Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and
Speaker 1: anywhere you get your podcasts, and always I'm Bloomberg dot Com,
Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Jay Bryson,
Speaker 1: Chief economist at Wills Fargo. Doctor Bryson, thank you so
Speaker 1: much for joining today. One set of data does not
Speaker 1: make a trend. If we put together three months like this,
Speaker 1: what does it signal to Jerome Powell? Well, so, I mean,
Speaker 1: if you look at the last three months, right, if
Speaker 1: that core rate was up zero point four percent, and
Speaker 1: so if you look at the last three months, you're
Speaker 1: still running at an annualized rate of close to five percent. There. Now,
Speaker 1: the good news is that the MP component or the
Speaker 1: owner's equivalent rant component is starting to come in, and
Speaker 1: so that should continue to put some downward pressure on
Speaker 1: inflation as we go forward. But we're still a long
Speaker 1: way from two percent at this point. And so you know,
Speaker 1: if you're Jerome Pal. You look at this, you say,
Speaker 1: I think Mike just said it. We're on the right track,
Speaker 1: But I don't think this makes the case for a
Speaker 1: pause in May. You know this and what we saw
Speaker 1: earlier in terms of the jobs report, I still think,
Speaker 1: knowing what I know right now, that they go twenty
Speaker 1: five in May, a lot of people agree with you,
Speaker 1: and yet they seem to be increasingly pricing out the
Speaker 1: potential for further rate hikes and possibly a great rate
Speaker 1: cutting cycle to start in the second half of this year. Jay,
Speaker 1: what would we have to see on Friday to discount
Speaker 1: the strength, the underlying strength and core that we see
Speaker 1: in this report, albeit perhaps not more than expected. So
Speaker 1: when you say Friday, at least are you talking about
Speaker 1: the retail sales numbers we're going to get out on
Speaker 1: on Friday? Jp, Morgan's earnings earnings? How much that learning stress? Yeah?
Speaker 1: So right, if we're starting to see signs and you
Speaker 1: know the upcoming bank earnings, you know, if there's a
Speaker 1: lot of stress out there in the financial system with
Speaker 1: banks in terms of their earnings, in terms of the
Speaker 1: credit standards tightening, things of that nature, that potentially could
Speaker 1: start to swing things in the direction of a pause
Speaker 1: in May. I mean, we'll see, you know what they
Speaker 1: say with the banks say in the coming weeks here,
Speaker 1: But you know, I think at this point that would
Speaker 1: be the thing that would for me would say, okay, May,
Speaker 1: maybe they actually go and pause. Is what sort of
Speaker 1: stress we're seeing in the banking system? Jay, There seems
Speaker 1: to be a complacency in markets about the fact that
Speaker 1: the FED will be able to get inflation under control,
Speaker 1: that the rates will go back down to three or
Speaker 1: perhaps even two percent in the next couple of years.
Speaker 1: And I'm talking about ten year yields. Are you less
Speaker 1: confident about that based on the increasing pressure for them
Speaker 1: to pause or just take step back as they wait
Speaker 1: to understand what the dynamic is. So in terms of
Speaker 1: the longer end of the curve, least I could see
Speaker 1: that going back to three percent. I mean, I just
Speaker 1: think that given the structural challenges in the US economy
Speaker 1: today in terms of its long run growth potential, for me,
Speaker 1: a long run three percent ten year yields makes perfect sense.
Speaker 1: I guess where I have a little bit more question
Speaker 1: is in terms of the two year yield. I don't
Speaker 1: agree with the view that the FED is going to
Speaker 1: be cutting rates by the end of the year potentially, right,
Speaker 1: if we're in a recession at the end of the year,
Speaker 1: I could definitely see that. But if we have a
Speaker 1: soft landing in the economy, I could see the inflation
Speaker 1: rate here getting stuck at three to three and a
Speaker 1: half percent. What does the FED do at that point?
Speaker 1: Does it throw in the towel and does it say, Okay,
Speaker 1: we can live with three and three and a half
Speaker 1: percent or do they really mean it, we need to
Speaker 1: get back down to two percent. And if they need
Speaker 1: to get back down to two percent, then you're not
Speaker 1: going to see I think rate cuts at the end
Speaker 1: of this year. I think you're going to see rates
Speaker 1: remain at a minimum elevated at that point. And so
Speaker 1: I have it just a little bit of a disagreement
Speaker 1: where the two year is right now. Hey, j you're
Speaker 1: not the only one. Jake Bryson of last FAGO, Thank you, sir,
Speaker 1: on the latest inflation data in America. Jeffrey Rosenberg joins
Speaker 1: portfolio manager of Systematic Multi Strategy fund at black Rock.
