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Speaker 1: Who you put your trust in matters. Investors have put

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Speaker 1: their trust in independent registered investment advisors to the tune

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Speaker 1: of four trillion dollars. Why learn more and find your

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Speaker 1: independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast.

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Speaker 1: I'm Tom Keane. Always with Michael McKee. Daily we bring

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

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Speaker 1: international relations. Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com,

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Speaker 1: and of course, on the Bloomberg The simplest, the simplest charts.

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Speaker 1: Our single best chart today is arguably the most famous

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Speaker 1: chart in modern equity theory. Roger Ibbotson of Yale University.

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Speaker 1: Everybody had this wall on their wall in the seventies

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Speaker 1: and eighties, and it's just nothing more and semilogue standard

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Speaker 1: and forced back to the depression. Brian Levitt with us

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Speaker 1: on what we know, what we've lived. There's all sorts

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Speaker 1: of history in there, the depression and then moving to

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Speaker 1: the nineteen thirty seven fall off, and then World War Two,

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Speaker 1: onto the malaise of the seventies and then up up

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Speaker 1: we go. Brian is well, is this index overvalued right now?

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Speaker 1: The index is overvalued compared to historical average UM. It

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Speaker 1: is reasonably valued compared to the current interest rate environment.

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Speaker 1: But the problem with market cap weighted indices is that

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Speaker 1: is more and more people enter into this, and more

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Speaker 1: people want passive strategies, you'll see valuations continue to head home.

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Speaker 1: You go to a revenue analysis, which I would call

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Speaker 1: the most anti Graham dot cattle theory i've ever heard.

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Speaker 1: Everybody goes down the income statement. They go to net

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Speaker 1: income gap earnings. Maybe the modern guys go to E

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Speaker 1: but operating income. You and a guy from years ago,

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Speaker 1: Tom Gelvin at Donaldson Lofkin Genrett, go right up to

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Speaker 1: revenue analysis. Why do you look at revenue based SMP five?

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Speaker 1: And I should add my colleague Vince Lowry, who have

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Speaker 1: launched revenue waited strategies. I mean, the interesting about revenue

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Speaker 1: is that it's not going to be manipulated. Right. It's

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Speaker 1: one of the purest numbers that you can have, so

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Speaker 1: very difficult to manipulate it. What I like about revenue

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Speaker 1: is that if you if you're to read, if you're

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Speaker 1: to look at the five companies in the sp right,

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Speaker 1: there's a screen. They're profitable, they're they're they're not inferior companies.

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Speaker 1: What we would argue is the market cap waiting is

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Speaker 1: an inferior methodology because it leads to froth or sentiment.

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Speaker 1: Certain sectors are in there. Let me give you a

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Speaker 1: Jack Welch moment again. Identify Chris with General Electric years ago.

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Speaker 1: Revenue is made up of two parts price in units.

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Speaker 1: If you take the differentials of those, you get odd

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Speaker 1: things happening, which which within your analysis now matter If

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Speaker 1: I want to invest revenue based pricing power or is

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Speaker 1: it a unit dynamic, Well, it'll be a combination of bolts.

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Speaker 1: So if you think about if you think about what

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Speaker 1: we're doing, and you think about the five companies, if

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Speaker 1: you revenue eate them on a quarterly basis based on

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Speaker 1: trailing twelve month earnings, what you're finding is that you're

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Speaker 1: consistently moving out of momentum. You're consistently moving out of

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Speaker 1: those companies whose market cap is climbing faster than the

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Speaker 1: broad market and instead moving into companies who are general

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Speaker 1: who have revenue that is larger than the broader market.

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Speaker 1: So you end up with a more value oriented, higher

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Speaker 1: quality portfolio. You know, everybody's trying to play with smart

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Speaker 1: beta with single factors, When do I want momentum, When

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Speaker 1: do I want low volatility? A lot of appetite for

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Speaker 1: low volatility. The problem is when you have a lot

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Speaker 1: of appetite for even low volatility, Now those become overvalued.

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Speaker 1: What a quarterly rebalance on revenue does? It consistently moves

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Speaker 1: you out of more recent winners. You participate in it,

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Speaker 1: but you consistently move out towards more towards companies with

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Speaker 1: true fundamental strength rather than those companies that are winning

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Speaker 1: simply because of sentiments. Franzcene, I'm not sold. Brand's gotta

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Speaker 1: do better. Keep going. All right, Let's talk about profit margins, Brian.

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Speaker 1: This is the one thing that's being eroded quarter after

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Speaker 1: coul dramas, week after week. Right, A lot of the

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Speaker 1: earnings growth we've seen has been on costs, on cuts

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Speaker 1: in costs. When are we going to see profits profit

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Speaker 1: margins go up? Well, I mean so, profit margins will

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Speaker 1: climb as if the if the economy continues to improve.

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Speaker 1: So one of the things that you will see is

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Speaker 1: that you know, if if businesses cut costs um but

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Speaker 1: but the money still but but revenues are picking up

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Speaker 1: the revenues are improving. What we're doing is we're rebalancing

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Speaker 1: based on the revenue in the portfolio um and so

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Speaker 1: these are going to be lower margin companies. You look

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Speaker 1: at a company like Walmart, you look, these are going

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Speaker 1: to be lower margin companies. But the fact of the

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Speaker 1: matter is these are more higher quality companies. So we're

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Speaker 1: not looking for a significant pickup in profit margins. What

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Speaker 1: we're looking at is to rebalance into quality value at name.

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Speaker 1: Let's sake, Home Deepot Lows this week, folks just talk

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Speaker 1: about on a Friday, Home Depot killed it with same

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Speaker 1: store sales three four ownered basis points above the spirit

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Speaker 1: of the nation nominal GDP. Lows didn't do that right.

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Speaker 1: So on a revenue dynamic, home Depot does better than Lows.

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Speaker 1: Do you want to own Home Depot or do you

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Speaker 1: want to own Lows? Well, the first thing you want

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Speaker 1: is broad exposure throughout market. So you want the employer,

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Speaker 1: you want the broad exposure throat. I want to own

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Speaker 1: a home Deepot, of course you want of course, you

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Speaker 1: want to own a Home Deepot. But what we're saying is,

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Speaker 1: if you're consistently moving into those companies whose revenue is

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Speaker 1: bigger than the market, you're gonna end up with a

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Speaker 1: much better valuation portfolio. So of course you want to

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Speaker 1: own those companies that are that are generating good growth

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Speaker 1: and are thriving. What we're saying is we're consistently moving

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Speaker 1: out of those that are climbing simply because of sentiment,

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Speaker 1: moving into those that are more quality and value oriented,

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Speaker 1: that have that are generated revenue or bigger revenue than

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Speaker 1: the market. If we don't have sustained growth, right, if

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Speaker 1: fundamentals aren't on these retailer side overall, and I would

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Speaker 1: argue for any company, then actually it's almost a fictitious gain.

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Speaker 1: And in the share price, well right, I mean, if

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Speaker 1: you don't have sustained growth, then you're you're not going

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Speaker 1: to have um sustainable markets for a long time regardless.

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Speaker 1: So if you think about it from a price to

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Speaker 1: sales perspective, a market cap weighted index is waiting, you know,

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Speaker 1: is focus more on the numerator. A revenue ated strategy

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Speaker 1: is going to be more on the denominator. So in

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Speaker 1: both instances, at some point, if you don't have sustained

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Speaker 1: growth in both instances, there's going to be a breakage.

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Speaker 1: What every pro This has been a fascinating discussion. Final question,

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Speaker 1: do you want to look at revenue the blunt instrument

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Speaker 1: or revenue or do you want to look at the

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Speaker 1: first derivative, the rate of change of revenue or is

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Speaker 1: Jeff M l would say organic revenue growth. So what

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Speaker 1: we're looking at is the blunt instrument of revenue level

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Speaker 1: of revenue, because what you're producing is a more value

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Speaker 1: oriented portfolio rather than more I mean, if you want

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Speaker 1: to look at the growth of revenue, you're gonna have

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Speaker 1: different characteristics. That really interesting discussion, you're francing and very controversial.

