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Speaker 1: advisor dot com. Welcome to the Bloomberg Surveillance Podcast. I'm
Speaker 1: Tom Keene with David Gura. Daily we bring you insight
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Speaker 1: of course on the Bloomberg A lot to talk about
Speaker 1: this morning with Jeffrey You, investment Strategisy at ups Wealth Management,
Speaker 1: who joins us from London. Morning. Jeffrey, good morning. Let's
Speaker 1: start with with that dollar strength in your sense of
Speaker 1: how long that's that's going to persist? Again, We're looking
Speaker 1: down the barrel here of a transition to a new
Speaker 1: a new presidency here in the US. How is that
Speaker 1: going affect things? We do think that pretty much and
Speaker 1: I should have run its course against some of the
Speaker 1: development again, some of the developed market currencies like Sterling
Speaker 1: and Europe for example. UM, we are going to get
Speaker 1: to a point where politics aside, the FED is going
Speaker 1: to be looking at this again saying okay, we thought
Speaker 1: we had a good inflation profile, but the dollar looks
Speaker 1: a bit too toppy right now? Is that going to
Speaker 1: affect our inflation profile? And the moment they signal that
Speaker 1: it will be doing so, then I think we're going
Speaker 1: to see a dollar reversal. So, um, I would you
Speaker 1: know the whole things a bit before saying right now,
Speaker 1: this is going to be the onset of another dollar surge,
Speaker 1: even after the recent moves that we've had a headline
Speaker 1: crossing the Bloomberg right now, Donald Trump said to pick
Speaker 1: Jeff Session, Senator Jeff Sessions of Alabama to be his
Speaker 1: attorney general, again reiterating that headline crossing the terminal here,
Speaker 1: Donald Trump said to pick Jeff Sessions for attorney general.
Speaker 1: Senator Sessions met with Donald Trump yesterday at Trump Tower
Speaker 1: in Midtown, Manhattan, the transition team releasing a statement thereafter
Speaker 1: commenting on how positive the meeting was, but not going
Speaker 1: so far ast it to aim the pick. Yesterday Bloomberg
Speaker 1: reporting Jeff Sessions will be the next attorney general or
Speaker 1: Donald Trump's pick to be the next attorney general pending confirmation.
Speaker 1: Of course, Jenny, when you look at what we know
Speaker 1: about Donald Trump from a policy perspective. What we've learned
Speaker 1: here over the last ten days or so, what conclusions
Speaker 1: can you draw about dollar strength? What have we heard
Speaker 1: that gives you an indication of where it might be
Speaker 1: in one word, reflationary, Right, so you know that that
Speaker 1: is the view right now, and I think you know
Speaker 1: several people have commented on this already. We were in
Speaker 1: a very deflationary mindset, secular stagnation, and then suddenly someone
Speaker 1: comes along which rips apart um like the playbook and says, Okay,
Speaker 1: now we are going to go for a reflationary wave
Speaker 1: coming out of the world's largest economy. And this is
Speaker 1: in a context where say, in China we are seeing
Speaker 1: of secular down trends and growth, but they still have
Speaker 1: the ability to actually reflate as well, and I'll be
Speaker 1: eaten a bad way. So now I think actually the
Speaker 1: onus is on Europe and so in the UK, and
Speaker 1: we've got the Autumn statement coming up, there's been talk
Speaker 1: of minor reflation to can the Eurozone, right, can the
Speaker 1: Eurozone actually now come through with reflationary policies. If this happens,
Speaker 1: then this mindset for seculate for secular stagnation, that we've
Speaker 1: had over the last few years, you know, might just
Speaker 1: start to turn around. But you know, it's only one
Speaker 1: piece of the puzzle right now, and talking about it
Speaker 1: is one thing. Implementation is another thing. I can be
Speaker 1: as guilty as any of having a short term memory
Speaker 1: here going back to previous transitions, did we see the
Speaker 1: amount of market movement that we've seen in this one?
Speaker 1: It has been extraordinary and it seems like investors trying
Speaker 1: desperately here to process what's happening, what what could be happening?
Speaker 1: How different is this time versus the past? It's very different,
Speaker 1: one because the result was so unexpected. And two it's
Speaker 1: so different because as people have highlighted the president elector
Speaker 1: he has no policy trail, right, and some it's it's
Speaker 1: a bit difficult to you know, take what he said,
Speaker 1: you en during the campaign of various sometimes and things
Speaker 1: contradicted each other, and try to apply a unique economic
Speaker 1: philosophy there. But I think as the nominees start to,
Speaker 1: you know, fall in place, we get a better sense
Speaker 1: of their philosophies and we should have a better sense of,
Speaker 1: you know, how the economic policy is going to implemented.
Speaker 1: Up ahead, Jeff, for you with us with you be
Speaker 1: a skood morning everyone, Tom Keenan London with Mr You,
Speaker 1: David Gura in New York. Maybe David Gura transitioning this
Speaker 1: weekend in New Jersey. I'm not sure of that. Everyone
Speaker 1: else seems to be doing it. Mr Trump will migrate
Speaker 1: out to Bedminster, New Jersey, perhaps from Midtown relief just
Speaker 1: for you. We didn't have time to talk about this morning,
Speaker 1: and I hope David will let me do this, which
Speaker 1: is we know the euro was linked with Germany and
Speaker 1: say the peripherals Spain, Portugal, Greece, etcetera. Earlier this week,
Speaker 1: literally the first chart I made in London was synthetic
Speaker 1: Deutscher Mark Italian Lira. Italy has a very expensive euro,
Speaker 1: doesn't it. It does most of Southern Europe, of the
Speaker 1: low growth countries, they have an expensive domestic currency and
Speaker 1: the only way for them to achieve competitiveness, as we've
Speaker 1: seen in Greece um is through internality evaluation, very very painful,
Speaker 1: and that drives poplar. So I want you to get
Speaker 1: in the debate. Let me frame it Horger Schmiding a
Speaker 1: barren Berg Bank saying do what the Spanish did, Do
Speaker 1: what the Irish did reform now and someone like Douglas
Speaker 1: David fokers landour Deutsche Bank saying no, they're not going
Speaker 1: to reform and this is an urgent matter to assist
Speaker 1: Italy towards some form of change given the linkage to
Speaker 1: Germany in the Europe. Do you think the view is
Speaker 1: with this constitutional shift, Well, the the referendum is required
Speaker 1: if Italy is to reform whatsoever. But what needs reform
Speaker 1: right now in Italy is its entire growth structure. The
Speaker 1: problem playing in Italy. People often talk about it's a
Speaker 1: least debt ratios italyast debt has actually been relatively sustainable. Right.