Speaker 1: He's been medicated over the last four months the beginning
Speaker 1: of two twenty three. It's been chaos I'm fascinated Jeff
Speaker 1: Rosenberg with your wide mandate at black Rock, how you've
Speaker 1: survived two twenty three. What have you done to your
Speaker 1: portfolio given the cacophony handed to you. Well, it's a
Speaker 1: it's a good framing for the question in front of
Speaker 1: today's data, Tom, because it is it is particularly a
Speaker 1: period of heightened uncertainty around the outlook. We talked about
Speaker 1: it in the earlier segments in terms of the uncertainty
Speaker 1: around in inflation. You know, we're moving through this period
Speaker 1: into a new period of you know, I think a
Speaker 1: pause and a reflection from the Fed, you know, whether
Speaker 1: they hike in May or not. For our portfolios, you know,
Speaker 1: that's made directional exposures whether markets are going up, our
Speaker 1: markets are going down. You know, pretty challenging environment to
Speaker 1: try to pick that direction. We have the benefit of
Speaker 1: being able to do a lot more flexible things around
Speaker 1: our portfolio to take away the direction and really look
Speaker 1: underneath the hood and play the dispersion that we see
Speaker 1: in markets and particularly you know, one of the big
Speaker 1: stories is you know, exceptionally high, historically high interest rate
Speaker 1: volatility relative to low equity volatility. But that low equity
Speaker 1: volatility is really a story of the surface. Underneath the surface,
Speaker 1: there's tremendous amounts of dispersion, and we're trying to take
Speaker 1: more advantage of that and lean our portfolio more into
Speaker 1: dispersion than in direction as you avoid trying to take
Speaker 1: a call unnecessarily what's going to happen at a time
Speaker 1: where that seems to be pretty much impossible. Jeff, I'd
Speaker 1: love your read on what we just experienced, which is
Speaker 1: an almost inline inflation report for CPI, the core CPI
Speaker 1: coming in inline with expectations and this market cheering and
Speaker 1: actually now expecting even greater rate cuts in the next
Speaker 1: twelve months. Does that make sense to you, Well, you know,
Speaker 1: I think Jonathan Farrow has said this in a couple
Speaker 1: of contexts, maybe more around around payroll. Be careful about,
Speaker 1: you know, the initial market reaction as to whether or
Speaker 1: not that's the longer run message. But the initial market
Speaker 1: reaction is really talking about, you know, the beat on
Speaker 1: headline and the impact on food and energy prices. You know,
Speaker 1: it helps, and it helps a lot in terms of
Speaker 1: the optics around inflation going down. I think that's the
Speaker 1: near term market reaction. The stuff I'm focused on and
Speaker 1: we're focused on is really about the labor markets, it's
Speaker 1: about wage inflation. It's really about what we see in
Speaker 1: this report in terms of core services core services X shelter.
Speaker 1: I think Mike mentioned that in the earlier segment, you know,
Speaker 1: there's a little bit of a trend coming down there.
Speaker 1: I wouldn't read a huge amount into this report in
Speaker 1: terms of giving the all clear for that much more
Speaker 1: important and durable services inflation. I think it's a it's
Speaker 1: a positive. It's in the sense that it wasn't a
Speaker 1: big negative surprise upward, and I think the market is
Speaker 1: trading a little bit off of that, but mostly off
Speaker 1: of the headline here this morning, as we careened toward
Speaker 1: that May third meeting of the Federal Reserve, what are
Speaker 1: you watching to get a sense of what is going
Speaker 1: on in real time beneath the hood with credit lending,
Speaker 1: with the expansion or contraction they're in. Yeah, I mean,
Speaker 1: obviously the big uncertainty, and Powell characterized it very well
Speaker 1: in that the direction of the banking crisis in March
Speaker 1: is to contribute towards tighter financial conditions, to contribute to
Speaker 1: the transmission of tighter monetary policy. The direction is clear,
Speaker 1: the magnitude is not, and so everyone's focused on the
Speaker 1: weekly H eight report and what's going on with bank lending.
Speaker 1: The issue, though, is that bank lending and bank lending
Speaker 1: expected standards tightening had been in place well before the
Speaker 1: banking crisis. So the issue isn't whether or not banks
Speaker 1: are tightening credit. The issue is how much did the
Speaker 1: banking crisis in March accelerate those trends. That is very
Speaker 1: hard to measure. It certainly is accelerated something we can measure,
Speaker 1: and that is deposits moving out of banks and into
Speaker 1: money market funds, waking up to it's no longer zero
Speaker 1: interest rates, and that's perhaps accelerated the funding costs of banks.
Speaker 1: But whether or not that transmits, whether that's a bank
Speaker 1: margin issue or whether it's a real economy issue, remains
Speaker 1: to be seen. Frozenberg. In the equity space, we can
Speaker 1: talk about bull market, bear market, We can talk about
Speaker 1: movements op ratios and such. In the bond market, we
Speaker 1: do less. Are we in the beginning a bond bull market,
Speaker 1: which is generally price up and yield down? And if
Speaker 1: I use a ten year as a proxy for that,
Speaker 1: do you frame out a surprisingly lower ten year yield
Speaker 1: out one year or two years. I think the jury
Speaker 1: is out on that kind of one year two year
Speaker 1: framing of the of the question Tom. Clearly, what's been
Speaker 1: happening over the last couple of weeks, really since and
Speaker 1: kicked off by the banking crisis. Remember, pre banking crisis,
Speaker 1: we were debating, you know, a fifty basis point hike
Speaker 1: and whether the FED needed or you know, we kind
Speaker 1: of forgot all about that because it's it's it's really
Speaker 1: much more a pivot towards did this banking crisis accelerate tightening?
