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Speaker 1: Member s I p C. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best in economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and
Speaker 1: of course on the Bloomberg. Now joining us is someone
Speaker 1: that was way out front. In fact, maybe President Trump
Speaker 1: read his book The Price of Civilization. Jeffrey Sachs is
Speaker 1: at Columbia University. He is a guide to world liberal
Speaker 1: He is someone who does not agree with the president,
Speaker 1: but he has to see how the president applies policy here.
Speaker 1: You were way out front on the struggles of this
Speaker 1: nation with your book Price of Civilization. The President struck
Speaker 1: a third rail with the American public, a poorer opulated,
Speaker 1: the different other issues that are out there that are
Speaker 1: all in your book. I mean you were at what
Speaker 1: is the prescription to get this administration to begin a
Speaker 1: constructive dialogue with liberals, independence, and Republicans. This administration is
Speaker 1: not having a constructive dialogue with anybody right now. What
Speaker 1: happened at the G twenty this weekend was alarming. Actually,
Speaker 1: they couldn't even make a statement opposing protectionism because Steve
Speaker 1: Manuk in the Treasury Secretary, held the ground to say, no,
Speaker 1: we're not going to oppose protectionism. We're not going to
Speaker 1: make a statement about climate change. It's so nineteen to one.
Speaker 1: The US Trump is absolutely arraying the whole world against
Speaker 1: the U S. You watch it step by step, That's
Speaker 1: that's what's happening. Would you suggest and just in one issue,
Speaker 1: the opioid epidemic, Rob Portman, I'm going to suggest doesn't
Speaker 1: read Jeffrey Sachs. He's a Republican, a moderate from Ohio.
Speaker 1: He probably is aware of your work, but he doesn't
Speaker 1: read it word for word. And except right now, you
Speaker 1: and the senator from Ohio have more common ground than
Speaker 1: with the president. Can the Democrats co opt a Republican
Speaker 1: centrist group to oppose this administration? But let me just
Speaker 1: say a word about what's happening. Our society is falling apart.
Speaker 1: This has been clear for years. There's a divide between
Speaker 1: those who have a college education, times couldn't be better.
Speaker 1: And those who have a high school degree. Jobs are falling,
Speaker 1: wages are falling, mortality rates are rising, opiate addiction rising,
Speaker 1: suicide rates rising. So along comes the Republican Health Plan.
Speaker 1: It's to cut the tax at the top and throw
Speaker 1: more than twenty million people off of healthcare coverage. Are
Speaker 1: they kidding? Are they kidding? What are they doing? It's
Speaker 1: dreadful what's going on right now? And we have to
Speaker 1: say it today. You know you said I'm you introduced
Speaker 1: me earlier. Is miserable mood because today is supposed to
Speaker 1: be world It is World Happiness Day and we are
Speaker 1: releasing the World Happiness Report. The United States is in
Speaker 1: a free fall right now. Out of the thirty four
Speaker 1: o C countries, the US Cayman twenty one. We're going
Speaker 1: to come back to that. Yeah. But so, Jeffrey, this
Speaker 1: is why people voted for Trump, right, He's trying to
Speaker 1: fix a problem. Now you're saying he's fixing it badly
Speaker 1: and he's focusing on the bad things, or he's going
Speaker 1: about it the wrong way. How would you deal with
Speaker 1: this unhappiness or this uneasiness that we clearly saw in
Speaker 1: the American people to give them something better. We would
Speaker 1: have rich people pay taxes and we would have poor
Speaker 1: people on healthcare. That's simple. We would say, we tell
Speaker 1: the truth in this country that the rich have never
Speaker 1: had it better, they've never had more money, they've never
Speaker 1: had more rise of incomes, and they should do something
Speaker 1: for our society. And what he's doing is exactly the opposite.
Speaker 1: He's given every single position in this administration to Goldman
Speaker 1: Sacks so that they can cut taxes at the top.
Speaker 1: It's a but he was but he was voted on
Speaker 1: that platform, right, Yeah, But then it's bait and switch.
