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Speaker 1: Bloomberg Surveillance with Michael McKee and Tom Keane on demand

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Speaker 1: by our Bloomberg Radio Plus app free for iPhone and

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Speaker 1: Android devices. Bill, we are creating jobs. I see the

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Speaker 1: temporary employment dynamics and all are these good jobs were creating? Well,

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Speaker 1: that's the question. Are they good jobs? You know? I

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Speaker 1: suspect that some of them are are not great jobs.

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Speaker 1: Some of them are at a minimum wage and a

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Speaker 1: little bit higher. And um, you know, the the average

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Speaker 1: income of American workers is proceeding higher, but not at

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Speaker 1: a very rapid pace. I noticed that the hours worked

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Speaker 1: in this particular report didn't increase. Yes, the participation rate

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Speaker 1: went up, and I think Yelling and Company would be

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Speaker 1: heartened by that because the extent that it keeps going up,

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Speaker 1: it means more and more people are coming back into

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Speaker 1: the workforce and takes pressure off of their Phillips curve

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Speaker 1: and off of their tailor models. So it's not exactly

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Speaker 1: a robust model from the standpoint of a hike. Uh.

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Speaker 1: It maybe a robust model from the standpoint of increasing

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Speaker 1: economic growth, which I expect in this quarter to be

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Speaker 1: about two How far away from normal is Janet Yellen's

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Speaker 1: FED I think they're at least a hundred of two

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Speaker 1: Hunter basis points higher in their dots than normal, and

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Speaker 1: the the normal is really being fought out and academic circles.

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Speaker 1: Most of the research has come from the San Francisco Fed.

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Speaker 1: UM they say that at the moment that a zero

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Speaker 1: percent real uh you know, FED funds rate might be

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Speaker 1: the appropriate rate, which would put it about it one

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Speaker 1: and a half percent. The blue dots are significantly higher

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Speaker 1: in the out years, and so you know, I think

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Speaker 1: the FED still has some rethinking to do. But let

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Speaker 1: me mention a point at that time, I think the

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Speaker 1: FED based thickly. They're not faking in numbers, but they

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Speaker 1: want the market to um to believe that that hikes

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Speaker 1: might come sooner and faster than expected, and that means

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Speaker 1: a positive yelkre uh. This economy, the finance industry, banks,

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Speaker 1: insurance companies all need a positive yelkurve to uh to

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Speaker 1: make substantial profits. And so to the extent that those

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Speaker 1: blue belts are higher than what they might really think

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Speaker 1: if they really thought about it, then uh, you know

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Speaker 1: that favors bank margins, and I think what they're really

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Speaker 1: shooting for as a positive yelcreve as opposed to being

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Speaker 1: practical and where the real interest rate is going. Well,

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Speaker 1: the question, Bill is, if you look at the projections

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Speaker 1: that FED made in December for the economy in two

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Speaker 1: thousand sixteen, we've basically hit all those benchmarks. So are

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Speaker 1: they data dependent or not? How is the market supposed

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Speaker 1: to divine where the fat is going? If they tell

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Speaker 1: you we're going to raise rates based on these forecasts

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Speaker 1: and then they don't, well, they're global data dependent, and

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Speaker 1: they don't want to admit that. They want to pretend

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Speaker 1: that they're the central banker for the United States and

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Speaker 1: fact of the central banker for the world, and they

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Speaker 1: have global responsibilities because the dollar has the reserve currency.

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Speaker 1: They won't really put that in print. So to the

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Speaker 1: extent that currencies moved, to the extent that the markets

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Speaker 1: have synkholes on a global basis, to the extent that

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Speaker 1: emerging market countries do worse that they've been doing better

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Speaker 1: in the last few weeks, um, then the FED takes

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Speaker 1: that into consideration. And so data dependency extends beyond the

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Speaker 1: US economy, although the FED doesn't really want to admit it. Well,

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Speaker 1: are we still worried about the dollar. The dollar has

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Speaker 1: basically not moved over the last month and a half.