Speaker 1: I think the jury is out, but clear the momentum
Speaker 1: in the bond market is towards more of a focus
Speaker 1: on recession risk. And as Lisa's talking about, you know,
Speaker 1: the pricing in of you know, a very rapid turn
Speaker 1: towards FED rights. We think that's probably overstated, but that's
Speaker 1: where the market's at right now. Well, you know, I
Speaker 1: want to be junior portfolio manager today. If people are
Speaker 1: saying long duration does better, big tech inequities does better,
Speaker 1: is this the time for Jeff Rosenberg to do a
Speaker 1: Jeff Nnick George VanDerHeyden reducts from thirty years ago and
Speaker 1: do you need to go out and buy a twenty
Speaker 1: year zero coupon bond to play a long duration play
Speaker 1: over a year or two years or three years. You know,
Speaker 1: the long duration call is really about recession versus inflation.
Speaker 1: And right now, as you can see after today's report,
Speaker 1: it appears that inflation fears are waning and that's going
Speaker 1: to give some more credence towards the notion that duration
Speaker 1: can once again play the diversifier in a recession environment.
Speaker 1: You want to be, you know, out as far in
Speaker 1: duration as you can stomach. We're a little bit more
Speaker 1: cautious on that view, however, Tom and again it was
Speaker 1: to my comments that you know, today the market is
Speaker 1: kind of playing off the headline. It's the services piece
Speaker 1: and the inflation from the wage picture and these still
Speaker 1: very tight labor markets. I think we still need to
Speaker 1: see that loosen up before you can say it's all
Speaker 1: clear and we're back to duration is on equivocally, you know,
Speaker 1: a clear hedge to a recession risk. It certainly is
Speaker 1: if you get the recession, but it becomes much more
Speaker 1: vulnerable if inflation is more sticky than we're currently anticipating,
Speaker 1: and market circles Jeff Rosenberg. Oh, Jeff, thank you so much.
Speaker 1: Jeff Rosenberg always with black Rock ad imposing with is
Speaker 1: always an annual visit at these meetings of the IMF
Speaker 1: from the World Bank. He's president of the peters An
Speaker 1: Institute of International Economics. He is, without question, with Richard Clarato,
Speaker 1: one of the leaders in thinking about Germany in the
Speaker 1: United States of America. Doctor Posen joins us this morning,
Speaker 1: John's going to talk to you about your wonderful essay
Speaker 1: on the simplistic static analysis of manufacturing in America. I
Speaker 1: want to go to the Matthew News. She learn you
Speaker 1: at Brooklyn High School million years ago and they said,
Speaker 1: don't look out five years. And then you went off
Speaker 1: to undergraduate, don't look out five years. Then you did
Speaker 1: your PhD work and they said, don't look out five years.
Speaker 1: And here's the International Monetary Fund with a five year
Speaker 1: model of three percent growth? Can people like you look
Speaker 1: out five years? We can look, but we may not see.
Speaker 1: I think Tom, the IMF is making a judgment call,
Speaker 1: which is within their rights, and I think it's a
Speaker 1: reasonable judgment call, but unfortunately, I think it buries the lead,
Speaker 1: which is that we're going to get a goosing of
Speaker 1: short term growth in the large economies in the US
Speaker 1: and China in Europe because it's going to be public
Speaker 1: spending on defense and on green and there's going to
Speaker 1: be a continued falling off of growth and the poor
Speaker 1: economies who are going to be forced to choose between
Speaker 1: US and China, and for reasons is very good report
Speaker 1: put up by the IMF recently. I know you've covered
Speaker 1: very good report by the World Bank recently you've recovered
Speaker 1: you've covered my stuff, the spillovers on growth for the
Speaker 1: developing world from the US China conflict and the subsidies
Speaker 1: race between Europe and US. It's very bad. What means
Speaker 1: critical here, And David folkarts Landau Deutsche Bank, with some
Speaker 1: serious publishing with Duly years ago, echoed what you said
Speaker 1: the day after Putin invaded Ukraine. So, if we have
Speaker 1: the fiscal stimulus that doctor folkarts Land I was talking about,
Speaker 1: you're talking about right now, and we dove tell that
Speaker 1: into your colleague Olivier Blanchard's phrase, fiscal space. Does the
Speaker 1: United States or Bolivia that we mentioned the other day,
Speaker 1: do they have fiscal space to act given the present promise?
Speaker 1: So you may have seen. I hosted a debate or
Speaker 1: a conversation between Olivier and Larry Summers on Pie dot
Speaker 1: comic a few weeks ago on this very topic, and
Speaker 1: where Olivier, Larry, and I, more importantly Olivia and Larry
Speaker 1: came down was that this kind of sustained fiscal expansion
Speaker 1: and possibly some inflation premium that continues going forward, will
Speaker 1: decrease the amount of fiscal space. Olivier's fiscal space rightly
Speaker 1: is about the gap between real interest rates and real growth,
Speaker 1: and that's been very large for a long time. This
Speaker 1: is probably going to cut that by a third to
Speaker 1: a half. That doesn't mean the US doesn't have fiscal space,
Speaker 1: but it means that there were more at risk than
Speaker 1: we've been for a very long time, and a bad
Speaker 1: shock to productivity to revenue where the interest rates could
Speaker 1: put us quickly into bad space. But additionally, if our star,
Speaker 1: the shorthand for this basically goes up, meaning that the
Speaker 1: gap between interest rates and growth shrinks. The Bolivia's, the
Speaker 1: Sri Lankas, the Pakistans, lots of Central America, lots of
Speaker 1: South Asia, lots of Africa. They lose fiscal space. When
Speaker 1: you have these discussions. Is there a tipping point for
Speaker 1: ten year yield, say for borrowing costs in the United States,
Speaker 1: after which the current fiscal model becomes untenable. Yes and no,
Speaker 1: sorry to do it that way, Lisa. The yes is
Speaker 1: you can do some very fancy mathy stuff. Jeremy Zedelmayer
Speaker 1: now the head of Broigel, used to be at the IMF,
Speaker 1: and Olivier and others have worked on this, and you
Speaker 1: have to do simulations. But cold bottom line, the odds
Speaker 1: of your tipping go up, and probably go up nonlinearly
Speaker 1: the closer you get to our midus G being zero.
