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Speaker 1: This is Bloomberg Surveillance. So you are a strict character,

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Speaker 1: which is a key indicator for you. A ship production

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Speaker 1: increased for two construcutive weeks in the wake of the

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Speaker 1: financial crisis. Consumers are more cautious. They don't ever want

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Speaker 1: to find themselves back in that precarious position. Financial market

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Speaker 1: serves supposed to respond to central banks, not the other

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Speaker 1: way around. When you have the cart leading the horse,

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Speaker 1: you typically can't steer very well. Bloomberg Surveillance your link

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Speaker 1: to the world of economics, finance, and investment on Bloomberg Radio.

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Speaker 1: Good morning. It is seven o'clock on Wall Street. At

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Speaker 1: seven o'clock in New Jersey. It only feels later. Are

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Speaker 1: parts go on to those of you who have been

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Speaker 1: stuck in traffic for hours overturned tractor trailer blocking the

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Speaker 1: Lincoln Tunnel. Tom Keene and I are here with you

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Speaker 1: here on Bloomberg Surveillance to get you through that time.

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Speaker 1: It is noon in London, in the city where another

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Speaker 1: Brexit poul shows leave in the lead and UH betting

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Speaker 1: markets tightened quite a bit, but yet it is a

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Speaker 1: risk on day around the world. We started with the

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Speaker 1: China and Tokyo Tokyo finishing up by four tenths of

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Speaker 1: eight percent, Stock six d and euros up four points

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Speaker 1: right now one point one percent, and the foot see

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Speaker 1: is hired by fifty two points nine tenths of eight percent,

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Speaker 1: the pound trading up by six tenths. Risk on in

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Speaker 1: the U S SMP features up by five points, Dally

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Speaker 1: meeting features up by forty nine both of those two

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Speaker 1: tents of eight percent same percentage for Nasdaq one hundreds

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Speaker 1: they're up eleven points fed meeting today. Nothing is supposed

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Speaker 1: to happen. Bond yields going up anyway. Ten year note

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Speaker 1: yield one point six three percent, the five year one

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Speaker 1: point one five and the two year goes for seventy

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Speaker 1: four basis points. This time yesterday German tenure note yield

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Speaker 1: was negative. It is just positive now by a basis point.

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Speaker 1: German two years still down negative eight. The year one

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Speaker 1: wenty six on the day is by about two tenths

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Speaker 1: of a percent. So the world has not come to

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Speaker 1: an end, even if it appears from the polls that

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Speaker 1: there are various possibilities for that to happen over the

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Speaker 1: next oh week or so. Uh so um. It is

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Speaker 1: a good day to speak to Abby Joseph Cohen because

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Speaker 1: she's generally an optimist about what's going on in the world. Abby,

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Speaker 1: I am sitting next to Tom Keane, so if he

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Speaker 1: mentions the Pittsburgh Penguins, I will whack him on your behalf.

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Speaker 1: I think Sidney Crosby deserves a lot of credit. It

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Speaker 1: was a tough one for you this year because we

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Speaker 1: certainly thought the capitals would have a good chance, but

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Speaker 1: unfortunately did not work out. But um, what about the

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Speaker 1: FED the US economy? Is that gonna work out this year? Uh?

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Speaker 1: Two weeks ago the FED meeting was live and Brexit

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Speaker 1: was dead. Now we've got a hundred degree reversal. Um.

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Speaker 1: It is has been obviously a very volatile first half

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Speaker 1: of two thousand sixteen in terms of the data flow

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Speaker 1: and also in terms of policy expectations. And one of

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Speaker 1: the things that I've been concerned about for a very

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Speaker 1: long period of time has been the impact of slow

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Speaker 1: growth outside the United States on our economy but also

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Speaker 1: on our policy making. Keep in mind that the said

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Speaker 1: since the financial crisis has really been serving as the

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Speaker 1: main central bank of the world, and when other central

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Speaker 1: banks have been unable to move um or they've been

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Speaker 1: unable to have an effective policy to actually stimulate their economies. Uh.