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Speaker 1: Trade weighted dollar has actually gone down the trade weighted

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Speaker 1: dollar index. Even with this jobs report, there's barely a

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Speaker 1: move in the dollar index. Is that still a real concern? Well,

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Speaker 1: it's a concern because of the lags. There's a six

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Speaker 1: that twelve month leggage, you know, Mike, and uh, we're

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Speaker 1: going to be seeing the effects of a stronger dollar

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Speaker 1: for you know, at least another six months. But yes,

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Speaker 1: the dollar has stopped going up, certainly against many of

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Speaker 1: the emerging market countries. Gosh, in Brazil it's it's down

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Speaker 1: by ten um. So it's getting better from that standpoint.

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Speaker 1: And to the extent that the dollar does weaken, you know,

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Speaker 1: that's a benefit as well for SMP five global companies

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Speaker 1: that you know, have been affected by a strong dollar

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Speaker 1: in the past, and now we'll see the tail wind

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Speaker 1: going forward as we move into two thousand and sixteen.

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Speaker 1: If you're just joining us on Bloomberg Television, Bloomberg Radio

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Speaker 1: worldwide and across the nation. After the jobs report, Bill

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Speaker 1: Gross of Jane's Capital Mr. Gross driving the market's higher, No, White, Mike,

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Speaker 1: it was a job's report features up to now up

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Speaker 1: eleven down, futures up eighty five, and we've seen some

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Speaker 1: significant yield moves Mike Butcher sing out, I can give

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Speaker 1: you the recent high, the reason high off the Bloomberg January,

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Speaker 1: and we came down downw only year and we come

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Speaker 1: right back up and now broken out in a two

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Speaker 1: year yield down. We going up up up into a

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Speaker 1: higher Michael McKee, the ten year yield up four basis points. Well, Bill,

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Speaker 1: what's the proper pricing for bonds right now, for the

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Speaker 1: yield curve right now, given the fact that the economy

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Speaker 1: seems to be coming back more strongly, but the Fed

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Speaker 1: doesn't seem to be ready to do anything. Well, let's

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Speaker 1: look at this two ways, myke. One from the standpoint

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Speaker 1: of what the Fed would do over the next twelve months.

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Speaker 1: You know, the market has factored in a one hike

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Speaker 1: and then one hike in the year beyond that. Perhaps

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Speaker 1: that's a little light, and so that would suggest perhaps

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Speaker 1: that the tenure is at a relatively low level compared

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Speaker 1: to where it should be. Let's compare it though to

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Speaker 1: the global market, and that's a key relative measure. I mean,

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Speaker 1: Japanese ten years in Japanese thirty years have gone down

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Speaker 1: by thirty or four or fifty basis points in the

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Speaker 1: past four or five weeks. And the course, we have

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Speaker 1: to compare the U. S. Treasury tenure to the German

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Speaker 1: Boon tenure and and take a spread there. And so

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Speaker 1: it's not just what the Fed might do, but it's

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Speaker 1: the comparison relative to global markets. And global markets, no doubt,

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Speaker 1: are pulling down US rates. And to the extent that

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Speaker 1: draggy you know next week, you know, continues to go

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Speaker 1: into negative territory, and to the extent that uh, the

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Speaker 1: bo j continues to move down into negative territory than

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Speaker 1: the U. S. Treasury is supported to some extent, and

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Speaker 1: price and yields are carried to some extent. Willill help

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Speaker 1: me here with the oddities of the moment, I don't

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Speaker 1: mean the San Francisco forty niners or American politics. I

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Speaker 1: would suggest Bill Gross, would you explain negative rates and

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Speaker 1: what it means for Janic's capital and for your unconstrained portfolio. Well, sure,

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Speaker 1: you know, obviously you only want to invest the negative

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Speaker 1: rates if you think they're going more negative that would

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Speaker 1: produce a higher price in terms of a bond. We

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Speaker 1: don't really do that because I think the move is

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Speaker 1: limited and you can only go so negative before domestic

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Speaker 1: economy has become affected by it and it becomes destructive.

