Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Lee.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
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Speaker 1: and Center. The main story this morning talks in Washington,
Speaker 1: high level between the Chinese and the United States, and
Speaker 1: a conversation, according to our team down in Washington about
Speaker 1: a currency pack to Ibrahim rack Barry joining us here
Speaker 1: in New York City's global head of f X analysis,
Speaker 1: a currency packed. We talked about this earlier in the year.
Speaker 1: We have no detail on what it would entail, no
Speaker 1: detail on whether both sides would agree, and no detail
Speaker 1: whatsoever and what the enforcement mechanism might be. Abraham, I'm
Speaker 1: sure you've given this thought before today, because it's been
Speaker 1: a story through much of the last twelve months. What
Speaker 1: are your thoughts on it now? So, I think that
Speaker 1: the prince able things to keep in mind is that
Speaker 1: the currency issues are actually pretty easy to resolve between
Speaker 1: the U S and China because their interests are fairly
Speaker 1: fairly aligned. The US doesn't want a stronger dollar, The
Speaker 1: Chinese don't want a weaker and men b at at
Speaker 1: this time. They don't want to encourage even more capital outlaws.
Speaker 1: So overall, I think this issue will be dealt with.
Speaker 1: It won't be very far reaching. I think we have
Speaker 1: the template. The template is what the US agreed with Korea.
Speaker 1: What's part of the U s m C A agreement
Speaker 1: in in essence, which is effectively more transparency around FS
Speaker 1: interventions and some commitment not to quote unquote manipulate X.
Speaker 1: So I don't think it's a big deal. It's relatively
Speaker 1: easy to resolve. The timing is just the Chinese are
Speaker 1: expecting to get something out of it, and I'm not
Speaker 1: quite sure we're there this week. The agreement in and
Speaker 1: of itself feels very superficial if this is what they
Speaker 1: agree on. Ultimately, the good news that I think for
Speaker 1: investors is that, according to our reporting, if we can
Speaker 1: secure some kind of packed around this, it would be
Speaker 1: phase one on the road to perhaps phase two and three,
Speaker 1: which is securing a deal around the tougher things and
Speaker 1: avoiding the terrified of next week. Abraham, We've been here before.
Speaker 1: We've been here so many times. This market is being
Speaker 1: whip sword by headline after headline, what is your advice
Speaker 1: to your clients right now? So we we think overall
Speaker 1: this is still a This is still a pretty cautious
Speaker 1: and challenging global environment. We're right at the cusp of
Speaker 1: what's consistent data wise with the soft landing, but it
Speaker 1: doesn't take much to steep us into the hard landing scenario.
Speaker 1: So you're definitely better off having exposure to hard lending hedges.
Speaker 1: So in fect space that will certainly be two more
Speaker 1: yen upside. For instance, down the line, the dollar is
Speaker 1: not a bad place to be either, but it is
Speaker 1: still a pretty diffuse environment, so you don't want to
Speaker 1: fully commit to a hard lending environment. I want to
Speaker 1: translate the currency chat yen upside means stronger yen stronger
Speaker 1: yet yes, stronger, yeah, I mean, I mean Japan pay
Speaker 1: is a huge pivot point here, frankly, like Turkey does
Speaker 1: in the Middle East, but Japan, in the Eastern Asia,
Speaker 1: in the Pacific Rim do they want a strong yend.
Speaker 1: No they don't. And in fact, I should be very clear,
Speaker 1: we are at at a pretty pivotal moment this month.
Speaker 1: We have a BOJ meeting coming up later this month
Speaker 1: where they're likely to at least have some action, and
Speaker 1: we have an important five yearly review from the government
Speaker 1: pension fund which again will probably try and stem the
Speaker 1: appreciation pressure. But my point here is in the general
Speaker 1: context we're in, that's probably not enough to to put
Speaker 1: to put a cap on on the n in particularly
Speaker 1: if things get worse. I think that's going to be
Speaker 1: just because the time and you and I meant talked
Speaker 1: earlier about how quiet the market's pen the eurostasis now
Speaker 1: seems critical. What is the news flow that will make
Speaker 1: euro move a demonstrable set of figures where I can
Speaker 1: make money? Is it le Guard or is it something else?
