it a bear market, is elevated here
Speaker 1: if we think back to where we ended last year,
Speaker 1: where the market fell almost yet we didn't have these
Speaker 1: long leading indicators of recession flashing red at that point.
Speaker 1: My view, as you want to be bullish there now,
Speaker 1: with the equity market just off all time highs, in
Speaker 1: some real concerns coming out of credit markets, I would
Speaker 1: I would have a you know, a much more cautious
Speaker 1: posture here. Now go ahead, Sorry, Well, I just want
Speaker 1: to know, is a trade deal something that could save
Speaker 1: this economic cycle? You know, it's it's certainly possible if
Speaker 1: it boosted optimism, optimism enough to disinvert the yield curve
Speaker 1: and you know, sort of indirectly put the FED into
Speaker 1: a more accommodative stance. We've been seeing just the opposite
Speaker 1: on Fortunately, it seems like a deal is almost wishful
Speaker 1: thinking now. I mean, if we look at how the
Speaker 1: administration has has acted, UM, it's not clear to me
Speaker 1: at all that there's even a desire for a deal,
Speaker 1: at least one that would you know, completely reverse the tariffs.
Speaker 1: I think the best we can hope for is sort of,
Speaker 1: you know, in an environment where the trade war doesn't
Speaker 1: continue to escalate. Um, And that's probably not going to
Speaker 1: cut it in terms of a big turnaround and the look,
Speaker 1: so let's say that's the base case. When do we
Speaker 1: get recession in the US, I would say, you know,
Speaker 1: we'd probably be looking at you know, business cycle peaks
Speaker 1: sometime around next summer, you know, through the through the winner.
Speaker 1: It's really looking ahead a year, maybe a little bit longer.
Speaker 1: The key here will be to watch some of these
Speaker 1: intermediate and shorter term leading indicators for confirmation. And it's
Speaker 1: probably still too soon to expect to see much, but
Speaker 1: even we can look at high yield spreads for example.
Speaker 1: So far no recession indicated by you know, by credit spreads,
Speaker 1: but they do suggest that growth is slowing, and certainly
Speaker 1: we could see more pressure they're going into next year.
Speaker 1: And then for listeners, I would watch, if you want one,
Speaker 1: watch jobless claims, you know, claims on a year over
Speaker 1: year basis of phenomenally important recession indicator, only leaning by
Speaker 1: a few months, but still if you're rising or more
Speaker 1: year to year on that four week moving average, then
Speaker 1: you know, go into the bunker because business cycle is
Speaker 1: probably coming down. Mica. One final question, and that is
Speaker 1: that there's an understanding of goods disinflation and deflation and
Speaker 1: the angst of the gloom crew that service sector inflation
Speaker 1: will begin to disinflate. Is that feasible that all the
Speaker 1: goods manufacturing trade challenge rolls right over and actually affects
Speaker 1: service sector inflation. Tom It depends on, you know, on
Speaker 1: on how the Fed manages. So if if overall aggregate
Speaker 1: demand growth is allowed to slump, then that's exactly what
Speaker 1: you'll see. If not, then prices will be going up
Speaker 1: in some sectors and down in others. One thing I
Speaker 1: think it's important to point out is many people look
Speaker 1: at the almost one and a half percent ten year
Speaker 1: yield and they think this is being driven by central banks.
Speaker 1: But what's missed is the fact that year over year
Speaker 1: nominal GDP aggregate demand growth has slowed from a six
Speaker 1: percent year to year growth rate in you two of
Speaker 1: last year to four percent growth. That's two hundred basis
Speaker 1: points that any wonder that the tenure yield has fallen
Speaker 1: almost as much. It isn't to me, but it seems
Speaker 1: like that's, you know, a bit overlooked out there in
Speaker 1: the commentation. We leave Michael Darter with What made his
Speaker 1: claim was just as the dynamics of nominal GDP top
Speaker 1: line animal spirit into what we see in bonds and equities.
Speaker 1: Michael Darter, thank you so much for this extensive conversation.
Speaker 1: I'm an important Friday Kevin Carey has been one of
Speaker 1: the few people who has actually said when everybody calmed
Speaker 1: down and actually look at what's available, the programs, and
Speaker 1: the desire to fix this train wreck. He is with
Speaker 1: education policy. He has written on this for the Chronicle
Speaker 1: of Higher Education. Most importantly, he's worked at the Center
Speaker 1: on Budget and Policy Priorities, which is not only something
Speaker 1: liberals read, it's something conservatives read as well. He's out
Speaker 1: of Binghamton and Ohio State University. Kevin, We're honored to
Speaker 1: have you on the program. Uh, let's get to the
Speaker 1: crisis part of it. Everybody lathers hysterical about student debt.
Speaker 1: Is the is the hysteria warranted? Well, there's a couple
Speaker 1: of different ways to talk about a crisis. Some people
Speaker 1: analogize the student debt amount of student debt, which is
Speaker 1: grown and grown and grown to the two thousand eight
Speaker 1: housing crisis. That's about analogy. It's not the same thing.