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Speaker 1: The said has has moved, um. But what we're seeing

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Speaker 1: in terms of the volatility over the last couple of

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Speaker 1: weeks in the markets is very much related to concerns

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Speaker 1: about growth in Europe, concerns about growth in China and

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Speaker 1: Japan and so on, and that of course has a

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Speaker 1: significant impact on the dollar and also our markets. Well,

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Speaker 1: the the dollar has not moved a whole lot though.

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Speaker 1: I mean, we're looking at the dollar a little bit

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Speaker 1: down today and we're sort of becolmed, as a sailor

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Speaker 1: would put it, even though you've got all these things

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Speaker 1: swirling around. But let's take a look beyond just a

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Speaker 1: day to day. UM. There clearly has been over the

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Speaker 1: last year and two a huge rise in the dollar.

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Speaker 1: And keep in mind the dollar is a relative price.

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Speaker 1: Part of the rise in the dollar is because we're

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Speaker 1: doing okay. Our economy is growing at about two percent

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Speaker 1: annualized rate. The unemployment rate has gone down notably. But

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Speaker 1: one of the big drivers of the rise in the

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Speaker 1: dollar has been weakness and concerned outside the United States. UM,

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Speaker 1: with the disappointing results in in so many other countries,

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Speaker 1: and with negative interest rates in other countries, that's something

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Speaker 1: that has moved the dollar higher. Basically, even as our

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Speaker 1: rates are still quite low and very low relative to

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Speaker 1: where they would normally be at this point of an

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Speaker 1: economic cycle, the fact that our rates are higher than

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Speaker 1: they are in other countries means that there's been exceptional

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Speaker 1: flow of capital into the United States. And it hasn't

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Speaker 1: been into the equity market. It's been into sixth income,

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Speaker 1: which keeps our rates low um and it also keeps

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Speaker 1: the dollar high. And this is something that we should

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Speaker 1: be concerned about. I have good faith, good knowledge of this,

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Speaker 1: folks at Abbe. Joseph Cohen did not work with Aristotle.

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Speaker 1: She did write an article Aristotle on investment decision making

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Speaker 1: eleven years ago. I think we need that now, Abby,

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Speaker 1: when we look at the turmoil and the day to

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Speaker 1: day news flow, how do we keep our blinders on? Essentially,

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Speaker 1: what would Aristotle do? That's a great question, tom Um.

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Speaker 1: What Aristotle was talking about was not to focus in

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Speaker 1: and not to make decision is based upon using our

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Speaker 1: terms short term information or inadequate information, and don't presume

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Speaker 1: that you know more than you do. And in this regard,

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Speaker 1: I would say an investor who is not trying to

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Speaker 1: focus in on the static um in the economic data,

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Speaker 1: but really on the trend UH in the flow is

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Speaker 1: going to be in better shape when we look at

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Speaker 1: the markets right now. And I'm fascinated by your visiting

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Speaker 1: institutions and speaking to Goldman Sachs clients, what's the actuarial

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Speaker 1: assumption given the new terminal value? Is your actual assumption

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Speaker 1: now out five, ten, twenty years? Is it sub four?

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Speaker 1: The the decisions that are being made, the assumptions being

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Speaker 1: plugged into models for pensions and endowments and so on,

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Speaker 1: who are truly long term investors? And the pensions in

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Speaker 1: particular have to make that determination because they want to

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Speaker 1: know if they're properly invested now for their liabilities twenty

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Speaker 1: thirty years into the future have significantly lowered their expectation

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Speaker 1: of returns. Keep in mind that a decade ago, UH,

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Speaker 1: the average expectation was about eight percent. Stop your critics, Abbey.

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Speaker 1: Your critics were telling us that, Abbey Joseph Cohen said

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Speaker 1: we would make fient a year. You know it, Tom.

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Speaker 1: What I'm talking about is the numbers that got plutted

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Speaker 1: into the model um, and I never said so basically

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Speaker 1: that eight percent number, and this is not a Goldman

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Speaker 1: Sacks number. This is a number that was industry wide,

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Speaker 1: was based upon the level of inflation, interest rates, and

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Speaker 1: economic and earnings growth. That number that's built into the

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Speaker 1: assumption for so many of these pension plans is now

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Speaker 1: moughly five percent, maybe a little bit lower. Keep in

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Speaker 1: mind too, that the asset mix makes a very big difference.