Speaker 1: It's complete bait and switch. He said I'm going to
Speaker 1: fight Wall Street and then he gave every top position
Speaker 1: in the administration to one company. How much more bait
Speaker 1: and switch can it be? We have to tell the
Speaker 1: truth about what's happening in this country. It's dramatic, it's
Speaker 1: a word on the poor. But Jeffrey Sax, do you
Speaker 1: actually admit that a lot of people in the US
Speaker 1: voted for President Trump because he was going to deregulate
Speaker 1: and they voted for him. Again, I'm not saying it's
Speaker 1: boutter wrong, but this is what people voted for. They
Speaker 1: voted for him because he made promises to them and
Speaker 1: he is lying. I'm sorry, this is the biggest, very
Speaker 1: very quickly here did Secretary Clinton loses election because she
Speaker 1: didn't go after Midwest Democrats who are more conservative than
Speaker 1: the East Coast liberals like you. She lost the election
Speaker 1: because she was a lousy candidate and she didn't have
Speaker 1: a position that people trusted. And Donald Trump said I'm
Speaker 1: going to help you, and what he's doing is helping
Speaker 1: his billionaire buddies. It's so clear, it's obvious as long
Speaker 1: as we look at what he's really doing. Don't watch
Speaker 1: what he tweets, watch what he says, watch what he's doing.
Speaker 1: I feel miserable. We're gonna talk happiness to Jeffrey Sachs
Speaker 1: here in Am. I just had a nightmare thought Jeffrey
Speaker 1: Sachs playing golf with Donald Trump floor around. That would
Speaker 1: be quite around, to say the least. Jeff Sex, thank
Speaker 1: you so much. Feel l joining us some p K
Speaker 1: burlicer on oil. Phil. We've got your new research note
Speaker 1: and folks, we protect the copyright of our guests. I'm
Speaker 1: not going to send it out to you, and you
Speaker 1: go right to gasoline. Why does a pro like you
Speaker 1: look at gasoline dynamics, Well something, Gasoline is probably excuse,
Speaker 1: probably the most important component of petroleum demand, and it's
Speaker 1: also the one that's most influenced by economic cycles and
Speaker 1: by expectations. UH. And and this report, UH what I've
Speaker 1: been writing about for a while. I've been looking at
Speaker 1: the failure, essentially of most following the market to recognized
Speaker 1: the consumers respond in an anticipatory fashion. You know, I
Speaker 1: take take my cues from my gold class making good friends.
Speaker 1: Stand Fisher of the FED Monitorists talk about expectations and
Speaker 1: how consumers adjust ahead of time when they hear news
Speaker 1: about changes in the FED. Right, consumers have done the
Speaker 1: same thing. In the case of gasoline. We had strong
Speaker 1: growth and gasoline on a year over year basis every
Speaker 1: month UH in two thousand and fifteen and two thousand
Speaker 1: and sixteen until OPEC said, oh, Saudi Arabia said we
Speaker 1: want to raise oil prices. And then consumers heard the
Speaker 1: news and immediately began changing their consumering pattern. Nothing surprising here.
Speaker 1: The big surprises that those who follow the market, follow
Speaker 1: oil markets totally ignore this. And gasoline is you know,
Speaker 1: a good portion of petroleum demand. How tight is this
Speaker 1: market getting right now? How tight is the gas market getting?
Speaker 1: Gasolene market is getting a little tighter because people produced
Speaker 1: a less less and because a good deal of gasolene
Speaker 1: has been exported. Uh. The gasolene was flashing around the
Speaker 1: East Coast two or three weeks ago to uh maybe
Speaker 1: a month ago, and large volumes were sent to other
Speaker 1: parts of the world because the prices just couldn't be
Speaker 1: held up. But you know, gasoline supply is getting a
Speaker 1: little tight, but gasolene demands looks to be down relative
Speaker 1: to UH last year by about two three. I know
Speaker 1: you're paying close attention to that Sarah conference in Houston
Speaker 1: a week or two ago, the h s Market conference.
Speaker 1: And what's the biggest news that came out of there
Speaker 1: is you listen to all those speakers on stage in Houston.
Speaker 1: Um I was. I wasn't there. Uh you know you're
Speaker 1: gonna and I haven't spoken since uh and the but
Speaker 1: the news that came out to me was the attempt
Speaker 1: by the oil exporting countries to try to get US
Speaker 1: producers to cooperate. Uh. They had a dinner, UH, they
Speaker 1: had the Nigerian delegation. I had had the dinner, and uh,
Speaker 1: every anti trust lawyer in the country must have been squirming,
Speaker 1: because you know, the idea of a group of producers
Speaker 1: getting together to talk about controlling production any place in
Speaker 1: the world is scary, but doing the United States is
Speaker 1: really dangerous and it shows opex desperation, the producer desperation. Uh.