Speaker 1: It's growth that has always been the problem. It's demographics
Speaker 1: and be that's been the problem as well. So now
Speaker 1: those things that takes time. So yes there can can
Speaker 1: be a sense of urgency. But right now, ever since
Speaker 1: some of the US election, I think the shift has
Speaker 1: suddenly um the focus suddenly shifted towards right now. It's
Speaker 1: actually not an attacking game where we push for reform.
Speaker 1: It's a defensive gained suttenly, we pushed back against the
Speaker 1: populous forces. That's a completely different strategy that the Eurozone
Speaker 1: elite so to say that they need to look at
Speaker 1: what happens if this this referenumentally doesn't pass. What happens
Speaker 1: to the Italian economy, Well, at this point it's going
Speaker 1: to I wouldn't say prolonged uncertainty or anything, but people
Speaker 1: just think, Okay, nothing's ever going to change. You're not
Speaker 1: going to lift your trend growth forecast for Italy or
Speaker 1: anyway whatsoever. But for the Eurozone as a whole. I
Speaker 1: think people are indeed concerned that this is another domino
Speaker 1: that the inexorable rise of populism, and they will lead
Speaker 1: on to potentially disruptive results next year. In the French
Speaker 1: and German votes, we saw investors process that Brexit referentum
Speaker 1: in real time, perhaps influenced how they process the U
Speaker 1: S presidential elections going here into the Italian referendum in
Speaker 1: these other elections in Europe in the next few months.
Speaker 1: Would investors know now that that they didn't know what
Speaker 1: those first two rounds. Always expect the unexpected. So what
Speaker 1: you thought was consensus, you know what you thought that
Speaker 1: very very accurate polling models and whatnot. No, we're telling
Speaker 1: you you must have a hedge the other way, so
Speaker 1: as you mentioned see how Sterling performed um overnight when
Speaker 1: the referend results came out in versus S ANDP futures
Speaker 1: and for example, almost exactly the same. But then the
Speaker 1: reaction afterwards it was quite similar, was quite similar in
Speaker 1: the way that the foot tea was doing fine and
Speaker 1: now the smps don't fine too. I want to expand
Speaker 1: with you right now, and the basically because you're with
Speaker 1: UBS Wealth Management, I'm going to say it's a more
Speaker 1: conservative test to money management. Are people getting shell ACKed?
Speaker 1: That's an American phrase, Jeoffrey, and maybe that's lost in translation, Rachel.
Speaker 1: I'm not sure shell act shell actors are getting clobered pounded.
Speaker 1: Are people taking losses now? Or is everybody pretty much
Speaker 1: out of the big trade of this big dollar move. Actually,
Speaker 1: if you look at in both events, are clients one
Speaker 1: they were over positioned in cash to begin with. You know,
Speaker 1: I think that that's a challenge that's been playing asset
Speaker 1: management in general over the last a few quarters. Also,
Speaker 1: so much uncertainty out there, you don't know how it's
Speaker 1: going to play out. I'd rather just staying ash and
Speaker 1: it's sort of work out, especially for UK clients holding
Speaker 1: a common assets for example, what's the level, what's the
Speaker 1: level of opportunity? Now in the foreign exchange world, are
Speaker 1: you thinking big figures? Are you thinking I got to
Speaker 1: get the January? So right now in the FFX world,
Speaker 1: we are seeing massive distortions in terms of valuations, right
Speaker 1: Mexican pay so you know that? So how where whereas
Speaker 1: fair value should be seventeen eighteen something like that, and
Speaker 1: it's four big figures, are three big figures of absolutely no,
Speaker 1: Sterling wears fair value over the mediums a longer term.
Speaker 1: Euro wears fair value over the mediums a longer term
Speaker 1: if you look at it as an economic and aggregate, right,
Speaker 1: So that gives you opportunities. And for our clients, we
Speaker 1: say eighty percent of your returns are still going to
Speaker 1: be delivered on your strategic as allocation. You take a
Speaker 1: five to seven year of you So in that context
Speaker 1: then there can be something to capture from the currency side,
Speaker 1: depending on your base currency of critically the alpha of
Speaker 1: big Well, we're gonna have to come back on this
Speaker 1: is too much. Mathematics are for Friday, Jeff, for you
Speaker 1: with this ubs Jennifer Jacobs of course reporting a number
Speaker 1: of men. Let's go ten minutes ago. Uh, this is
Speaker 1: from two sources. The President alex said to pick the
Speaker 1: senator from Alabama, Jeffrey Jefferson Sessions, Jeff Sessions for Attorney General.
Speaker 1: I want to make clear that's from two sources. Uh.
Speaker 1: Jennifer Jacobs saying that, Uh, it is unclear if Mr
Speaker 1: Trump is formally offered the job to Mr Sessions. We've
Speaker 1: offered the job of explanation of foreign exchange to Jeffrey,
Speaker 1: you of ubs Um, who always gives a clarity and
Speaker 1: and and it helps with that. A strong dollar, now,
Speaker 1: is it different than a strong dollar of the eighties
Speaker 1: pre Plaza accord or the strong dollar of the late
Speaker 1: nineties to two thousand one associated as a Reuben dollar.