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Speaker 1: And a few years ago um, right before the financial

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Speaker 1: crisis and right after, when the major economies were in recession,

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Speaker 1: many investors who run these large pools of capital had

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Speaker 1: moved into emerging markets with the belief that there would

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Speaker 1: be very good returns available, and that has been a

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Speaker 1: source of disappointment as well in recent years. Keep in mind,

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Speaker 1: the United States equity market has notably outperformed almost every

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Speaker 1: other market since we emerge from recession in two thousand nine.

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Speaker 1: One of the things that when the investor was pointing

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Speaker 1: out to me this morning is what's going on out

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Speaker 1: there in the world right now is not a black swan.

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Speaker 1: We know and understand all the risks out there, and

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Speaker 1: so the market reaction is something that you can control

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Speaker 1: or react to. As opposed to something that's going to

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Speaker 1: take anybody by surprise. I'm not sure I agree with

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Speaker 1: that totally. Um we see for sample of the weakness

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Speaker 1: globally uh in in economic growth. We're not in a

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Speaker 1: global recession, not at all, but we do have interest

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Speaker 1: rates that are unprecedented. And I think that many central banks,

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Speaker 1: and many active banks, and many investors um are now

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Speaker 1: realizing that the incremental view of negative interest rates it's

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Speaker 1: not quite right. You know. The argument has always been

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Speaker 1: some time immemorial that if you need to have little

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Speaker 1: more growth, you lower interest rates. And what we have

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Speaker 1: seen since the financial crisis is those rates keep getting lowered,

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Speaker 1: and here we are in negative territory, and that may

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Speaker 1: not be such a thing. So, for example, the negative

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Speaker 1: rates that we saw in Europe beginning about eighteen months ago,

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Speaker 1: what we did say an improvement in economic activity in Europe.

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Speaker 1: But was that because of the interest rates, or because

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Speaker 1: those low rates meant that the euro was going down

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Speaker 1: relative to the all or what we're now seeing, for example,

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Speaker 1: is that the lending institutions in Europe are saying we're

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Speaker 1: not really lending, they're not getting the deposit because why

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Speaker 1: would you want as a saver to put your money

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Speaker 1: into a bank and get a negative return um and

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Speaker 1: and then the banks then don't have the same sort

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Speaker 1: of liquidity to turn around and lend down. So we

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Speaker 1: don't really know, um what some of these circumstances are.

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Speaker 1: Keep in mind that the SECT Reserve during the financial

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Speaker 1: crisis made a very specific decision not to go to

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Speaker 1: negative administrations. I agree with that. We got to come

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Speaker 1: back and discuss this further. With that be Joseph Cohen.

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Speaker 1: The transmission mechanism of negative rates across different countries and

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Speaker 1: indeed to the United States. Futures up three down, futures

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Speaker 1: up thirty eight. This hour of surveillance brought you by

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Speaker 1: Montisko Volvo. Is it montaskvovo dot com. Here's Michael R

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Speaker 1: with news heading my Tom, Thank you very much. Authority

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Speaker 1: believe the second wife of the Orlando, Florida shooter knew

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Speaker 1: about her husband's plot ahead of time and official sense,

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Speaker 1: though investigators are reluctant to charge her only on the

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Speaker 1: basis of possible advanced knowledge of her husband's plans. With

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Speaker 1: the primary season out of the way, Bernie Sanders and

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Speaker 1: Hillary Clinton met face to face last night. Clinton one

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Speaker 1: going away and yesterday's primary and Washington, d C. Last night,

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Speaker 1: Clinton and Sanders met face to face for about ninety minutes.

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Speaker 1: President Obama will meet with the Dali Lama at the

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Speaker 1: White House today. China won't be happy with the meeting.

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Speaker 1: China sees the exile Tibetan spiritual leader as a separatist.

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Speaker 1: Global News twenty four hours a day, powered by our

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Speaker 1: twenty four hundred journalists and more than a hundred fifty

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Speaker 1: news bureaus around the world. Now Michael Barr Fan and Michael,

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Speaker 1: thanks so much. Let me do a day to check up.