Speaker 1: With essentially the change in technology and drilling and finding oil. Uh,
Speaker 1: they are working. Uh. You know, the U S producers
Speaker 1: are working extremely hard to drive costs down. And and
Speaker 1: More's law the more from Intel that technology doubles every uh,
Speaker 1: with every new generation or speed doubles applies to oil fracking.
Speaker 1: So suddenly people are talking about being profitable with twenty barrel.
Speaker 1: So we had a real moment ten days ago. Edward
Speaker 1: more Stark on the door the acclaimed oil or theologist
Speaker 1: at City Group and basically said, oils stupid. Maybe it
Speaker 1: works higher, but he said, given a longer time frame
Speaker 1: we go to the land of Phil Verlager, which is
Speaker 1: cheaper oil, what will be the catalyst if we have stability,
Speaker 1: if we go to somewhat of a higher per barrel,
Speaker 1: what will be the catalyst to get us to the
Speaker 1: Verlager vision? Well, it'll be it'll be a the same
Speaker 1: sort of catalyst, the catalysts technology. Uh, the fact that
Speaker 1: every every time we drill another well, we're finding new things.
Speaker 1: One of the stateless lumber shades president out there came
Speaker 1: out with a statement that the amount of data one
Speaker 1: uses right now for a well, uh, is the amount
Speaker 1: of constitutes the amount of data on to high definition television,
Speaker 1: tell of movies. I mean, big data is just beginning
Speaker 1: to arrive into the oil business. And when did it arise.
Speaker 1: We're just going to have an overwhelming falling calos and
Speaker 1: an overwhelming expansion and opportunity. And it's gonna happen here.
Speaker 1: It's gonna happen in Argentina where there's a great opportunity.
Speaker 1: It's gonna happen in Russian where there's a great deal
Speaker 1: of shale. Uh, we're gonna you know, two years ago
Speaker 1: or a year and a half ago, Spencer Dale of
Speaker 1: BT came out with a thing, and I think I
Speaker 1: came out with about the same simultaneously. But is the
Speaker 1: oil is no longer a finite resource? Uh, so much
Speaker 1: oil is gonna have to be left in the ground.
Speaker 1: It's really a race to see who loses. You are
Speaker 1: you very kindly quote and praise our colleagues that Liam
Speaker 1: Denning and Halfier have bloss here of Bloomberg News on
Speaker 1: the issue of technology. And what I find fascinating is
Speaker 1: how the old hands, the oil producers are processing all
Speaker 1: of this technological change. Talk a bit about that, how
Speaker 1: they're how they're facing this change. Well, it's not the
Speaker 1: it's not really the oil producers, it's the companies like
Speaker 1: Slumberge and so on. Now I'm a visiting fellow at
Speaker 1: the School of Minds. We've just moved here to Denver,
Speaker 1: and the School of mind produces some of the best engineers,
Speaker 1: uh in the world. It's been recognized for years. And
Speaker 1: what what what's happening is all these young engineers are
Speaker 1: coming out knowing all these new technologies. So a woman
Speaker 1: I know is working uh for for slumbers j I
Speaker 1: think down in Texas comes out is totally trained in
Speaker 1: new technology and everything, and they bring all this technology
Speaker 1: to the to the drilling companies, and then the drilling
Speaker 1: companies apply it steadily, uh, to the to the wells
Speaker 1: and and just essentially bring along these the companies who
Speaker 1: are are developing. It's it's in many ways. It's like
Speaker 1: the agricultural business. It's the farmers are the customers for
Speaker 1: the John Deere's and the Monsantos, the Montsando's producers of
Speaker 1: the new the new UH seeds, and the farmers by
Speaker 1: the seeds and double the triple their their products. So
Speaker 1: it's it's it's that sort of relationship. And the universities
Speaker 1: and the companies like Slumber, J. Baker Hughes are just
Speaker 1: all developing these technologies and driving costs down. What do
Speaker 1: you do in Golden Colorado? Is this like a big
Speaker 1: salary and a six pack? Of course, every time it
Speaker 1: comes out of the faucet. I've moved down their UH.
