1 00:00:00,320 --> 00:00:04,160 Speaker 1: Who you put your trust in matters. Investors have put 2 00:00:04,200 --> 00:00:07,640 Speaker 1: their trust in independent registered investment advisors to the tune 3 00:00:07,640 --> 00:00:12,240 Speaker 1: of four trillion dollars. Why learn more and find your 4 00:00:12,240 --> 00:00:29,040 Speaker 1: independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast. 5 00:00:29,440 --> 00:00:33,120 Speaker 1: I'm Tom Keene with David Gura. Daily we bring you 6 00:00:33,200 --> 00:00:38,200 Speaker 1: insight from the best in economics, finance, investment, and international relations. 7 00:00:38,640 --> 00:00:43,199 Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and 8 00:00:43,280 --> 00:00:51,239 Speaker 1: of course, on the Bloomberg. This is Bloomberg Surveillance. I'm 9 00:00:51,240 --> 00:00:55,800 Speaker 1: Michael McKay along with Francie Lakla in London. Um, you 10 00:00:55,920 --> 00:01:00,360 Speaker 1: have Tom Keene somewhere running around your city, Um Pound, 11 00:01:00,560 --> 00:01:02,400 Speaker 1: but he's not on the air. Just to make sure 12 00:01:02,400 --> 00:01:06,000 Speaker 1: he doesn't go bankrupt. He's okay for now. Well, we'll 13 00:01:06,040 --> 00:01:08,880 Speaker 1: try to keep him satisfied. I mean with prices the 14 00:01:08,920 --> 00:01:11,679 Speaker 1: way they actually I got an email from Tom's wife 15 00:01:11,720 --> 00:01:13,760 Speaker 1: who said that she is trying to keep him from 16 00:01:13,840 --> 00:01:16,080 Speaker 1: spending a lot of money. I guess with the pound 17 00:01:16,120 --> 00:01:20,000 Speaker 1: where it is the temptation. The temptation is great, and 18 00:01:20,040 --> 00:01:23,520 Speaker 1: even if it's cheaper, you've you've still spent the money. Uh, 19 00:01:24,160 --> 00:01:26,440 Speaker 1: there is always a business story right to Tom's life. 20 00:01:26,720 --> 00:01:29,440 Speaker 1: It's always if it's not pound volatility, it's something to 21 00:01:29,440 --> 00:01:32,720 Speaker 1: do with treasury spreads and stuff like that. You followed, Tom, 22 00:01:32,720 --> 00:01:35,080 Speaker 1: and you look at the economic GDP around the world, 23 00:01:35,240 --> 00:01:37,959 Speaker 1: and women's shoes at Herod's they were there yesterday. You've 24 00:01:38,000 --> 00:01:41,119 Speaker 1: predicted that and you were right all right. Joining us 25 00:01:41,120 --> 00:01:44,680 Speaker 1: now and wandering over from Bloomberg Television with me is 26 00:01:44,840 --> 00:01:48,240 Speaker 1: John Sylvia. He is the chief economist at Wells Fargo 27 00:01:48,400 --> 00:01:53,480 Speaker 1: and Charlotte. He's up visiting in Washington from visiting in 28 00:01:53,480 --> 00:01:55,520 Speaker 1: New York from Charlotte. I don't know if I said Washington. 29 00:01:55,520 --> 00:01:58,120 Speaker 1: We've been talking about Donald Trump so much today that 30 00:02:00,000 --> 00:02:01,760 Speaker 1: that's on my mind, and I'm sure we'll get to 31 00:02:01,840 --> 00:02:03,960 Speaker 1: him and trump Atomics. But I want to follow up 32 00:02:04,320 --> 00:02:07,880 Speaker 1: on the ending of our conversation on bloombrick surveillance on television. 33 00:02:07,920 --> 00:02:10,239 Speaker 1: And this is just a warning to all of you 34 00:02:10,480 --> 00:02:13,200 Speaker 1: out there. If you didn't hear it, UM, you need 35 00:02:13,240 --> 00:02:15,120 Speaker 1: to get up earlier and turned friend and I on 36 00:02:15,200 --> 00:02:21,160 Speaker 1: this week, Um, we were talking about how the FED 37 00:02:21,360 --> 00:02:25,440 Speaker 1: has been at or near zero for seven years now. 38 00:02:25,720 --> 00:02:29,119 Speaker 1: The rest of the world central banks have been at 39 00:02:29,240 --> 00:02:33,440 Speaker 1: or below zero for many years now, and there's no inflation. 40 00:02:33,480 --> 00:02:37,840 Speaker 1: It just it's not being generated. And is it time 41 00:02:39,000 --> 00:02:44,080 Speaker 1: to ask the question? Has the central banking model of 42 00:02:44,080 --> 00:02:47,760 Speaker 1: how inflation is generated and the implication therefore obviously has 43 00:02:47,840 --> 00:02:50,160 Speaker 1: to do with with how people react in the markets 44 00:02:50,480 --> 00:02:53,919 Speaker 1: for them to jettison that and figure out something new. Well, certainly, 45 00:02:54,360 --> 00:02:57,360 Speaker 1: let's say to the two major models. One, you print 46 00:02:57,400 --> 00:02:59,000 Speaker 1: a lot of money, you get a lot of inflation 47 00:02:59,560 --> 00:03:05,560 Speaker 1: UM nineteen seventies, early eighties Monitorius model UM doesn't seem 48 00:03:05,600 --> 00:03:08,400 Speaker 1: to be playing out. Second, there's de Philip's curve model, 49 00:03:08,600 --> 00:03:12,640 Speaker 1: in which a lower unemployer rate will generate significantly higher 50 00:03:12,720 --> 00:03:16,440 Speaker 1: wage pressures and therefore, you know, labor costs UM. And 51 00:03:16,520 --> 00:03:19,600 Speaker 1: that really didn't work for the last two or three years, 52 00:03:19,720 --> 00:03:22,840 Speaker 1: and now it's starting to work a little bit. So 53 00:03:22,919 --> 00:03:25,920 Speaker 1: I think the challenge Mike is Okay, yeah, what what 54 00:03:26,120 --> 00:03:29,760 Speaker 1: is our model? And I gotta believe that the market, 55 00:03:29,800 --> 00:03:34,000 Speaker 1: particularly the bond market, is looking at this and saying UM, globalization, 56 00:03:34,200 --> 00:03:38,720 Speaker 1: trade uh, competitive pressures. There's a lot of other factors 57 00:03:38,760 --> 00:03:41,640 Speaker 1: going into this than the simple economics of a trade 58 00:03:41,640 --> 00:03:46,480 Speaker 1: off between unemployment and wage pressure. So what is that um? 59 00:03:46,560 --> 00:03:48,240 Speaker 1: John is there is there something is it. I don't 60 00:03:48,240 --> 00:03:50,480 Speaker 1: know if it's the psyche that people will actually go 61 00:03:50,520 --> 00:03:53,000 Speaker 1: and spend because the market seemed to be in the 62 00:03:53,080 --> 00:03:56,280 Speaker 1: euphoria and they believe that Donald Trump will helped him. Oh, 63 00:03:56,320 --> 00:03:59,840 Speaker 1: I think clearly for the holiday season here and you 64 00:03:59,880 --> 00:04:03,720 Speaker 1: know States, there was a sense of euphoria and let's 65 00:04:03,720 --> 00:04:07,200 Speaker 1: go spend some money. Holidays sales particularly were very very strong, 66 00:04:07,760 --> 00:04:11,720 Speaker 1: UM particually UM. You know, online UH sales were particularly trying. 67 00:04:11,760 --> 00:04:14,000 Speaker 1: So there was that euphoria that we're going to kick 68 00:04:14,080 --> 00:04:17,960 Speaker 1: up our pace of economic growth. Now growth can improve. 69 00:04:18,040 --> 00:04:20,240 Speaker 1: And then the question, you know, going back to the 70 00:04:20,240 --> 00:04:23,720 Speaker 1: Mike's point, is we're not getting the inflation associated with 71 00:04:23,760 --> 00:04:27,960 Speaker 1: the kind of unemployment rate levels and economic growth that 72 00:04:28,040 --> 00:04:31,800 Speaker 1: people are expected. Tony Kristenzi from Primco was here yesterday 73 00:04:31,839 --> 00:04:33,840 Speaker 1: and he pointed out, and we were talking about it 74 00:04:33,880 --> 00:04:35,480 Speaker 1: on the air, when when you look at dots go 75 00:04:35,640 --> 00:04:37,920 Speaker 1: and you can call that up on your Bloomberg terminal 76 00:04:38,240 --> 00:04:41,400 Speaker 1: and you can see the not just the FEDS path 77 00:04:41,480 --> 00:04:44,839 Speaker 1: for interest rates, but the option UH the overnight index 78 00:04:44,880 --> 00:04:48,240 Speaker 1: swaps basically the market's view of where interest rates are going, 79 00:04:48,600 --> 00:04:51,920 Speaker 1: and they don't have nearly the enthusiasm for what Donald 80 00:04:51,960 --> 00:04:55,400 Speaker 1: Trump could do in terms of creating growth end inflation 81 00:04:55,640 --> 00:04:58,599 Speaker 1: that equity markets do. Yeah, there's no there's no doubt 82 00:04:58,600 --> 00:05:01,560 Speaker 1: the inflation pot of it really is a very different 83 00:05:01,560 --> 00:05:05,280 Speaker 1: ball game going forward. Once again, Uh, the U s 84 00:05:05,360 --> 00:05:08,000 Speaker 1: economy is not a closed economy like it was in 85 00:05:08,040 --> 00:05:10,880 Speaker 1: the nineteen fifties, sixties, and early seventies, So you're not 86 00:05:10,960 --> 00:05:14,880 Speaker 1: getting that obvious Phillips curve kind of trade off. Um, 87 00:05:14,920 --> 00:05:18,800 Speaker 1: you've got a much broader mechanism for generating inflation over time, 88 00:05:19,200 --> 00:05:23,280 Speaker 1: and we're just not seeing that old model work done. 89 00:05:23,480 --> 00:05:25,840 Speaker 1: How do you believe the US economy will change in 90 00:05:25,880 --> 00:05:28,039 Speaker 1: the next twelve months. People are saying that maybe the 91 00:05:28,080 --> 00:05:31,039 Speaker 1: economy will grow three percent by the end of next year. 92 00:05:31,400 --> 00:05:34,400 Speaker 1: That would be a huge increase. Well, three percent in 93 00:05:34,520 --> 00:05:39,000 Speaker 1: the short run. France scene is certainly possible if you 94 00:05:39,040 --> 00:05:42,080 Speaker 1: have tax catchy, if you have some infrastructure spending, perhaps 95 00:05:42,160 --> 00:05:46,560 Speaker 1: more optimism in terms of trading relationships. But the challenge 96 00:05:46,560 --> 00:05:50,120 Speaker 1: for for us here in the private sector is is 97 00:05:50,200 --> 00:05:54,400 Speaker 1: that sustainable? And for us, what you really need is 98 00:05:54,480 --> 00:05:58,000 Speaker 1: something with respect to productivity, something with respect to labor 99 00:05:58,040 --> 00:06:01,480 Speaker 1: force growth, the labor force participatation rates, that's going to 100 00:06:01,600 --> 00:06:05,080 Speaker 1: make that three more sustainable. I think again, you know 101 00:06:05,120 --> 00:06:08,280 Speaker 1: when you look at the British experience, Um, you know, 102 00:06:08,360 --> 00:06:11,520 Speaker 1: the the going for growth. Yeah, that was easy in 103 00:06:11,520 --> 00:06:14,400 Speaker 1: the short run for six months or a year to 104 00:06:14,520 --> 00:06:17,680 Speaker 1: generated an awful lot of inflation and led to a 105 00:06:17,720 --> 00:06:20,000 Speaker 1: lot of long run problems in the British economy in 106 00:06:20,040 --> 00:06:23,520 Speaker 1: the sixties and seventies. So are we in any danger 107 00:06:23,839 --> 00:06:29,040 Speaker 1: of that or has the dynamic changed so much that, um, 108 00:06:29,200 --> 00:06:34,160 Speaker 1: whatever happens, the FED and anybody who's worried about inflation 109 00:06:34,360 --> 00:06:37,160 Speaker 1: has a lot of time to react. Well. For us, 110 00:06:38,040 --> 00:06:42,080 Speaker 1: the way I expressed it internally, uh, is that we're 111 00:06:42,120 --> 00:06:44,520 Speaker 1: the market is on its second date with Donald Trump. 