Speaker 1: I don't see how there. I think it should be
Speaker 1: something else. Now, we we have argued that you were
Speaker 1: actually able to make money on euro because it kept
Speaker 1: on drifting lower over the last twelve months, and particularly
Speaker 1: euro dollar has been quite inefficiently. But now what yes,
Speaker 1: and and now we think what would be the big
Speaker 1: driver isn't act that we see real recession risk in
Speaker 1: Germany and if that spreads to the rest of Europe,
Speaker 1: that I think would be a serious potential further downside
Speaker 1: for for Europe. But for what we actually think we
Speaker 1: will see the continued drift rather than an acceleration of
Speaker 1: the trend. Well, Abraham, let's explore your baseline, your base case.
Speaker 1: You believe we can engineer a soft landing. Care is
Speaker 1: that still your base case? It is, but only only
Speaker 1: really just this is a low conviction call, exactly. We
Speaker 1: we we are in very mixed circumstances. So we we
Speaker 1: weighed up both of those scenarios, and right now we're
Speaker 1: you know, we're really in the middle of the road
Speaker 1: between the two. We think that there's a soft landing
Speaker 1: because we're actually still seeing some positive signs out of
Speaker 1: China in terms of the data, credit markets, which historically
Speaker 1: have been a good indicated also still looking quite okay,
Speaker 1: and in fact, the US still has some positive signs.
Speaker 1: How dependent is that low conviction baseline call of yours
Speaker 1: to engineer a soft landing? How dependent is that call
Speaker 1: on what happens between the Chinese and the United States
Speaker 1: over the next couple of months. Quite quite dependent. So
Speaker 1: within that is an expectation that we will not see
Speaker 1: my further escalation from here. We should all be clear
Speaker 1: ahead of the U S election, the US is extremely
Speaker 1: unlikely to roll back tariffs so we don't think we'll
Speaker 1: see a deal that resolves a lot of the issues,
Speaker 1: but we are at a point where we think there's
Speaker 1: only really tactical changes to the US China dynamic for
Speaker 1: the next few months, So that gives you a fighting
Speaker 1: chance to keep the software. We wanna get a final
Speaker 1: question to you, because no doubt, through much of this
Speaker 1: program will be dedicating it to what's happening with the
Speaker 1: trade talks down in Washington, d C. That will no
Speaker 1: doubt be the number one story for many people through
Speaker 1: the training week as well. Yeah, Abraham, a thing we
Speaker 1: go back to on this program is that typically for
Speaker 1: investors were always overly focused on the shark closest to
Speaker 1: the boat, and we need to be thinking about what's
Speaker 1: happening out swhere. Do you think we are underestimating events
Speaker 1: around the periphery of the main story at the moment
Speaker 1: that perhaps needs a little bit more attention, And if so,
Speaker 1: where is that attention where should it be? So we
Speaker 1: think there are a couple of other important storys around.
Speaker 1: We already touched on Japan, including ahead of those g
Speaker 1: P i F reviews later this month. The big story
Speaker 1: in G ten of X for US is also the
Speaker 1: candies where we see a lot of sensitivity to weaker
Speaker 1: global environment, but also central banks that seemed to be
Speaker 1: a little bit behind the curve. So exactly so weaker,
Speaker 1: weaker Swedish crona and at least no further upside on
Speaker 1: the on the Norwegian side as well. And then of
Speaker 1: course the other big topic, including an f X land
Speaker 1: is Brexit. Abraham, thanks so much. It has just been
Speaker 1: a crazy day. Thank you, thank you so much. We're
Speaker 1: focused on trade, We're focused on the markets. We welcome
Speaker 1: all of you coast to coast and worldwide. But right
Speaker 1: now the interview of my day on Turkey. This is
Speaker 1: Stephen Cook, his book faced on absolutely extraordinary on the
Speaker 1: Path from the Arab Spring. He joins us now with
Speaker 1: the Counseil on Foreign Relations from our studios. And while
Speaker 1: she did, Steve Stephen good more warning, um I I
Speaker 1: look at the events and let's bring it forward from
Speaker 1: new questions coming off of Mr Aradjan's lengthy speech uh
Speaker 1: in Anchora, what is next for Mr ra to Wan?