Speaker 1: Friend of mine who's teaching there, I was supposed to
Speaker 1: teach their back in the early nineties and had a
Speaker 1: medical issue. Um asked me. They have a new research institute,
Speaker 1: the Pain Institute. And what I'm looking for is is
Speaker 1: an opportunity to work with some of these younger students
Speaker 1: and and spread the economics and and and as I
Speaker 1: said when I was talking about the demand here in Gasolene,
Speaker 1: is the monetary economists have moved ahead with rational expectations.
Speaker 1: And you just read their material and Stanley's and I've
Speaker 1: watched therely for years and that this whole economics, the
Speaker 1: way of thinking about backing out demand for petroleum has
Speaker 1: Let's come back soil f earliger with this on the
Speaker 1: Colorado school of mind. What have we learned about the
Speaker 1: role of OPEC now and going forward in light of
Speaker 1: what we've seen since that deal was inked a few
Speaker 1: months back. Well, OPEC has been struggling to be relevant
Speaker 1: for several years UM. In the early part of this decade,
Speaker 1: we had a series of disruptions of supply in Nigeria, Libya,
Speaker 1: Syria and the tight oil market, and you know, OPEC
Speaker 1: essentially ignored what was going on and produced at full rate,
Speaker 1: so it was no different than the market for week uh.
Speaker 1: When the production disruptions essentially passed and the US oil
Speaker 1: supply came in, the organization looks to try to reorganize
Speaker 1: and this is the way Cartel's work and cut production
Speaker 1: and the sustained prices, and what they have found is
Speaker 1: that essentially in today's world they are at best a
Speaker 1: very marginal player as an organization. The reason is that
Speaker 1: demand is now a good deal more price sensitive. Who
Speaker 1: spoke about the consumers responding quickly to news of higher prices.
Speaker 1: Consumers are more astute. And secondly that the supply response
Speaker 1: is much quicker and the costs again as we were
Speaker 1: talking on the previous segment, are falling much more rapidly.
Speaker 1: So OPEC I think is opex day has passed? And
Speaker 1: UH the organism attempts by groups of countries such as
Speaker 1: especially high cost countries producers like Venezuela are waging a
Speaker 1: regard war that they are not ultimately going to be successful,
Speaker 1: but they may hold prices up a little bit and
Speaker 1: just provide a much greater incentive for UH lots of
Speaker 1: small producers, relatively small problem producers such as E G,
Speaker 1: E O G and others, and UH pioneer just to
Speaker 1: keep pushing ahead and expand supply. UH. You know, if
Speaker 1: you want to say, put it bluntly, UH, they've been
Speaker 1: overtaken by technology. I'm still confused here about the metrics
Speaker 1: that we use to gauge how these countries are upholding
Speaker 1: their ends of the barn. With Saudi Arabia in particularly,
Speaker 1: they released their own figures. We had figures from the
Speaker 1: International Organization as well. What do you prize more when
Speaker 1: you're when you're looking for for outputs, say what are
Speaker 1: you looking at? I very rarely try to do that.
Speaker 1: What I do is I turned to the market. I
Speaker 1: turned to the futures market. Uh you know. I was
Speaker 1: when the company called Drexel Burning was around. I was
Speaker 1: helping create this market. And today we have over five
Speaker 1: and almost five and a half billion barrels of oil
Speaker 1: outstanding in futures contracts. And what you do is you
Speaker 1: look at the shape of the forward price curve and
Speaker 1: how the companies are responding, and you look at the
Speaker 1: cash prices. It is you know what OPEC says it's
Speaker 1: doing is it has become irrelevant. Now I know this
Speaker 1: is this is what people have watched for fifty years.
Speaker 1: And as I'm moving into this new home, we got
Speaker 1: a hundred boxes of file cabinets and books and you
Speaker 1: look at all these old books and so on where
Speaker 1: people talked about OPEC and how we had to follow
Speaker 1: production and so on, and and it's all quaint. It's
Speaker 1: it's like filing away old train schedules when you used
Speaker 1: to use the train to go across the country. I mean,
Speaker 1: I look still at where we are, and we've gone
Speaker 1: from a hundred dollar framework down to twenty nine and
Speaker 1: back up to fifty ish. When you think about it
Speaker 1: every day, what is the thing our audience should watch
Speaker 1: in the oil market? If I were what, you know,
Speaker 1: if i'm I thought, I'm an investor, I wouldn't be
Speaker 1: watching so much the oil market because it's it's it's
Speaker 1: not going to move dramatically. Uh. What I'm watching is
Speaker 1: uh North Korea. Uh so you go act of political
Speaker 1: analysis that if somebody does something that takes a lot
Speaker 1: of demand off the market, which is what an attack
Speaker 1: on North Korea would do, or takes a lot of
Speaker 1: supply off the market, you're going to be in a
Speaker 1: very different situation. And every commodity market is this way.