112 00:06:45,200 --> 00:06:49,120 Speaker 1: First date looked wonderful everything you know as roses, looks 113 00:06:49,120 --> 00:06:50,760 Speaker 1: like we're gonna do a lot of things. And now 114 00:06:50,800 --> 00:06:54,320 Speaker 1: the second date is okay, can you deliver a r 115 00:06:54,520 --> 00:06:58,719 Speaker 1: What is the sustainable economic policy that's going to improve 116 00:06:58,800 --> 00:07:02,960 Speaker 1: growth over time for estates? Done? Second day? Now we're 117 00:07:02,960 --> 00:07:05,960 Speaker 1: more realistic in terms of what can actually happen. And 118 00:07:05,960 --> 00:07:10,480 Speaker 1: again our conversation earlier today, um, Mike, Um, fiscal policy 119 00:07:10,520 --> 00:07:13,000 Speaker 1: will be difficult because there will be some fiscal hawks, 120 00:07:13,280 --> 00:07:17,400 Speaker 1: infrastructure spending takes time, and trade is a very uncertain 121 00:07:17,440 --> 00:07:20,480 Speaker 1: thing with respect to our relationships with respect to China 122 00:07:20,520 --> 00:07:24,640 Speaker 1: and other countries. What can he actually do if we 123 00:07:24,680 --> 00:07:26,600 Speaker 1: take it methodically? So are you more worried that he 124 00:07:26,600 --> 00:07:30,040 Speaker 1: won't be able to spend in infrastructure as much as 125 00:07:30,080 --> 00:07:33,360 Speaker 1: he's said he would? Um, But actually he has more 126 00:07:33,360 --> 00:07:35,480 Speaker 1: of a chance of getting things through in terms of 127 00:07:35,520 --> 00:07:38,960 Speaker 1: tax reform. Well, the example I use fran Scene, of course, 128 00:07:39,200 --> 00:07:43,160 Speaker 1: is Larry Summer's comments about the Lars Anderson Bridge over 129 00:07:43,200 --> 00:07:46,760 Speaker 1: the Childs River in Boston. Um, there's a lot of 130 00:07:46,840 --> 00:07:50,280 Speaker 1: infrastructure that people say we need. But now you're going 131 00:07:50,320 --> 00:07:52,880 Speaker 1: to go through the permitting process. Now you're you're dealing 132 00:07:52,880 --> 00:07:56,000 Speaker 1: with the E p A putting things across water. Now 133 00:07:56,040 --> 00:07:58,240 Speaker 1: you're dealing with a lot of contracts. A lot of 134 00:07:58,280 --> 00:08:00,560 Speaker 1: this is going to take a long time him to 135 00:08:00,680 --> 00:08:02,760 Speaker 1: put it into place. And the same thing I think 136 00:08:02,800 --> 00:08:06,280 Speaker 1: with respect the tax policy. Um, yes I can cut 137 00:08:06,400 --> 00:08:12,080 Speaker 1: the martiall tax rate on both businesses and personal uh taxes, 138 00:08:12,280 --> 00:08:15,840 Speaker 1: But how am we going to pay for this? Or 139 00:08:16,040 --> 00:08:20,000 Speaker 1: again what deductions am I going to get rid of? 140 00:08:20,280 --> 00:08:23,559 Speaker 1: That creates a very very different dynamic frenzy our guest 141 00:08:23,800 --> 00:08:26,720 Speaker 1: is John Sylvia, the chief economist at Wells Fargo, And 142 00:08:26,800 --> 00:08:29,680 Speaker 1: in our last segment, you sort of ended by saying, uh, 143 00:08:29,840 --> 00:08:32,720 Speaker 1: since we don't know what Donald Trump is actually going 144 00:08:32,760 --> 00:08:35,839 Speaker 1: to do in what Congress will pass, etcetera, we don't know. 145 00:08:36,080 --> 00:08:39,640 Speaker 1: You don't know what the economic forecast is going to 146 00:08:39,679 --> 00:08:43,319 Speaker 1: be for two thousand and seventeen. So what if you're 147 00:08:43,360 --> 00:08:47,120 Speaker 1: Janet yelling? What is the Fed going to do? Because 148 00:08:47,160 --> 00:08:50,240 Speaker 1: they have to make policy which works with long and 149 00:08:50,320 --> 00:08:53,960 Speaker 1: variable legs, as the old trope as it based on forecasts. 150 00:08:53,960 --> 00:08:56,480 Speaker 1: And yet how do you make a forecast? Well, we 151 00:08:56,600 --> 00:09:01,520 Speaker 1: have not altered our economic forecast into is of the 152 00:09:01,679 --> 00:09:05,160 Speaker 1: Fed until we see what in fact is going to 153 00:09:05,200 --> 00:09:08,480 Speaker 1: be done with respect to federal spending, defense spending and 154 00:09:08,520 --> 00:09:11,520 Speaker 1: tax cuts. And I think for Janet Yellen, I would 155 00:09:11,520 --> 00:09:13,439 Speaker 1: say the same thing if if r at the Fed, 156 00:09:13,520 --> 00:09:16,120 Speaker 1: I'd said to wait and see, let's see what gets done. 157 00:09:16,640 --> 00:09:19,480 Speaker 1: Let's not prejudge what's going to happen. And so I 158 00:09:19,480 --> 00:09:22,120 Speaker 1: think the federal take a very very cautious approach to 159 00:09:22,280 --> 00:09:25,880 Speaker 1: raising the federal funds. Right and look at the data, John, 160 00:09:25,960 --> 00:09:29,040 Speaker 1: what happens to dollar in two thousand seventeen, more strength, 161 00:09:29,080 --> 00:09:32,480 Speaker 1: and actually, how should Janet Ellen view that? UM, I 162 00:09:32,480 --> 00:09:35,280 Speaker 1: would pick up on your earlier point friend seeing and 163 00:09:35,360 --> 00:09:38,439 Speaker 1: emphasize that both the dollars off a little bit and 164 00:09:38,520 --> 00:09:41,640 Speaker 1: the price of oil is off a little bit. UM, 165 00:09:41,679 --> 00:09:45,079 Speaker 1: I think there's going to be a reassessment with respect 166 00:09:45,160 --> 00:09:48,960 Speaker 1: to what can actually get done in terms of economic 167 00:09:49,080 --> 00:09:52,800 Speaker 1: policy and how much growth slash inflation is really being 168 00:09:52,840 --> 00:09:55,720 Speaker 1: put into place. We still have a very cautious view 169 00:09:55,760 --> 00:09:58,880 Speaker 1: on the dollar overall. We do think there's a little 170 00:09:58,960 --> 00:10:02,679 Speaker 1: more dollar apprecia creation. But the dollar cuts two different ways. 171 00:10:02,720 --> 00:10:05,160 Speaker 1: I mean, as you know, a stronger dollar does lower 172 00:10:05,160 --> 00:10:09,840 Speaker 1: import prices and therefore help the FED lower UM inflation targeting. 173 00:10:10,480 --> 00:10:15,560 Speaker 1: But the dollar strength also suggests that this year seventeen coming, 174 00:10:15,800 --> 00:10:18,160 Speaker 1: we're going to see another big trade deficit, which is 175 00:10:18,200 --> 00:10:21,280 Speaker 1: a negative on economic growth. UM So for us, the 176 00:10:21,360 --> 00:10:24,080 Speaker 1: dollar cuts two ways. We do see some modest improvement 177 00:10:24,120 --> 00:10:26,920 Speaker 1: in the dollar, but again for me um or on 178 00:10:26,960 --> 00:10:31,120 Speaker 1: the second date, we're waiting to see what actually comes through. 179 00:10:31,240 --> 00:10:34,040 Speaker 1: First date was wonderful. Second date, we need to figure 180 00:10:34,080 --> 00:10:36,199 Speaker 1: out what's actually going to be put in place. Are 181 00:10:36,240 --> 00:10:39,600 Speaker 1: you someone who worries about the trade deficit? I mean 182 00:10:40,000 --> 00:10:43,600 Speaker 1: this is. This was a big issue on the campaign trail, 183 00:10:43,679 --> 00:10:45,760 Speaker 1: but a lot of e commas say, you know, two 184 00:10:45,800 --> 00:10:48,800 Speaker 1: to three percent of GP, it's not a big deal. 185 00:10:49,440 --> 00:10:51,880 Speaker 1: I would say at this point, Mike, we seem to 186 00:10:51,960 --> 00:10:55,200 Speaker 1: be able to finance our trade deficit with capital influence 187 00:10:55,320 --> 00:10:58,440 Speaker 1: very nicely, thank you very much. So I am not 188 00:10:58,520 --> 00:11:02,280 Speaker 1: worried about the trade defference of per SE. As an economist, 189 00:11:02,480 --> 00:11:05,559 Speaker 1: I understand that a lot of the trade deficit is 190 00:11:05,640 --> 00:11:10,920 Speaker 1: really trade between a company bringing parts in or exporting 191 00:11:11,000 --> 00:11:15,600 Speaker 1: products out. So it's a lot of companies trading within themselves, 192 00:11:15,640 --> 00:11:18,520 Speaker 1: bringing imports and exports, and particuly when you look at 193 00:11:19,200 --> 00:11:22,080 Speaker 1: capital goods in the United States, and particularly automobiles, I mean, 194 00:11:22,160 --> 00:11:25,120 Speaker 1: you know what part of our car is not made 195 00:11:25,120 --> 00:11:28,600 Speaker 1: and not America? I supposed to just America. So no, 196 00:11:28,920 --> 00:11:31,000 Speaker 1: I do not worry about the trade defference of per 197 00:11:31,000 --> 00:11:33,640 Speaker 1: SE at this level because simply it seems that we're 198 00:11:33,679 --> 00:11:36,160 Speaker 1: able to finance it. And going back to Francine's point, 199 00:11:36,960 --> 00:11:39,160 Speaker 1: we get a lot of capital influence into the United 200 00:11:39,200 --> 00:11:41,960 Speaker 1: States that help US finance that deficit. So it's not 201 00:11:42,040 --> 00:11:44,839 Speaker 1: a major concern for me. John, What happened? What is 202 00:11:44,880 --> 00:11:46,920 Speaker 1: the question that you asked Donald Trump, if he were 203 00:11:47,240 --> 00:11:49,560 Speaker 1: to call in to Bloomberg surveillance right now, in five 204 00:11:49,559 --> 00:11:51,880 Speaker 1: minutes from now, what is the one thing that unique 205 00:11:52,040 --> 00:11:58,400 Speaker 1: to to understand better how it impacts your world the economy. Well, 