Speaker 1: Who does he have to sell the message to next? Well, really,
Speaker 1: the only people that he has to sell the message
Speaker 1: to is the Turkish public. Uh and the real risk
Speaker 1: for aer to one is that this incursion ends up
Speaker 1: being a more serious and protracted military conflict. UH. The
Speaker 1: Turks have now entered an area that had been controlled
Speaker 1: by this Syrian Kurdish fighting force known as the People's
Speaker 1: Protection Units. There's fighters aren't likely to take on Turkey directly,
Speaker 1: but engaged in more of a guerilla warfare. So for
Speaker 1: the moment, are One is riding high. He gave a
Speaker 1: very tough speech UH in Anchora not long ago. But
Speaker 1: if this operation unfolds and UH and and keeps Turkey
Speaker 1: in in Syria for a long period of time, he
Speaker 1: may run into some political problems. Stated. Can you explore
Speaker 1: where the EU stands on all of this? There was
Speaker 1: a threat from the Turkish president today to open the
Speaker 1: doors to the three point six million Syrian refugees. Who
Speaker 1: speaks for the EU at the moment, who's dealing with this? Well,
Speaker 1: this is a very important issue, and the and the
Speaker 1: presence of so many refugees in Turkey for which the
Speaker 1: European Union has been paying Turkey to keep them. There
Speaker 1: has been a point of leverage with President Air Juan
Speaker 1: every time the European Union or individual European states have
Speaker 1: grown critical of Airduan's domestic behavior. Uh, and he certainly
Speaker 1: has proven himself to be an authoritarian like many others
Speaker 1: in the region. Uh. He has threatened to open the doors.
Speaker 1: So uh, there's going to be a UN Security Council
Speaker 1: meeting today. THEU is going to meet and discuss this.
Speaker 1: He is warning them not to take a strong stance
Speaker 1: against Stephen Cooking. I'm so glad to bring this up.
Speaker 1: But John, Yes, exactly the right question. I, as the
Speaker 1: ignorant American, was close about the unique Germanic Turkish access.
Speaker 1: I began with sabelt Ka Kelly, the actress in Game
Speaker 1: of Thrones and her charity work in her Germany for
Speaker 1: the Turkish community. Let's go right there. How does Chancellor
Speaker 1: Miracle adapt and adjust to what President Trump has wrought? Well,
Speaker 1: this is something that the Europeans have been trying to
Speaker 1: deal with since the beginning of the Trump presidency. The
Speaker 1: decision to stand aside as the Turks rolled into Syria
Speaker 1: is one of those impulsive decisions that I think no
Speaker 1: one has really quite gotten used to. And the problem
Speaker 1: that is that it presents to the Europeans is that
Speaker 1: the resulting instability has an impact on European politics. UH
Speaker 1: Syrian refugees have been a flashpoint in European politics. There
Speaker 1: were Neo Nazis in Europe well before the conflict in
Speaker 1: Syria began in March two thousand eleven, but the presence
Speaker 1: of so many Syrian refugees who have traveled through Turkey
Speaker 1: on the way to Europe, particularly in Germany, has UH
Speaker 1: encouraged and provided fuel for the extreme right in Europe
Speaker 1: to make political gains. Stephen, there are so many different
Speaker 1: angles to explore around this story, the response from Europe,
Speaker 1: but also the response here in the United States. A
Speaker 1: real divide in the Republican Party now between the executive
Speaker 1: branch and senators, including Senator Lindsay Graham, an ally of
Speaker 1: the President, close out of the President introducing a bipartisan
Speaker 1: bill to sanction Turkey. Stephen, how do you see the
Speaker 1: US response evolving in the coming months and the separation,
Speaker 1: the division between the White House and Congress. It really
Speaker 1: is rather extraordinary that it has taken a Turkish and
Speaker 1: cruision and to herd them Syria to get the Democrats
Speaker 1: and the Republicans together, which I think demonstrates the depth
Speaker 1: of anger on Capitol Hill towards Turkey, once well regarded
Speaker 1: by almost everyone on Capitol Hill is a strategic partner
Speaker 1: of the United States, but this action has fueled concerns
Speaker 1: that UM, it will take the pressure off the Islamic State,
Speaker 1: which is regrouping and rebuilding, and will once again threaten
Speaker 1: the region in American interests in perhaps the United States. Uh.