Speaker 1: Because this is the math, I mean, the basic math.
Speaker 1: Once you're above, Once that our minus G turns positive,
Speaker 1: meaning interest rates are outpacing growth, that's when the bad
Speaker 1: debt dynamics kick in. That's when if you have debt
Speaker 1: to GDP it's over one hundred percent of kicks in. Now,
Speaker 1: it's not a tipping point that that happens. Going back
Speaker 1: to where Tom started this this week, this month, maybe
Speaker 1: for Bolivia, not for the US. But if that turns
Speaker 1: out to be the case, that being rates above growth
Speaker 1: rates for six months a year, then you start getting serious.
Speaker 1: The bad politics hand stots it. You mentioned that the
Speaker 1: subsidies right between Europe and the United States. I still
Speaker 1: don't think this is getting enough coverage. You said it's
Speaker 1: very bad. Can you paint a pictures to why this
Speaker 1: is so bad? So as it happens Olivia and I
Speaker 1: and some of our trade experts from Peterson, Chad Bound
Speaker 1: and Jeff Shot, we're meeting with a European finance minister
Speaker 1: last night about this very issue. Basically, the problem with
Speaker 1: subsidies in trade is that it ends up being not
Speaker 1: just waste soul. That's bad. But as I've tried to
Speaker 1: argue my article and this history shows us, it escalates
Speaker 1: very quickly. And this is what we're seeing. The US
Speaker 1: puts out this IRA, which includes huge subsidies for particular companies,
Speaker 1: not just subsidies for green tech, not just subsidies for
Speaker 1: R and D that would be nice, but subsidies for
Speaker 1: particular companies on a criteria they have to be producing
Speaker 1: the US and mostly they have to be US headquartered.
Speaker 1: And so then Europe said, okay, well we'll do subsidies
Speaker 1: and retaliation. And then the UK says already has one
Speaker 1: of the opposition politicians, Miliband came out and said, you know,
Speaker 1: we got to keep up with this. We're not going
Speaker 1: to be left behind. We had the Indian Finance Minister
Speaker 1: at PIA on Monday and she said, we're going to
Speaker 1: do subsidies. And so what you end up with is
Speaker 1: like an arms race. Everybody builds up, nobody gains economy
Speaker 1: of scale, the competitive basis for having the winning company,
Speaker 1: say based on better technology, more efficient processes, doesn't win
Speaker 1: because you're subsidizing here and you're subsidizing here, and France
Speaker 1: says we're not going to buy American, and America says
Speaker 1: we're not going to buy French, and so you end
Speaker 1: up with this huge on balance sheet obligation to the
Speaker 1: fiscal to go back to where Lisa was. And one
Speaker 1: of the worst things about this is this is open ended.
Speaker 1: So the way the US pass the latest round of subsidies,
Speaker 1: it's driven by the consumer. It's how much you produce.
Speaker 1: It's not oh, we're going to get to this level.
Speaker 1: You produce more, you get more subsidies. So this becomes
Speaker 1: a fiscal issue as well as you run in place
Speaker 1: to just get to the same spot. And then finally
Speaker 1: it's totally discriminatory against the rest of the world because basically, China,
Speaker 1: the EU, in the US can afford to do this,
Speaker 1: India can pretend to afford to do this, UK can pretend,
Speaker 1: and the rest of the world you're out of luck.
Speaker 1: It's done under the guise of supply chain resiliency, and
Speaker 1: these phrases get thrown around and they take on a
Speaker 1: life in their own. It's almost just the truth. You
Speaker 1: have to get more resiliency into the supply chain, and
Speaker 1: that means you have to bring it home. You've dismissed
Speaker 1: that straight up. I think you've said it proven to
Speaker 1: be a fallacy through economic history, and I can think
Speaker 1: of several failed socialist communist states that attracted the same thing,
Speaker 1: and it's difficult to do it. Is the United States, Europe, China,
Speaker 1: even if they have access to the funds, they can
Speaker 1: afford to do it. Who says it's going to be
Speaker 1: a success? I well, thank you. I agree. You know,
Speaker 1: there is a legitimate question to be raised as private
Speaker 1: supply chains have risen organically, individual purchasing managers saying I
Speaker 1: got an order from the CFO to cut cost ten percent,
Speaker 1: so I'll outsourced this. Oh, I've now outsourced this so
Speaker 1: I know somebody else. You know, there's a reasonable public
Speaker 1: policy interest in saying let's not overdo that. But that's
Speaker 1: very different from saying bringing it home is safer. You know,
Speaker 1: it's the same logic as your investor watchers say diversification matters.