Speaker 1: Is this strong dollar different? I do think it is
Speaker 1: because the US has balance of payments and the exposures
Speaker 1: the USS balance of payments actually completely different. Now around
Speaker 1: the time the Plaza chord and clearly current accounts adjustment
Speaker 1: was needed and enduring the Reuben phase. Uh, the U
Speaker 1: s cycle was at sync with the e M cycle.
Speaker 1: This time around, I would say the main difference is
Speaker 1: the US can broadly afford a strong reflationary dollar and
Speaker 1: not really care about what happens the rest of the world.
Speaker 1: I knew your answer. That's tricky on my part, jeff
Speaker 1: You if that's your answer about us, is it their problem?
Speaker 1: Is it Mexico's problem, Malaysia's problem, Turkey's problem. The theory
Speaker 1: is they're less exposed than you they used to be.
Speaker 1: I don't buy it, um, Turkey, you hit the nail
Speaker 1: on the head there. You know that probably if you
Speaker 1: measure debt ratios as a proportion or in the relative
Speaker 1: to their funding abilities, probably one of the most of
Speaker 1: those currencies out there. So in that sense, Um, I
Speaker 1: would say, e M. Right now, use this how many
Speaker 1: moon period where markets are not really gunning for your
Speaker 1: currencies right now, look at your liabilities, look at your
Speaker 1: dollar exposures, try to hedge them, or just try to
Speaker 1: generate some savings as quickly as possible. Jeffer, you mentioned
Speaker 1: emerging markets, and I think about the potential for real
Speaker 1: change to trade policy in this country and globally when
Speaker 1: you look at currencies. What could the potential effect there
Speaker 1: be if we see more protectionism, if we see the
Speaker 1: kind of terrors that people have been talking about. Now
Speaker 1: here's where it gets interesting, because I do think there
Speaker 1: is an opening. So let's assume that the US, you know,
Speaker 1: does turn its back to globalization. There is a unique
Speaker 1: opportunity for countries, especially in Asia and emerging market so
Speaker 1: to actually find their new trader courts and actually just
Speaker 1: trade amongst themselves. The US is the biggest economy in
Speaker 1: the world, but it's not the only economy in the world,
Speaker 1: right so you know, they can actually generate demand that
Speaker 1: way as well. I don't think it's going to happen
Speaker 1: in the Eurozone. But this is why people are looking
Speaker 1: at the r CEP, you know, looking at a CM
Speaker 1: plus China, Japan, South Korea and New Zealand, India and Australia.
Speaker 1: You know, that's a chunky economic block they're put together.
Speaker 1: Not going to be the same rules as what happened
Speaker 1: through on t t P or what probably APEC had
Speaker 1: in mind general. But it doesn't mean that with the
Speaker 1: US out of the game globalization and f t A
Speaker 1: is that's not going to be the way forward. And
Speaker 1: I was just saying UK doesn't really have a Pacific
Speaker 1: border right now, but why shouldn't UK joined the our
Speaker 1: CEP if it's so desperate for such agreements amongst like
Speaker 1: Minded countries and Eurozone. It's also sorts of turning its
Speaker 1: back against globalization right now. So this is a challenge
Speaker 1: but also represents an opportunity. Big trade summit this weekend
Speaker 1: in Lima, Lima, Peru. We are you gonna be watching
Speaker 1: that closely for free signs? I think we will. But
Speaker 1: also the commentary um and than the body language between
Speaker 1: you know, the bilactual meetings between Asian leaders and President
Speaker 1: Obama and probably some of the comments that actually less
Speaker 1: interesting the comments are from Obama. Probably more interesting the
Speaker 1: questions and that Asian leaders will be asking Obama. I'm
Speaker 1: gonna put this on on Twitter for its extraordinary chart
Speaker 1: of Turkish Lira and Jeffrey there's the mathematics of a
Speaker 1: curve on a log, which is called log quadratic. I'm sorry,
Speaker 1: this is log moon shot. It is a real depreciation
Speaker 1: of Turkish leader. We know the politics of Turkey and
Speaker 1: the interesting dual interest rate, etcetera. When do they scream
Speaker 1: uncle to uncle drunk Uncle Donald? Well, so is it really, uh,
Speaker 1: you know, something that the Turkish government can actually do
Speaker 1: about if you look at what has fuel Turkish growth
Speaker 1: over the last few years, you know, borrowing in dollar debt,
Speaker 1: strong investment growth. Has been a lot of investment in
Speaker 1: the in the property sector as well, and now that's
Speaker 1: proving to be difficult to sustain. So they need reforms
Speaker 1: domestically right now to rebalance the economy in the same way.
Speaker 1: You know that that China has been trying to rebalanced
Speaker 1: its company. You're seeing similar credit to GDP ratios. So again,
Speaker 1: use this window of opportunity to do so, otherwise it
Speaker 1: could be too late to have standard deviations off a
Speaker 1: monthly church that isn't ugly charge. Jeff for you, Thank
Speaker 1: you so much. Always good to see you in London.
Speaker 1: Here is with ubs Well management. David Gurraw. You know
Speaker 1: back and forth that will whether we see appointments today.
Speaker 1: Do you see any reporting that we may see further
Speaker 1: appointments than the sources said on Jeff Sessions. I don't know.
Speaker 1: It's it's it's funny. I mentioned that we got a
Speaker 1: press release from the Trump transition team last night. Let
Speaker 1: me just pull that up quickly because it was so extraordinary.