206 00:11:58,520 --> 00:12:01,040 Speaker 1: if it was a private conversation, and I would really 207 00:12:01,320 --> 00:12:04,719 Speaker 1: ask him, how do you want to structure fiscal policy 208 00:12:05,160 --> 00:12:07,560 Speaker 1: in terms of are we talking tax cuts, we're talking 209 00:12:07,600 --> 00:12:11,120 Speaker 1: tax reform, two different concepts. To what extent are you 210 00:12:11,200 --> 00:12:13,360 Speaker 1: going to pursue those and what are we willing to 211 00:12:13,440 --> 00:12:16,240 Speaker 1: trade off in terms of getting a lower tax rate 212 00:12:16,559 --> 00:12:18,600 Speaker 1: that you're willing to go to Congress and say we're 213 00:12:18,600 --> 00:12:21,720 Speaker 1: going to cut certain tax breaks. I think the structure 214 00:12:22,120 --> 00:12:24,840 Speaker 1: of fiscal policy is the number one story for US. Well, 215 00:12:24,920 --> 00:12:29,600 Speaker 1: fiscal policy itself is an issue. Janet Yellen suggested at 216 00:12:29,600 --> 00:12:33,360 Speaker 1: her news conference in December fourteenth that perhaps it's not 217 00:12:33,520 --> 00:12:37,199 Speaker 1: necessarily a good idea at this point, well from Janet 218 00:12:37,280 --> 00:12:40,400 Speaker 1: Yellen's point of view, and for most economists, we are 219 00:12:40,480 --> 00:12:43,120 Speaker 1: late in the cycle. All right, So now you're gonna 220 00:12:43,120 --> 00:12:46,920 Speaker 1: cut taxes, You're gonna stimulate economic growth, to what extent 221 00:12:47,400 --> 00:12:49,840 Speaker 1: are you simply increase in the demand side of the 222 00:12:49,880 --> 00:12:54,720 Speaker 1: economy more consumer spending, more housing, more business investment, and 223 00:12:54,960 --> 00:12:57,760 Speaker 1: is that going to be met with additional supply? For 224 00:12:57,880 --> 00:13:00,959 Speaker 1: Janet Yellen, looking at that labor market at full employment, 225 00:13:01,360 --> 00:13:04,080 Speaker 1: it doesn't appear as if, Mike, there's a lot of 226 00:13:04,160 --> 00:13:07,040 Speaker 1: capacity for an increase in supply. Do you think a 227 00:13:07,080 --> 00:13:08,960 Speaker 1: lot of the people who are on the sidelines of 228 00:13:09,120 --> 00:13:12,959 Speaker 1: the labor market will be pulled into the labor work Well, 229 00:13:13,280 --> 00:13:15,880 Speaker 1: I'll tell you, Mike. You know, from my personal point 230 00:13:15,920 --> 00:13:20,640 Speaker 1: of view, Uh no, uh, the demographics are really driving 231 00:13:20,679 --> 00:13:24,640 Speaker 1: that labor force participation rate and labor force growth. So 232 00:13:24,679 --> 00:13:27,080 Speaker 1: when you say a lot of people coming in, no, 233 00:13:27,679 --> 00:13:31,719 Speaker 1: you say some modest amount. Yes. But once again, Mike, 234 00:13:31,760 --> 00:13:34,320 Speaker 1: when you go back to manufacturing, we really need to 235 00:13:34,400 --> 00:13:37,040 Speaker 1: upgrade the skills of a lot of people in the 236 00:13:37,080 --> 00:13:41,280 Speaker 1: United States to be competitive with a more advanced manufacturing economy. 237 00:13:42,000 --> 00:13:43,839 Speaker 1: John Silvia always great to see you. I hope we'll 238 00:13:43,840 --> 00:13:46,480 Speaker 1: see you a lot. In two thousand seventeen up from 239 00:13:46,559 --> 00:13:50,360 Speaker 1: Charlotte from Wells Fargo where he is the chief economist. 240 00:14:02,559 --> 00:14:06,320 Speaker 1: Joining us now is Neil Sharing. He's Capital Economics chief 241 00:14:06,400 --> 00:14:10,199 Speaker 1: Emerging markets economists, and his perfect timing because we are 242 00:14:10,280 --> 00:14:14,760 Speaker 1: seeing an awful lot of factors converging on emerging markets 243 00:14:14,800 --> 00:14:17,959 Speaker 1: that will make two thousand seventeen very interesting, not the 244 00:14:18,040 --> 00:14:20,160 Speaker 1: least of which, of course, is the election in the 245 00:14:20,240 --> 00:14:23,840 Speaker 1: US of Donald Trump and what will mean geo politically 246 00:14:24,080 --> 00:14:26,440 Speaker 1: and what it means for the US economy. Therefore, interest 247 00:14:26,520 --> 00:14:29,440 Speaker 1: rates and the US dollar, which are big contributors to 248 00:14:29,800 --> 00:14:33,680 Speaker 1: what happens in emerging markets. The mx e F Emerging 249 00:14:33,720 --> 00:14:36,560 Speaker 1: Markets Index up five points today, six tents of eight percent. 250 00:14:36,640 --> 00:14:38,800 Speaker 1: So it doesn't look like there's a lot of pessimism 251 00:14:38,840 --> 00:14:41,200 Speaker 1: out there at the moment, Not at the moment, no, 252 00:14:41,400 --> 00:14:43,880 Speaker 1: and I think that's probably justified at this stage for 253 00:14:43,920 --> 00:14:46,920 Speaker 1: two reasons. The first is that obviously a lot of 254 00:14:46,920 --> 00:14:49,240 Speaker 1: focus has been on what Trump is going to do 255 00:14:49,400 --> 00:14:53,680 Speaker 1: around protectionism, um. But I think in the short term 256 00:14:53,680 --> 00:14:55,960 Speaker 1: at least, it makes sense to move quite slowly in 257 00:14:56,000 --> 00:15:02,040 Speaker 1: this in this area politically and normeric reasons too. Um. 258 00:15:02,160 --> 00:15:05,240 Speaker 1: So far, at least, the types of interventions we've seen 259 00:15:05,280 --> 00:15:08,840 Speaker 1: have been about trying to keep jobs in America, um 260 00:15:09,760 --> 00:15:13,320 Speaker 1: and and and really but but but small scale we've 261 00:15:13,400 --> 00:15:18,640 Speaker 1: not We've seen some rowing back from the Blankett tariffs 262 00:15:18,640 --> 00:15:21,920 Speaker 1: on Chinese good tariffs on Mexican goods, so that's the 263 00:15:21,960 --> 00:15:24,280 Speaker 1: first thing. The second thing is that although the so 264 00:15:24,320 --> 00:15:30,040 Speaker 1: called trumpflation trade lucofiscal policy necessitating tighter monetary policy in 265 00:15:30,080 --> 00:15:33,280 Speaker 1: the US UM has obviously pushed the dollar higher and 266 00:15:33,360 --> 00:15:36,920 Speaker 1: raised interest rate expectations in the US, the sensitivity and 267 00:15:37,000 --> 00:15:41,200 Speaker 1: vulnerability of to that of emerging markets I think has diminished. 268 00:15:41,480 --> 00:15:44,160 Speaker 1: Over the past couple of years. You've seen these big 269 00:15:44,200 --> 00:15:47,840 Speaker 1: current account deficits that that had opened up in places 270 00:15:47,840 --> 00:15:50,840 Speaker 1: like Brazil and India and Indonesia, they've started to narrow. 271 00:15:51,400 --> 00:15:54,760 Speaker 1: So really it's only a handful of vms that are 272 00:15:54,840 --> 00:15:56,880 Speaker 1: very vulnerable to hire U S rates and the stronger 273 00:15:56,920 --> 00:16:00,160 Speaker 1: dollar probably, but Turkey at the top of that of 274 00:16:00,280 --> 00:16:03,200 Speaker 1: that list. Really that the big risks for emerging markets 275 00:16:03,200 --> 00:16:06,120 Speaker 1: a domestic in nature. In T seventeen, I think, right, 276 00:16:06,160 --> 00:16:09,200 Speaker 1: And you're thinking of that, and you painted a nice 277 00:16:09,240 --> 00:16:12,240 Speaker 1: global picture of a lot of these emerging markets. Which 278 00:16:12,280 --> 00:16:15,200 Speaker 1: are the ones that have not pushed in the structural 279 00:16:15,240 --> 00:16:19,560 Speaker 1: reforms needed to be stronger in the next eighteen months. Wow, 280 00:16:19,640 --> 00:16:21,280 Speaker 1: that's a good question. I think it's probably easy to 281 00:16:21,280 --> 00:16:24,160 Speaker 1: say which are the ones that have because really we've 282 00:16:24,200 --> 00:16:28,160 Speaker 1: seen since two thousand and ten, really um that there 283 00:16:28,200 --> 00:16:31,360 Speaker 1: reform momentum in emerging economies has has slowed and actually 284 00:16:31,400 --> 00:16:33,680 Speaker 1: grown to a halt. I think a lot of that 285 00:16:33,760 --> 00:16:35,760 Speaker 1: has has its roots in the two thousand and eight 286 00:16:35,800 --> 00:16:40,360 Speaker 1: global financial crisis, when obviously emerging markets were relatively resilient. 287 00:16:40,880 --> 00:16:44,680 Speaker 1: I think that really engendered complacency in policy making circles 288 00:16:44,680 --> 00:16:47,920 Speaker 1: and emerging markets. Since then, we've seen almost no structural 289 00:16:47,960 --> 00:16:51,280 Speaker 1: reform in in in any major emerging market, with perhaps 290 00:16:51,360 --> 00:16:54,360 Speaker 1: two exceptions. The first is Mexico, where we saw quite 291 00:16:54,360 --> 00:16:58,960 Speaker 1: an impressive reform package in under President Pennon, yesa obviously 292 00:16:59,000 --> 00:17:02,320 Speaker 1: now um the thoughts of turned to Trump. The Mexican 293 00:17:02,320 --> 00:17:05,600 Speaker 1: government itself, Pennions is the most unpopular president on record 294 00:17:05,720 --> 00:17:08,920 Speaker 1: elections there in eighteen. Perhaps that's the next place to 295 00:17:08,920 --> 00:17:13,399 Speaker 1: watch for populism. The second place is Argentina, um, where 296 00:17:13,960 --> 00:17:17,600 Speaker 1: we had a market friendly government elected in late twenty 297 00:17:19,119 --> 00:17:24,440 Speaker 1: fift big fiscal reforms announced, the liberalization of the capital account, 298 00:17:24,720 --> 00:17:28,920 Speaker 1: liberalization of the currency, all necessary steps, but the consequence 299 00:17:28,960 --> 00:17:32,480 Speaker 1: has been a deep recession and growing disenchantment with the 300 00:17:32,520 --> 00:17:35,720 Speaker 1: government there. So really there's not very many good news 301 00:17:35,720 --> 00:17:39,560 Speaker 1: stories on the on the domestic reform front in emerging economies. 302 00:17:39,560 --> 00:17:42,000 Speaker 1: These days. Well, let's talk a little bit more about Mexico, 303 00:17:42,080 --> 00:17:45,560 Speaker 1: because it is, along with China, target number one for 304 00:17:45,800 --> 00:17:49,320 Speaker 1: Trump at least on the campaign trail. The mex boll 305 00:17:49,359 --> 00:17:52,560 Speaker 1: index finishing up and buy about six percent for the year. 306 00:17:52,880 --> 00:17:56,400 Speaker 1: Not too bad. The Mexican pay so took a hit. 307 00:17:57,040 --> 00:18:02,080 Speaker 1: Um now training at twenty point six eight today. Um, 308 00:18:02,160 --> 00:18:07,240 Speaker 1: how vulnerable is the Mexican economy to what happens here? Hugely? 