Speaker 1: I think you mentioned all the communist countries. This is
Speaker 1: part of what I've been arguing. I mean, you look
Speaker 1: at Russia. Russia has spent twenty years trying to make
Speaker 1: itself self sufficient just so it could go do things
Speaker 1: like conveyed Ukraine and not worry about it. And like
Speaker 1: the US, like China, it's huge, but it still doesn't work.
Speaker 1: It ends up backfir and you end up with a
Speaker 1: corrupt industrial complex that doesn't give you what you need. John,
Speaker 1: I'm British headline twenty twelve, eleven years ago, Business Group
Speaker 1: economist to replace Arch Dove posead Bank of England. Do
Speaker 1: you have any advice former MPC member for Megan Green
Speaker 1: if she is anointed to There'll be a coronation if
Speaker 1: she moves to the Bank of England. Oh, I hadn't
Speaker 1: heard the news. Congratulations to Megan, that's great. You know,
Speaker 1: the external members including Catherine Mann my former colleague who's
Speaker 1: now one at the Bank of England. Have a good
Speaker 1: record of genuinely giving independent thought. And you mentioned me
Speaker 1: as being characterized as the arch dove a decade or
Speaker 1: eleven years ago. Of course, now I'm considered a hawk
Speaker 1: because I'm telling the Bank of England, you guys are
Speaker 1: whistling fantasies. Inflation stopped coming down, so be data driven
Speaker 1: and everything will be okay. But I hadn't heard about Megan.
Speaker 1: That's great, Adam. The external model at the Bank of
Speaker 1: engand on the MPC. It's different to say the Federal Reserve.
Speaker 1: Why is that so important? And what lessons can we
Speaker 1: take from that? Mohammedan Adam was talking to Tom and
Speaker 1: I about this on Friday. He said that the MPC
Speaker 1: model of having external members is helpful. Do you think
Speaker 1: it is? I think it is. I fear it's not
Speaker 1: as helpful as it should be because sort of you
Speaker 1: look back at what the Bank of England has done
Speaker 1: or others with an external model versus what the Fed
Speaker 1: has done, and the differences aren't as great as I
Speaker 1: would like to think. But I do feel it's been
Speaker 1: important for the bank, both in terms of legitimacy, just
Speaker 1: that they're you end up having more split votes and
Speaker 1: more open discussion and debate, which is better for the
Speaker 1: public sense that this is hard, but they're taking it
Speaker 1: seriously and occasionally you get things right a little faster
Speaker 1: because the external member squeaky you used to have and
Speaker 1: still probably do. My former colleague Danny Blancheflower, who was
Speaker 1: quite squeaky, but so or the worse thins Henry the Eighth,
Speaker 1: I think, but he was, but he in this particular instance,
Speaker 1: he was right. And I think history has shown I
Speaker 1: was probably right on some of the stuff I squeaked
Speaker 1: about while I was there. So it's it's useful. Adam
Speaker 1: a clinic as O Wise, thank you said, it's going
Speaker 1: to from you, Adam Housing that of the Patison Institute
Speaker 1: for International Economics of right now, we're going to wait
Speaker 1: and see on a banking crisis. We do this with
Speaker 1: Timothy Adams, President and chief executive Officer of the very
Speaker 1: important IF the Institute of International Finance. This is a
Speaker 1: gathering of I'm going to say, the large bankers, and
Speaker 1: he's going to get upset with me, I mean, and
Speaker 1: you know that's that's what he's going to say, the
Speaker 1: stereotype is a four bankers and you is it? You
Speaker 1: mointing him diamond and arrest sitting around one table, who
Speaker 1: is the I f four hundred institutions, sixty five countries.
Speaker 1: I thank you. This is a unique occurrence, folks, and
Speaker 1: we're going to audible here on this banking crisis and
Speaker 1: your fury over it. I'm going to go back to
Speaker 1: eighteen thirty three and a guy from Tennessee. You grew
Speaker 1: up in the aura of Andrew Jackson, and he said,
Speaker 1: our biggest fear is bank consolidation. If we went from
Speaker 1: four thousand smaller banks, they're not part of if to
Speaker 1: three thousand smaller banks, would anything change in your Kentucky No,
Speaker 1: not at all. And if you look where we were
Speaker 1: in nineteen thirty we had thirty thousand banks across the
Speaker 1: United States and now we have four thousand, two hundred
Speaker 1: FDI in short institutions, the trajectory is pretty clear, not
Speaker 1: only in the United States, but globally. We're going towards
Speaker 1: greater consolidation. Technology. It's a scale business, and the cost
Speaker 1: of technology, whether it's for aml or for providing a
Speaker 1: customer experience on the front end, is it credibly. My
Speaker 1: concern with this it's so important, is we had a
Speaker 1: marketing scheme in Silicon Valley wrapped around the glause of
Speaker 1: a bank. We all had enjoyment watching the SVB blow up.
Speaker 1: The concern that we have to have is the new
Speaker 1: banking environment we have. What does I say other than
Speaker 1: read Jamie Diamond's annual letter. Well, Jamie Diamond's Anger letters
Speaker 1: pretty dark and good, so I'd urge everyone to read it. Look,
Speaker 1: we have consolidation, a different it's going to be a
Speaker 1: different system going forward. Technology has dramatically changed the way
Speaker 1: in which financial intermediation happens, and artificial intelligence, the chat
Speaker 1: GBT revolution is going to only accelerate that process over
Speaker 1: the coming months and years, and it's happening at a
Speaker 1: breakneck pace. You don't think this is a banking crisis.