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Speaker 1: Michelle Buyer is the head of US Economics new title,

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Speaker 1: new new business card, Bank of America, Mary Lynch, Michelle,

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Speaker 1: you've got to sit down with your colleagues and figure

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Speaker 1: out what the central bank is going to do. If

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Speaker 1: the central Bank doesn't know what it's going to do,

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Speaker 1: then what are you supposed to tell people? That is

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Speaker 1: a challenge, um, but I think that's what we're tasked

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Speaker 1: with you, not only US as fed woers, but as

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Speaker 1: a market participants. Is we're supposed to be monitoring the

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Speaker 1: economic data. We're SUPs the watching fight and conditions. We're

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Speaker 1: supposed to be trying to weigh all these different variables,

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Speaker 1: just like the central bankers are, and then come up

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Speaker 1: with what we think our appropriate assessment is of conditions

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Speaker 1: and policies. So I think right now the message might

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Speaker 1: be a bit confusing because they're trying to distinguish some

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Speaker 1: of these short term UH factors that are influencing policy

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Speaker 1: versus the longer term UH dynamics which are going to

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Speaker 1: be telling us about the next cycle, or perhaps these

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Speaker 1: issues around the terminal rate um. And that's where the

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Speaker 1: confusion came this week. Even just look at San Francisco

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Speaker 1: had President Williams. He published a great paper talking about

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Speaker 1: little our star that equilibrium, said funds rate, but that's

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Speaker 1: really a story about the end of the cycle or

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Speaker 1: even the next cycle. And then he came out yesterday

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Speaker 1: and said, I don't know the FED should consider hiking

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Speaker 1: before the end of the year. So I think that

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Speaker 1: confuses people. But that's inevitable when we have so many

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Speaker 1: fundamental changes to how we're setting policy, Hurting itself is

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Speaker 1: losing some credibility. Yeah, perhaps, I think that's always a risk.

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Speaker 1: UM and I think that if you ask the market participants,

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Speaker 1: they will tell you the credibility is gone. It wasn't

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Speaker 1: gone a long time ago. I don't think so. I

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Speaker 1: think that the FED still maintains credibility um, and that

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Speaker 1: when they do speak and when they do try to

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Speaker 1: use forward guidance, it still works. Um. So you know,

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Speaker 1: for that last May, when they came out with a

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Speaker 1: pretty strong signaling campaign, the market responded and started to

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Speaker 1: price back in FED hikes. Now, of course that ended

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Speaker 1: up not being correct and the FED had to postpone

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Speaker 1: their hiking cycle little bit longer. But I think that

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Speaker 1: they still have the ability to influence the markets. Michelle

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Speaker 1: Meyer with his U S economist Marilyn Michelle. I look

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Speaker 1: at at the gloom out there, and I mentioned this

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Speaker 1: earlier and I'll mention it further today. Folks. I'm taken

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Speaker 1: aback by articles that say the world's coming to an end,

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Speaker 1: sell everything, go to cash, and I would suggest there's

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Speaker 1: a plethora of those where we have many of them

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Speaker 1: in August. You're an economist, you're not a market strategist.

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Speaker 1: But but when you when you look at the not hysteria,

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Speaker 1: but the angst out there, link the corporate world, in

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Speaker 1: earnings world into your economics, is it really that bad.

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Speaker 1: It's not really that's bad, but it's not what perhaps

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Speaker 1: people were hoping for throughout this cycle. So I think

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Speaker 1: that's been one of the challenges, is that expectations have

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Speaker 1: had to be reset to acknowledge that this is a

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Speaker 1: very different type of recovery. We're not going to see

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Speaker 1: three percent GDP growth. We have to accept that a

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Speaker 1: low two percent economy is actually one that's okay, and

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Speaker 1: that it's still above what we would consider trends. So

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Speaker 1: I think that's been the challenges that everybody's had to

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Speaker 1: kind of reset their expectations to acknowledge that there's been

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Speaker 1: structural changes to the economy and a per impairment in

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Speaker 1: terms of our potential growth. And that's been a hard

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Speaker 1: thing for us to do with forecasters, and we've been

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Speaker 1: caught offsides like everybody else. And I think it's been

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Speaker 1: a hard thing to do for people thinking about evaluations

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Speaker 1: the companies as well. I figured out the difference between

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Speaker 1: economists and people on Wall Street. Tom economists don't have

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Speaker 1: anything to sell. You'd sell everything if you could. But

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Speaker 1: that's probably a fair point. Is cynical today? Cynical one

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Speaker 1: continue with Michelle Miller uh Well I would get it

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Speaker 1: kind of the point that William's paper was making when

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Speaker 1: you try to figure out what's going to happen with

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Speaker 1: the economy or your model is broken. He seems to

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Speaker 1: suggest that, you know, we're not figuring this out right

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Speaker 1: because something has changed in a secular manner in the economy.

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Speaker 1: And that goes back to this idea of the structural

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Speaker 1: damage or the permanent changes to the economy. So now

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Speaker 1: the question is, how does the FED how to policymakers

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Speaker 1: rethink what policy will look like in subsequent cycles. So

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Speaker 1: I think what you'll what what Williams was doing was

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Speaker 1: trying to think a forward looking basis, you know, how

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Speaker 1: do we deal for the next cycle, or how do

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Speaker 1: we deal out the end of this cycle because we've

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Speaker 1: had structural changes and because we're in environment with a

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Speaker 1: low potential growth rate and a low equilibrient FED funds rate.

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Speaker 1: So I think one of the conversations of starting to

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Speaker 1: gain a lot more traction will probably be a focus

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Speaker 1: at Jackson Hole is, you know, should we be targeting

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Speaker 1: something about two percent inflation? Should we be thinking about

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Speaker 1: a price level target? Which means that because they kind

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Speaker 1: of undershot on inflation for so long we can overshoot

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Speaker 1: in a more formal way by targeting that level of

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Speaker 1: inflation rather than the rate. So I don't think they're

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Speaker 1: going to make any of these changes formally, any consided

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Speaker 1: and maybe not even in a cycle unless you have

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Speaker 1: further swelling. UM. But I think that this is a

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Speaker 1: conversation that they're starting to have and for good reason.

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Speaker 1: Can I unpack what you just said there and ask

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Speaker 1: you this, um, If you're going to set a price

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Speaker 1: level target and overshoot for a while, you have to

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Speaker 1: have inflation to do it. Uh? Do you are you

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Speaker 1: in the camp the model camp that says we are

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Speaker 1: going to get inflation and we are going to get

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Speaker 1: enough that that could actually happen. And part of it

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Speaker 1: depends on what the said does like, So there is

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Speaker 1: a question CANAFAD actually generate inflation? I'm not sure in

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Speaker 1: this environment where you have so many other exologinous factors,

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Speaker 1: these structural changes, these global forces. But if you look historically,

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Speaker 1: if the SAT does weave interest rates very low, keeps

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Speaker 1: policy accommodative, it can help create an environment where the

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Speaker 1: economy can overheat. The employment you can come down significantly,

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Speaker 1: and you can have some wage pressures push into overall inflation.

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Speaker 1: So I'm not convinced that that environment is totally passed.

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Speaker 1: I think that you could still see those types of

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Speaker 1: um mechanisms play its way through this cold but it's

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Speaker 1: just gonna take longer. I think that's the key when

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Speaker 1: you think about wage dynamics. Unemployment is low, Wages are

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Speaker 1: starting to pick up in certain sectors, but there's still

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Speaker 1: so many frictions and rigidities in the labor market that's

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Speaker 1: creating UH challenges to getting very strong inflation. Michael McKee

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Speaker 1: and Tom Keene on a Friday thrilled are with us.

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Speaker 1: It's August, it's lazy, it's sleepy. Now it's not Michelle

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Speaker 1: Meyer writing up a storm at Bank of America Maryland. Michelle,

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Speaker 1: I know Mike wants to get back to bigger picture stuff.

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Speaker 1: I want to go Michelle Meyer narrow, which is you've

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Speaker 1: done original research on housing. What is in the ether

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Speaker 1: in Denver, Portland's in these cities out west that are

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Speaker 1: am I wrong New York like in their real estate prices. Yeah,

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Speaker 1: you're saying impressive home price appreciation in those cities you

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Speaker 1: mentioned in Portland, Seattle, and Denver, where prices are up

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Speaker 1: double digit home price appreciate an access of temper or

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Speaker 1: set on a year of your basis. So I think

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Speaker 1: there's a there's a There's a number of factors, um.

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Speaker 1: One is just the health of the regional economies. There

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Speaker 1: you have strong labor markets um, growth in population UM.