309 00:18:07,800 --> 00:18:10,320 Speaker 1: I mean that there's there's it's very difficult to underplay 310 00:18:10,320 --> 00:18:15,080 Speaker 1: this about Mexico's GDP is exports to the US. So 311 00:18:15,119 --> 00:18:18,680 Speaker 1: it really matters, um, what what happens to trade policy. 312 00:18:18,960 --> 00:18:22,760 Speaker 1: If you look, you can put quite a nice chart 313 00:18:22,800 --> 00:18:26,520 Speaker 1: of Mexican industrial production against US industrial production since after 314 00:18:26,720 --> 00:18:29,160 Speaker 1: the two have moved in lockstep, and that just goes 315 00:18:29,200 --> 00:18:31,880 Speaker 1: to show just how integrated the Mexican economy and US 316 00:18:31,920 --> 00:18:34,480 Speaker 1: economies have have become. So it really does matter. It's 317 00:18:34,480 --> 00:18:37,639 Speaker 1: difficult to understate that. I think. Um, the question, to 318 00:18:37,720 --> 00:18:39,920 Speaker 1: my mind at least is to what extent is they're 319 00:18:39,920 --> 00:18:43,000 Speaker 1: going to be pushed back from corporate America to any 320 00:18:43,080 --> 00:18:48,760 Speaker 1: trade protection measurement measures announced or considered by the Trump administration. 321 00:18:48,840 --> 00:18:51,240 Speaker 1: I think that is the key point of resistance, because 322 00:18:51,960 --> 00:18:54,520 Speaker 1: supply chains across the border have become so deeply a 323 00:18:54,560 --> 00:18:58,679 Speaker 1: meshed that I think any serious attempts to restrict trade 324 00:18:59,119 --> 00:19:02,240 Speaker 1: with Mexican nothing Mexico can do on its own very little. 325 00:19:02,520 --> 00:19:04,200 Speaker 1: China is a different case. Actually, in this I think 326 00:19:04,280 --> 00:19:09,800 Speaker 1: China has quite substantial power in this regard um, just 327 00:19:09,880 --> 00:19:13,320 Speaker 1: by virtue of its sheer size to push back Mexico 328 00:19:13,800 --> 00:19:16,480 Speaker 1: different cattle official together and not much it can do 329 00:19:16,560 --> 00:19:19,560 Speaker 1: to to push back. Sorry, Neil, what what can I 330 00:19:19,600 --> 00:19:23,040 Speaker 1: actually corporate America do even if they decide like this 331 00:19:23,080 --> 00:19:25,399 Speaker 1: is wrong. Let's say there are trade or terror of 332 00:19:25,560 --> 00:19:29,480 Speaker 1: simposed on the supply chain of American companies doing business 333 00:19:29,520 --> 00:19:32,520 Speaker 1: in China. Right, it's the president, right, he does what 334 00:19:32,600 --> 00:19:34,520 Speaker 1: he wants. How do you how do you fight back? 335 00:19:34,560 --> 00:19:38,159 Speaker 1: Will you say that I mean, yes, that that is true? Um, 336 00:19:38,280 --> 00:19:41,000 Speaker 1: But there's there's things they can do through lobbying and 337 00:19:41,200 --> 00:19:45,800 Speaker 1: lobbying Congress. Of course, Congress under the Constitution has control 338 00:19:45,880 --> 00:19:50,600 Speaker 1: over the regulation of commercial affairs with foreign with foreign countries. Actually, 339 00:19:50,600 --> 00:19:52,800 Speaker 1: there's quite a lot the president can do unilaterally whereout 340 00:19:52,800 --> 00:19:55,639 Speaker 1: having to go through Congress to make affairs more restrictive. 341 00:19:56,160 --> 00:19:59,680 Speaker 1: Liberalizing trade policies is more difficult, that has to go 342 00:19:59,760 --> 00:20:01,600 Speaker 1: through Congress, but it's quite a lot with it within 343 00:20:01,680 --> 00:20:04,440 Speaker 1: the current confines in the setup that the President Trump 344 00:20:04,480 --> 00:20:06,359 Speaker 1: could do without going through Congress. So it's really a 345 00:20:06,440 --> 00:20:10,560 Speaker 1: lobbying effort, I think, and I wouldn't underestimate that. I 346 00:20:10,560 --> 00:20:14,000 Speaker 1: wouldn't underestimate the lobby and ability of corporate America. My 347 00:20:14,200 --> 00:20:16,240 Speaker 1: sense is that a middle ground, at least in the 348 00:20:16,320 --> 00:20:18,280 Speaker 1: first couple of years, is going to be found whereby 349 00:20:18,640 --> 00:20:21,200 Speaker 1: President Trump can stand up and say I've saved five 350 00:20:21,240 --> 00:20:24,520 Speaker 1: thousand jobs at Sprint, I've saved eight hundred jobs that carrier. 351 00:20:24,840 --> 00:20:27,720 Speaker 1: That gives him a platform to say, look, I'm keeping 352 00:20:28,160 --> 00:20:31,040 Speaker 1: to my election promises. But actually it doesn't really change 353 00:20:31,119 --> 00:20:33,359 Speaker 1: very much on the ground. To my mind, The big 354 00:20:33,480 --> 00:20:35,560 Speaker 1: risk comes to the second half of the second half 355 00:20:35,600 --> 00:20:39,240 Speaker 1: of the presidential term. By that point, the US recovery 356 00:20:39,320 --> 00:20:41,240 Speaker 1: is looking quite long in the tooth. Already we've had 357 00:20:41,240 --> 00:20:43,639 Speaker 1: a bit of fiscal stimulus, perhaps that's starting to fade. 358 00:20:43,960 --> 00:20:46,080 Speaker 1: The effects of high US interest rates are starting to 359 00:20:46,200 --> 00:20:49,840 Speaker 1: come in uh and bite the US economy. Slowing thoughts 360 00:20:49,880 --> 00:20:53,360 Speaker 1: are turned into reelection. We know that when President Trump's 361 00:20:53,520 --> 00:20:56,080 Speaker 1: back again or President Electrump's back is against the wall. 362 00:20:56,920 --> 00:20:59,120 Speaker 1: The first person that gets playing, so the first people 363 00:20:59,480 --> 00:21:02,640 Speaker 1: that get aims perhaps foreigners and foreign entities. And that's 364 00:21:02,680 --> 00:21:06,359 Speaker 1: when I think the real threat of protectionism starts to bite. 365 00:21:07,119 --> 00:21:11,720 Speaker 1: Uh the plans he is talking about in terms of trade, 366 00:21:13,040 --> 00:21:17,920 Speaker 1: Are you marking down growth figures for any emerging market 367 00:21:18,400 --> 00:21:22,000 Speaker 1: countries directly because of it? It's very difficult, I think 368 00:21:22,040 --> 00:21:25,960 Speaker 1: at this stage, simply because there's so we We simply 369 00:21:26,040 --> 00:21:29,240 Speaker 1: don't know what the policies are going to look like 370 00:21:29,320 --> 00:21:32,000 Speaker 1: at this stage, both on the domestic fiscal front and 371 00:21:32,160 --> 00:21:35,239 Speaker 1: then the trade front and the tour inter related by 372 00:21:35,240 --> 00:21:37,080 Speaker 1: the way, because if you get a big fiscal expansion 373 00:21:37,080 --> 00:21:39,399 Speaker 1: in the US but no trade restriction, and some of 374 00:21:39,480 --> 00:21:41,520 Speaker 1: that demand is going to leak out to more benefit 375 00:21:41,640 --> 00:21:44,320 Speaker 1: emerging economies. At this stage, we've nudged down some of 376 00:21:44,400 --> 00:21:48,959 Speaker 1: our forecasts for Mexico, mainly because of the uncertainty generated 377 00:21:49,359 --> 00:21:51,960 Speaker 1: by the Trump victory rather than the direct effect of 378 00:21:52,000 --> 00:21:55,520 Speaker 1: trade restrictions themselves. But we're not slashing our forecasts at 379 00:21:55,560 --> 00:21:58,760 Speaker 1: this stage. I know others have others of forecasting recessions 380 00:21:58,800 --> 00:22:01,159 Speaker 1: in Mexico next year. I don't think that is the 381 00:22:01,200 --> 00:22:04,119 Speaker 1: big threat. Like I say, my my focus would be 382 00:22:04,160 --> 00:22:08,040 Speaker 1: on twenty I think that's when the real risks come, 383 00:22:08,520 --> 00:22:12,040 Speaker 1: even for China. Even for China, I think for China 384 00:22:12,160 --> 00:22:16,000 Speaker 1: itself that the key risks at this stage and this 385 00:22:16,160 --> 00:22:17,480 Speaker 1: is true of all the bricks by the way, but 386 00:22:17,640 --> 00:22:20,280 Speaker 1: but but particularly is China. The key risks are domestic. 387 00:22:21,040 --> 00:22:23,680 Speaker 1: It's what's how does this huge credit boom play out. 388 00:22:24,320 --> 00:22:28,040 Speaker 1: The policy stimulus that we saw the second half of fifteen, 389 00:22:28,080 --> 00:22:30,280 Speaker 1: the first half of twenty sixteen, that's played an important 390 00:22:30,359 --> 00:22:32,960 Speaker 1: role in stabilizing in the economy. We have our own 391 00:22:33,040 --> 00:22:36,480 Speaker 1: cups of economics activity proxy for China that's suggesting that 392 00:22:36,560 --> 00:22:39,720 Speaker 1: the economy is now growing at its fastest paces. So 393 00:22:39,840 --> 00:22:43,240 Speaker 1: all those fears of hard landing twelve months ago dissipated 394 00:22:43,880 --> 00:22:47,600 Speaker 1: and improved ill founded. The flip side of that, of course, 395 00:22:47,640 --> 00:22:49,920 Speaker 1: has been that the policy stimulus has simply added to 396 00:22:50,080 --> 00:22:54,359 Speaker 1: debt levels um and this this looks unsustainable to us. 397 00:22:54,640 --> 00:22:57,760 Speaker 1: So how does that play out? That is the that 398 00:22:57,920 --> 00:22:59,800 Speaker 1: that's the key issue for China over the next couple 399 00:22:59,880 --> 00:23:02,720 Speaker 1: of years. I think rather than than Trump and trade, well, 400 00:23:02,840 --> 00:23:05,520 Speaker 1: we are talking with Neil Sharing, he's the chief Emerging 401 00:23:05,560 --> 00:23:08,840 Speaker 1: Markets economist for Capital Economics. He's based here in New York. 402 00:23:09,359 --> 00:23:12,800 Speaker 1: If it weren't for Donald Trump, we'd still be talking 403 00:23:12,880 --> 00:23:15,600 Speaker 1: to you about what's going to happen in capital markets 404 00:23:15,880 --> 00:23:18,040 Speaker 1: in emerging markets, but we would be asking it in 405 00:23:18,119 --> 00:23:20,399 Speaker 1: a different way. So let me do some of that 406 00:23:20,840 --> 00:23:23,040 Speaker 1: and ask you what some of the other issues for 407 00:23:23,240 --> 00:23:26,240 Speaker 1: markets are. Particularly when you talk emerging markets, you're talking 408 00:23:26,240 --> 00:23:30,600 Speaker 1: a lot of commodity economies, and commodities are starting to 409 00:23:30,840 --> 00:23:33,760 Speaker 1: rise again. That's right, I think. I think there's probably 410 00:23:33,840 --> 00:23:36,560 Speaker 1: three themes distinct from Trump that we need to think about. 