Speaker 1: I thought, uh, he said here this was This was
Speaker 1: after he met with Donald Trump yesterday, noting the meeting, saying, well,
Speaker 1: nothing has been fine. Lights and he's still talking with
Speaker 1: others as he forms his cabinet. The president elect has
Speaker 1: been unbelievably impressed with Senator Sessions and his phenomenal record
Speaker 1: as Alabama's Attorney general and U S Attorney. It's no
Speaker 1: wonder that the people of alabam are reelected him without opposition.
Speaker 1: So no clues like that, and maybe that's what we
Speaker 1: should be looking for. Statements like that after these meetings,
Speaker 1: you know, if they if they go well, an indication
Speaker 1: that could be formalized. Shortly there after, he wrote a
Speaker 1: script looking for white smoke coming out of the Trump
Speaker 1: Tower at some points, Secretary of State, whatever it is,
Speaker 1: there's the the news Slow has been fierce over the
Speaker 1: last uh ten days. Also fierce in his economics has
Speaker 1: been Michael fre of JP Morgan. He has been absolutely
Speaker 1: brilliant about identifying the glide pass to a new level.
Speaker 1: I knew what's called terminal value, terminal rate, and this
Speaker 1: linkages of our economic growth or subpar economic growth, two
Speaker 1: interest rates. All of that turned on its head with
Speaker 1: a Trump election, higher yield, stronger dollar. Michael Faroli his
Speaker 1: head spinning as he gets to the acclaimed JP Morgan note,
Speaker 1: no doubt to be published at six o'clock tonight. Help
Speaker 1: us here, Michael Farley, give us a head start. You
Speaker 1: talked about three percent GDP the other day. What will
Speaker 1: be the theme tonight of your JP Morgan note, Thomas,
Speaker 1: you know, I would say we have the possibility of
Speaker 1: three GDP for a year or two if all of
Speaker 1: Trump's UH fiscal policy plans that he announces during his
Speaker 1: campaign where I'm so he talked about a tax cut
Speaker 1: that would run close to five billion dollars a year
Speaker 1: or six trillion dollars over ten years, and then's some
Speaker 1: pretty big members on institution and spending. So that's that's
Speaker 1: kind of there in principle. I'm not political person, but
Speaker 1: I you know, I suspect we get something much smaller
Speaker 1: than that. So, uh, three percent for a year or
Speaker 1: two seems, but we don't think that's the most likely.
Speaker 1: If I'm one of your Booth school seminars, University of Chicago.
Speaker 1: The money question, Dr Feroli is simple, do you amend
Speaker 1: your new level of potential g d P or the
Speaker 1: terminal value of GDP because of Trump election and Trump economics?
Speaker 1: We are not so Tom when you talk about potential
Speaker 1: GDP growth as you know, the commists usually like to
Speaker 1: think about labor supply and labor productivity and the two
Speaker 1: of those together kind of give you potential potential growth,
Speaker 1: and we don't really see these policy changes fundamentally altering
Speaker 1: those things in the long run. So when I just
Speaker 1: mentioned these tax cuts, is in the spending we think
Speaker 1: I could give you, you know, a nice short run
Speaker 1: philippas of activity, but not something that is going to
Speaker 1: really change the productive capacity economy. We actually see the risks,
Speaker 1: you know, when we talk about potential GDP. Perhaps there
Speaker 1: are two kind of off setting risks. One is that
Speaker 1: you know, some of these more restrictive immigration policies could
Speaker 1: actually lower labor supply. Uh. And there you know, an
Speaker 1: argument could be made that some of the tax policies
Speaker 1: would increase labor productivity, particularly if you reduce taxes on
Speaker 1: capital income and corporate income taxes in principle that should
Speaker 1: reduce the cost of capital to increase capital deepening and
Speaker 1: therefore productivity. Um, you know, we see those as kind
Speaker 1: of pretty small risks around the view that longer run
Speaker 1: trend growth is. You know, we have it at a
Speaker 1: little bit below one and a half percent, and we
Speaker 1: don't know, as I said, we're not changing based on
Speaker 1: these kind of short run influences and disturbances to aggreate
Speaker 1: demand that would likely come about through some of these policies.
Speaker 1: Michael Fairlie pulled back the curtain if you wouldn't just
Speaker 1: talk about the complexities of forecasting for for what this
Speaker 1: might look like in terms of what we know and
Speaker 1: what we're learning here as this transition goes on, I
Speaker 1: imagine you're you're playing with a lot of variables here.
Speaker 1: There's a lot we still don't know. Yeah, there are
Speaker 1: more than usual. So first we don't know what the
Speaker 1: policy we're gonna get is going to be. And then
Speaker 1: once we get that policy, there's still a lot of
Speaker 1: uncertainty among economists how different aspects of fiscal policy kind
Speaker 1: of ricochet through the economy. So usually economists are just
Speaker 1: kind of dealing with the second part of the uncertainty,
Speaker 1: and the first. Being trained economists, I don't really know
Speaker 1: what's going to happen and wash and I read the
Speaker 1: papers like everyone else, and it seems like a you know,
Speaker 1: a fall right now. So we're dealing with I think
Speaker 1: two layers of uncertainty, and that's really just on the
Speaker 1: fiscal policy. Um, there are other aspects of a the
Speaker 1: new administration that could also impact the economy, most notably
Speaker 1: trade policies. And that is a big wild card to
Speaker 1: degree to which he will follow through on some of
Speaker 1: the things he said in the campaign. Yeah. I think
Speaker 1: about that and the greed which we've been talking about
Speaker 1: the contours of that fiscal policy package, how much will
Speaker 1: be tax cuts, how much we'll be spending on infrastructure.