Speaker 1: You know, you look at copper. There's this big strike
Speaker 1: down in Chili that's changed the dynamic copper market. It
Speaker 1: is something like that. You know, I picked North Korea
Speaker 1: because that's the highest scary thing right now, but it
Speaker 1: is you know, it is not in the oil market
Speaker 1: right now. Okay, so we gotta leave it there. Feel
Speaker 1: really good, Thank you so much, and congratulations on analysis
Speaker 1: of gasoline. Is the dynamic going into the warmer season
Speaker 1: brought you by Bank of America. Mary Lynch dedicated to
Speaker 1: bringing our clients insights and solutions to meet the challenges
Speaker 1: of a transforming world. That's the power of global connections.
Speaker 1: Mary Lynch, Pierce Federan Smith Incorporated Member s I p C.
Speaker 1: On the Spectum Enterprise phone line. Jack Bogo, Mr Bogo,
Speaker 1: wonderful to speak to you again. What has changed is
Speaker 1: not so much the migration of billions of dollars from
Speaker 1: active to passive, but just in the last six months
Speaker 1: we are now it what appears to be a crisis
Speaker 1: moment for active managers, mergers, mergers, mergers, cutting of costs,
Speaker 1: et cetera. Where will active management be in five years, Well,
Speaker 1: it will almost certainly be a smaller proportion of the
Speaker 1: mutual fund industry and than it is today. And today
Speaker 1: passive is around mutual fund equity mutual funds, and you know,
Speaker 1: it could get it gets very tough to build these numbers,
Speaker 1: these share numbers. But I would say probably five years
Speaker 1: from now it would be maybe maybe over forty five.
Speaker 1: There's a very strong tide out there, tom as you know,
Speaker 1: and amazingly, I mean the the e t F I'm sorry,
Speaker 1: the Total Index fun business. I was doing a bad
Speaker 1: forty billion last year and this year forty billion a
Speaker 1: month a month, and this year in the first two
Speaker 1: months it's something like sixty seven billion. That's a huge
Speaker 1: increase in UM in index fund close. I haven't seen
Speaker 1: all the data for active management, but they're still very, very,
Speaker 1: very negative. I want to quote a letter here from
Speaker 1: one Warren Buffett of Omaha, Nebraska. Quote. If a statue
Speaker 1: is ever erected to honor the person who's done the
Speaker 1: most for American investors, the hands down choice should be
Speaker 1: Jack Bogel. What's your relationship like with with Warren Buffett?
Speaker 1: And how how closely, how in sync or your two
Speaker 1: investing strategies. Well, are in many accidentical. And I first
Speaker 1: met Warren probably in about five out of the State
Speaker 1: Securities Commissioners meeting and in San Diego, California. We had
Speaker 1: a nice chat and we stayed in touch really a
Speaker 1: little bit. Ever since. He's written forwards to my books.
Speaker 1: He's done a great blurb if you will endorsement of
Speaker 1: the tenth anniversary edition of my little Book of Common
Speaker 1: Sense Investing, which will be coming out in the ball
Speaker 1: and it's right there in the cover of the book
Speaker 1: and that book has been He greatly admired that book,
Speaker 1: greatly admires it, and every time he speaks about it,
Speaker 1: up go the sales. He has a lot of a
Speaker 1: lot of effect. But you know, it's so close. He
Speaker 1: he recommends the S and P five just about every
Speaker 1: regular investor. He's leaving a trust for his wife and
Speaker 1: he has directed that invested in the Vanguards seven s
Speaker 1: and Index fund. You know, decades on he gets a
Speaker 1: shameless plug in. There again, you got the plug in
Speaker 1: for the Vanguard funds. Jack there with Mr Buffet, I
Speaker 1: get there's David continued, I. I can't avoid the plug.