411 00:23:36,560 --> 00:23:40,560 Speaker 1: Commodities is one, domestic political risks uh in d geo 412 00:23:40,600 --> 00:23:43,640 Speaker 1: political risks, and emerging economies have been on the rise, 413 00:23:43,680 --> 00:23:46,840 Speaker 1: and I think partly misunderstood that's another. And then that 414 00:23:47,040 --> 00:23:49,359 Speaker 1: levels in emerging economies is another thing we need to 415 00:23:49,720 --> 00:23:53,040 Speaker 1: think about when it comes to commodities itself. Um. I 416 00:23:53,200 --> 00:23:55,560 Speaker 1: think the big story here is that the time to 417 00:23:55,680 --> 00:23:57,760 Speaker 1: worry was in two thousand and twelve, two times and 418 00:23:57,920 --> 00:24:01,120 Speaker 1: thirteen we had oil above a hun dred, we had 419 00:24:01,200 --> 00:24:04,720 Speaker 1: iron or copper prices close to records. That was the 420 00:24:04,760 --> 00:24:06,359 Speaker 1: time to worry. That was really on the back of 421 00:24:06,960 --> 00:24:11,080 Speaker 1: unsustainably rapid growth in China and also unbalanced growth in 422 00:24:11,200 --> 00:24:14,760 Speaker 1: China that was fueling very very heavily skewed towards investment 423 00:24:14,920 --> 00:24:17,639 Speaker 1: and in heavy industry that was fueling demand for for 424 00:24:18,200 --> 00:24:21,080 Speaker 1: for commodities. That was the time, to my mind, took 425 00:24:21,119 --> 00:24:27,200 Speaker 1: to worry about commodities, commodity currencies and emerging market commodity economies. UM, 426 00:24:28,800 --> 00:24:30,320 Speaker 1: I think a lot of that has now washed out. 427 00:24:30,480 --> 00:24:33,080 Speaker 1: We've obviously commodities are bounced off the bottom that we 428 00:24:33,160 --> 00:24:36,520 Speaker 1: saw at the first half of this year. Um, we're 429 00:24:36,560 --> 00:24:38,000 Speaker 1: not going to go back to the levels that we 430 00:24:38,080 --> 00:24:40,359 Speaker 1: saw in two thuds and the thirteen. In terms of prices, 431 00:24:40,400 --> 00:24:43,280 Speaker 1: I don't think, but I think there's probably a room 432 00:24:43,400 --> 00:24:45,600 Speaker 1: for for for commodity prices to edge a bit higher. 433 00:24:46,000 --> 00:24:48,800 Speaker 1: That probably means that things are currencies like the Brazilian real, 434 00:24:48,960 --> 00:24:52,359 Speaker 1: the Indonesian root pier, the Malaysian ring it they may 435 00:24:52,440 --> 00:24:53,960 Speaker 1: edge a bit higher this year that even in the 436 00:24:54,040 --> 00:24:56,879 Speaker 1: Russian rouble, But of course that's planned up with with 437 00:24:57,000 --> 00:24:59,280 Speaker 1: Trump as well. So there's so many kind of interconnecting 438 00:24:59,359 --> 00:25:02,320 Speaker 1: themes at the want that that we need to work through. 439 00:25:03,040 --> 00:25:05,479 Speaker 1: And Nell, let's talk about the geopolitics we'll get back 440 00:25:05,520 --> 00:25:08,000 Speaker 1: to communities. But you say, look, if they're taking up 441 00:25:08,080 --> 00:25:10,359 Speaker 1: nicely as a trend is higher, let's not worry too 442 00:25:10,440 --> 00:25:12,840 Speaker 1: much about that. What do you mean by geopolitics? You 443 00:25:12,960 --> 00:25:16,240 Speaker 1: mentioned Turkey as as I believe one of probably the 444 00:25:16,280 --> 00:25:20,199 Speaker 1: places where you'd be most cautious about is this because 445 00:25:20,320 --> 00:25:24,640 Speaker 1: it's it's becoming more and more like an autocratic government 446 00:25:25,080 --> 00:25:29,520 Speaker 1: and as air doan actually reinforces power, he's certainly in charge, right, 447 00:25:29,720 --> 00:25:31,600 Speaker 1: is it like a dictatorship? And actually does that not 448 00:25:31,800 --> 00:25:37,240 Speaker 1: mean stability for investors? Well, one person's stability is another 449 00:25:37,320 --> 00:25:40,639 Speaker 1: person's unpredictability. I think it depends which side of the 450 00:25:41,160 --> 00:25:42,840 Speaker 1: which side of the fence you sit on, and whether 451 00:25:43,080 --> 00:25:46,600 Speaker 1: and whether you fall foul of the government. Um. I 452 00:25:46,640 --> 00:25:48,800 Speaker 1: would actually say that there's a border point to make here, 453 00:25:48,880 --> 00:25:51,280 Speaker 1: which is that a lot of the political risk and 454 00:25:51,320 --> 00:25:55,080 Speaker 1: emerging markets has been bracketed under the banner of riding 455 00:25:55,240 --> 00:25:58,640 Speaker 1: quote unquote rising quote unquote populism, and I think it's 456 00:25:58,640 --> 00:26:00,399 Speaker 1: a bit more nuanced than that. I think there are 457 00:26:00,400 --> 00:26:03,160 Speaker 1: probably at least three different strands that you can identify. 458 00:26:03,280 --> 00:26:06,159 Speaker 1: One is I think economic nationalism, and that is the 459 00:26:06,200 --> 00:26:08,600 Speaker 1: banner under which I would put Turkey. A lot of 460 00:26:08,680 --> 00:26:13,840 Speaker 1: this is about somehow restoring former former glories and economies 461 00:26:14,320 --> 00:26:19,119 Speaker 1: or somehow facing down perceived foreign threats. And now that 462 00:26:19,359 --> 00:26:23,760 Speaker 1: that is the the the banner under which President of 463 00:26:23,880 --> 00:26:29,520 Speaker 1: the one and has has um seen this authoritative crackdown 464 00:26:29,560 --> 00:26:33,359 Speaker 1: in Turkey. The big risk for for economies in that sense, 465 00:26:33,480 --> 00:26:35,119 Speaker 1: I think is that it creates a huge amount of 466 00:26:35,200 --> 00:26:38,359 Speaker 1: uncertainty for the for the business environment, for investment. The 467 00:26:38,440 --> 00:26:41,800 Speaker 1: second is broader disenchantment with political classes. That's mainly an 468 00:26:41,800 --> 00:26:44,440 Speaker 1: issue in Latin America these days, actually particularly Brazil, but 469 00:26:44,520 --> 00:26:47,800 Speaker 1: I think keeping eye in Mexico there's elections there next year, 470 00:26:48,400 --> 00:26:51,560 Speaker 1: next year eighteen, also South Africa as well, that that 471 00:26:51,680 --> 00:26:53,880 Speaker 1: that could be something that comes onto the to the agenda. 472 00:26:54,200 --> 00:26:58,920 Speaker 1: And then there's the broader geopolitical um issues too, bigger 473 00:26:59,000 --> 00:27:02,240 Speaker 1: relationship to relations here US and China, US and Russia. 474 00:27:02,800 --> 00:27:05,400 Speaker 1: Watch for how that develops over the course of this year, 475 00:27:05,480 --> 00:27:08,000 Speaker 1: because um, I think that is going to be that 476 00:27:08,400 --> 00:27:11,879 Speaker 1: these are perhaps low probability but high high impact events. 477 00:27:11,920 --> 00:27:14,160 Speaker 1: If they start to spiral out of control, well those 478 00:27:14,160 --> 00:27:17,639 Speaker 1: again get back to the president ellect. But some of 479 00:27:17,720 --> 00:27:21,960 Speaker 1: the other political risk economies are among the bigger emerging 480 00:27:22,080 --> 00:27:26,760 Speaker 1: market economies out there. You mentioned Brazil, Argentina, South Africa. 481 00:27:27,160 --> 00:27:32,320 Speaker 1: How do those play out? Is each one independent of 482 00:27:32,440 --> 00:27:34,600 Speaker 1: the other or is there some sort of broader trend 483 00:27:35,359 --> 00:27:38,200 Speaker 1: of political concern Well, I think that they're independent in 484 00:27:38,240 --> 00:27:40,439 Speaker 1: the sense that the specific conditions in each of those 485 00:27:40,480 --> 00:27:44,639 Speaker 1: economies are very new, unique to the particular countries in 486 00:27:45,000 --> 00:27:48,600 Speaker 1: in question. So I wouldn't necessarily try to say that 487 00:27:48,760 --> 00:27:50,960 Speaker 1: just because X happens in Brazil, that means why it's 488 00:27:50,960 --> 00:27:53,440 Speaker 1: going to happen in South Africa. But I do think 489 00:27:53,520 --> 00:27:56,440 Speaker 1: there's a there is a narrative that binds but binds 490 00:27:56,520 --> 00:27:59,040 Speaker 1: these themes together, and that is the economic growth in 491 00:27:59,080 --> 00:28:02,399 Speaker 1: these economies. As load as economic growth are slowed, so 492 00:28:02,560 --> 00:28:04,560 Speaker 1: incomes are slowed. That means there's less of the pie 493 00:28:04,680 --> 00:28:07,879 Speaker 1: to share around. That means that governments have less income 494 00:28:07,960 --> 00:28:12,399 Speaker 1: to essentially buy off discontent. Um and I think at 495 00:28:12,440 --> 00:28:16,159 Speaker 1: the same time, expectations across the emerging world on behalf 496 00:28:16,240 --> 00:28:19,240 Speaker 1: of consumers have increased over the past decade. They they've 497 00:28:19,440 --> 00:28:23,560 Speaker 1: kind of bank or they're they're banking, increasing gains an 498 00:28:23,600 --> 00:28:27,359 Speaker 1: income uh and moves up there the the income lad 499 00:28:27,440 --> 00:28:29,240 Speaker 1: of if you like, UM so I think that is 500 00:28:29,320 --> 00:28:33,800 Speaker 1: the the kind of underlying narrative. The binding narrative is 501 00:28:34,520 --> 00:28:37,000 Speaker 1: economic growth is slow and incomes are slowing, and that 502 00:28:37,119 --> 00:28:40,000 Speaker 1: creates political problems for for governments. They manifest themselves in 503 00:28:40,040 --> 00:28:42,640 Speaker 1: different ways across different countries, but I think it's something 504 00:28:42,720 --> 00:28:44,520 Speaker 1: that's here to stay. And what it means for investors 505 00:28:44,640 --> 00:28:47,160 Speaker 1: is we've got to get used to more political uncertainty 506 00:28:47,400 --> 00:28:50,840 Speaker 1: and political shocks to effect financial markets and verging economies. 