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Speaker 1: And perhaps the building has been a little bit too

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Speaker 1: laid relative to other areas. So you have some mean

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Speaker 1: housing stock UM, and they're desirable places to live. You

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Speaker 1: have a lot of new entrance into the labor market,

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Speaker 1: people just graduating college that are looking for that type

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Speaker 1: of you know, environment and and and they're finding it

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Speaker 1: as areas all right, Um, as long as we're out

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Speaker 1: west to Jackson and that a gorgeous place in the Mounson,

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Speaker 1: I could I could tell you that the housing prices

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Speaker 1: they are very expensive. Is we'll get your way in

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Speaker 1: on this this question. Is Janet Yellen actually going to

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Speaker 1: say something that should move the markets? And I say

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Speaker 1: should because people could read anything into it, and you

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Speaker 1: know him, I'd say it's sunny and they'll decide that

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Speaker 1: means something. But is she going to use this opportunity

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Speaker 1: to send a message. I am skeptical. I'm really skeptical

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Speaker 1: that she's gonna send a message about near term hikes

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Speaker 1: or the timing of the next three hike UM, which

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Speaker 1: is what market participants are probably looking for. I think

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Speaker 1: she's going to talk more about these longer term issues

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Speaker 1: in terms of setting policy. And remember the topic is

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Speaker 1: about designing a resilient framework for policy, So that sounds

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Speaker 1: to me that they're going to be talking about some

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Speaker 1: of these bigger issues around financial stability concerns, UM, about

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Speaker 1: the setting inflation targets, et cetera. So you know, to

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Speaker 1: your point, Mike, I think market participants are going to

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Speaker 1: be trying to look for any signal, and they may

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Speaker 1: be able to find some sort of hints, but I

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Speaker 1: don't think that's Yellin's intention. Well, when we uh get

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Speaker 1: to ten thirty am Eastern Time on Friday next, what

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Speaker 1: do you think the it's of a rate move are

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Speaker 1: going to be UM or do we have to wait

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Speaker 1: for the following Friday and the job's report. I think

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Speaker 1: that the following Friday is when you get more more

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Speaker 1: action around the jobs report, I think, and I think

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Speaker 1: that's the right thing to trade because that's a concrete

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Speaker 1: piece of data that the set is clearly very focused

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Speaker 1: on and that's going to inform the trend in the

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Speaker 1: labor market. So you know, when you come to the

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Speaker 1: end of next week after yelling talks, the risk maybe

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Speaker 1: is that, um, you know, the market further prices out

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Speaker 1: September a bit um because I don't think that she's

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Speaker 1: going to signal that they're looking to go at the

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Speaker 1: next meeting, and if market participants are waiting for that,

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Speaker 1: they might be disappointed. You guys have been when I

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Speaker 1: can focus. This is ancient history. Michelle is too young

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Speaker 1: to remember this. Four or five years ago. Mary Lynch

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Speaker 1: was way out front on what I'm gonna call a

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Speaker 1: cautious view on the economy. Everybody's caught up to you.

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Speaker 1: We're there now with the Michelle Meyer Ethan Airi's term

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Speaker 1: avail you. I get that you saw the productivity numbers.

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Speaker 1: Dare I say at Jackson Hole they should do the

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Speaker 1: whole damn event on investment in America? Where is the

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Speaker 1: investment then? What do policymakers need to do about it?

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Speaker 1: I would love to say I was too young to

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Speaker 1: remember that before or five years ago, I was at

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Speaker 1: Bank America doing the same thing. Um so so yeah,

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Speaker 1: I think we were obviously very very cautious about the

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Speaker 1: cycle after we got that initial inventory cycle and then

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Speaker 1: you know, we just look back at financial crisis. UM.

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Speaker 1: I think at this point we have to ask ourselves

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Speaker 1: what would help to stimulate growth? And I think that

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Speaker 1: tell me a good point, which is that we could

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Speaker 1: see perhaps in fiscal spending directly targeted at infrastructure advancement,

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Speaker 1: at you know, putting dollars back into the economy in

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Speaker 1: a way that could really help to boost activity in

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Speaker 1: a direct way with strong multipliers. So UM, in environment

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Speaker 1: where interest rates are so low, boring costs are low,

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Speaker 1: you know, you can make a case at the government

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Speaker 1: at this point can can look to pursue those policies, um.

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Speaker 1: And and that would help productivity, right because when you

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Speaker 1: think about this low productivity environment, there's low potential growth environment.

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Speaker 1: There's not much the FED can do to adjust proactivity

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Speaker 1: in real time. But there are things that could be

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Speaker 1: done on the fiscal side that make the economy more

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Speaker 1: efficient and can help to improve productivity. Saul Meyer, thank

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Speaker 1: you so much. I greatly appreciate a head of US

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Speaker 1: Economics for Bank of America, who you put your trust

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Speaker 1: in matters investors have put their trust in independent registered

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Speaker 1: investment advisors to the tune of four trillion dollars. Why

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Speaker 1: they see their role is to serve, not sell. That's

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Speaker 1: why Charles Schwab is committed to the success of over

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Speaker 1: seven thousand independent financial advisors who passionately dedicate themselves to

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Speaker 1: helping people achieve their financial goals. Learn more and find

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Speaker 1: your independent advisor dot com. Our friend Greg Va has

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Speaker 1: a no doubt this morning, very short. He's he's taking

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Speaker 1: most of the day off today, but he suggests that

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Speaker 1: maybe the presidential race is tightening a little bit. Hillary

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Speaker 1: Clinton's campaign looking a little stale, people concerned about the

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Speaker 1: Clinton Foundation. And yet you look at a service like

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Speaker 1: five thirty eight dot com and Nate Silver's people, and

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Speaker 1: they still have Hillary clinton percent chance to win the election.

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Speaker 1: How are we supposed to make any sense of this

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Speaker 1: sort of thing. Let's go straight to the source and

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Speaker 1: asked the horse. Frank Newport is the editor in chief

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Speaker 1: of Gallup, and I know you you're not doing horse

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Speaker 1: race polls the way you have in the past, But

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Speaker 1: when you look at the polls that people have done,

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Speaker 1: do you see any significant movement out there at this

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Speaker 1: point or are we still sort of in status quo. Ah, Yes,

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Speaker 1: I'm a dispatched the observer this year. These polls I've

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Speaker 1: been monitor in first election, I really was involved in.

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Speaker 1: I think, broadly speaking, I was saying this to somebody yesterday.

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Speaker 1: There's always movement. The narratives developed in Wade. So we

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Speaker 1: had this coming out of the Democratic Convention, assumption that

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Speaker 1: Clinton was doing very well, was dominating. The polls seemed

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Speaker 1: to support that, and that became the big topic. And

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Speaker 1: now I think we will see a change in interpretation it.

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Speaker 1: Probably there will be some polls out like the Pupil

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Speaker 1: that came out yesterday showing that she was ahead by

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Speaker 1: only four points by their reckoning. So people will begin

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Speaker 1: to say, oh, maybe she's not doing as well now.

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Speaker 1: And that's not unusual at all. It's fairly typical in

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Speaker 1: a race. I think it's too early to say is

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Speaker 1: a quote tightening end quote. I think that we're going

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Speaker 1: to see some of these kind of ups and downs

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Speaker 1: as we go on up to the first of which

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Speaker 1: is the next big event in the election cycle. When

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Speaker 1: do the polls start to have real predictive power. Well,

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Speaker 1: that depends on who you ask. There's some professors who

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Speaker 1: study these things and say they already do you know,

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Speaker 1: they say, looking at it. One professor I know quite well,

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Speaker 1: University of Texas, Dr Christier Elician, studied these things, wrote

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Speaker 1: a book about it, and he says, the candidate who

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Speaker 1: is ahead in August at this point, or at least

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Speaker 1: after the conventions, because I'm convention to the best have

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Speaker 1: been in August, generally goes on to win. So he's

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Speaker 1: already kind of willing to conceive that it not conceived.

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Speaker 1: But to conclude that Hillary Clinton will be the winner, um,

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Speaker 1: I think it depends racist change. You go back in

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Speaker 1: history and you find races where one Candida was pretty

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Speaker 1: far ahead and it tightened very significantly and can be

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Speaker 1: gave a very close race near the end. So I

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Speaker 1: just think that things can change. This race has been

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Speaker 1: highly unusual. Donald Trump's highly unusual, So I think it's

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Speaker 1: probably a little too soon to conclude that it's. Uh,

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Speaker 1: we just read the statistical predictions that I don't put

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Speaker 1: a lot of faith in at this point that Hillan

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Speaker 1: Culinton is going to be the victor. It is very

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Speaker 1: unusual race. Does does it make it harder to poll accurately?