Speaker 1: He was the one that plug there you go, there
Speaker 1: you go. We were talking with Arthur Levin a moment
Speaker 1: ago about the passive versus active debate, and I asked
Speaker 1: him how close we are to settling it? What's what's
Speaker 1: your sense of that? Well, we've seen something very very
Speaker 1: few people have talked about this, but what we've really
Speaker 1: done has moved active to a different section. Exchange traded funds,
Speaker 1: which are the big driver this year. They haven't always
Speaker 1: been in recent years, but they are right now. And
Speaker 1: that is people who are doing a lot of trading
Speaker 1: a lot of activity in their index fund investing. And
Speaker 1: you know, you can buy an index fun and bet
Speaker 1: whether the markets going up or down today and get
Speaker 1: three times leverage. I'm not sure exactly what sense that makes,
Speaker 1: and I would recommend nobody do it. But there's some
Speaker 1: very aggressive e t s out there. There's a very
Speaker 1: undiversified e t s out there, and there's a lot
Speaker 1: of trading. These e t s are turning over it
Speaker 1: while the Spider, the most popular stock in the world
Speaker 1: every day, the Standards and Boors five under e t
Speaker 1: F run by State Street has an annualized turnover at
Speaker 1: the moment of two thousand percent a year. Two percent
Speaker 1: a year. I mean, I'm the kind of guy Toma
Speaker 1: thinks three percent a year is pushing the envelope. Yeah,
Speaker 1: I mean, I I look jack at this debate, and
Speaker 1: again I look at the M and A, and it
Speaker 1: really just comes back to the theory, which you know
Speaker 1: your expert on among others of modern portfolio management. What
Speaker 1: did they get wrong the act of tom Let me
Speaker 1: respectfully disagree with that. You know, I had never heard
Speaker 1: of modern port folio theory. And when I started the
Speaker 1: first FUN back in back in nineteen seventy five recommend
Speaker 1: into the board of directors and got it approved here
Speaker 1: at Vanguard, the first index fund, And all I did
Speaker 1: was look at the record. I'm the pragmatic indexer. The
Speaker 1: record shows very clearly, and it showed the same thing
Speaker 1: to the great economist Paul Samuelson, that the record shows
Speaker 1: clearly that most managers, if not all managers, cannot consistently
Speaker 1: beat the stock market. And when you think about it, Tom,
Speaker 1: how could they. They're all average, They're competing with each other,
Speaker 1: and the market is the average. So if you take
Speaker 1: out a little bit every year, you'll do better than
Speaker 1: the guys that are taking out the great hunks of
Speaker 1: money every every day. Very quickly. Here, I'm just I'm disappointed, sir,
Speaker 1: you don't have Princeton the champion of the final four. Gonzaga.
Speaker 1: What is it about Gonzaga that Jack Bocal likes. Well,
Speaker 1: they're they're little, they were pretty unknown four or five
Speaker 1: years ago, and they've gone from being a constant underdog
Speaker 1: to you know, a rising star. And one of these
Speaker 1: days that the star will will be aligned with some
Speaker 1: pretty good things. So that was my guest. That's good,
Speaker 1: Jack Bogel, thank you so much greatly appreciated. Mr Bogel,
Speaker 1: one of the celebrities that we have within our Bloomberg
Speaker 1: brackets today, the aerospace engineer at the Minneapolis Fed, Neil
Speaker 1: at cash carry Um, the president of the Minneapolis Fed.
Speaker 1: In a recent UH dissenter, Neil, I want to get
Speaker 1: away from the four questions you've been asked in the
Speaker 1: forty seven interviews you've done sense of descent, and I
Speaker 1: want to get a little Matthew, as you put in
Speaker 1: your wonderful note with a lot of good charts on
Speaker 1: why I dissented. You talk about linearity, and you talked
Speaker 1: about the vector of inflation in this worry that we
Speaker 1: get convexity or acceleration or a second derivative move in
Speaker 1: inflation at some point. Discuss the evidence from your PhDs
Speaker 1: that we can get an acceleration of inflation at a
Speaker 1: certain tipping point. Well, first of all, Tom, I'm good
Speaker 1: to talk to you, and thanks for having me. Well,
Speaker 1: that's the thing I'm pushing our PhD saying, show me
Speaker 1: the evidence of this downlinearity, and there isn't any. I
Speaker 1: mean the question is all of our models work and
Speaker 1: are based on the premise of inflation expectations being anchored.