Speaker 1: All that said, UH, it doesn't strike me that there's
Speaker 1: much that the Congress can view to prevent UH further
Speaker 1: Turkish action or the American or the Trump administration's tacit
Speaker 1: support for what the Turks are doing. Stephen Cooke too
Speaker 1: quickly here from your book False Dawn, Chapter two, Bread Freedom,
Speaker 1: Social Justice, Where will be the bread for the disrupted
Speaker 1: on the Turkish Syrian border? Where will that come from? Well,
Speaker 1: that is an extremely important question, and already aid groups
Speaker 1: have pointed out that much of this population is dependent
Speaker 1: upon international non governmental organizations and their work is being
Speaker 1: disrupted by UH this Turkish incursion. So people who are
Speaker 1: already quite vulnerable and once again finding themselves in an
Speaker 1: even more difficult situation. Stephen, we appreciate its on this morning,
Speaker 1: Stephen Cook of the Council and farm Relations. Cinia Fellow
Speaker 1: for Middle East and Africa Studies. Tell me a really original,
Speaker 1: unique situation that could end really quite badly. Now I'll
Speaker 1: get lots of talk about on trade with an esteemed
Speaker 1: equity guest, the mechanical engineer from Pennsylvania knows how to
Speaker 1: use a slide rule. David Pearl where this was epic
Speaker 1: Partner's David, I want to go to the ramcode deal
Speaker 1: just out what did they say, John, They're gonna now
Speaker 1: they're gonna announce a perspectus to give the green light
Speaker 1: for the world's biggest But we're only green lighting. It's
Speaker 1: not an I p O. It's a stub diliquefy am
Speaker 1: I right, David defined price. Ah right, It's just a
Speaker 1: way to monetize their holding because they're really not selling
Speaker 1: much the public. You're not any real ownership. But then
Speaker 1: you just described Silicon Valley. I mean Silicon Valley will
Speaker 1: put out what six eight of an equity A Ramco
Speaker 1: is putting out one to whatever within all you've seen
Speaker 1: in the last ninety days is a Silicon Valley Unicorn parade.
Speaker 1: Is it over? I do think it is over right
Speaker 1: now because the market is seeing a concern about companies
Speaker 1: continually losing money. These are companies that bleed free cash flow.
Speaker 1: They have to continue they have exactly, they have to
Speaker 1: go to market continually to stay in business. And the
Speaker 1: markets are getting a little leery of this. You're seeing
Speaker 1: that in numerous recent I p o s and bond offers.
Speaker 1: So we've got a bit of detail here, Tom, so
Speaker 1: let's go through it. The people involved in the deal. It's,
Speaker 1: according to our reporting here at Bloomberg, looking to sell
Speaker 1: two p of a RAM, which could raise forty billion.