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Speaker 1: If people are and this is what some have suggested,

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Speaker 1: if people are afraid to admit they want to vote

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Speaker 1: for Donald Trump, well that's the so called Bradley effect. Uh,

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Speaker 1: something posters talk about when a black candidate was running,

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Speaker 1: and posters in California posters contended that that happened. People

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Speaker 1: said the opposite people were going to vote for a

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Speaker 1: black candidate but actually didn't on election day. I don't

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Speaker 1: think that there's any evidence for that at this point. Um,

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Speaker 1: that's a nice conjecture, but it's my opinion, having studied

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Speaker 1: this for many years, that most people who would support

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Speaker 1: Donald Trump wouldn't feel any reason not to say so

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Speaker 1: to some anonymous poster on the other end of the phone.

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Speaker 1: Is there a large undecided at this point? Oh, I

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Speaker 1: don't think any larger than usual. Remember, all presidential races

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Speaker 1: have built in structures where a large percent of the

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Speaker 1: people are going to vote Republican or Democrat because of

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Speaker 1: their party identification and a lot of other structural actors.

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Speaker 1: So in any race, there's only a fairly small group

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Speaker 1: of people who can swing both ways, so to speak.

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Speaker 1: Frank Newport is the editor in chief of Gallup UH,

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Speaker 1: and as such are our go to source on how

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Speaker 1: things work in the world of polling, and just before

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Speaker 1: the break, I had asked you about undecided voters, and

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Speaker 1: I'm just wondering, given the publicity that this race, the

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Speaker 1: unusual kind of race that we have, this race has had, UM,

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Speaker 1: there's still a lot of people yet to be persuaded.

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Speaker 1: Can you change minds at this point or are people

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Speaker 1: pretty set in what they're thinking. Well, that's a good question.

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Speaker 1: If you interview campaign operatives campaign managers, they will tell

431
00:24:42,920 --> 00:24:46,800
Speaker 1: you they're two approaches. One is trying to generate turnout

432
00:24:46,840 --> 00:24:49,040
Speaker 1: among those who have already made up their mind, and

433
00:24:49,080 --> 00:24:52,080
Speaker 1: that's critical. Um. In fact, that's where a lot of

434
00:24:52,119 --> 00:24:54,680
Speaker 1: dollars go, is to get people to come out to vote.

435
00:24:54,720 --> 00:24:57,600
Speaker 1: For example, young people and minorities so typically would vote

436
00:24:57,600 --> 00:24:59,440
Speaker 1: for the Democratic candidate, but they don't do you any

437
00:24:59,480 --> 00:25:02,160
Speaker 1: good if they're out at the actual voting polls. Democrats

438
00:25:02,240 --> 00:25:06,200
Speaker 1: usually have a harder time turning out there supporters and Republicans.

439
00:25:06,240 --> 00:25:08,600
Speaker 1: Second is trying to change minds, and there's still some

440
00:25:08,680 --> 00:25:11,359
Speaker 1: of that that can go on. You've seen that, for

441
00:25:11,400 --> 00:25:14,720
Speaker 1: example during the conventions, where every indicator showed that people

442
00:25:14,760 --> 00:25:18,440
Speaker 1: did swing more towards Trump and the Republicans during his convention,

443
00:25:18,840 --> 00:25:22,160
Speaker 1: and then swung more back towards Clinton the Democrats defention,

444
00:25:22,240 --> 00:25:24,560
Speaker 1: So minds can do. The debates can make a difference

445
00:25:24,560 --> 00:25:26,480
Speaker 1: from and he actually did better for a while after

446
00:25:26,520 --> 00:25:29,760
Speaker 1: the first debate in twelve. So there's both of them,

447
00:25:30,119 --> 00:25:33,480
Speaker 1: those factors going on trying to increase turnout and already

448
00:25:33,480 --> 00:25:35,840
Speaker 1: have their mind made up and trying to change some minds.

449
00:25:36,359 --> 00:25:43,159
Speaker 1: Frank Rutherford has eighteen seventy six turnout. I was stunned

450
00:25:43,200 --> 00:25:46,960
Speaker 1: at the lines that day President Obama two thousand, eight

451
00:25:47,240 --> 00:25:52,040
Speaker 1: fifty eight, down from eight two. But of course President

452
00:25:52,040 --> 00:25:56,120
Speaker 1: Obama's turnout looks spectacular compared to some of what we saw.

453
00:25:56,160 --> 00:26:04,760
Speaker 1: Bill Clinton forty nine uh percent. What's the update on turnout?

454
00:26:04,960 --> 00:26:09,560
Speaker 1: I think it's absolutely key. Do you know now or

455
00:26:09,600 --> 00:26:11,320
Speaker 1: do you need to wait for the last day of

456
00:26:11,320 --> 00:26:14,359
Speaker 1: October um? I think we need to wait. There's some

457
00:26:14,359 --> 00:26:17,200
Speaker 1: structural factors involved here. I do think turnout will be

458
00:26:17,280 --> 00:26:20,959
Speaker 1: higher than those midterm elections. The one you mentioned Clinton

459
00:26:21,040 --> 00:26:23,360
Speaker 1: versus Dov was boring. You know, he was pretty much

460
00:26:23,359 --> 00:26:25,680
Speaker 1: gonna win. Everybody knew, and it was kind of is

461
00:26:25,720 --> 00:26:29,120
Speaker 1: that where we are right now? With secretary, because now

462
00:26:29,119 --> 00:26:31,520
Speaker 1: we are in an open seat election, which typically does

463
00:26:31,560 --> 00:26:34,840
Speaker 1: have higher turnout. Open seat elections generally billmore turnout, So

464
00:26:34,880 --> 00:26:37,720
Speaker 1: structurally I would think it would certainly be higher than

465
00:26:37,720 --> 00:26:39,679
Speaker 1: in those mid term elections. But I do think we

466
00:26:39,720 --> 00:26:41,560
Speaker 1: have to wait and see. We ask questions like how

467
00:26:41,640 --> 00:26:43,600
Speaker 1: much attention do you painted so forth, but a little

468
00:26:43,600 --> 00:26:46,680
Speaker 1: early to try to gauge how that's effect turnout. Neil Gabbler,

469
00:26:46,880 --> 00:26:49,320
Speaker 1: writing for Bill Moyers dot com. Clearly with a left

470
00:26:49,359 --> 00:26:53,440
Speaker 1: tilt quote, it's just easier for the press to paint

471
00:26:53,480 --> 00:26:59,320
Speaker 1: Democrats as Chebili Swilling elite. US Mike McKee Cartman called

472
00:26:59,359 --> 00:27:05,600
Speaker 1: me that the other day, Shapley Swilling tell me about disaffected.

473
00:27:05,680 --> 00:27:10,440
Speaker 1: I'm just now beginning to see a tinge of disaffected

474
00:27:10,520 --> 00:27:16,160
Speaker 1: language across all of this analysis. Are there disaffected Reagan Democrats?

475
00:27:16,240 --> 00:27:21,760
Speaker 1: Are there disaffected Republicans? Or is that way overweighted? Well,

476
00:27:21,920 --> 00:27:24,239
Speaker 1: I think always are going to be disaffected people on

477
00:27:24,280 --> 00:27:26,439
Speaker 1: both sides. If you mean people who are not happy

478
00:27:26,480 --> 00:27:28,480
Speaker 1: with the candidates. Let me give you an example. We

479
00:27:28,600 --> 00:27:32,960
Speaker 1: just asked of Republicans, say they're satisfied Trump's their candidate,

480
00:27:34,119 --> 00:27:36,879
Speaker 1: said they wish somebody else was a Republican nominee. But

481
00:27:37,000 --> 00:27:40,159
Speaker 1: for the Democrats is just fifty data that we're going

482
00:27:40,200 --> 00:27:42,800
Speaker 1: to be releasing later today who say that they're satisfied

483
00:27:42,880 --> 00:27:45,680
Speaker 1: Hillary Clinton is their nominee. How does that? How does

484
00:27:45,680 --> 00:27:49,760
Speaker 1: that compare with Governor Romney and President Obama? It's it's lower.

485
00:27:49,880 --> 00:27:52,320
Speaker 1: We've got some comparisons in there. We had eight percent

486
00:27:52,359 --> 00:27:54,960
Speaker 1: of Democrats who were satisfied with Obama measured at a

487
00:27:54,960 --> 00:27:59,359
Speaker 1: different point in the campaign, in who've been happy with

488
00:27:59,440 --> 00:28:02,800
Speaker 1: Romney at one point with George sr when we've asked

489
00:28:02,800 --> 00:28:04,680
Speaker 1: it before. So, yes, there are a lot of people

490
00:28:04,680 --> 00:28:07,800
Speaker 1: who aren't thinking that these are the best possible candidates

491
00:28:07,840 --> 00:28:09,879
Speaker 1: for their party. Whether or not that means are going

492
00:28:09,920 --> 00:28:11,680
Speaker 1: to vote on the other side is a different question.