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Speaker 1: What we're trying to do is basically range bound UH

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Speaker 1: central banks. We believe that central banks won't move far,

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Speaker 1: that they were fast, that these UH fifty basis point

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Speaker 1: hikes in the FED and even less in terms of

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Speaker 1: the UK and Japan and UH the e c B.

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Speaker 1: You know, then it produces the relative stasis. It doesn't

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Speaker 1: mean that rates don't move forward basis points on a morning.

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Speaker 1: It does mean that the ten here is bound within

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Speaker 1: a twenty plus or twenty range, and so al we

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Speaker 1: sell volatility around that and it produces a much higher yield.

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Speaker 1: I think people are surprised bill by how strong hiring

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Speaker 1: continues to be, given the fact that we have created

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Speaker 1: so many jobs for so long and the unemployment rate

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Speaker 1: is so low. The markets are gonna are the markets

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Speaker 1: going to have a tough time accepting the fact that

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Speaker 1: at some point we're going to slow down. But a

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Speaker 1: hundred feet two thousand jobs would still be a strong month, Well,

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Speaker 1: it would be. Let's face, The FED, though, is keen

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Speaker 1: on wages. They they focus on the labor and labor

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Speaker 1: conditions and to them, uh, you know, if if wages

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Speaker 1: get out of hand, then inflation will get a hand.

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Speaker 1: You know, we noticed this month, although there may be

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Speaker 1: a aberration, as you've noted the ten to fifteen minutes ago,

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Speaker 1: that the average hourly earnings went down from two five

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Speaker 1: to two point two percent on a annual y o

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Speaker 1: Y basis, And so you know, definitely wages are uh

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Speaker 1: and hourly earnings are not out of control. If you

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Speaker 1: factor in productivity props at one percent, then you know

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Speaker 1: you've got inflation in the one percent category. It seems

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Speaker 1: to me that the FED needs to focus on on

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Speaker 1: those conditions and know that two percent inflation, right is

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Speaker 1: perhaps a long way off. You know, the break evens

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Speaker 1: and the tips market almost worldwide, but let's stuff about

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Speaker 1: the US. Almost on all maturities from five to ten

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Speaker 1: to twenty to thirty years in maturity um, the break

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Speaker 1: even inflation rate is about one point four percent, which

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Speaker 1: means the market expects inflation for the next thirty years

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Speaker 1: to be one point four percent. And so why is

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Speaker 1: the FED so concerned about inflation when the market seem

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Speaker 1: to be telling it that everything's okay. Ordinarily you would

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Speaker 1: say go with the market. But if they're expecting that

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Speaker 1: kind of inflation for thirty years, somebody's got to be

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Speaker 1: wrong somewhere. Well, I think so, um, you know, to

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Speaker 1: my way of thinking, when the demographics kick in, when

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Speaker 1: the boomer is really good old and demand medical care

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Speaker 1: and stop spending money on consumption, and things will change dramatically,

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Speaker 1: and that to me means higher inflation. But at the moment,

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Speaker 1: the market doesn't see it that way. And certainly, to

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Speaker 1: be fair, you know, for the next five years or

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Speaker 1: the next two, three or four years, inflation seems well

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Speaker 1: under control. Unless I'm outities get a bid well being

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Speaker 1: the best example, going to fortify sixty dollars, you know,

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Speaker 1: unless that happens, than inflation is contained as we see

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Speaker 1: by you know, the wage numbers today. Bill, I want

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Speaker 1: to congratulate you on your latest note off Janna's Capital.

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Speaker 1: We always read them, we always like them. There's never

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Speaker 1: been a bad one. This one, folks, is extraordinary, and

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Speaker 1: it leads with the City Group chart, which drives me insane.