Speaker 1: There hasn't been a lot of talk about trade, and
Speaker 1: I wonder if that leads you and others to believe
Speaker 1: that maybe we should take at face value what he
Speaker 1: said on the campaign trail. Are you able to forecast
Speaker 1: what what you know a change in tariffs might mean
Speaker 1: for for the GDP, for for the economy generally. So
Speaker 1: that's a great question. You know, economists, UM, being pro
Speaker 1: free trade is almost an occupational requirement. UM. But we
Speaker 1: see the benefits of trade as being long run ones
Speaker 1: that deal with efficiency and efficient allocation of resources. We
Speaker 1: don't really think about benefits of free trade, or even
Speaker 1: the impacts of free trade from kind of a short
Speaker 1: run business cycle standpoint. Uh. And so we're kind of
Speaker 1: flying blind and thinking about if we were suddenly, you know,
Speaker 1: erect tariff walls. How that would impact economy. We tend
Speaker 1: to think that it would be pretty disruptive because there
Speaker 1: are a lot of domestic producers who are even now
Speaker 1: even more intertwined in global supply chain. Uh. You know,
Speaker 1: so as he thought saw like the Tohuco earthquake, that
Speaker 1: you know, once the supply chains get disrupted, that can
Speaker 1: really kind of reverberate through uh, through a lot of
Speaker 1: sections econmy So it's not clear that, um, yeah, I
Speaker 1: think there's a good kid to be made that you know,
Speaker 1: sort of rapidly erecting tariffs would uh, you know, it
Speaker 1: could be pretty disruptive. I mean that really goes back
Speaker 1: to one of the one of the hearts of the
Speaker 1: selection and the linkage into your world, Michael faroli is,
Speaker 1: is the idea of new protectionalism, and around that the
Speaker 1: idea of neo mercantilism, which can be defined eight ways. Folks,
Speaker 1: it's the Friday, We're not going to do that. All
Speaker 1: it means is a more closed society, a zero sim society,
Speaker 1: a non growthy philosophy. Is that where we're heading. I
Speaker 1: don't know, so certainly there was a lot of chatter
Speaker 1: that not just chatter during the campaign. Um, it seems
Speaker 1: like that has not been talked about quite as much
Speaker 1: since the election. Another thing I would say is that
Speaker 1: that doesn't seem to be a big priority of Congress
Speaker 1: uh enacting new tariffs. Now, there are you know a
Speaker 1: lot of gray areas in terms of where Congress and
Speaker 1: the President can act in terms of trade policy. Um,
Speaker 1: But in things that are going to fall into Congress, Uh,
Speaker 1: we don't see that, you know, big sea change in
Speaker 1: terms of the attitudes towards TORD trade. I mean, even
Speaker 1: with TPP, we are already seeing some of that step
Speaker 1: back before the election. UM. So we're not expecting openness,
Speaker 1: of course, but but we don't see commerce kind of
Speaker 1: rushing to to enact the legislatively that would that would
Speaker 1: tear to Michael. To get us to our next section.
Speaker 1: Are the dots moving? Everything else seems to be moving,
Speaker 1: including the ground underbe Are the dots moving in real time?
Speaker 1: I don't. Well, we still have a couple of weeks
Speaker 1: ago evidence things can change, But you know, I'm not
Speaker 1: not convinced that the dots are going to move. So
Speaker 1: on the one hand, some may choose some on the
Speaker 1: committee may choose to incorporate some added fiscal thrust into
Speaker 1: their outlook for next year and beyond. Others may not
Speaker 1: have sounded like yes, sir Terry Yellen was kind of
Speaker 1: taking weights the attitude. Um. On the other hand, we've
Speaker 1: had a I would say, um, kind of material tightening
Speaker 1: in some financial conditions over the past week and a half.
Speaker 1: In particular, the dollar has moved, as I checked, about
Speaker 1: four percent, and that's you know, that does impact not
Speaker 1: only growth, but but inflation. It pushes them away from
Speaker 1: them from the branded on inflation. Michael Frowley was JP Morgan.
Speaker 1: They put out in a clay note Friday afternoons must
Speaker 1: read on the street. And I do hope Michael, at
Speaker 1: some point your team puts their heads together about the
Speaker 1: conundrum of inflation adjusted wages. Tell us about the dynamic
Speaker 1: if inflation rises, rates up, dollar stronger. I get it. All.
Speaker 1: If inflation rises, is it just a given that nominal
Speaker 1: wages rise as well, so the real wage stays equal
Speaker 1: or even the real wage increases. Uh. I don't think
Speaker 1: it's given, certainly in the short run, and we've seen
Speaker 1: this over you know, the last few years. Is when
Speaker 1: you get moves and headline inflation that can tend to
Speaker 1: be more volatile than than moves nominal wages that can
Speaker 1: depress real wages. But you know, over the long run,
Speaker 1: theory would suggest that real wages should grow in line
Speaker 1: with labor productivity, which has been um as you know,
Speaker 1: not doing so well. And and for that reason, perhaps
Speaker 1: the kind of nominal wage boogie that that one should
Speaker 1: expect when things are you know, operating as they should
Speaker 1: at full you know, full employment might be quite a
Speaker 1: bit lower than it was. You know, what we used
Speaker 1: to think when we grew up, when we when we
Speaker 1: thought maybe nominal wages consistent with two percent inflation should
Speaker 1: be four percent. Maybe now nominal wages wage growth should
Speaker 1: be more like three percent, because productivity growth just isn't
Speaker 1: the same as it was a decade or two ago.