493
00:28:12,240 --> 00:28:15,520
Speaker 1: There has been a lot of unusual campaigning and a

494
00:28:15,560 --> 00:28:20,399
Speaker 1: lot of words expended on foreign policy and immigration and

495
00:28:20,440 --> 00:28:24,639
Speaker 1: things like that. But James carvil In posited, it is

496
00:28:24,680 --> 00:28:28,479
Speaker 1: the economy stupid, uh, And I'm wondering if really what

497
00:28:28,520 --> 00:28:31,240
Speaker 1: we should be watching rather than the debates and etcetera, etcetera,

498
00:28:31,359 --> 00:28:34,359
Speaker 1: is h you know, the first Friday in September and

499
00:28:34,400 --> 00:28:37,040
Speaker 1: the first Friday in October when we get the jobs reports.

500
00:28:37,560 --> 00:28:40,880
Speaker 1: Is the economy likely to be the deciding factor again

501
00:28:41,040 --> 00:28:45,040
Speaker 1: this time? Yeah, it always is. Um. We asked people

502
00:28:45,120 --> 00:28:47,920
Speaker 1: what's their highest priority for the election. What's the most

503
00:28:47,920 --> 00:28:49,760
Speaker 1: sport problem pace in the country. It is right now,

504
00:28:49,800 --> 00:28:53,640
Speaker 1: the economy still, there's no question about that. Candidates know

505
00:28:53,760 --> 00:28:56,320
Speaker 1: this and that's why they've been giving economic speeches in

506
00:28:56,400 --> 00:28:59,640
Speaker 1: Michigan over the last couple of weeks. So, yes, what

507
00:28:59,760 --> 00:29:02,360
Speaker 1: the economy looks like is going to make a big difference.

508
00:29:02,440 --> 00:29:05,560
Speaker 1: But again, perceptions not reality. You've got a lot of

509
00:29:05,600 --> 00:29:07,960
Speaker 1: indicators now that could make us think, hey, the economy

510
00:29:08,000 --> 00:29:11,720
Speaker 1: is doing well, but our economic confidences confidence whe track

511
00:29:11,880 --> 00:29:13,920
Speaker 1: is in that negative territory right now. Is a lot

512
00:29:13,920 --> 00:29:16,360
Speaker 1: of Americans, for whatever reason, don't want to think that

513
00:29:16,440 --> 00:29:18,520
Speaker 1: the economy is doing better. And that's what's the matter.

514
00:29:18,720 --> 00:29:22,720
Speaker 1: The economy has been muddling along since the recovery began.

515
00:29:23,080 --> 00:29:26,920
Speaker 1: How does how do your numbers correlate with the election

516
00:29:27,280 --> 00:29:33,280
Speaker 1: um prospects for basically Hillary Clinton's representing the incumbent party.

517
00:29:33,600 --> 00:29:36,680
Speaker 1: How does it track with that? Well, it's not a

518
00:29:36,680 --> 00:29:39,200
Speaker 1: perfect correlation. If you look at the graph of consumer

519
00:29:39,240 --> 00:29:42,960
Speaker 1: confidence versus um the election outcome, it's not a perfect

520
00:29:43,000 --> 00:29:45,480
Speaker 1: correlation because there's so many other factors that are involved,

521
00:29:45,480 --> 00:29:48,960
Speaker 1: but it's clearly a factor when you've got one party

522
00:29:49,080 --> 00:29:51,360
Speaker 1: that has occupied the White House for eight years and

523
00:29:51,440 --> 00:29:54,680
Speaker 1: you've got the other candidate now saying elect me because

524
00:29:54,720 --> 00:29:57,840
Speaker 1: I need to change things dramatically. Now, keep in mind,

525
00:29:57,840 --> 00:30:00,520
Speaker 1: if you read Hillary Clinton's economic speech, you'll say things

526
00:30:00,560 --> 00:30:02,760
Speaker 1: like We're going to create more jobs than any president

527
00:30:02,800 --> 00:30:05,040
Speaker 1: since World War Two. So she's claiming she's going to

528
00:30:05,120 --> 00:30:06,840
Speaker 1: make a lot of change as well, but she is

529
00:30:07,000 --> 00:30:09,360
Speaker 1: the party of the that's been in the White House.

530
00:30:09,960 --> 00:30:12,720
Speaker 1: Based on your knowledge, and of course Gallops knowledge on

531
00:30:12,840 --> 00:30:16,280
Speaker 1: polling is is prodigious, to say the least. If any

532
00:30:16,320 --> 00:30:20,040
Speaker 1: given candidate gets up with the pivot that Mr Trump

533
00:30:20,120 --> 00:30:24,000
Speaker 1: had last night, do the voters does Does it shift

534
00:30:24,040 --> 00:30:26,760
Speaker 1: your voting in the next six or seven days? If

535
00:30:26,800 --> 00:30:30,080
Speaker 1: a candidate says, oh, I'm sorry, new leaf, however you

536
00:30:30,120 --> 00:30:33,200
Speaker 1: want to phrase it, does it shift what people think?

537
00:30:33,240 --> 00:30:37,280
Speaker 1: Does it really work? You know, that's a question which

538
00:30:37,360 --> 00:30:40,240
Speaker 1: is really dependent on the situation. You're talking about. Trump

539
00:30:40,320 --> 00:30:44,320
Speaker 1: saying oh I meet some people, man suddenly becoming a

540
00:30:44,360 --> 00:30:46,520
Speaker 1: more humble kind of guy. I tried that last night

541
00:30:46,560 --> 00:30:49,720
Speaker 1: at home. Frank it didn't work. Yeah, I understand. I

542
00:30:49,800 --> 00:30:52,239
Speaker 1: think that that's I can't generalize. I think we just

543
00:30:52,280 --> 00:30:53,800
Speaker 1: have to wait and see. As I said at the

544
00:30:53,800 --> 00:30:56,280
Speaker 1: outset of our discussion here, I do think these things

545
00:30:56,320 --> 00:30:58,880
Speaker 1: come in waves, and I wouldn't be shapark shocktive in

546
00:30:58,920 --> 00:31:01,080
Speaker 1: the next week or two. Then it is Trump catching

547
00:31:01,160 --> 00:31:03,920
Speaker 1: back up, you know, doing better. But let's wait and see.

548
00:31:04,040 --> 00:31:05,600
Speaker 1: The The answer are going to be in the data.

549
00:31:06,040 --> 00:31:10,280
Speaker 1: How does the secretary respond to Mr Trump's new effort

550
00:31:10,440 --> 00:31:12,560
Speaker 1: what we've seen and clearly what we're going to see

551
00:31:12,560 --> 00:31:15,080
Speaker 1: in the coming days. Do you see in the history

552
00:31:15,120 --> 00:31:21,280
Speaker 1: of campaigns abrupt adaptation to someone desperate? Um, that's the

553
00:31:21,400 --> 00:31:23,800
Speaker 1: question that her campaign team is gonna have to we're

554
00:31:23,800 --> 00:31:26,200
Speaker 1: asking you. Yeah, no, I understand. Know what I would

555
00:31:26,280 --> 00:31:28,400
Speaker 1: do if I were advising the Clinton campaign is one

556
00:31:28,440 --> 00:31:30,640
Speaker 1: and only one thing, and that is do a major,

557
00:31:30,680 --> 00:31:34,480
Speaker 1: major press conference about emails. We are finding more and

558
00:31:34,520 --> 00:31:36,719
Speaker 1: more data. When you ask people about Hillary Clinton, they

559
00:31:36,760 --> 00:31:39,800
Speaker 1: just say emails. That's so dominant and so prevalence. Lets

560
00:31:39,880 --> 00:31:42,680
Speaker 1: see that she has to come out and more directly.