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Speaker 1: And I'm so glad Bill you did this. Christopher wander

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Speaker 1: Over here on Bloomberg Television. I'll put it out on

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Speaker 1: Bloomberg Radio plus City Group at forty two dollars a

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Speaker 1: share is a fiction that's after a ten to one

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Speaker 1: reverse split. Here we go up, we go to five

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Speaker 1: hundred dollars a share. Down, we go to forty two

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Speaker 1: dollars a share. You make a clear bill. You're worried

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Speaker 1: about permanent damage in our American banking system. Can you

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Speaker 1: support your former employee, Neil kesh Kari in reviewing are

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Speaker 1: too big to Fail banks? Well, my point wasn't exactly

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Speaker 1: Neil's point, but Neil has a point. You know, there

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Speaker 1: are banks that are too big to fail, and let's

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Speaker 1: make sure that we regulate them properly and that they

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Speaker 1: have sufficient capital. I think they have been recapitalizing and

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Speaker 1: they do have more capital than they had before. My point,

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Speaker 1: by showing City at five now at forty two, basically

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Speaker 1: said that many banks are are like that, not to

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Speaker 1: the same extreme, but certainly in Europe with Credit Suite

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Speaker 1: and Deutsche Bank. Their earnings power going forward, not not

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Speaker 1: the fact that they might be vulnerable to bankruptcy because

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Speaker 1: they're recapitalized, but their earnings power going forward is limited

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Speaker 1: because negative interest rates and because the yield curve appears

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Speaker 1: to be relatively flat and will continue to be flat

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Speaker 1: for a long time. That means their margins, their nimbs

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Speaker 1: will be limited. And it simply means to me that, well,

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Speaker 1: you know, banks are not of a bad investment, but

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Speaker 1: you know, let's face it, they're in a new age

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Speaker 1: with limited ability to increase earnings based upon this yield curve.

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Speaker 1: But Bill critically and Alan green Spend speaks of this,

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Speaker 1: You speak of this our David Weston and Bloomberg go

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Speaker 1: and pointed it out to me yesterday. Credit growth is

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Speaker 1: ramping up a little bit. Can you buy the idea

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Speaker 1: that that's a symbol of a recovering America or is

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Speaker 1: that credit growth within banking a fiction? No? And I

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Speaker 1: think we need it, and I think that's a critical element.

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Speaker 1: You know, I'm monitorist, you know, I'm uh, you know,

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Speaker 1: sort of stuck on a on a Hyman Minsky type

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Speaker 1: of model work. Credit feeds economic growth, that the two

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Speaker 1: are related. Our finance based economy depends on the perpetual

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Speaker 1: creation of more and more credit. And so yeah, the

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Speaker 1: rate is three to four percent, and now perhaps it

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Speaker 1: goes to five. I think in order to create a

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Speaker 1: nominal GDP growth of four, which is what the FED

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Speaker 1: wants to do, they need to create credit growth much

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Speaker 1: higher than that, because, uh, you know, it's been evident

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Speaker 1: in the past ten fifteen years that you need a

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Speaker 1: much higher of credit growth in order to stimulate a

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Speaker 1: certain amount of nominal GDP growth. And so it's getting better,

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Speaker 1: but it's still in the four percent area, and as

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Speaker 1: long as it stays there, it's underneath you know, the

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Speaker 1: cost of capital in the system, which is about six percent.

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Speaker 1: And if you can only grow nominal GDP by uh four,

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Speaker 1: if you can only grow credit by four percent with

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Speaker 1: the cost of capital and six then uh, you know,

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Speaker 1: nominal GDP suffers and you can't get out of the whole.

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Speaker 1: So credit growth is the key. You've got to find

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Speaker 1: some way for the private system to generate it. The

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Speaker 1: FED has done their duty in terms of lowering interest

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Speaker 1: rates and queuing all of that, but now the private

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Speaker 1: system needs to take debate. Some of it is occurring,

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Speaker 1: but I think leave much more. Bloomberg Surveillance weekday mornings

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Speaker 1: at seven Eastern in New York on Bloomberg Even three

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Speaker 1: oh in Boston M and nine four point five f

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Speaker 1: MHD two or on serious x M satellite radio channel

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Speaker 1: one nineteen h