Speaker 1: I just want to interject here. We're getting some news
Speaker 1: crossing the bloomberg here about Donald Trump's picked to head
Speaker 1: the c I. A representative Mike Pompeio said to be
Speaker 1: tapped by Trump to head the Central Intelligence Agency. He
Speaker 1: is a congressman from Kansas, the fourth district in Kansas,
Speaker 1: which encompasses Wichita. Graduate of Harvard Law School, worked at
Speaker 1: Williams and Connolly Army veteran as well. Again. Frank Pompeo
Speaker 1: reportedly picked here by Donald Trump to be the head
Speaker 1: of the CIA. Michael, let me ask you about what
Speaker 1: we heard yesterday from Janet Yellen on Capitol Hill, tom
Speaker 1: asking about inflation. What's your sense of how fast inflation
Speaker 1: will will rise here in the new year, And did
Speaker 1: Janet Yellen say anything about the pace of rate increases
Speaker 1: in two thousand seventeen UM. So, we've been looking for
Speaker 1: inflation to continue moving higher. We think core PC inflation
Speaker 1: gets a two percent by year end. You know, the
Speaker 1: markets obviously had a big change of heart or big
Speaker 1: change of views lately on inflation. Not sure really what
Speaker 1: what would justify that given what we see are likely
Speaker 1: going to be pretty modest changes in the growth outlook
Speaker 1: next year, given the the fiscal policy back drops, So uh,
Speaker 1: we could always see inflation break a little bit higher
Speaker 1: than that. We certainly are. I think there's a lot
Speaker 1: of evidence we're close to full employment, UM. But also
Speaker 1: we just don't know what the composition said is gonna
Speaker 1: look like in in in a year or two, and
Speaker 1: are they going to be more hawkish or dubbish. I
Speaker 1: don't think anyone has a good sense. But in terms
Speaker 1: of yelling signaling for next year, she she's stuck with
Speaker 1: the gradual pace uh, and once again defended it by
Speaker 1: referencing what me and Tom were talking about earlier, which
Speaker 1: is this idea that neutral rates are probably pretty low,
Speaker 1: and so that the distance they have to go to
Speaker 1: get uh the overnight and just right back to normal
Speaker 1: is actually not all that great. So she she said,
Speaker 1: you know, for seventeen probably um, not a very fast
Speaker 1: paced pace of rate. You highlight the conundrum. Whatever anybody's politics,
Speaker 1: which is Cherry Yellen's normal or Michael Faroli's normal, is
Speaker 1: not the president alex normal. He has a mandate, in
Speaker 1: a clear mandate, to do better than normal, doesn't he. Well,
Speaker 1: he's talked about getting four GDP growth real GDP growth
Speaker 1: um as his normal, and uh, I wish him luck. Um.
Speaker 1: It's I think there are some of these things that
Speaker 1: are very hard for policy to change, demographics being the
Speaker 1: most obvious, but then even productivity growth is a bit
Speaker 1: of a mystery where new ideas and new technology come from.
Speaker 1: You know, I think we know there are certain policies
Speaker 1: that can encourage it, but you know R and D
Speaker 1: tax credits and so so on, but they're not guaranteed
Speaker 1: to deliver it, and certainly not guaranteed to deliver it
Speaker 1: in a short time span. So yeah, Michael, thank you
Speaker 1: so much. Michael far Eli on this Friday morning with
Speaker 1: great great news flow as well. He is with JP Morgan,
Speaker 1: who you put your trust in matters. Investors have put
Speaker 1: their trust in independent registered investment advisors to the tune
Speaker 1: of four trillion dollars. Why they see their roles to serve,
Speaker 1: not sell. That's why Charles Schwab is committed to the
Speaker 1: success over seven thousand independent financial advisors who passionately dedicate
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Speaker 1: New York, Tom Keene in London, Bloomick Surveillance on Bloomberg Radio.
Speaker 1: We're getting reports that James Bullard, president and CEO of
Speaker 1: the St. Louis Fed in Germany, speaking with our colleague
Speaker 1: Matt Miller, talking about low productivity. Let's see what he
Speaker 1: had to say. It's really really low compared to what
Speaker 1: it was historically. And uh, you know what exactly is
Speaker 1: driving down as a subject of research, but but just
Speaker 1: for purposes of thinking about the next two years or
Speaker 1: two and a half years, our approaches that probably that
Speaker 1: will continue going forward, probably will still see a slow
Speaker 1: productivity growth. Some of these programs, some of those fiscal change,
Speaker 1: physical initiatives, might help productivity go higher, but we'll we'll
Speaker 1: see as this thing develops. There's a lot of ifs
Speaker 1: in your statements. There's a lot you know, at this
Speaker 1: point we're very early on and as what do you
Speaker 1: see they but do you see the risks to the
Speaker 1: upside or the risks to the downside? Looking at say
Speaker 1: the dot plot in two thousand seventeen. You know, even
Speaker 1: if a lot of I know markets are talking about well,
Speaker 1: maybe the FED would raise rates faster than previously expected.
Speaker 1: But it's supposed we did that, that would be a
Speaker 1: reaction to faster growth, that would be a reaction to
Speaker 1: faster inflation. It would be appropriate monetary policy given those
Speaker 1: those kind of development. So I think I'd like to
Speaker 1: make a distinction between an appropriate monetary policy that's responding
Speaker 1: to things that are going on in the economy versus
Speaker 1: h we're just raising rates even though the forecast hasn't
Speaker 1: changed so um, so I think if we got into
Speaker 1: a faster rate rise environment, it would be for good reasons.
Speaker 1: Let me ask about some things, uh, that we've seen
Speaker 1: in the markets. That dollar strength has been incredible lately
Speaker 1: on the d X, y up over a hundred um.
Speaker 1: The euro weakness. I think this is the longest streak
Speaker 1: of daily drops for the euro against the dollar in
Speaker 1: the history of the single currency. Does that concern you
Speaker 1: the speed with which we're seeing these assets fluctuate. Uh,
Speaker 1: there has been some volatility post election that the tenure
Speaker 1: has come up, tenure yield has come up. But if
Speaker 1: you look at it in a bigger picture, over the
Speaker 1: last year since the Fed first made a move on
Speaker 1: the policy rate, you know, really we're coming back to
Speaker 1: levels that are consisting with December, and so that gives
Speaker 1: me some comfort that, uh, this these kinds of prices
Speaker 1: are probably not out of line. So basically what happened
Speaker 1: was we raised rates in the dollar. Actually during actually
Speaker 1: fell and the yields fell, but almost seventy bases points
Speaker 1: contrary to what the Fed was trying to do, which
Speaker 1: was the opposite of what you would have thought. But
Speaker 1: now we're coming back up to those previous levels. So
Speaker 1: and a lot of that is expected inflation, which has
Speaker 1: been too low. And so to the extent it's been
Speaker 1: moving expected inflation closer to our two percent target, I
Speaker 1: think that's encouraging from a central banker's point of view.