561
00:31:42,680 --> 00:31:45,400
Speaker 1: In my opinion, I were advising her do some much

562
00:31:45,440 --> 00:31:48,120
Speaker 1: more major kind of like Trump did say I'm responsible

563
00:31:48,160 --> 00:31:50,720
Speaker 1: due like Thailand all but Johnson, Johnson, I'm writing something

564
00:31:50,720 --> 00:31:52,760
Speaker 1: on that I'm responsible. It's not our fault, but I

565
00:31:52,880 --> 00:31:55,280
Speaker 1: take full responsibility. I made a mistake. I'm going to

566
00:31:55,400 --> 00:31:58,320
Speaker 1: do this, which is not in her nature because she's

567
00:31:58,400 --> 00:32:00,719
Speaker 1: a lawyer who's used to getting to positions and not

568
00:32:00,760 --> 00:32:03,240
Speaker 1: showing any kind of evidence of guilt. But she needs

569
00:32:03,280 --> 00:32:05,440
Speaker 1: to do that because I think the data are clear

570
00:32:05,520 --> 00:32:07,680
Speaker 1: that that's the impression people have it for that one

571
00:32:07,720 --> 00:32:09,920
Speaker 1: word comes up more than anything else for the track,

572
00:32:10,000 --> 00:32:12,560
Speaker 1: what are you reading senior hearing about Hillary Clinton? Frank

573
00:32:12,640 --> 00:32:18,000
Speaker 1: Newport's showtime begins the first Tuesday of September. What's your

574
00:32:18,080 --> 00:32:22,920
Speaker 1: biggest mystery about the American electorate? My biggest mystery about

575
00:32:22,920 --> 00:32:26,960
Speaker 1: the American electorate? Um, I have no mysteries about him

576
00:32:26,960 --> 00:32:30,120
Speaker 1: because I study them so carefully, and what have you?

577
00:32:30,200 --> 00:32:32,680
Speaker 1: I think right now, the biggest factor going on is

578
00:32:32,720 --> 00:32:37,360
Speaker 1: that Americans, this is important, are very, very very upset

579
00:32:37,400 --> 00:32:40,240
Speaker 1: with their government and elected representatives. And that's what Trumps

580
00:32:40,320 --> 00:32:43,720
Speaker 1: tapped into and that's what's critical in this election as

581
00:32:43,800 --> 00:32:47,000
Speaker 1: wants some change. Brilliant briefing, Frank Newport, Thank you so much.

582
00:32:47,000 --> 00:32:50,280
Speaker 1: With gallup of course he is their editor in Cheap

583
00:33:01,120 --> 00:33:03,720
Speaker 1: No Numbers, but still a lot to talk about with

584
00:33:03,760 --> 00:33:08,400
Speaker 1: Michael Darda, He's chief economist at MKM Partners, And the

585
00:33:08,440 --> 00:33:12,080
Speaker 1: story of the week has been what's the FED gonna do?

586
00:33:12,480 --> 00:33:15,240
Speaker 1: What's Janet Yelling gonna say? Next Friday in Jackson Hall,

587
00:33:15,480 --> 00:33:19,360
Speaker 1: because we're getting all kinds of different answers from different

588
00:33:19,440 --> 00:33:22,960
Speaker 1: FED people, And as one market participant put it this morning,

589
00:33:22,960 --> 00:33:26,680
Speaker 1: there is a remarkable lack of consensus on the policy

590
00:33:26,720 --> 00:33:29,960
Speaker 1: making body. Michael, how do you read the tea leaves

591
00:33:30,000 --> 00:33:34,960
Speaker 1: at this point or can you even attempt to read them? I, Mike,

592
00:33:35,040 --> 00:33:37,440
Speaker 1: thanks for having me on. You know, I would say,

593
00:33:37,480 --> 00:33:40,400
Speaker 1: based on the FED minutes released this week, in some

594
00:33:40,560 --> 00:33:47,880
Speaker 1: of the recent speeches made comments by Um, Dudley Um,

595
00:33:47,880 --> 00:33:51,280
Speaker 1: and Williams, it still looks like the you know, the

596
00:33:51,360 --> 00:33:55,160
Speaker 1: consensus on the FED um is for one more rate

597
00:33:55,200 --> 00:33:57,840
Speaker 1: increase this year, meaning if we look at just FED

598
00:33:58,240 --> 00:34:01,640
Speaker 1: zero in just and said voters, which is what's relevant

599
00:34:02,320 --> 00:34:05,040
Speaker 1: for policy this year, that you know, the doves in

600
00:34:05,080 --> 00:34:08,319
Speaker 1: the hawks sort of washed themselves out and in you know,

601
00:34:08,800 --> 00:34:12,120
Speaker 1: in those in the middle would probably be yelling. Dudley

602
00:34:11,840 --> 00:34:15,760
Speaker 1: Rose and Grin and Powell, and you know, those members

603
00:34:15,800 --> 00:34:19,680
Speaker 1: still seem to um desire at least one rate rise

604
00:34:19,760 --> 00:34:22,960
Speaker 1: this year, and once again the market has doubts over

605
00:34:23,000 --> 00:34:27,759
Speaker 1: whether they'll be able to deliver. Well, are they going

606
00:34:27,800 --> 00:34:31,880
Speaker 1: to even try? I guess is the question? You know,

607
00:34:31,960 --> 00:34:35,040
Speaker 1: this is you know, we've had quite some time now

608
00:34:35,080 --> 00:34:37,920
Speaker 1: where the Fed signals a desire to raise rates multiple

609
00:34:38,000 --> 00:34:40,759
Speaker 1: times and the market has doubts, and then you know,

610
00:34:40,800 --> 00:34:43,080
Speaker 1: the Fed ends up getting criticized that, you know, they

611
00:34:43,120 --> 00:34:45,960
Speaker 1: should just go out there and ignore markets, but they

612
00:34:46,000 --> 00:34:49,799
Speaker 1: really can't do that. You know, in December, the Fed

613
00:34:49,880 --> 00:34:53,640
Speaker 1: raised rates into a credit market storm, signaled four more

614
00:34:53,719 --> 00:34:57,080
Speaker 1: increases this year, and they had no choice to back off.

615
00:34:57,120 --> 00:34:59,600
Speaker 1: If they didn't back off from that approach, you know,

616
00:34:59,600 --> 00:35:01,840
Speaker 1: they would have pushed the economy over a clift. It

617
00:35:01,840 --> 00:35:05,120
Speaker 1: would have become a self fulfilling prophecy. So the bond

618
00:35:05,160 --> 00:35:08,239
Speaker 1: market is still telling the Fed that even with the

619
00:35:09,239 --> 00:35:12,960
Speaker 1: much more subdued path of short rate increases scene in

620
00:35:13,040 --> 00:35:16,080
Speaker 1: futures markets, they're going to undershoot their target. So one

621
00:35:16,120 --> 00:35:18,880
Speaker 1: has to ask, why are they even talking about tightening?

622
00:35:19,840 --> 00:35:23,360
Speaker 1: Michael Darted The single sentence note of this morning is

623
00:35:23,400 --> 00:35:27,239
Speaker 1: from the Good David Kotak down in Florida, and he

624
00:35:27,320 --> 00:35:32,120
Speaker 1: compares private market libor to the artificial yield of the

625
00:35:32,200 --> 00:35:36,520
Speaker 1: three months t buill. These are both ninety three month rates,

626
00:35:36,600 --> 00:35:39,759
Speaker 1: and the fact is the spread has widened out to

627
00:35:39,840 --> 00:35:42,640
Speaker 1: where it was in two thousand eleven, two thousand twelve,

628
00:35:43,320 --> 00:35:46,279
Speaker 1: nowhere near where it was in August nine years ago.

629
00:35:47,080 --> 00:35:52,360
Speaker 1: But he makes a clear idea that an elevated libor

630
00:35:52,400 --> 00:35:57,840
Speaker 1: private market rate is the equivalency of a FED second

631
00:35:57,960 --> 00:36:02,560
Speaker 1: quarter point rate hike. Is the market doing the work

632
00:36:02,840 --> 00:36:08,160
Speaker 1: for chair yelling. It's a actually a very interesting point, tom. So.