Speaker 1: I don't. I think it's a market turbulence. As we
Speaker 1: have transitioned from a period of low negative real interest rates,
Speaker 1: huge fiscal support. Look at the deficits we've run and
Speaker 1: you read our annual debt report to a period that's
Speaker 1: more normal. But going from one transition to another, we
Speaker 1: were going to see things pop. I didn't think it
Speaker 1: was gonna be Silicon Valley Bank. But I do think
Speaker 1: we'll see other stresses in the system that's not a crisis.
Speaker 1: What kind of stresses are you expected to see. Well,
Speaker 1: you know, there's a lot of concern about commercial real
Speaker 1: estate or something we've been watching. I don't think it's
Speaker 1: a crisis, but I think it deserves our attention overcoming
Speaker 1: twenty four to thirty six months. Is there something about
Speaker 1: what's happened with some of the smaller regional banks that's
Speaker 1: going to lead to issues in CIRA. Well, certainly there's
Speaker 1: a feedback loop. So that's why I think it's worth watching.
Speaker 1: And there are concerns, but if you look at credit
Speaker 1: card data is still pretty strong. C and I is
Speaker 1: still pretty strong. Obviously, commercials down, but the system is
Speaker 1: pretty normal. Think about it. On ninety nine percent of
Speaker 1: our banks in the United States are globally over the
Speaker 1: past four weeks open their doors and had normal business.
Speaker 1: This is a small slice of very unique, idiosyncratic institutions.
Speaker 1: No one enjoyed watching it, and it's demias. No one
Speaker 1: enjoyed the fallout of companies that are struggling to wonder
Speaker 1: where they're going to get the money to make paycheck.
Speaker 1: There also was a larger question around what does systemic
Speaker 1: mean in a new era when there are specific banks
Speaker 1: that have a dominant position specific businesses. How has the
Speaker 1: idea of systemic been redefined? Yeah, I think it's concentration
Speaker 1: risk that would spbe was the dominant player not only
Speaker 1: Silicon Valley, about in the research triangle in North Carolina,
Speaker 1: for example, six thousand institutions it's supported. So it's concentration risks.
Speaker 1: So we need to think about other institutions that are
Speaker 1: dominant players in a particular industry or region and ask
Speaker 1: ourselves what kind of risk does that pose if they
Speaker 1: become stressed? How much of that equation is shifting to
Speaker 1: a geopolitical question of which banks have more dominant positions
Speaker 1: in specific countries where there are increasing tensions between say
Speaker 1: the US and China, or the US and certain Middle
Speaker 1: Eastern nations. It's a great question, as I just said
Speaker 1: as we were coming on air, is the geopolitical issues
Speaker 1: I still worry about. It was in Japan last week
Speaker 1: the dominant conversation was US China relations, US Russian relations
Speaker 1: or China Russia relations. President Macron had just visited just
Speaker 1: landing in Beijing. Those are the issues that keep me
Speaker 1: up at night. How concerned of the executives you meet with,
Speaker 1: how much do they feel like there is a storm
Speaker 1: bearing down as Jamie Diamond was talking about, or reflect
Speaker 1: the gloom that you hear from the IMF projections. You know,
Speaker 1: coming into the last few weeks, we've really trying to
Speaker 1: look through the cycle and prepared be prepared for twenty
Speaker 1: twenty four, which is how do we have the technology,
Speaker 1: do we have the talent for recovering growth? But it's
Speaker 1: the geopolitical concerns, the fragmentation which the IMF talked about
Speaker 1: in their annual report, the issue of US relations which
Speaker 1: seems to get worse by the day. Those are things
Speaker 1: that are most worried about. There anything that your palmer's
Speaker 1: financial institutions are actually doing that suggest as anything to
Speaker 1: worry about with regards to China. They all just want
Speaker 1: to be there. Well, John has been in a lure
Speaker 1: for you know, one hundred and fifty years. It's that changed.
Speaker 1: So I think there is questions about de risking as
Speaker 1: we are seeing with respect to all supply chains, not
Speaker 1: just the financial sector, but the real economy as well.
Speaker 1: I think we have to worry about what are the
Speaker 1: risks operating in a variety of different markets. And if
Speaker 1: you look at many of our firms were in Russia
Speaker 1: for decades, that became untenable, right, so we have to
Speaker 1: look at other geographies that could become under stress. Is
Speaker 1: there any evidence whatsoever that financial institutions are ever proactive
Speaker 1: about any of this? I mean, we've been talking about
Speaker 1: Russia for years and years and years and years and years.
Speaker 1: It is not a surprise to anyone. I don't know
Speaker 1: why we've talked about the last eighteen months as if
Speaker 1: it's surprising. It's not surprising. It's not a shock. It's
Speaker 1: a failure of leadership in Europe to see this one coming.
Speaker 1: Chancellor Merka was warned about this repeatedly. Didn't change the
Speaker 1: energy relationship in any way, shape or form, and financial
Speaker 1: institutions have been caught with the pants down in Russia.
Speaker 1: It's hardly a shock to anyone that this has happened.