507 00:28:52,400 --> 00:28:54,440 Speaker 1: What is the one thing now that you think is 508 00:28:54,640 --> 00:28:57,080 Speaker 1: is being mispriced and emerging markets? And we talked a 509 00:28:57,120 --> 00:28:59,120 Speaker 1: little bit about commodities, we talked a little bit about 510 00:28:59,120 --> 00:29:03,840 Speaker 1: foreign policy. But with big events that people unforesee, those 511 00:29:03,840 --> 00:29:06,000 Speaker 1: are the sharks, right, it's the financial crisis, it's the 512 00:29:06,040 --> 00:29:09,040 Speaker 1: black Swan events. Is there something that you see on 513 00:29:09,120 --> 00:29:12,440 Speaker 1: the horizon that's not priced in? A lot of good 514 00:29:12,480 --> 00:29:14,520 Speaker 1: news is priced in, but I would say in certain 515 00:29:14,560 --> 00:29:18,720 Speaker 1: cases a lot more bad news as priced in as well. Yeah, well, 516 00:29:18,840 --> 00:29:20,200 Speaker 1: what a good question. I mean, if I knew the 517 00:29:20,200 --> 00:29:22,040 Speaker 1: answer to that, then I'd be a lot of a 518 00:29:22,160 --> 00:29:28,800 Speaker 1: richer man with night. But exactly, Um, I think a 519 00:29:28,880 --> 00:29:31,240 Speaker 1: lot of the risks that are kind of on people's 520 00:29:31,360 --> 00:29:34,040 Speaker 1: radar screens at the moment, I think of priced into 521 00:29:34,040 --> 00:29:36,040 Speaker 1: the market now. So that we've got we've talked a 522 00:29:36,080 --> 00:29:38,760 Speaker 1: bit about political risk. I think that's largely known about now. 523 00:29:39,080 --> 00:29:43,640 Speaker 1: Geopolitical events, Trump, I think is well discussed and markets 524 00:29:43,640 --> 00:29:46,360 Speaker 1: are well versed in UM. My sense is that the 525 00:29:46,880 --> 00:29:50,600 Speaker 1: bigger risks in emerging economies that aren't necessary on people's 526 00:29:50,680 --> 00:29:53,719 Speaker 1: radar screens are a bit more structuring in nature. UM. 527 00:29:54,600 --> 00:29:57,120 Speaker 1: Over the past ten years fifteen years, we've got used 528 00:29:57,160 --> 00:29:59,920 Speaker 1: to the idea of catch up in emerging economies, this 529 00:30:00,040 --> 00:30:03,240 Speaker 1: idea that emerging economies just grow faster than develops economies. 530 00:30:03,240 --> 00:30:06,040 Speaker 1: There the engine of global growth. Uh. And actually, I 531 00:30:06,160 --> 00:30:10,000 Speaker 1: don't think if you if you look back beyond two thousand, uh, 532 00:30:10,840 --> 00:30:13,760 Speaker 1: that's not the case in the nineties. It didn't happen, 533 00:30:13,800 --> 00:30:16,680 Speaker 1: in the nine eighties, it didn't happen in the nineteen seventies, 534 00:30:16,760 --> 00:30:20,080 Speaker 1: it didn't happen. UM. So catch up really was an 535 00:30:20,240 --> 00:30:23,680 Speaker 1: an anomaly that was unique to the two thousands, and 536 00:30:23,760 --> 00:30:25,760 Speaker 1: it was a factor of various things that were happening 537 00:30:25,760 --> 00:30:28,280 Speaker 1: at the time, but the common theme was a common 538 00:30:28,360 --> 00:30:32,200 Speaker 1: thread was reforming in emerging economies. I think that's over. 539 00:30:32,920 --> 00:30:35,440 Speaker 1: It was just spoken about reformers really ground to a 540 00:30:35,520 --> 00:30:38,320 Speaker 1: halt across emerging economy. So what markets need to to 541 00:30:38,640 --> 00:30:41,240 Speaker 1: the risk that markets need that aren't really pricing and 542 00:30:41,320 --> 00:30:44,760 Speaker 1: I don't think is is that economic growthing in emerging 543 00:30:44,800 --> 00:30:48,000 Speaker 1: economies is structurally now much much lower. That creates huge 544 00:30:48,000 --> 00:30:50,440 Speaker 1: problems because income growths can be much lower, so things 545 00:30:50,480 --> 00:30:53,560 Speaker 1: like debt burdens become a bit more unsustainable. There's big 546 00:30:53,600 --> 00:30:56,720 Speaker 1: implications for equity market returns of course as well. Um, 547 00:30:56,800 --> 00:30:59,000 Speaker 1: so that's the thing that I would keep my eye on. 548 00:30:59,600 --> 00:31:01,280 Speaker 1: Let you go, I just have a minute left here, 549 00:31:01,360 --> 00:31:04,480 Speaker 1: but without asking about one of the biggest of all 550 00:31:04,560 --> 00:31:07,600 Speaker 1: emerging markets, and that's India. Prime Minister Moodi has been 551 00:31:07,600 --> 00:31:12,000 Speaker 1: around for now sometime. He's got his policies in place. 552 00:31:12,360 --> 00:31:14,800 Speaker 1: What happens in two thousand and seventeen depends whether your 553 00:31:14,800 --> 00:31:16,720 Speaker 1: glass is half or or half empty. The half full 554 00:31:17,080 --> 00:31:20,680 Speaker 1: is that actually some important reforms have been announced, particularly 555 00:31:20,720 --> 00:31:24,600 Speaker 1: to tax in labor um. The half empty is this 556 00:31:24,720 --> 00:31:29,360 Speaker 1: demonetization that was essentially botched the RBI governors ship direction 557 00:31:29,400 --> 00:31:32,440 Speaker 1: of policy is much much less certain. Uh there. Now 558 00:31:32,800 --> 00:31:35,320 Speaker 1: My sense is that actually the economy probably improves a 559 00:31:35,360 --> 00:31:39,080 Speaker 1: bit over the course of next year and demonetization. Notwithstanding 560 00:31:39,160 --> 00:31:40,520 Speaker 1: the second half of next year, we might get a 561 00:31:40,560 --> 00:31:45,240 Speaker 1: bit of a recovery, but really huge potential in India, 562 00:31:45,320 --> 00:31:48,440 Speaker 1: huge economic potential. I think that mainly goes on unfulfilled. 563 00:31:48,960 --> 00:31:51,640 Speaker 1: Good news is Franzi is a smart personnel. She didn't 564 00:31:51,640 --> 00:31:54,760 Speaker 1: have to carry around as many big bills exactly. That's 565 00:31:54,800 --> 00:32:00,240 Speaker 1: the very good news. Sharing carefully economic chiefly emerging Arket 566 00:32:00,560 --> 00:32:03,480 Speaker 1: and Tom Keene's while it gets smaller too, thanks serving 567 00:32:03,640 --> 00:32:10,320 Speaker 1: with us here on Bloomberg Surveillance. Who you put your 568 00:32:10,360 --> 00:32:14,640 Speaker 1: trust in matters. Investors have put their trust in independent 569 00:32:14,720 --> 00:32:18,320 Speaker 1: registered investment advisors to the tune of four trillion dollars. 570 00:32:19,080 --> 00:32:22,880 Speaker 1: Why they see their role is to serve, not sell. 571 00:32:23,760 --> 00:32:26,080 Speaker 1: That's why Charles Schwab is committed to the success of 572 00:32:26,160 --> 00:32:31,240 Speaker 1: over seven thousand independent financial advisors who passionately dedicate themselves 573 00:32:31,640 --> 00:32:35,480 Speaker 1: to helping people achieve their financial goals. Learn more and 574 00:32:35,680 --> 00:32:46,320 Speaker 1: find your independent advisor dot com. Well. One of the 575 00:32:46,560 --> 00:32:49,600 Speaker 1: toughest things to do in the economics businesses to make 576 00:32:49,640 --> 00:32:51,720 Speaker 1: projections about what's going to happen to the economy, and 577 00:32:51,720 --> 00:32:55,640 Speaker 1: it becomes even tougher when you've got a new administration 578 00:32:55,800 --> 00:32:57,680 Speaker 1: coming in and even tougher still, when you got a 579 00:32:57,680 --> 00:32:59,920 Speaker 1: new administration coming in with all kinds of different policies, 580 00:33:00,000 --> 00:33:03,560 Speaker 1: nobody knows what's going to get adopted. So what do 581 00:33:03,640 --> 00:33:06,960 Speaker 1: you do? Let's ask John Writing is a head of 582 00:33:07,200 --> 00:33:11,720 Speaker 1: rd Q Economics, um are you able? We've talked to 583 00:33:11,760 --> 00:33:14,440 Speaker 1: several economists today who say they just throw up their hands. 584 00:33:14,480 --> 00:33:16,840 Speaker 1: Are you able to make any kind of forecast for 585 00:33:16,920 --> 00:33:19,760 Speaker 1: what two thousand and seventeen is going to be? Like? Well, 586 00:33:19,840 --> 00:33:22,640 Speaker 1: I think that the first thing to hang our hats 587 00:33:22,680 --> 00:33:25,840 Speaker 1: on is that the economy is entering two thousand seventeen 588 00:33:26,280 --> 00:33:29,280 Speaker 1: pretty close to full employment. So that's a point in 589 00:33:29,360 --> 00:33:33,800 Speaker 1: the economy where how the economy behaves from the supply side, 590 00:33:33,880 --> 00:33:37,480 Speaker 1: that is, labor force growth and productivity begin to take 591 00:33:37,600 --> 00:33:40,280 Speaker 1: over from what's going to happen on the demand side. 592 00:33:40,840 --> 00:33:44,360 Speaker 1: So we've got some long established trends now going back 593 00:33:44,440 --> 00:33:47,240 Speaker 1: five or six years, a very sluggish productivity growth one 594 00:33:47,280 --> 00:33:50,840 Speaker 1: percent per year or less, and we know the demographics 595 00:33:51,440 --> 00:33:54,479 Speaker 1: and the room to run in terms of a pickup 596 00:33:54,480 --> 00:33:59,200 Speaker 1: in the labor force. Participation evaporated towards the end of 597 00:33:59,280 --> 00:34:02,560 Speaker 1: this year, so we're looking at labor force growth of 598 00:34:02,600 --> 00:34:05,800 Speaker 1: half a percentage. So, so to start off with, we 599 00:34:06,560 --> 00:34:11,080 Speaker 1: we have an environment of relatively slow growth. Now we 600 00:34:11,239 --> 00:34:15,320 Speaker 1: don't know the exact policies, but we all expect, I believe, 601 00:34:15,480 --> 00:34:21,160 Speaker 1: some kind of fiscal stimulus infrastructure spending and lower tax rates. 