633
00:36:08,200 --> 00:36:12,120
Speaker 1: The library rate is an unsecured funding rate, and the

634
00:36:12,200 --> 00:36:15,239
Speaker 1: T bill I wouldn't say as artificial, you know, at

635
00:36:15,239 --> 00:36:17,400
Speaker 1: these levels, but it's being a bit up higher price,

636
00:36:17,480 --> 00:36:20,680
Speaker 1: lower yield. Yep, you still have a very high demand

637
00:36:20,800 --> 00:36:24,160
Speaker 1: for you know, for safety and for risk free assets,

638
00:36:24,920 --> 00:36:27,680
Speaker 1: and you know the you know, the library contains some

639
00:36:27,920 --> 00:36:31,360
Speaker 1: you know, some risk of default, and so moving northward

640
00:36:31,400 --> 00:36:34,760
Speaker 1: in that fashion, you know, I think is it's accurate

641
00:36:34,800 --> 00:36:38,000
Speaker 1: to say that that's tantamount to a to a tightening

642
00:36:38,000 --> 00:36:40,840
Speaker 1: in conditions, which again brings us back to the point

643
00:36:40,960 --> 00:36:43,680
Speaker 1: I tried to make before, which is if you know,

644
00:36:43,719 --> 00:36:45,959
Speaker 1: if you have that happening, and you have nominal growth

645
00:36:46,080 --> 00:36:48,640
Speaker 1: slowing and it is, and you have core inflation rolling

646
00:36:48,719 --> 00:36:53,040
Speaker 1: over and it is, why is the Fed still signaling

647
00:36:53,280 --> 00:36:55,560
Speaker 1: a desire to tighten? And I think the reason is

648
00:36:55,600 --> 00:36:57,600
Speaker 1: because at the end of the day, they still have

649
00:36:57,719 --> 00:37:02,200
Speaker 1: more confidence in Phillips curve econometric models and they do

650
00:37:02,280 --> 00:37:08,040
Speaker 1: in markets. Overall. Financial conditions have gotten easier though, so, um,

651
00:37:08,520 --> 00:37:10,879
Speaker 1: what do what do you make of the Well, yep,

652
00:37:11,040 --> 00:37:13,440
Speaker 1: that's a good point, Mikes. Of the stock market, you know,

653
00:37:13,560 --> 00:37:16,600
Speaker 1: obviously is back close to the highs of the cycle.

654
00:37:16,760 --> 00:37:22,400
Speaker 1: So there's been some um confidence recently and you know,

655
00:37:22,640 --> 00:37:25,239
Speaker 1: in in at least in the stock markets behavior that

656
00:37:25,560 --> 00:37:28,360
Speaker 1: we're transitioning to a lower growth path, but in a

657
00:37:28,400 --> 00:37:31,760
Speaker 1: recessionary one. And that was the fear in January going

658
00:37:31,800 --> 00:37:34,120
Speaker 1: into the first half of half of February with the

659
00:37:34,160 --> 00:37:38,240
Speaker 1: steep market decline, and risk spreads have come in fairly, powerfully,

660
00:37:38,280 --> 00:37:42,120
Speaker 1: powerfully this year. So you know, just judging based on

661
00:37:42,160 --> 00:37:45,320
Speaker 1: those two elements, yes, you could say financial conditions have eased,

662
00:37:45,400 --> 00:37:48,160
Speaker 1: but you know, the bond market is really not convinced

663
00:37:48,160 --> 00:37:50,200
Speaker 1: that we're going to see much in the way of

664
00:37:50,400 --> 00:37:53,319
Speaker 1: nominal growth momentum, the level of rates is quite low.

665
00:37:53,360 --> 00:37:57,800
Speaker 1: The yield curve has narrowed a lot in critically, inflation expectations.

666
00:37:57,800 --> 00:38:02,360
Speaker 1: Even with this powerful narrowing of spreads have utterly failed

667
00:38:02,800 --> 00:38:05,959
Speaker 1: to reverse course, and they're at levels that are well

668
00:38:06,000 --> 00:38:08,759
Speaker 1: below what we would expect to see If the Fed,

669
00:38:08,800 --> 00:38:10,560
Speaker 1: we're going to hit its target, and that's going to

670
00:38:10,640 --> 00:38:12,880
Speaker 1: be a serious problem that ends up coming back to

671
00:38:12,920 --> 00:38:15,759
Speaker 1: bite the FED in the next downturn um, you know,

672
00:38:15,800 --> 00:38:18,080
Speaker 1: if it doesn't reverse And I think, you know, perhaps

673
00:38:18,160 --> 00:38:20,839
Speaker 1: that's one of the reasons we've recently seen some discussion

674
00:38:20,880 --> 00:38:24,239
Speaker 1: about the Fed changing target, is going for a more

675
00:38:24,239 --> 00:38:28,080
Speaker 1: aggressive target. This was the President Williams this week made

676
00:38:28,080 --> 00:38:30,600
Speaker 1: a big splash with a blog post on that there

677
00:38:30,600 --> 00:38:33,520
Speaker 1: does not seem to be a lot of belief in

678
00:38:33,560 --> 00:38:37,440
Speaker 1: the markets the weekend. Discern Michael that the Federal Reserve

679
00:38:37,880 --> 00:38:39,799
Speaker 1: is going to be raising rates because while you do

680
00:38:39,880 --> 00:38:44,760
Speaker 1: have some of these um things impacting something like lib or,

681
00:38:45,080 --> 00:38:48,400
Speaker 1: you don't have a broad rise in the cost of

682
00:38:48,440 --> 00:38:51,640
Speaker 1: money anywhere. No, Mike, you don't, And I mean markets

683
00:38:51,640 --> 00:38:55,000
Speaker 1: have been skeptical about the FEDS dot plot for some time.

684
00:38:55,040 --> 00:38:59,680
Speaker 1: In the FED stock plot has been an ever downshifting trajectory.

685
00:39:00,200 --> 00:39:02,920
Speaker 1: So the set has been way too optimistic about the

686
00:39:02,920 --> 00:39:05,319
Speaker 1: path of short term interest rates, at least in terms

687
00:39:05,320 --> 00:39:08,640
Speaker 1: of rising, and the market has been more pessimistic, and

688
00:39:08,719 --> 00:39:11,359
Speaker 1: the market has been right. That raised a question though

689
00:39:11,360 --> 00:39:16,560
Speaker 1: about the FED losing credibility. Yes, I think the FED

690
00:39:16,680 --> 00:39:20,600
Speaker 1: is losing credibility. I mentioned the tips inflation break even

691
00:39:20,640 --> 00:39:24,000
Speaker 1: market before. Um, you know it's not perfect. But when

692
00:39:24,080 --> 00:39:28,400
Speaker 1: you have a sustained systematic decline in inflation expectations and

693
00:39:28,520 --> 00:39:30,440
Speaker 1: the Feds out there saying, well, we don't really know

694
00:39:30,480 --> 00:39:33,000
Speaker 1: what that means, or we think that there are distortions

695
00:39:33,040 --> 00:39:37,000
Speaker 1: from liquidity and risk premium, you know, okay, fine, but

696
00:39:37,040 --> 00:39:41,160
Speaker 1: then nominal GDP growth slows down uh in a fairly

697
00:39:41,239 --> 00:39:44,799
Speaker 1: dramatic fashion, uh, beginning right after the FED started the

698
00:39:44,840 --> 00:39:47,560
Speaker 1: taper and then proceeded to end QUEI and lift rates

699
00:39:47,600 --> 00:39:50,040
Speaker 1: for the first time. And now we have core inflation

700
00:39:50,160 --> 00:39:52,440
Speaker 1: rolling over. So at some point, you know, I think

701
00:39:52,440 --> 00:39:55,840
Speaker 1: they're going to have to recognize, Um, you know that

702
00:39:55,880 --> 00:39:58,600
Speaker 1: the confidence they've had in these Phillips curve models of

703
00:39:58,640 --> 00:40:01,600
Speaker 1: the inflation process, which simply say, well, if the labor

704
00:40:01,640 --> 00:40:03,960
Speaker 1: market is tight enough, we're going to hit our inflation target?

705
00:40:04,239 --> 00:40:08,160
Speaker 1: Are in serious, serious doubt, Michael. I have a chart

706
00:40:08,239 --> 00:40:10,759
Speaker 1: in my Bloomberg which I actually call the darted chart,

707
00:40:11,640 --> 00:40:15,960
Speaker 1: and it's nominal g d P. If you regress nominal

708
00:40:16,040 --> 00:40:20,320
Speaker 1: GDP from two thousand four, twelve years back, pre crisis,

709
00:40:21,040 --> 00:40:24,000
Speaker 1: and critically, if you regress it from say two thousand

710
00:40:24,000 --> 00:40:28,600
Speaker 1: and ten, it's moved downwards. I mean, the animal spirit

711
00:40:28,680 --> 00:40:33,560
Speaker 1: of this nation is diminishing. Are you worried about real

712
00:40:33,640 --> 00:40:39,160
Speaker 1: economic growth? Are you worried about the overlay of inflation? Well, Tom,

713
00:40:39,600 --> 00:40:41,640
Speaker 1: I'm worried about both. I mean, we have a problem

714
00:40:41,640 --> 00:40:44,359
Speaker 1: on the real side, which is that productivity growth has

715
00:40:44,360 --> 00:40:49,080
Speaker 1: been incredibly weak, compounding at just point six per annum

716
00:40:49,080 --> 00:40:53,000
Speaker 1: over the last six years. And we have a demographic headwind,

717
00:40:53,200 --> 00:40:55,800
Speaker 1: so working age population growth is going to be slower,