Speaker 1: So at least as of today, looking at the data,
Speaker 1: as of today, these moves are not uh, not shocking.
Speaker 1: That was St. Louis FED President James Bullard speaking to
Speaker 1: our colleague Matt Miller and Frankfort earlier today. This is
Speaker 1: Bloombrick Surveillance, brought you by Commonwealth Financial Network. When it's
Speaker 1: time to change the conversation, talk with the broker dealer
Speaker 1: r I A that's ready to listen eight six six
Speaker 1: four or six two three six three eight or visit
Speaker 1: Commonwealth dot com to learn more. I want to bring
Speaker 1: you Lny Shulativa Bloomberg Intelligence joining us now. She us
Speaker 1: economist at at Bloomberg Intelligence. And later just react a
Speaker 1: bit to what James Bullard had to say there, especially
Speaker 1: when it comes to productivity. Absolutely so a lot of sets,
Speaker 1: because not just James Board, but many of them already
Speaker 1: told us that they're really concerned about productivity. Uh, that's
Speaker 1: why they see potential growth being lower this time around,
Speaker 1: and that's why the neutral rate is lower. So that's
Speaker 1: a big concern. And and and obviously they hope that
Speaker 1: new um policy, new fiscal stimulus that hopefully we're gonna
Speaker 1: get at sometime next year, will help with low productivity.
Speaker 1: But this kinds of similus. They take time. They take
Speaker 1: time because first of all, they need we need the details,
Speaker 1: and we need time to England. Okay, well said Elena.
Speaker 1: What I think is the debate here, and folks, we
Speaker 1: had some great interviews on this Good Morning Steve Major
Speaker 1: and the team at HSBC. Is this a one off
Speaker 1: level change whatever you're looking at, and then we sustain
Speaker 1: that level change or is it a one off level
Speaker 1: change and we dampened back to where we were pre
Speaker 1: the election? Which is it? I think it's Uh, it's
Speaker 1: moll a continued growth and expectations for the economy to
Speaker 1: grow at a higher rate. First of all, it's not
Speaker 1: just the fiscal stimulates that will probably boost growth. Remember
Speaker 1: we're approaching full employment, and the economy by itself will
Speaker 1: you know, grow more, will grow faster just just because
Speaker 1: of the fund mental Really Uh, income growth will pick up.
Speaker 1: That's our foecust for next year, and consumer spending will
Speaker 1: need to provide the growth breach until infrastructure spending kicks in.
Speaker 1: Do you have any increase in investment spending with your
Speaker 1: enthusiasm about the consumer? I think that will take time
Speaker 1: to materialize. Obviously, uncertainty has increased right after the election,
Speaker 1: but then it kind of sell and uh ass as
Speaker 1: long as we find out more about the ciscal plan
Speaker 1: and as the details start to emerge, we're gonna businesses
Speaker 1: will feel better about investing, about hiring people. In the
Speaker 1: meantime though, it's it's all up to the consumer. Yeah,
Speaker 1: just very quickly here, How in line is James Bullard
Speaker 1: sense of timing with with Janet Yellens from what we
Speaker 1: heard yesterday in terms of of hikes for the new year, Yes,
Speaker 1: I think well, James Bullards dot we basically we knew
Speaker 1: where he was, right, He told us where he was
Speaker 1: one hike this year and then flat there upter So
Speaker 1: he's in line with what the consensus of the committee
Speaker 1: is expecting this year. But we'll see, Yeah, he's I
Speaker 1: think he's not a boat the next year, right, Okay,
Speaker 1: Elena will have to leave it there. Elena Scholeva with
Speaker 1: us at Bloomberg Economics. We're gonna finish our last half
Speaker 1: hour here in London, and David I might mention, we
Speaker 1: finished strong with Yakholm Fell's of Pimco. We've got a
Speaker 1: surprise last guest which really captures the fabric and emotion
Speaker 1: of this London post Brexit, but of Yakom fells On
Speaker 1: is profoundly important after the key debate here in London
Speaker 1: this week, Yakom fells you have been one of the
Speaker 1: most articulate voices in thinking about the breakup of Europe.
Speaker 1: Algersh Meeting earlier this week with Baron Bank was adamant
Speaker 1: that the German model everybody be responsible and do your
Speaker 1: domestic economy can work. And David folcus Land out of
Speaker 1: Deutsche Bank just flat out disagreeing and saying Italy is
Speaker 1: in severe problem and the I m F may have
Speaker 1: to come in and assist. You're one of the leading
Speaker 1: of voices on this. Which way will this cut? Well? Look,
Speaker 1: tom As Meeting is a good old friend of mine,
Speaker 1: we worked together more than thirty years ago. But I
Speaker 1: disagree with him on this one um. And the reason
Speaker 1: is that I think the politics of Europe has changed
Speaker 1: over the past year, and what we've seen in in
Speaker 1: the UK with the Brexit vote and in the US
Speaker 1: with Trump being elected. I think that's just a taste
Speaker 1: of things to come in Europe. And the reason why
Speaker 1: Europe held together in the past, and why each crisis
Speaker 1: was followed by a step towards more integration, it was
Speaker 1: simply that there was the political will to make this
Speaker 1: work and to hold together. And I think what's happening
Speaker 1: in in countries like France, in the Netherlands and in
Speaker 1: Germany UH means that this will to keep things together
Speaker 1: is no longer there. Governments. Established governments are under pressure
Speaker 1: from populist movements and that's why I worry that if
Speaker 1: and when the next crisis hits, the euro may actually
Speaker 1: break up. David, I find this just extraordinary to hear
Speaker 1: this from doctor Fills. Yeah, you saw it though in
Speaker 1: acute focus, though, Doctor Fels when you when you looked
Speaker 1: at the images of President Obama in Europe this week,
Speaker 1: meeting with the Chancellor angel A Mercal, meeting with Premister
Speaker 1: Lexacy prison in Greece, He's delivering one message. I think
Speaker 1: there are those who are open to hearing his message,
Speaker 1: but there is an awareness in Europe at the times
Speaker 1: have changed. Yes, absolutely, and I think you know Europe
Speaker 1: is now out on its own because they cannot be
Speaker 1: sure that they still have an ally in the United States. Uh,
Speaker 1: they're very tricky negotiations coming with the UK on on Brexit. Um.