602 00:34:21,560 --> 00:34:23,960 Speaker 1: And so we're going to get fiscal stimulus at a 603 00:34:24,080 --> 00:34:30,080 Speaker 1: time of relatively full employment. So the question from economist 604 00:34:30,080 --> 00:34:33,160 Speaker 1: perspective is this is very different from the environment that 605 00:34:33,239 --> 00:34:35,120 Speaker 1: we've been and we're sort of going back to a 606 00:34:35,520 --> 00:34:42,040 Speaker 1: more potentially more nine seventies environment unless we get that 607 00:34:42,200 --> 00:34:45,040 Speaker 1: pickup in productivity growth. And that's to me, that's the 608 00:34:45,120 --> 00:34:47,400 Speaker 1: sixty four million dollar questions I look at over the 609 00:34:47,480 --> 00:34:49,680 Speaker 1: next four years, is all we're going to stick with 610 00:34:49,760 --> 00:34:53,320 Speaker 1: a relatively sluggish one percent or so productivity growth or 611 00:34:53,440 --> 00:34:56,640 Speaker 1: can we get back to the two percent average growth 612 00:34:56,719 --> 00:34:58,640 Speaker 1: that the economy has had over the last hundred years 613 00:34:58,760 --> 00:35:03,719 Speaker 1: or even something high. And I think the pessimistic take 614 00:35:03,800 --> 00:35:07,400 Speaker 1: on it is productivity trends are slow to turn. The 615 00:35:07,560 --> 00:35:11,919 Speaker 1: optimistic take is that we have the potential here too 616 00:35:12,800 --> 00:35:17,759 Speaker 1: remove the biggest obstacle to investment in the US, which 617 00:35:17,920 --> 00:35:21,800 Speaker 1: is the high corporate tax rate in the US relative 618 00:35:21,880 --> 00:35:24,000 Speaker 1: to the rest of the developed world. When the US 619 00:35:24,080 --> 00:35:26,480 Speaker 1: is at thirty five percent plus state and local taxes 620 00:35:26,719 --> 00:35:32,080 Speaker 1: and the UK's and Ireland's lower, the case for investing 621 00:35:32,080 --> 00:35:35,400 Speaker 1: in the US for a multinational company is a difficult 622 00:35:35,400 --> 00:35:37,399 Speaker 1: one to make. But John, I don't even know how 623 00:35:37,640 --> 00:35:40,839 Speaker 1: you start addressing productivity rights because a lot of people 624 00:35:40,840 --> 00:35:43,239 Speaker 1: are saying that it may be the way we measure it, 625 00:35:43,400 --> 00:35:46,160 Speaker 1: or the fact that actually all of this technological advancement 626 00:35:46,239 --> 00:35:49,759 Speaker 1: that they're seeing or deflationary pressures in terms of productivity 627 00:35:49,840 --> 00:35:52,800 Speaker 1: because of uber under sharing economy is it's just the 628 00:35:52,920 --> 00:35:55,600 Speaker 1: way we have to live now. So if you're President Trump, 629 00:35:55,920 --> 00:36:00,680 Speaker 1: how do you address it? Well, in the end, presidents 630 00:36:00,800 --> 00:36:05,160 Speaker 1: and governments can only set a framework. Productivity growth is 631 00:36:05,239 --> 00:36:12,160 Speaker 1: largely established by the company, leftl by individual company decisions. 632 00:36:12,239 --> 00:36:15,160 Speaker 1: So what I'm saying here, Francine, is the first thing 633 00:36:15,239 --> 00:36:18,880 Speaker 1: to do is let's take away the biggest obstacle to 634 00:36:19,120 --> 00:36:21,880 Speaker 1: undertake an investment in the US. Because here here's a 635 00:36:21,920 --> 00:36:26,560 Speaker 1: little factoried about the U s economy. Between n and 636 00:36:27,239 --> 00:36:31,360 Speaker 1: two thousand nine, capital per worker, the capital labor ratio 637 00:36:31,600 --> 00:36:34,040 Speaker 1: rose on average three percent per year. We gave on 638 00:36:34,120 --> 00:36:39,160 Speaker 1: average US workers three percent more stuff computers, desks, cars, whatever, 639 00:36:39,280 --> 00:36:41,759 Speaker 1: to work with than they had in the previous year, 640 00:36:42,120 --> 00:36:45,080 Speaker 1: And since two thousand nine it's been flat. In fact, 641 00:36:45,120 --> 00:36:49,320 Speaker 1: it's declined slightly. And about half our productivity growth comes 642 00:36:49,400 --> 00:36:52,719 Speaker 1: from making the economy what economy is called more capital intensive. 643 00:36:52,920 --> 00:36:57,279 Speaker 1: So let's at least start by taking away the disincentive 644 00:36:57,360 --> 00:37:00,560 Speaker 1: to put more capital to work in the US versus 645 00:37:00,600 --> 00:37:05,640 Speaker 1: putting it to work in other economies. Is there a 646 00:37:06,920 --> 00:37:12,160 Speaker 1: policy that would do that absent even if you lower 647 00:37:13,080 --> 00:37:17,400 Speaker 1: taxes um corporate taxes, are they going to put that 648 00:37:17,560 --> 00:37:23,000 Speaker 1: money towards that kind of investment? Well, I think that's 649 00:37:23,080 --> 00:37:25,600 Speaker 1: where and we were talking a little affair the difference 650 00:37:25,640 --> 00:37:30,160 Speaker 1: between lower tax rates and tax reform. The problem is 651 00:37:30,800 --> 00:37:34,319 Speaker 1: that the US tax system creates a lot of incentives 652 00:37:34,600 --> 00:37:37,040 Speaker 1: for games in capital structure, which means if you're looking 653 00:37:37,080 --> 00:37:41,040 Speaker 1: to add earnings per share, you might and post tax 654 00:37:41,120 --> 00:37:43,760 Speaker 1: after tax earnings per share you might put more effort 655 00:37:43,840 --> 00:37:49,200 Speaker 1: into rearranging your capital structure doing inversion deals, and most 656 00:37:49,280 --> 00:37:51,799 Speaker 1: inversion deals have been done in the last a few 657 00:37:51,920 --> 00:37:54,279 Speaker 1: years have been done to take advantage of lower tax 658 00:37:54,400 --> 00:37:56,960 Speaker 1: rates overseas and make it look as if you're an 659 00:37:57,000 --> 00:38:01,320 Speaker 1: overseas company, or by changing the leverage of your balance 660 00:38:01,360 --> 00:38:04,040 Speaker 1: sheet taking on more debt for shape buy back. So 661 00:38:06,400 --> 00:38:11,360 Speaker 1: what we need is to take away the ability to 662 00:38:11,680 --> 00:38:15,440 Speaker 1: add value to one segment of the capital structure by 663 00:38:15,680 --> 00:38:20,960 Speaker 1: playing these capital structure games and have companies focus on 664 00:38:22,040 --> 00:38:25,239 Speaker 1: growing and adding value through growth. And wouldn't that the 665 00:38:25,480 --> 00:38:28,000 Speaker 1: radical idea? It would be a radical idea, But actually 666 00:38:28,040 --> 00:38:30,239 Speaker 1: it just comes if people are confident. Right. This is 667 00:38:30,280 --> 00:38:33,399 Speaker 1: also why even if you you know, leave the share 668 00:38:33,440 --> 00:38:37,080 Speaker 1: buy backs to one side, CEOs are sitting on cash 669 00:38:37,160 --> 00:38:39,799 Speaker 1: because they don't see anything good coming out of either 670 00:38:39,880 --> 00:38:42,840 Speaker 1: their company or earnings growth or you know, the world 671 00:38:43,040 --> 00:38:44,800 Speaker 1: in the next one to two years. How do you 672 00:38:44,920 --> 00:38:48,440 Speaker 1: change that? Well, Francine, your was our confidence in the 673 00:38:49,719 --> 00:38:54,360 Speaker 1: great British macroeconomists from the last century, John Maynard Kanes 674 00:38:54,760 --> 00:38:57,640 Speaker 1: called the animal spirits. So that's a very good question. 675 00:38:58,280 --> 00:39:02,600 Speaker 1: How do you revive five animal spirits? So people want 676 00:39:02,640 --> 00:39:05,279 Speaker 1: to jump in and take that chance, And I think 677 00:39:05,360 --> 00:39:08,800 Speaker 1: that's a very difficult question to answer. I think you 678 00:39:09,080 --> 00:39:12,320 Speaker 1: can begin to address it by changing the environment and 679 00:39:12,719 --> 00:39:17,040 Speaker 1: you know, instead of vilifying CEOs, maybe try and make 680 00:39:17,120 --> 00:39:20,680 Speaker 1: the atmosphere more pro growth, pro business. In Washington, John 681 00:39:20,719 --> 00:39:23,640 Speaker 1: We were talking a little bit before about animal spirits 682 00:39:23,680 --> 00:39:26,239 Speaker 1: and about the fact that if Donald Trump is to 683 00:39:26,320 --> 00:39:29,719 Speaker 1: succeed in reflating the U. S economy, it also has 684 00:39:29,800 --> 00:39:33,000 Speaker 1: to go with giving the power to see os to 685 00:39:33,000 --> 00:39:34,880 Speaker 1: feel a little bit more confident about the future so 686 00:39:35,000 --> 00:39:38,360 Speaker 1: they can start spending and investing instead of only focusing 687 00:39:38,480 --> 00:39:41,480 Speaker 1: on their shareholders. How difficult is that we see it 688 00:39:41,640 --> 00:39:44,719 Speaker 1: in Japan with Governor Krota trying to also focus on 689 00:39:44,880 --> 00:39:48,600 Speaker 1: inflation through animal spirits. Does it take too long? Do 690 00:39:48,719 --> 00:39:51,120 Speaker 1: we do we have enough time in the economy for 691 00:39:51,200 --> 00:39:58,400 Speaker 1: that to happen? Well, obviously this is very speculative area. UM. 692 00:39:58,719 --> 00:40:00,680 Speaker 1: I think part of the problem when you say tape 693 00:40:00,680 --> 00:40:04,680 Speaker 1: too long is if you're running a company and you're 694 00:40:04,719 --> 00:40:08,040 Speaker 1: making a decision about an investment that might be in 695 00:40:08,200 --> 00:40:13,720 Speaker 1: place for many years. Um you actually really want someone 696 00:40:13,800 --> 00:40:17,360 Speaker 1: to be focusing on that longer term perspective. The problem 697 00:40:17,520 --> 00:40:20,239 Speaker 1: is you could put policies in place now and those 698 00:40:20,320 --> 00:40:24,400 Speaker 1: policies could be reversed in four years time or in 699 00:40:24,600 --> 00:40:29,080 Speaker 1: eight years time after another election. So that that's the 700 00:40:29,200 --> 00:40:32,680 Speaker 1: that's the first challenge. How do we get something that 701 00:40:32,960 --> 00:40:36,200 Speaker 1: looks like permanency in the environment, Because what a business 702 00:40:36,239 --> 00:40:39,759 Speaker 1: people want. They want a predictable environment, and they want 703 00:40:40,800 --> 00:40:46,520 Speaker 1: an environment in which there aren't impediments to doing economic activities. 704 00:40:46,600 --> 00:40:50,000 Speaker 1: So again I come back to what can the administration do? 705 00:40:51,080 --> 00:40:56,839 Speaker 1: Tax reform, tax rate reduction, UH, simplifying and reducing regulations, 706 00:40:56,920 --> 00:40:59,640 Speaker 1: because I do think the burden of business regulations has 707 00:40:59,680 --> 00:41:06,160 Speaker 1: become um very very high. UH and UH. But there 708 00:41:06,200 --> 00:41:11,560 Speaker 1: are other uncertainties antitrust policy. What were the attitude towards mergers? Again, 709 00:41:12,200 --> 00:41:15,920 Speaker 1: companies have focused on in many ways on the merger 710 00:41:16,239 --> 00:41:22,600 Speaker 1: purchasing growth than on um growing endogenous lee and I 711 00:41:22,760 --> 00:41:25,239 Speaker 1: think a lot of that comes to do with distortions. 