Speaker 1: So why were they still there? And is there any
Speaker 1: reason to believe they're going to be proactive about issues
Speaker 1: like China? I'm not convinced to you, well, most of
Speaker 1: the I am convinced that we are sensitive to the
Speaker 1: risks of US China attentions. It is the product of
Speaker 1: every conversation we have at our board meetings, and now
Speaker 1: the questions what do you do about it? And that's
Speaker 1: the same question of real acconemies. I mean lots of
Speaker 1: real economy CEOs are saying we should do risk. Are
Speaker 1: they moving out? Not clear that that's happening. When is
Speaker 1: the risk of stranded assets going to supersede the risk
Speaker 1: of losing out in profits in terms of China? Well,
Speaker 1: I don't I'm not sure we're going to have stranded assets.
Speaker 1: We taught US stranded assets a lot with respect of
Speaker 1: climate change, but the timeline of that is very different
Speaker 1: from the way which we do capital planning. This was
Speaker 1: an education, a clinic. It always is. Tim outans that
Speaker 1: the Institute of International Finance joining US now in his
Speaker 1: Washington as General Mark Kimmitt, Yes, the former Assistant Secretary
Speaker 1: of State for Political and Military Affairs, but he has
Speaker 1: been a terrific advisor to Bloomberg Surveillance on the complexities
Speaker 1: of military in this modern era. General Kimmitt, thank you
Speaker 1: so much for joining Bloomberg Surveillances today. I want to
Speaker 1: go right now to something dovetailed. It's a bit off
Speaker 1: the script here of the themes out there, and I
Speaker 1: think it's been ignored in the American press. We are
Speaker 1: reaffirming our position in the Pacific Rim by a one
Speaker 1: hundred million dollars twelve month capital commitment to the Philippines
Speaker 1: in four Navy army bases. I think most of America's
Speaker 1: ignorant of the army commitment in World War Two, what
Speaker 1: happened north of Manila, the bravery that was done there,
Speaker 1: And what I'd like to know from you is the
Speaker 1: importance of this projection by the Pentagon to a new
Speaker 1: Pacific Rim strategy army and Navy. Look. I don't want
Speaker 1: to sound trite, but you and I Tom grew up
Speaker 1: when the Iron Curtain was up. I think this generation
Speaker 1: is going to be growing up with the Bamboo Curtain,
Speaker 1: and we are setting a curtain for that ranges from
Speaker 1: Korea to the Philippines, to Japan down to Australia to
Speaker 1: try to contain the hegemonic behavior of China militarily, cooperation
Speaker 1: and competition going on economically, but there is a significant
Speaker 1: concern about the hegemonic aspirations of China and that's what
Speaker 1: the military is setting up. Our guests talk about a
Speaker 1: substantial increase of Pentagon spending to GDP. You're the best
Speaker 1: general we have linking in financial matters. It's widely understood
Speaker 1: that kimodons the high ground there. Do we have the
Speaker 1: will to expand Pentagon spending to GDP? Well, I may
Speaker 1: know a lot about the military, but that's more of
Speaker 1: a political question. The issue is can the president, can
Speaker 1: the Pentagon make the argument to Congress and to the
Speaker 1: American people that that raising of GDP is necessary at
Speaker 1: a time when quite candidly, the federal budget is under
Speaker 1: significant arrests from other expenditure programs and entitlement programs. I
Speaker 1: hope they do. I think it's necessary, but that's a
Speaker 1: tough sell to make these days. General I keep going
Speaker 1: back to what Peter Cheer, a commentator said on this
Speaker 1: show a couple of days ago, when he said that
Speaker 1: this is probably the most perilous and fraught moment geopolitically
Speaker 1: that he's experienced and that his generals who were with
Speaker 1: him as former generals, have experienced in a very long time.
Speaker 1: Do you agree and is it really focused in China
Speaker 1: or is it broader. Well, first of all, he must
Speaker 1: be quite young, because the threats that we faced when
Speaker 1: I was young officers were far more significant. Whether it
Speaker 1: was the Soviet Union, the impacts of the post Vietnam period,
Speaker 1: the Russian Soviet interference in both Africa, Latin America, Central America.
Speaker 1: There are a significant number of challenges there, Not to mention,
Speaker 1: we had a population that was absolutely unsupportive of the
Speaker 1: military writ large. Yes, we have challenges today, but I'm
Speaker 1: convinced that the US military is up to those challenges,
Speaker 1: whether it's the Army, Navy, Air Force, Marines. We need
Speaker 1: to modernize, we need to expand, but our soldiers are ready.
Speaker 1: How does that dovetail into the leaks, the national security
Speaker 1: leaks that we've seen. Perhaps the military is ready, but
Speaker 1: is the intelligence infrastructure, is the cyber sort of secure
Speaker 1: already in place to really support them? I certainly hope. So.
Speaker 1: I was never concerned about the intelligence products that we
Speaker 1: were getting from DA the human intelligence, the signals intelligence,
Speaker 1: the military intelligence, cyber you know, I think we're at
Speaker 1: a situation at least where we don't know what we
Speaker 1: don't know. But the fact that Russia has not been
Speaker 1: able to execute a successful cybersecurity operation against Ukraine I
Speaker 1: think tells everyone that we're probably ahead of where we
Speaker 1: should be. I'm just not competent to answer that question.