718
00:40:55,840 --> 00:40:58,960
Speaker 1: so growth potential is lower. On top of that, we've

719
00:40:59,000 --> 00:41:03,520
Speaker 1: had exceptionally weak nominal growth and low inflation, which is

720
00:41:03,520 --> 00:41:06,440
Speaker 1: a demand side problem. The FED can deal with the

721
00:41:06,440 --> 00:41:10,480
Speaker 1: demand side problem, um, the supply side issues that that

722
00:41:10,640 --> 00:41:13,759
Speaker 1: doesn't have much control over. Now, you know, there's a

723
00:41:13,760 --> 00:41:17,400
Speaker 1: big debate as to whether that's temporary you know, um,

724
00:41:17,440 --> 00:41:19,959
Speaker 1: you know, or more permanent. But I'm really I'm quite

725
00:41:19,960 --> 00:41:23,400
Speaker 1: worried about both. And it's interesting the inflation hawks have

726
00:41:23,480 --> 00:41:25,480
Speaker 1: really been hanging their hats either on the pick up

727
00:41:25,520 --> 00:41:29,560
Speaker 1: an hourly wage growth or the momentum and core services inflation,

728
00:41:30,280 --> 00:41:35,200
Speaker 1: utterly failing to recognize that those are slow moving, lagging indicators.

729
00:41:35,239 --> 00:41:39,520
Speaker 1: And if nominal GDP growth is decelerating sharply and now

730
00:41:39,560 --> 00:41:42,080
Speaker 1: we're at the very low end of the six year range,

731
00:41:42,400 --> 00:41:45,600
Speaker 1: unless that resources, there's just simply not going to be

732
00:41:45,800 --> 00:41:50,359
Speaker 1: enough aggregate demand to push inflation higher. Period. Where does

733
00:41:50,560 --> 00:41:53,840
Speaker 1: Congress fit into this? I get the idea of central

734
00:41:53,840 --> 00:41:56,080
Speaker 1: bank and I think we all have a grasp of

735
00:41:56,160 --> 00:42:03,879
Speaker 1: monetary responsibility to legislative alties, have a responsibility to legislate

736
00:42:04,000 --> 00:42:07,919
Speaker 1: the demand side of the economy. Well, you know, I'm

737
00:42:07,920 --> 00:42:11,160
Speaker 1: more of a traditional monitorist in the respect that you know,

738
00:42:11,200 --> 00:42:14,200
Speaker 1: if it's central banks that that really have the influence

739
00:42:14,239 --> 00:42:17,439
Speaker 1: and the responsibility over the demand side. There's a big

740
00:42:17,440 --> 00:42:20,400
Speaker 1: debate now, you know, a lot of renewed interest in

741
00:42:20,480 --> 00:42:24,920
Speaker 1: fiscal stimulus, but let's not let's not forget that Japan

742
00:42:25,080 --> 00:42:28,319
Speaker 1: ran very large deficits over a period in which the

743
00:42:28,360 --> 00:42:32,680
Speaker 1: b o J completely failed and the result was stagnation

744
00:42:32,680 --> 00:42:37,560
Speaker 1: and nominal GDP and deflation. So I'm very skeptical that

745
00:42:37,760 --> 00:42:41,520
Speaker 1: fiscal policy, if we're talking about demand side Kenzie and stimulus,

746
00:42:41,640 --> 00:42:43,160
Speaker 1: is going to save the day if we don't have

747
00:42:43,200 --> 00:42:46,520
Speaker 1: to feed on the right track where fiscal policymakers can

748
00:42:46,560 --> 00:42:49,280
Speaker 1: do some good and they're not doing it and probably

749
00:42:49,320 --> 00:42:51,560
Speaker 1: won't do it do it in the future based on

750
00:42:52,000 --> 00:42:55,880
Speaker 1: our candidates for the next election. Is on the supply side,

751
00:42:55,920 --> 00:43:00,919
Speaker 1: so reforming tax codes, reforming regulatory codes, reforming immigration policies

752
00:43:01,360 --> 00:43:06,280
Speaker 1: to be more pro growth, reforming education. So you know, unfortunately,

753
00:43:06,320 --> 00:43:08,400
Speaker 1: it doesn't look like we're going to get much of

754
00:43:08,400 --> 00:43:11,080
Speaker 1: a consensus in a positive direction on that score. But

755
00:43:11,280 --> 00:43:14,480
Speaker 1: physical policy aimed at the supply side, and don't let

756
00:43:14,480 --> 00:43:16,960
Speaker 1: the central banks off the hook they are responsible for

757
00:43:17,000 --> 00:43:22,080
Speaker 1: the demand side. Well yes, but um, you know, what

758
00:43:22,120 --> 00:43:24,680
Speaker 1: you're saying on the supply side is all textbook. But

759
00:43:25,160 --> 00:43:28,120
Speaker 1: if you can't get the animal spirits, if you can't

760
00:43:28,160 --> 00:43:32,000
Speaker 1: get people on the demand side, you're not gonna get anywhere.

761
00:43:32,000 --> 00:43:35,279
Speaker 1: And that that is the answer we keep getting from

762
00:43:35,680 --> 00:43:38,640
Speaker 1: the business people is that we we don't see any

763
00:43:38,719 --> 00:43:41,759
Speaker 1: visibility for profits because there's no demand. So we're not

764
00:43:41,760 --> 00:43:46,600
Speaker 1: going to invest right right, Listen, I will concede this much.

765
00:43:46,640 --> 00:43:49,120
Speaker 1: I will say that if you have a situation where

766
00:43:49,120 --> 00:43:52,360
Speaker 1: the central bank, you know, using the tools of monetary policy,

767
00:43:52,440 --> 00:43:55,520
Speaker 1: either short rates or the base, if they set out

768
00:43:55,560 --> 00:43:58,120
Speaker 1: to hit a target, and let's not fool ourselves, the

769
00:43:58,160 --> 00:44:00,880
Speaker 1: feed is not easy. They've been ti evening, so you know,

770
00:44:00,880 --> 00:44:03,719
Speaker 1: there's this bizarre perception that the Fed's trying to ease

771
00:44:03,760 --> 00:44:08,040
Speaker 1: and failing. No, they've been tightening and their succeeding, perhaps

772
00:44:08,040 --> 00:44:10,840
Speaker 1: more so than they expected. But let's say that dealing

773
00:44:10,840 --> 00:44:15,279
Speaker 1: with the next downturn, the set is easing policy. If

774
00:44:15,320 --> 00:44:17,839
Speaker 1: it seems like that is simply not going to be

775
00:44:17,880 --> 00:44:20,400
Speaker 1: powerful enough, then I do think there's a place in

776
00:44:20,400 --> 00:44:24,480
Speaker 1: the discussion for for a fiscal back stop to help that.

777
00:44:25,080 --> 00:44:27,920
Speaker 1: You know, look, if they set an aggressive enough target

778
00:44:28,000 --> 00:44:30,680
Speaker 1: and they're credible, then you may not meet the fiscal

779
00:44:30,760 --> 00:44:34,200
Speaker 1: back stop right because we're using fiscal policy, we're running

780
00:44:34,239 --> 00:44:36,440
Speaker 1: up the debt vitio. And if the FED can achieve

781
00:44:36,480 --> 00:44:39,440
Speaker 1: its targets without that, then you know that really ought

782
00:44:39,480 --> 00:44:42,280
Speaker 1: to be the first line of defense. Michael, ten seconds,

783
00:44:42,320 --> 00:44:44,120
Speaker 1: Are you gonna have a lunch this weekend? Like you

784
00:44:44,200 --> 00:44:47,480
Speaker 1: had in Tuscany's six weeks ago, were like seven bottles

785
00:44:47,480 --> 00:44:52,759
Speaker 1: of wine and you know I was, I was on cappuccino.

786
00:44:53,560 --> 00:45:01,800
Speaker 1: Cappuccino Michael Darda not from Tuscany. Yeah, JM Partners. Thanks

787
00:45:01,800 --> 00:45:05,960
Speaker 1: for listening to the Bloomberg Surveillance podcast. Subscribe and listen

788
00:45:06,239 --> 00:45:11,640
Speaker 1: to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer.

789
00:45:12,200 --> 00:45:16,800
Speaker 1: I'm on Twitter at Tom Keane. Michael McKee is at Economy.

790
00:45:16,800 --> 00:45:20,560
Speaker 1: Before the podcast, you can always catch us worldwide. I'm

791
00:45:20,600 --> 00:45:31,239
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00:45:31,239 --> 00:45:34,600
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793
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