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Speaker 1: Three down futures of thirty six yields was one fifty eight,

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Speaker 1: were now out to one sixty three. The two year

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Speaker 1: was a zero point six nine right now zero point

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Speaker 1: seven three. So elevated rates in the last twenty four

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Speaker 1: hours with Andy, Joseph Cohen, Bloomberg Surveillance, Bloomberg Gervanance brought

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Speaker 1: you by your Chi State BMW centers visited online at

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Speaker 1: Chi State BMW dot com. At BMW they only make

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Speaker 1: one thing, the ultimate driving machine. Global Business News twenty

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Speaker 1: four hours a day at Bloomberg dot com. The Radio

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Speaker 1: plus Mobile Act and on your radio. This is a

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Speaker 1: Bloomberg business flash, and this Bloomberg a business flash being

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Speaker 1: brought to you by the accountants and advisors at Eisner

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Speaker 1: And for cyber security. It's on the mind of every

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Speaker 1: business leader managing cyber risk should be to get started

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Speaker 1: with a cyber risk assessment. Learn more eisener A for

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Speaker 1: dot com slash cyber risk. The markets are higher ahead

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Speaker 1: of the open Odd Wall Street, although all the best

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Speaker 1: levels of the session. Foot see one hundred now is

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Speaker 1: up the nine tents, the CAEC in Paris at one

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Speaker 1: point two percent higher, the German Acts up point nine percent.

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Speaker 1: Stock index futures in the US inching higher following a

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Speaker 1: four day to climb that sent the SMP five hundred

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Speaker 1: to a three week low. This is all, of course,

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Speaker 1: before the Federal reserves a rate decision. Today, the SMP

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Speaker 1: five hundred uh still less than three percent from its

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Speaker 1: record that was set to nearly thirteen months ago. Among

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Speaker 1: the stocks moving in the pre market trading, Twitter that

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Speaker 1: he is hired this morning, up about eight tenths of

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Speaker 1: a percent. Mark Andreson, the founder of the adventure capital

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Speaker 1: firm andres and Horwitz, said companies may consider the social

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Speaker 1: media firm for an acquisition, of course, that's been jumping

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Speaker 1: the past two days after Microsoft agreed to by LinkedIn

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Speaker 1: SMP futures right now three points, the down futures of

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Speaker 1: forty eight nastic futures ten points higher as we track

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Speaker 1: the euro one twelve twenty seven sterling up half a

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Speaker 1: percent on eighties six and at nine x screwed right now,

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Speaker 1: Tim forty six cents a barrel that's down about one

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Speaker 1: percent at three. And we check the markets for you

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Speaker 1: every fifteen minutes during the tradeing day right here on

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Speaker 1: Bloomberg Radio. And back to Michael and Tom John Tucker,

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Speaker 1: Thank you so much Bloomberg Surveillance this morning. Bunch of

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Speaker 1: bye Investco looking for investment views investcos high conviction portfolio managers.

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Speaker 1: investco us on Twitter. Features up five, doubt features up seven.

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Speaker 1: We continue with Abby Joseph Cohen of Goldman sax Abbey.

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Speaker 1: One of the things I found interesting in this experiment

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Speaker 1: of negative rates is the sort of kind of like

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Speaker 1: of it. We're sort of kind of like doing negative

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Speaker 1: rates because most of the negative rates are a discussion

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Speaker 1: between the government and banks, but those effects are not

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Speaker 1: passed on two businesses or to individuals, to households, to

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Speaker 1: the public. Is it What do we do with a

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Speaker 1: sort of kind of like negative rate transmission mechanism. Well, Tom,

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Speaker 1: you are correct that this is a new world that

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Speaker 1: we're not familiar with, and there have been effects of

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Speaker 1: negative rates that were shall we say, not intended UM.

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Speaker 1: And one of the things that we're seeing, of course

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Speaker 1: UM in Europe and Japan and elsewhere it is that

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Speaker 1: the banks are not in a dramatically better liquidity situation.

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Speaker 1: In Europe, for example, UH their balance sheets have started

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Speaker 1: to improve, but they're nowhere near as strong as they

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Speaker 1: are in the US. UH. US banks have much stronger

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Speaker 1: balance sheets. They're ready for bossle free and and so on.