Speaker 1: Now you can do the math on that. I'm just
Speaker 1: wondering how ambitious it is to sell two per at
Speaker 1: forty billion dollars, David. They've they've continually trying to value
Speaker 1: this company at two trillion, and I'm not sure the
Speaker 1: market wants to deal with that valuation. That that that
Speaker 1: it's the entire issue. So the smaller amount that they sell,
Speaker 1: the more likely they can keep the price higher because
Speaker 1: there isn't that much of a market looking at the
Speaker 1: rest of the energy stocks around COOS, that's such a
Speaker 1: premium if you do this, do you get the sense
Speaker 1: that this is a very original IPO and there could
Speaker 1: be some favors coult In here to support the valuation
Speaker 1: of this issue. Well, again, the the beauty of UM
Speaker 1: doing a traditional i p O is the placement and
Speaker 1: so finding some strong buyers and keeping the share size
Speaker 1: as small as you can will help. Can we back
Speaker 1: up and long ago and far away? In my ute,
Speaker 1: an i p O was what David eight percent of
Speaker 1: a company? Secent of a company. Maybe there's a little
Speaker 1: private stub off. I mean, John, we flipped this on
Speaker 1: its head. What you just said there I would have
Speaker 1: told you twenty years ago was impossible. Well, in fact,
Speaker 1: the usually the reason you would go public is because
Speaker 1: you're raising capital to grow. That's not the case in
Speaker 1: the one at all. This is about monetization of you know,
Speaker 1: the owners. And that's that's why I struggle with the
Speaker 1: valuation of this company because you know what the intent
Speaker 1: and the objective is of the Kingdom. They quite clearly
Speaker 1: see a top for this business if they want to
Speaker 1: sell it down. And if you're an investor looking at
Speaker 1: it knowing that that's what the Kingdom sees, why would
Speaker 1: you be a buyer of that story? Well, all I
Speaker 1: can say is it is a well run company. On
Speaker 1: the positive side, it is. It is for dividend for income.
Speaker 1: It will generate cash. But but again the valuation I
Speaker 1: can't really speak to because right now the comparables are
Speaker 1: much much lower that That is Ambre Horden's really smart
Speaker 1: interview yesterday Rochelle Oil John. She started with the dividend
Speaker 1: Shell has basically done nothing. I mean X on mobile
Speaker 1: tenures trailing three point one percent per year, you get
Speaker 1: a big US dividends? Shall you get John? Is six
Speaker 1: percent dividend? I mean shall should be on the real
Speaker 1: you and change almost six and a half percent? Is
Speaker 1: your is your dividend? Are we going to get the
Speaker 1: dividend for Mariam Coo? Would you suggest? I know, not
Speaker 1: there like yeah, I really doubt it's going to be
Speaker 1: that high. But the dividend is definitely one of the
Speaker 1: ways that they will be paying investors and themselves, So
Speaker 1: it makes sense to have a dividend, but it's not
Speaker 1: going to be as high as David. I want to
Speaker 1: talk about what's happening with the trade story as well,
Speaker 1: and on a single name issue, because I think this
Speaker 1: this week has really taken it from a global macro
Speaker 1: story from top down to a single name story with
Speaker 1: the likes of Activision, Blizzard, the likes of the NBA
Speaker 1: as well. These names the Walt Disney Company because of
Speaker 1: ESPN getting caught up in two completely different value systems.
Speaker 1: If you want to operate in the United States and
Speaker 1: you want to operate in China, to satisfy the consumers
Speaker 1: in the United States and simultaneously satisfy the state in
Speaker 1: China is becoming increasingly difficult. As a stock selector, a
Speaker 1: stock picker. How are you thinking about that at the moment, David?