Speaker 1: There's not a there's not a frothy securitization of student
Speaker 1: loans out there. People aren't speculating on other people's loans. Um.
Speaker 1: I think it is an enormous problem for a lot
Speaker 1: of people. And I think, uh, if you step way
Speaker 1: back and say, over the last thirty or forty years,
Speaker 1: we essentially decided to convert our higher education system to
Speaker 1: UH in many ways predominantly debt financed or substantially debt
Speaker 1: finance system. Um. I think it's it's that has not
Speaker 1: worked out well and it's hurting a lot of people. Okay,
Speaker 1: so let's look at the finance first. The quickest solution,
Speaker 1: of course, this comes up with the keyen household does
Speaker 1: any other household? Is the quickest solution to get over
Speaker 1: this ten year or fifteen year payback and extended out
Speaker 1: over a lifetime of employment. I'm going to guess thirty
Speaker 1: or forty years. Well, I mean, you can extend a
Speaker 1: loan out to thirty years, um, but really there's no
Speaker 1: reason to do that because we have a system of
Speaker 1: UM income based for payment and loan forgiveness now out
Speaker 1: the federal government runs. So you can UM at most
Speaker 1: make your monthly payments, say fixed percentage of your disposable income,
Speaker 1: and then any UM remaining data is forgiven after twenty
Speaker 1: years or if you're in a public service job, ten years,
Speaker 1: which is actually a really good deal. Although we're having
Speaker 1: a lot of problems now with the initial implementation of
Speaker 1: that program. I mean, I mean my point here is,
Speaker 1: people like you and others are making all these well
Speaker 1: meaning efforts to write this program, and I would suggest
Speaker 1: families aren't aware of all these efforts. Am I right
Speaker 1: or wrong on that? I don't think people realize that
Speaker 1: we have a a income based repayment and loan forgiveness program.
Speaker 1: I mean then, and we've had it since two thousand
Speaker 1: and seven. The reason they don't realize how why don't
Speaker 1: we know this? Um? The programs are too complicated. There
Speaker 1: are too many options for repaying your loans. Every Congress
Speaker 1: never he's away old options for repaying loans. They just
Speaker 1: keep adding new ones. So we're at the point now
Speaker 1: where if you try to figure it out, it's like
Speaker 1: looking at a huge spreadsheet. There are dozens of possible combinations. UM.
Speaker 1: The loan servicing companies. These are private companies that the U. S.
Speaker 1: Department of Education contracts with to help people make these decisions. UM.
Speaker 1: They often don't do a good job. They're paid on
Speaker 1: a per capita basis UH for servicing these loans, which
Speaker 1: means the more complicated your loan and the more advice
Speaker 1: you need, the less money you make for them, exactly.
Speaker 1: They're not. The system is not incentivized to sit the
Speaker 1: kid down. He's twenties, four years old, he's got a
Speaker 1: big fat loan, he's got a payoff, and they don't
Speaker 1: make it simple. They're not incentivized to make it simple, right, No,
Speaker 1: they're not at all. I mean, in some ways they're
Speaker 1: incentivized just push people into certain kinds of repayment that
Speaker 1: actually make you ineligible for loan forgiveness and in the
Speaker 1: long term, absolutely bizarre. What's the politics of this? Is
Speaker 1: Democrat and against Republican, Republican against Democrat, or is everybody
Speaker 1: just appalled by what we've worked at, what we've worked
Speaker 1: our way into. I mean, I don't think there's a
Speaker 1: member of Congress that doesn't have a lot of constituents
Speaker 1: who are super worried about this. So and that I
Speaker 1: think it is a bipartisan issue. On the specific issue
Speaker 1: of loan forgiveness, I think that is pretty partisan. I mean,
Speaker 1: we have these um enormous policy proposals from some of
Speaker 1: the Democrats running for president, including Elizabeth Warren and Bernie Sanders,
Speaker 1: to have essentially massed that forgiveness for the loans that
Speaker 1: are out there got combined with U kind of a
Speaker 1: free college plan. UM. Republicans have proposed to eliminate public
Speaker 1: service loan forgiveness. UM. That hasn't gone anywhere and won't
Speaker 1: as long as the Democrats control the House. But I
Speaker 1: think on the forgiveness question, it is a partisan issue.
Speaker 1: Which country does this? Right? I mean, is there a
Speaker 1: Kevin care you just joining us? So it's Kevin Carey
Speaker 1: with education policy? Which which country gets the Kevin care
Speaker 1: re prize for common sense and educating our our kids? Well?