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Speaker 1: So let's take a look at the U s UM,

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Speaker 1: where we have very low interest rates UM. The recent

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Speaker 1: survey by the Federal Reserve indicates that credit lending standards

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Speaker 1: have in fact been tightening UM. And so we have

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Speaker 1: the situation where it's cheap to borrow if you can

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Speaker 1: get approved to borrow UM. And one of the things

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Speaker 1: that gives me some encouragement is Over the last few

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Speaker 1: months in the United States, there has been an increase

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Speaker 1: in borrowing by small to mid sized businesses, mainly from

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Speaker 1: regional banks in the United States. It's an indication that

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Speaker 1: business owners are feeling more comfortable. Uh, they're getting ready

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Speaker 1: to do more capital spending. And we also see that

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Speaker 1: they've been doing more hiring. And this is something that

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Speaker 1: is obviously extraordinarily important for ongoing economic growth in the

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Speaker 1: United States. How much though, are banks being hurt by

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Speaker 1: the fact that, um, they can't get their net interest

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Speaker 1: margins up uh? And is that affecting their willingness Yeah,

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Speaker 1: you can qualify for a loan, but their their willingness

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Speaker 1: to make land absolutely and and you really have you

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Speaker 1: hit the point on the head. And and that is

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Speaker 1: these very flat yield curves and negative interest rates mean

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Speaker 1: that banks are not really in the usual position they

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Speaker 1: are to take on risk. And and keep in mind

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Speaker 1: that the way the financial system works is that they

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Speaker 1: are lending institutions who are willing to lend out their

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Speaker 1: capital um uh and take a bit of risk um.

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Speaker 1: And what we basically see is that the rules that

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Speaker 1: have been imposed UM have pushed us away. You know

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Speaker 1: on this risk spectrum. Think of it as a lot

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Speaker 1: of economic growth and lending on one side, and on

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Speaker 1: the other side, risk off, unwillingness to lend, not much

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Speaker 1: economic growth, and normally we'd like to be someplace, let's say,

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Speaker 1: in the middle of that spectrum, where lending institutions are

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Speaker 1: careful but they are willing to take on some risk

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Speaker 1: when when they think that the credit quality is reasonable.

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Speaker 1: What we see is that banks and other lending institutions

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Speaker 1: have really moved dramatically to the other side of the spectrum,

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Speaker 1: not good to economic growth point one and point two.

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Speaker 1: The banks themselves with very weak UH net interest margin,

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Speaker 1: it's hard to make money um and UM. So we

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Speaker 1: are in fact seeing the banking institutions continue to be

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Speaker 1: in distress. Now. While there's always a lot of political

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Speaker 1: focus on the large banks, the real duress is being

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Speaker 1: seen at the small and midsize institutions. And we continue

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Speaker 1: to see that there have been a number of these

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Speaker 1: institutions who, by the way, serve consumers, they serve small

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Speaker 1: and mid sized businesses. Um. These are the ones that

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Speaker 1: are being up either auf folded, or merged out of existence.

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Speaker 1: Thirty seconds left very little time. But I gotta ask you.

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Speaker 1: You mentioned politically is the presidential campaign in the market

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Speaker 1: yet um? It is um and it always is. By

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Speaker 1: the way, Basically, consumer confidence usually doesn't do well UM

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Speaker 1: during a presidential campaign because of the uncertainty, and this

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Speaker 1: particular campaign, as it's getting uglier, is having an impact.

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Speaker 1: It's an impact not just on spending, but also we

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Speaker 1: see decisions being made by investors, not just institutions, but

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Speaker 1: also individuals who increasingly say maybe they'd like to be

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Speaker 1: on the sidelines. Nattie, Joseph Cohen, thank you so much.

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Speaker 1: Greatly appreciated. With Goldman Sax Mike, I, I'll be fascinated

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Speaker 1: to see what Janet Yellen says today about negative interest

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Speaker 1: rates we're getting Do you agree, Mike that we're getting

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Speaker 1: a little bit wiser on the ramifications of this original economics.

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Speaker 1: The fan never liked negative rates, as she said, uh

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Speaker 1: a couple of weeks ago. They're off the table for

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Speaker 1: the US Central Bank. It's what they do to fantas

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Speaker 1: economy through other use. Stay with us Bloomberg surveillance. Bloomberg

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