Speaker 1: This is this is an incredibly complex area. We could
Speaker 1: talk about this for a while and I will tell
Speaker 1: you the question is if you run a company, who
Speaker 1: are you responsible to if it's creating value for your
Speaker 1: shareholders and owners or is it the stakeholders, including society
Speaker 1: at large, the customers. It's almost undoable right now because
Speaker 1: of the issues you just said that there's no way
Speaker 1: for a company to satisfy all their stakeholders. But as
Speaker 1: an investor, their duty is to create value for shareholders,
Speaker 1: and so they have to make an economic decision that's
Speaker 1: best for the company, no matter what the politics, and
Speaker 1: that is going to be very difficult in this environment
Speaker 1: and many of these companies flick the switch on that
Speaker 1: in the last couple of months and said that the
Speaker 1: shareholders no longer the number one priority. That was some
Speaker 1: news that came out led by the likes of JP
Speaker 1: Mork and I believe David, Do you believe that in
Speaker 1: the first place? And if that is to be true,
Speaker 1: if we're meant to take account of all the stakeholders
Speaker 1: in our business now as a business leader, how complex
Speaker 1: will it be to navigate two completely different markets the
Speaker 1: United States and China. Oh, it's going to be a
Speaker 1: much harder world to invest stint and to run a
Speaker 1: company in. I mean as a as a as a
Speaker 1: shareholder and investor. I'm going to make an economic decision
Speaker 1: on whether the company is doing the right thing for
Speaker 1: us as owners. But that does include to some degree
Speaker 1: these um, you know, stakeholder issues and you know, ethical
Speaker 1: political issues, epic partners, foundational sharp ratio, risk free rate.
Speaker 1: Where's the risk free rate right now? To three decimal points?
Speaker 1: It's pretty low. And actually this is this has been
Speaker 1: one of the scary things that has happened since QUEI
Speaker 1: started in and has almost restarted this year, that many
Speaker 1: companies back to the unicorns who probably shouldn't exist, can
Speaker 1: still raise money. And you know this is still concerning
Speaker 1: as a free cash flow investor because the law of
Speaker 1: economics is the competitor who is more profitable eventually wins.
Speaker 1: But now the person who can lose the most money
Speaker 1: can disrupt the profitable companies. Quickly walk through an example.
Speaker 1: You don't even have to mention the name of a
Speaker 1: company you got wrong. Where you looked at the free
Speaker 1: cashow it looked legitimate, and three or five years later
Speaker 1: you guys said, man, we mess that up. How do
Speaker 1: you get there? Yeah, it's usually because of some change
Speaker 1: in the market or competition. Um, we're pretty good about
Speaker 1: the profitability of the company's note issue. No, But as
Speaker 1: a disruptor, let's put it this way. Walt Disney was
Speaker 1: one of the most profitable companies, has been a great stock.
Speaker 1: Netflix disrupted the industry. It can lose. It's losing three
Speaker 1: and a half billion dollars this year and we'll lose
Speaker 1: more next year. Keeps reading your mind and has spent
Speaker 1: more money on content than even Disney had. Uh, and
Speaker 1: yet will never make money. But it is affecting Disney,
Speaker 1: and Disney now will have to invest a lot of money,
Speaker 1: basically hurt shareholder value to compete and they will, uh,
Speaker 1: they'll probably be successful as a matter of fact in
Speaker 1: the long term, but they've hurt shareholder value in the
Speaker 1: short Does ample change if they've got to get into
Speaker 1: content Paul Sweeney suggest that won't be nearly as profitable
Speaker 1: as the Apple combine. Oh, yeah, absolutely. I think Apple.
Speaker 1: Apple does want to transition to recurring revenue services, including content,
Speaker 1: but this is an area they don't have any competitive advantage,
Speaker 1: and to begin with, they're going to spend a lot
Speaker 1: of money, and once again, it does hurt shareholder value.