712 00:41:25,280 --> 00:41:27,799 Speaker 1: It becomes the easy play, the one you can show 713 00:41:27,840 --> 00:41:30,360 Speaker 1: in a pitch book, where it's harder to show what 714 00:41:30,520 --> 00:41:33,440 Speaker 1: the returns to some investment might be over a ten 715 00:41:33,520 --> 00:41:36,000 Speaker 1: year period. But what does the threat for example of 716 00:41:36,080 --> 00:41:39,120 Speaker 1: global you know, trade wars. So I'm thinking of something 717 00:41:39,200 --> 00:41:41,560 Speaker 1: with China, but it could be with you know, smaller 718 00:41:41,600 --> 00:41:44,440 Speaker 1: emerging markets such as Mexico. If you're a city of 719 00:41:44,680 --> 00:41:47,600 Speaker 1: CEO sitting on cash, how do you view that because 720 00:41:47,800 --> 00:41:50,480 Speaker 1: instead of looking at jobless claims and inflation, your CEO 721 00:41:50,560 --> 00:41:55,400 Speaker 1: and suddenly you have to also become a foreign policy expert. Well, again, 722 00:41:56,280 --> 00:42:00,280 Speaker 1: a great question and a difficult one to answer, because 723 00:42:02,160 --> 00:42:06,240 Speaker 1: if you look at the economic impact of imposing a tariff, 724 00:42:06,320 --> 00:42:08,279 Speaker 1: that is to say, attacks on imports, and you said 725 00:42:08,320 --> 00:42:11,640 Speaker 1: that's going to be might be my policy, then you 726 00:42:12,440 --> 00:42:16,200 Speaker 1: have to think what is the potential response elsewhere. Now 727 00:42:16,440 --> 00:42:20,759 Speaker 1: there is a the body of global agreements and law 728 00:42:21,719 --> 00:42:25,120 Speaker 1: under the World Trade Organization which the US is a 729 00:42:25,239 --> 00:42:31,040 Speaker 1: part of, which to some degree um constraints US behavior. 730 00:42:31,800 --> 00:42:35,120 Speaker 1: And it might sound great to tear up the rule book, 731 00:42:35,120 --> 00:42:36,839 Speaker 1: but I think you know, tearing up the rule book 732 00:42:36,920 --> 00:42:39,759 Speaker 1: is um it is fairly hard, and that would be 733 00:42:40,080 --> 00:42:43,840 Speaker 1: very negative for the business climate because companies are the 734 00:42:44,000 --> 00:42:49,520 Speaker 1: u S. Companies are global companies, and many transactions would 735 00:42:49,880 --> 00:42:53,040 Speaker 1: within the company, organizing the company would be will be 736 00:42:53,160 --> 00:42:57,040 Speaker 1: affected by that. On the other hand, one idea which 737 00:42:57,080 --> 00:43:00,319 Speaker 1: we may see get traction, which might be portrayed by 738 00:43:00,440 --> 00:43:03,520 Speaker 1: some as a tariff, is this idea of a border 739 00:43:03,600 --> 00:43:07,360 Speaker 1: adjustment tax, which, as I say, in Europe, for example, 740 00:43:07,440 --> 00:43:10,360 Speaker 1: you levy VAT on domestically sold goods, but goods that 741 00:43:10,400 --> 00:43:13,680 Speaker 1: are sold abroad there's no VAT level because the assumption 742 00:43:13,840 --> 00:43:16,880 Speaker 1: is the comptry in which those goods are to be 743 00:43:16,960 --> 00:43:18,640 Speaker 1: sold would have a v A T and it will 744 00:43:18,640 --> 00:43:21,239 Speaker 1: be taxed there and extent the US doesn't have a 745 00:43:21,360 --> 00:43:25,360 Speaker 1: v A T um it does create a tax incentive 746 00:43:25,440 --> 00:43:29,560 Speaker 1: towards exports versus domestic sales. So I can see that 747 00:43:29,800 --> 00:43:35,080 Speaker 1: being an area that might get away under those w 748 00:43:35,320 --> 00:43:40,560 Speaker 1: T laws. Uh, And might be one that, if so correctly, 749 00:43:40,600 --> 00:43:43,520 Speaker 1: wouldn't results in a reaction that's way, but it's a 750 00:43:43,680 --> 00:43:47,160 Speaker 1: it's a great question. Uh. And attitudes towards China and 751 00:43:47,239 --> 00:43:50,120 Speaker 1: towards currency and towards trader are all part of that 752 00:43:50,280 --> 00:43:53,920 Speaker 1: business environment. But overall, I do think we're going to 753 00:43:54,040 --> 00:43:59,200 Speaker 1: be in a more business friendly, business positive climate and 754 00:43:59,440 --> 00:44:02,719 Speaker 1: maybe on in which we will see more investment activity. 755 00:44:02,880 --> 00:44:07,560 Speaker 1: But um, you know that that's the great thing about forecasting, 756 00:44:07,640 --> 00:44:12,520 Speaker 1: even hindsight unpredictable, and seventeen probably unpredictable than most years. 757 00:44:12,760 --> 00:44:14,880 Speaker 1: Talk to me about the labor market in the US. 758 00:44:15,360 --> 00:44:17,920 Speaker 1: Are you concerned that we may see a labor market 759 00:44:18,040 --> 00:44:21,719 Speaker 1: that's deteriorating. I mean, is obviously the year that has 760 00:44:21,800 --> 00:44:25,880 Speaker 1: seen steady but also historically low level of jobless claims. 761 00:44:26,280 --> 00:44:29,719 Speaker 1: Does that continue or does it reverse? Well? I think 762 00:44:30,280 --> 00:44:33,320 Speaker 1: how I characterized labor market is we're pretty close to, 763 00:44:33,520 --> 00:44:35,839 Speaker 1: if not at full employment, with the four point six 764 00:44:35,960 --> 00:44:40,320 Speaker 1: percent unemployment rate. And I think the story is about 765 00:44:40,520 --> 00:44:44,680 Speaker 1: hidden unemployment have been greatly overplayed. I don't think there's 766 00:44:44,760 --> 00:44:48,120 Speaker 1: that much hidden unemployment. There hasn't been a recovery in 767 00:44:48,320 --> 00:44:52,919 Speaker 1: labor force participation and demographics. The aging of America means 768 00:44:53,040 --> 00:44:58,520 Speaker 1: the population of work engage is growing only about half 769 00:44:58,560 --> 00:45:01,440 Speaker 1: a percent per year. So do you know we used 770 00:45:01,440 --> 00:45:02,960 Speaker 1: to that first Friday of the month and the jobless 771 00:45:02,960 --> 00:45:05,000 Speaker 1: claims come out, and we have in our mind two 772 00:45:05,080 --> 00:45:08,680 Speaker 1: hundred thousands as a as a number that's a good number, 773 00:45:08,800 --> 00:45:11,520 Speaker 1: and one that would lower the unemployment rate, and a 774 00:45:11,680 --> 00:45:14,200 Speaker 1: number more like a hundred and twenty five thousand keep 775 00:45:14,200 --> 00:45:16,600 Speaker 1: the unemployment rate steady. We're gonna move into an environment 776 00:45:16,640 --> 00:45:18,520 Speaker 1: where a hundred thousand is going to be a strong 777 00:45:18,640 --> 00:45:22,000 Speaker 1: jobs report and fifty to seventy five thousand will be 778 00:45:22,080 --> 00:45:24,880 Speaker 1: all that's needed to keep the unemployment rate steady. So 779 00:45:24,920 --> 00:45:28,880 Speaker 1: if you're an environment where labor is hard to find, 780 00:45:29,000 --> 00:45:32,440 Speaker 1: you are more inclined to hold onto the labor that 781 00:45:32,520 --> 00:45:35,800 Speaker 1: you've got. There's an awful lot, very high levels of 782 00:45:35,960 --> 00:45:39,160 Speaker 1: job openings that haven't been filled. Now, having said that 783 00:45:39,200 --> 00:45:45,680 Speaker 1: in terms of bodies the jobs, but if you're unemployed, 784 00:45:46,200 --> 00:45:49,640 Speaker 1: one might say that any job is a you know, 785 00:45:49,719 --> 00:45:51,719 Speaker 1: it's something of a quality job and better than the 786 00:45:51,800 --> 00:45:56,080 Speaker 1: circumstance that you're in. We are seeing rising wages, but 787 00:45:56,920 --> 00:46:02,879 Speaker 1: the quality jobs that are open end the current labor force. 788 00:46:02,920 --> 00:46:05,680 Speaker 1: There may be a skills mismatch, and that is something 789 00:46:06,040 --> 00:46:09,040 Speaker 1: that there are no I don't see policies to address 790 00:46:09,040 --> 00:46:13,440 Speaker 1: the issues of skills mismatch, issues of education. I think, uh, 791 00:46:13,560 --> 00:46:18,279 Speaker 1: those are very important things. And then of course there 792 00:46:18,440 --> 00:46:22,560 Speaker 1: is the challenge down the road if technologies like the 793 00:46:22,760 --> 00:46:27,680 Speaker 1: driverless car um really kick in, UM, you know, they 794 00:46:27,719 --> 00:46:31,160 Speaker 1: could transform some industries in the same way for example, 795 00:46:31,320 --> 00:46:34,560 Speaker 1: that online retailing is beginning to kick in and effect 796 00:46:34,719 --> 00:46:38,520 Speaker 1: at retails. So I still expect to see over the 797 00:46:38,600 --> 00:46:41,000 Speaker 1: next few years a lot of churn in the labor market. 798 00:46:41,560 --> 00:46:45,040 Speaker 1: And you know, quality jobs need a quality labor force, 799 00:46:45,040 --> 00:46:47,160 Speaker 1: and I would really like to see some thought given 800 00:46:47,800 --> 00:46:51,279 Speaker 1: to that over the next few years. All right, John, 801 00:46:51,320 --> 00:46:53,319 Speaker 1: thanks so much for all of the insight John writing 802 00:46:53,360 --> 00:47:03,719 Speaker 1: their rd Q Economics. Thanks for listening to the Bloomberg 803 00:47:03,760 --> 00:47:09,239 Speaker 1: Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud, 804 00:47:09,680 --> 00:47:13,880 Speaker 1: or whichever podcast platform you prefer. I'm out on Twitter 805 00:47:14,040 --> 00:47:17,800 Speaker 1: at Tom Keene. David Gura is at David Gura. Before 806 00:47:17,840 --> 00:47:22,200 Speaker 1: the podcast, you can always catch us worldwide on Bloomberg Radio. 807 00:47:34,960 --> 00:47:38,799 Speaker 1: Who you put your trust in matters. Investors have put 808 00:47:38,840 --> 00:47:42,239 Speaker 1: their trust in independent registered investment advisors to the tune 809 00:47:42,280 --> 00:47:46,879 Speaker 1: of four trillion dollars. 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