Speaker 1: I mean, you know, people often point to Australia and
Speaker 1: New Zealand is having UM income based loan repayment programs
Speaker 1: that work. UM. But what's important to know is that
Speaker 1: that's accompanied by UM a pretty low cost system to
Speaker 1: start with. You know, so we we have a very
Speaker 1: high cost really education system. UM. Uh, that we have
Speaker 1: an unusual number of students going to private nonprofit and
Speaker 1: private for profit colleges, where in a lot of countries
Speaker 1: it's basically just the public university system. UM. That that's
Speaker 1: out there in terms of publicavities, we're at the prime
Speaker 1: time of write and checks on this. Is there any
Speaker 1: outrage that forty has become sixty, and that's sixty is
Speaker 1: becoming seventy. I mean, you know, it's it's a market,
Speaker 1: and I know that look what it's done to us, right.
Speaker 1: I mean, I think part of the denied dynamic here
Speaker 1: too is that you have institutions. Um that I mean
Speaker 1: every you know, every one of the one point six
Speaker 1: trillion dollars in outstanding loans went into the pocket of
Speaker 1: a college somewhere, right. So so we talked about reforming
Speaker 1: the system to bring those numbers down. I'm not sure
Speaker 1: colleges have an incentive to do that because that means
Speaker 1: they're gonna get paid less. Um. But people default on loans,
Speaker 1: it's no skin off of the college. They get paid
Speaker 1: up front. They have no financial risk in this system
Speaker 1: at all. Uh. And UM, I think they've been chasing
Speaker 1: dollars in status and in some cases, um, looking to
Speaker 1: make money. UM. In A lot of I mean a
Speaker 1: lot of of those loans are for graduate school. And
Speaker 1: I think that gets lost sometimes when we talk about
Speaker 1: loan burdens and opportunity, but just proportionately, this money is
Speaker 1: being taken out to go to graduate school. That's where
Speaker 1: a lot of growth is in the market, and that's
Speaker 1: where frankly, a lot of the profits are the profits
Speaker 1: of their the growth is their discuss For us what
Speaker 1: comes up constantly, which is and particularly for critics of
Speaker 1: America's effort here, which is kids through loans, taking degrees
Speaker 1: that have a history of not implying employment, having degrees
Speaker 1: that do not apply the ability to repay back those loans.
Speaker 1: Is that a valid criticism? Absolutely. You know, there's a
Speaker 1: there's a remarkably little regulation of our higher education system.
Speaker 1: There's a baseline assumption that the market will work, um,
Speaker 1: and that people won't borrow too much money in order
Speaker 1: to get a degree. Um. But that's simply I mean,
Speaker 1: if you look at the fact that we have a
Speaker 1: million students defaulting on their loans every year, that's obviously
Speaker 1: not true. It's actually a very complicated market market. It
Speaker 1: needs to be regulated. Um. You can't just it's not
Speaker 1: like going out to buy a cup of coffee. It's
Speaker 1: a very complicated thing to to purchase. Now, the Obama
Speaker 1: administration tried to fix this by essentially making a regulation
Speaker 1: based on exactly what you said. They would look at
Speaker 1: every program and every for profit college, um, and say
Speaker 1: and some in some nonprofit colleges. Um look at how
Speaker 1: much money students were borrowing, look at how much money
Speaker 1: they were earning. And if the ratio was way off,
Speaker 1: if people were borrowing a lot of money for degrees
Speaker 1: the produced very little earnings, they would say, you're out,
Speaker 1: You're out of the program. We're not going to support
Speaker 1: that financially. Where did that go? The Trump administration is
Speaker 1: in the process of dismantling those regulations. So, you know, Kevin,
Speaker 1: just you know, to give you an anecdote, here, the
Speaker 1: middle child calls up and says, I want to go
Speaker 1: to graduate school. I'm like, great, pharmacy. I think it
Speaker 1: looks great. She said, No, something more stable, screenwriting. I mean,
Speaker 1: that's I mean, Kevin, that's the heart of the matter,
Speaker 1: isn't it. Well. And the thing is that you can
Speaker 1: invent a master's degree in anything, people, I mean, there's
Speaker 1: if you're accredited college, you can just say master's degree
Speaker 1: in screenwriting, and really you can go off and borrow
Speaker 1: they sure, there's no there's no one that will tell
Speaker 1: you not to do that. There's really approval for that.
Speaker 1: I'm sure there are master's degrees in screenwriting and the
Speaker 1: whole really general government. If it's a graduate degree, if
Speaker 1: it's an undergraduate degree, there are vary how much money
Speaker 1: you can Keevin, we're out of time. We're gonna have
Speaker 1: to have you back when someday they pay all those bills.
Speaker 1: Kevin Carey Education policy on our nation's debt. Major Team
Speaker 1: Surveillance Shout out to a tumultuous week. We are produced
Speaker 1: some days of the week by Richard Truman. This is Bloomberg.
Speaker 1: I'm thanks for listening to the Bloomberg Surveillance Podcast. Subscribe
Speaker 1: and listen to interviews on Apple Podcasts, SoundCloud, or whichever
Speaker 1: podcast platform you prefer. I'm on Twitter at Tom Keane
Speaker 1: before the podcast. You can always catch us worldwide. I'm
Speaker 1: Bloomberg Radio two.