Speaker 1: But the bigger takeaway for a lot of people is
Speaker 1: that the US is spying on its allies. That we
Speaker 1: always have a right, So this is sort of not
Speaker 1: a surprise, and perhaps it shouldn't be. But that also
Speaker 1: that the US could be a sive right, that there
Speaker 1: could be breaches here if other countries share intelligence. How
Speaker 1: concerning is that to you? How much is that what
Speaker 1: you're focused on. That's that's probably the most important issue there,
Speaker 1: the issue of allies spying on allies. I mean, that's
Speaker 1: something that's understood. This is not a surprise. It's just
Speaker 1: an embarrassment when it gets into the general public. With
Speaker 1: regards to your other questions, particularly what we call the
Speaker 1: Five Eyes countries that we share with, that is a
Speaker 1: significant threat to the relationships because very simply it reduces
Speaker 1: the intelligence flows. The other country is much better than
Speaker 1: we are in certain areas, but if they don't want
Speaker 1: to share it because they can't trust us, that's going
Speaker 1: to have a ground effect. I want to talk about
Speaker 1: the United States allies. Europe has been a weak link
Speaker 1: when it came to Russia over the last decade, particularly Germany.
Speaker 1: Germany was want time and time again about the energy
Speaker 1: dependence it had on Russia and didn't do enough to
Speaker 1: back away, and we've had to deal with that in
Speaker 1: the last twelve months. Now we're dealing with China, and
Speaker 1: some people might make the same accusation that you're once
Speaker 1: again as a weak link. And I would bring up
Speaker 1: the comments from the French President, the French leader of
Speaker 1: the last week as an example of that. You've talked
Speaker 1: about the hegemonic aspirations of China and the risk around
Speaker 1: that for the United States has been effective hedgehum on
Speaker 1: the global stage. Both wouldn't get ample. It needs to
Speaker 1: bring its allies with it. The Europeans, you say, much
Speaker 1: evidence of that when it comes to China. Well, with
Speaker 1: regards of China, I'm more concerned that the relationships we
Speaker 1: have are the strong links with Australia, Korea, Japan, the Philippines.
Speaker 1: That's the front line. The supporting line comes out of Europe.
Speaker 1: So while Europe is important, particularly with regards to the
Speaker 1: economic cooperation or economic enforcement, when China violates wto. I'm
Speaker 1: more concerned that we've got it right with the Allies
Speaker 1: on the front lines, and then those in the second tier,
Speaker 1: the Europeans. That's important, but less important give us a
Speaker 1: window into China. Stillwell was over there a long time
Speaker 1: ago and it was basically total chaos. Marshall retiring, had
Speaker 1: to fly over there on an emergency basis and try
Speaker 1: to figure out the new Has anything changed in seventy years.
Speaker 1: Do we have an intelligence basis there where we can
Speaker 1: be more confident of our actions or is there that
Speaker 1: cacophony that's still Well and Marshall faced Well. First of all,
Speaker 1: I'm not an intelligence expert, but I sure know there
Speaker 1: are a lot of people in this town that know
Speaker 1: China well in terms of the intelligence assets we have
Speaker 1: on the ground. If I knew what they were, I
Speaker 1: couldn't tell you that. But I think we've got a
Speaker 1: fairly good picture of what's happening in China. China, this
Speaker 1: isn't a mystery like Gorbachev in Russia, where we had
Speaker 1: really difficult intelligence. The problem that we have with intelligence
Speaker 1: is we're very very good about assessing capabilities, what they've got,
Speaker 1: how many tanks they've got, how many planes they've got,
Speaker 1: how many soldiers they have. The hard part for the
Speaker 1: intelligence experts is determining intentions. What are they going to
Speaker 1: do with all of those capabilities. I think that's conundrum
Speaker 1: that's been going on for years and years. One can
Speaker 1: only hope that when it comes to China, we can
Speaker 1: find some manner in which we can come to some
Speaker 1: sort of I hate to keep using these words coming
Speaker 1: out of the Cold War, but some sort of parastroike
Speaker 1: or some sort of detante, because it's clear that China
Speaker 1: has asked I work in the Middle East. You can't
Speaker 1: swing a dead cat without hitting a Chinese businessman on
Speaker 1: a daily basis. Maybe we quote you that you may
Speaker 1: they're out there. They're pushing hard. They're pushing hard economically,
Speaker 1: as we saw with the agreement between the Saudis and
Speaker 1: the Iranians. They want to play heavily in a diplomatic field.
Speaker 1: We just got to make sure in the military that
Speaker 1: we can contain their military aspirations. You've made a series
Speaker 1: of personal assessments about their intentions. What about timeline specifically,
Speaker 1: what about taiwine specifically? A tough policy issue. I think
Speaker 1: the Chinese, regardless of what we're seeing with all the
Speaker 1: noise in the air and on the sea. They're taking
Speaker 1: the long view. They believe that eventually Taiwan will return
Speaker 1: to the People's Republic of China. They're not in a hurry,
Speaker 1: I think militarily, they know that trying to invade and
Speaker 1: occupied Taiwan would be an absolute disaster. But they've got time. General.
Speaker 1: We appreciate your time this morning. Thank you, suck you fantastic. General.
Speaker 1: Mark Kim at Dad the former Assistant Secretary of State
Speaker 1: for Political Military at Fast Subscribe to the Bloomberg Surveillance
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