Speaker 1: If inflation expectations get unanchored, they break somehow, then all
Speaker 1: sorts of bad things can happen. We don't know what
Speaker 1: causes inflation expectations to break or to become unanchored, but
Speaker 1: all the data right now suggests they are rock solid anchored,
Speaker 1: and investors appropriately really believe the Federal Reserve that we're
Speaker 1: committed to not letting inflation take off. And so if
Speaker 1: that's the case, then I don't see this big concern
Speaker 1: that inflations all of a sudden going to go above target.
Speaker 1: Help me with horse and cart, David Gara, This is
Speaker 1: an extreme, a complex economic model of the horse before
Speaker 1: the cart. When you showed up at the University of
Speaker 1: Illinois Urban a years ago, Champagne, I thought you were
Speaker 1: you know, maybe it came on a horse and a
Speaker 1: cart or something equivalent to it. Can the FED be
Speaker 1: the horse or by definition is the FED the cart?
Speaker 1: And must act ex post in light of visible evidence? Well,
Speaker 1: I don't know how else to behave and conduct policy
Speaker 1: other than the look at the evidence. Otherwise we're just guessing.
Speaker 1: Because for the past five or six years, the Sutter
Speaker 1: Reserve has been consistently guessing the form C participants that
Speaker 1: inflation is around the corner, and if they had acted
Speaker 1: based on those guesses, they would have hurt the economy.
Speaker 1: And so I'm saying, we've been guessing wrong for five
Speaker 1: or six years. Let's stop guessing. Let's just focus on
Speaker 1: the data and let the data guide us present cast car.
Speaker 1: I look back on the speech that FED your Janet
Speaker 1: Yellen gave in Chicago ahead of the last meeting, and
Speaker 1: something that she said a couple of times is the
Speaker 1: FED has not fallen behind the curve when it comes
Speaker 1: to inflation, when it comes to the labor market. I
Speaker 1: understand you're very concerned about their being slack. How worried
Speaker 1: are you about the FED falling behind the curve? I'm not.
Speaker 1: I agree with her about that, and not in terms
Speaker 1: of we're not too late, because here's the thing. From
Speaker 1: a risk management perspective, we have very powerful tools to
Speaker 1: raise rates to bottle up inflation if it starts to accelerate.
Speaker 1: We have far fewer tools, as do other central banks
Speaker 1: around the world to deal with very low inflation. And
Speaker 1: so from a risk management perspective, that also tells us
Speaker 1: we should be patient, allow inflation to build back towards targets.
Speaker 1: So I agree with her. I don't think we're behind
Speaker 1: the curve, but if we are, we have the tools
Speaker 1: to and the will to deal with it. At the
Speaker 1: end of the last statement, it says voting against the
Speaker 1: action with Neil cash Car who preferred at this meeting
Speaker 1: to maintain the existing target range for the federal funds. Right,
Speaker 1: you go on and write a very extended medium post
Speaker 1: explaining why in fact that you did that incredibly valuable
Speaker 1: to somebody like me or does somebody like Tom. You
Speaker 1: also note that of the medium term inflation forecasts in
Speaker 1: the semi economic projections have been too high. What's wrong
Speaker 1: with the Fed's ability to forecast right now? And is
Speaker 1: there a way to change the forecasting mechanism? You know,
Speaker 1: people are doing their very best, and we have some
Speaker 1: of the best economists, the best PC's in the world,
Speaker 1: helping us to think through these issues. I think we
Speaker 1: all have this desire to go back to normal, that
Speaker 1: we just think in a couple of years things are
Speaker 1: going to return to normal. And after the financial crisis,
Speaker 1: it has taken the economy a lot longer to return
Speaker 1: to normal. You know, remember over time, the FED is
Speaker 1: really just following what the economy is doing. Over the
Speaker 1: last thirty years, real interest rates have been falling all
Speaker 1: around the world, not because of the FED, not because
Speaker 1: the central banks, because there broader economic forces and we're
Speaker 1: adjusting around that overall trend. And so uh, I want
Speaker 1: to return to normal to Let's let the data guide us.