Speaker 1: And again governments are under pressure from populist movements. And
Speaker 1: as you know, we have a series of elections coming
Speaker 1: up next year. This December, we have the Italian vote
Speaker 1: on the constitutional reform. We have an Austrian presidential election
Speaker 1: that may see a nationalist president who is anti immigration
Speaker 1: and anti you come into power. And then we have
Speaker 1: the Dutch, the French and the German elections next year
Speaker 1: in March, May and September. So I think the risk
Speaker 1: premium on European assets is likely to rise, um, and
Speaker 1: it's not going to be comfortable. What is the argum
Speaker 1: falls outlook for for oars of a recession you mean
Speaker 1: in Europe? Yes, I don't think your recession is on
Speaker 1: the table because the ECB is very supportive. Um. What
Speaker 1: we've seen after the US election is that the euro
Speaker 1: has weakened versus the dollar and some other currencies, so
Speaker 1: that will help export US. No, I think Europe, the
Speaker 1: European economy is likely to bump sideways in a range
Speaker 1: of around one to one point five pc growth. So
Speaker 1: recession is not the thing I worry about. What I
Speaker 1: really worry about is the fabric and political fabric of Europe. Well,
Speaker 1: I'm glad you mentioned the political fabric without question. Um,
Speaker 1: Yakom on surveillance today the image this was on Bloomberg television, folks,
Speaker 1: and you'd be amazed, folks, how we try to get
Speaker 1: lucky with the video footage that comes in and we
Speaker 1: fly with it in real time. And there we were
Speaker 1: Yacom fells with waiting for the camera in there in
Speaker 1: my years saying it's troops marching and this that the
Speaker 1: other thing. And right as we went to the tape,
Speaker 1: we had Chancellor Miracles standing alone saying goodbye to President Obama.
Speaker 1: Is it your sense? Is one of our great watchers
Speaker 1: on Germany. This is a changing of the tide for
Speaker 1: Europe and for Germany. As we see a new president
Speaker 1: in the US. Well, we'll have to see what what
Speaker 1: his policies will be. But um, I think there is
Speaker 1: at least a possibility that you know Trump will turn
Speaker 1: more or that the US will turn more inward looking.
Speaker 1: Europe has always relied on the United States as as
Speaker 1: as a very strong ally. Um Trump has seemingly good
Speaker 1: relationships to Russia to put in, I think that warries
Speaker 1: some people in Europe. So yeah, I think it's a
Speaker 1: turning of the tide. We'll have to see how how
Speaker 1: US foreign policy evolves, but I think what is clear
Speaker 1: is that Europe will have to take a tougher stance
Speaker 1: on its own. And I think it is clear to
Speaker 1: governments that they will have to raise defense spending because
Speaker 1: this is something that that that that Trump wants to see.
Speaker 1: The tide turns into the gravitational force of president like
Speaker 1: Donald Trump. When it comes to the federal reserve, how
Speaker 1: do you begin to forecast out think about what the economy,
Speaker 1: the US economy looks like with a radically re envisioned
Speaker 1: federal Reserve. Well, I think that the key thing to
Speaker 1: watch is what we will actually get in terms of
Speaker 1: fiscal expansion in the US. So will we really see
Speaker 1: the big tax cuts that Trump has been talking about?
Speaker 1: Will we see higher infrastructure spending? My guesses will get
Speaker 1: both of it, and that means the landscape for monetary
Speaker 1: policy for the FED has has has really changed. UM.
Speaker 1: I think it is is almost impossible to conceive a
Speaker 1: situation where you get very expansionary fiscal policy and a
Speaker 1: FED that hikes interest rates more aggressively or even starts
Speaker 1: to uh starts to to to reduce its balance sheet,
Speaker 1: which is something that is being discussed, because that would
Speaker 1: be a scenario where you would see a very sharp
Speaker 1: increase in interest rates, and that could actually undo the
Speaker 1: consensus in markets that rates will be lower for longer. UM.
Speaker 1: It could drive the dollar to unprecedented tie. We're already
Speaker 1: seeing some of this if you look at if you
Speaker 1: look at the d X Y today, which has has
Speaker 1: moved above on one. So uh, that kind of policy
Speaker 1: would actually fire back because a strong dollar would be
Speaker 1: bad for the US manufacturing sector UM and thus bad
Speaker 1: for the people who voted President Trump into office. Let's
Speaker 1: leave it there, YACOLM. Fels, thank you so much for
Speaker 1: a short visit today. Greatly appreciate your comments on Europe.
Speaker 1: Yulcolm Fells is with Pim Good. Thanks for listening to
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm out on Twitter
Speaker 1: at Tom Keene. David Gura is at David Gura. Before
Speaker 1: the podcast, you can always catch us worldwide. I'm Bloomberg Radio.
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