Speaker 1: Let's stop guessing. The other thing I put in that
Speaker 1: piece is I think we're behaving as though two per
Speaker 1: sent as a ceiling rather than a target. If we
Speaker 1: really truly believe the two is a target, then we
Speaker 1: should be behaving that way. Within this is a working paper,
Speaker 1: your Minneapolis Fed folks, if you're just joining us, Neils
Speaker 1: carry with this President of the Minneapolis Fed, Amador Bianchi,
Speaker 1: Pacola and Perry about exchange rates and dollar dynamics at
Speaker 1: the zero bound? What's wrong with getting away from the
Speaker 1: zero bound? Did share yelling? And can we have a
Speaker 1: few measured rate rises to give us some wiggle room
Speaker 1: if we've got to go back down at some point? Well,
Speaker 1: you know, I don't find that argument compelling. It's like
Speaker 1: saying you're driving down the highway and you think there
Speaker 1: might be a hill coming up so let's let off
Speaker 1: the gas now so that if a hill comes up,
Speaker 1: we can floor it. You know, you're much better off
Speaker 1: just maintaining your speed, and then if you reach a hill,
Speaker 1: give it what remaining gas you have left. So this
Speaker 1: preemptive raised hikes just so we can turn around and
Speaker 1: cut them. I don't actually think that that makes sense.
Speaker 1: I think we just need to allow the economy to
Speaker 1: continue to perform, allow inflation to gradually go up to target,
Speaker 1: allow the labor market to continue using up slack, and
Speaker 1: then raise rates when the data call for it. You
Speaker 1: mentioned the data. What's your preferred set of data when
Speaker 1: it comes to inflation? What are you looking at? What's
Speaker 1: Neil cash Car looking at? You know, there's the number
Speaker 1: one thing that I look at is twelvemonth core PC
Speaker 1: personal consumption expenditures. At the prior f MC meeting, it
Speaker 1: was around one point seven year over year. It's now
Speaker 1: ticked up to one point seven, but it's still well
Speaker 1: below our two percent target. And the reason we focus
Speaker 1: on core is because core is the best predictor we
Speaker 1: know of of future headline inflation. So we do care
Speaker 1: about headline inflation, but we know that energy and food
Speaker 1: bounce around a lot, so we focus on Core as
Speaker 1: a forward indicating give us an update on too Big
Speaker 1: to Fail? Are you and James Diamond on speaking terms, Well,
Speaker 1: I haven't spoken of it quite a while. UM I
Speaker 1: would hope that he would admit it that JP Morgan
Speaker 1: and Goldman Sachs and Bank of America are still too
Speaker 1: big to fail because if they got into trouble today,
Speaker 1: the Federal Reserve and the Treasury would have to step
Speaker 1: in to stabilize them, not for their own sake, but
Speaker 1: because of the damage they would do to the U.
Speaker 1: S economy. And I think Republicans and Democrats agree we
Speaker 1: need to do something about that. President cash Curry, thank
Speaker 1: you so much. Neil cash Cary with a miniapluis fed
Speaker 1: uh with with a different view and an important view.
Speaker 1: I can't say enough about their website. All of the
Speaker 1: FEDS have distinctive websites, and the mini appus FED as
Speaker 1: a terrific Lincoln sure of their district including agriculture, along
Speaker 1: with the independence that's been seen for decades from the
Speaker 1: Minnieapolis uh fed Uh. Neil cash Curry today on the
Speaker 1: Spectrum Enterprise phoneline is what do we learned to David.
Speaker 1: You know, I'm really glad that he did write this,
Speaker 1: this piece of the medium, and I don't know if
Speaker 1: he's going to do that after every meeting, but it
Speaker 1: is certainly insightful. You know, we listen to the speeches,
Speaker 1: we look at the trans to the speeches, but to
Speaker 1: have this sort of considered assessment of why he voted
Speaker 1: the way he did, I thought was great. So agree
Speaker 1: and with great charts, which you would expect from engineer
Speaker 1: Cash carrigs Well, a real different take on how to
Speaker 1: do monetary transparency. Thanks for listening to the Bloomberg Surveillance Podcast.
Speaker 1: Subscribe and listen to interviews on iTunes, SoundCloud, or whichever
Speaker 1: podcast platform you prefer. I'm out on Twitter at Tom Keene.
Speaker 1: David Gura is at David Gura. Before the podcast, you
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