Speaker 1: In fact, that was one of the issues we had
Speaker 1: with Apple as a long term hold. Just to clear
Speaker 1: hit David, just to clean this up, because I think
Speaker 1: it's really really important if we do describe this era
Speaker 1: as the era of easy money, and some people might
Speaker 1: push aggressively back on that, but if this era came
Speaker 1: to a close and this very unique era of exceptionally
Speaker 1: easy money, and did you saying that some of these
Speaker 1: business models that have been established to the likes of
Speaker 1: the Walt Disney Company and others are getting involved in
Speaker 1: are ultimately unsustainable at this price level. That unsustainable business
Speaker 1: models well, for Walt Disney, they have the capital to
Speaker 1: survive this. It's just hurting near term profits and mid
Speaker 1: term profit Netflix. But for the disrupts like Netflix, this
Speaker 1: would be a disaster. Uh. They literally have to go
Speaker 1: to market at least once to twice a year to
Speaker 1: stay in business, and they have successfully done that, but
Speaker 1: that could come to an end. We're out of time
Speaker 1: doing the interesting stuff, Thank you, partners are in particularly
Speaker 1: untrade and the ramifications of China. It's the story. John
Speaker 1: and I are watching. What a session it was overnight,
Speaker 1: the market dropping on a report from the South China
Speaker 1: Morning Post suggesting that deputy level talks had gone poorly.
Speaker 1: The Chinese delegation may leave early. Then the market rallied
Speaker 1: on reports they will stay through Friday. Then we rolled over,
Speaker 1: then bounced back as Bloomberg report of the US may
Speaker 1: roll out a currency pack as part of a deal
Speaker 1: that could also suspend a planned tariff increase next week.
Speaker 1: The talks at a high level haven't even started yet.
Speaker 1: Equity futures all over the place right now. We are
Speaker 1: negative around about five points on the SMP five hundred,
Speaker 1: down a round about a tenth of one percent for
Speaker 1: the fetes view on all of this. I'm really pleased
Speaker 1: to say that we can now catch up with the
Speaker 1: Dallas FAT President Robert Kaplan alongside our colleague bloom Bugs
Speaker 1: Michael McKee. Thank you very much. We would like to
Speaker 1: welcome Rob Kaplan to Bloomberg Radio and Television worldwide. Thank
Speaker 1: you for joining us this morning. Thanks for being in Texas.
Speaker 1: As we noted just minutes ago, you released an essay
Speaker 1: on the economy and Monetary policy in which you say,
Speaker 1: at this juncture, having adjusted the policy rate twice this year,
Speaker 1: it is my intention to take some time to carefully
Speaker 1: monitor economic developments. It sounds like you're not convinced that
Speaker 1: you need to cut rates on OCT I'll withhold judgment
Speaker 1: until right before the meeting. I was supportive of the
Speaker 1: July cut, also was an advocate of the September cut,
Speaker 1: And the reason I was in favor of those cuts
Speaker 1: is I feel that decelerating global growth weakness and manufacturing
Speaker 1: weakness and business investment, there's a risk at those that
Speaker 1: those weaknesses may intensify and spread to other parts of
Speaker 1: the U. S economy, and I felt it was appropriate
Speaker 1: for us to take some action. Now that we've acted twice.
Speaker 1: I'm gonna withhold judgment here and take We've got about
Speaker 1: twenty days to the next meeting. I planned to take
Speaker 1: most of it to make a judgment. Well, you also
Speaker 1: say in your essay, I believe that moves in US
Speaker 1: market determined rates are consistent with concerns about economic weakness
Speaker 1: spreading more broadly to other parts of the US economy.
Speaker 1: Now market rates, particularly Fed funds futures, have priced in
Speaker 1: a rate cut. Do you have to ratify what the
Speaker 1: markets are thinking. No, the market rates are referring to
Speaker 1: our particularly particularly looking at the treasury curve, and and
Speaker 1: since the fall of two thousand eighteen, over the last year,
Speaker 1: the tenure treasury has gone from three and a quarter
Speaker 1: yield to high one fifties today, is about a hundred
Speaker 1: and sixty five basis point rally. It's a substantial rally.
Speaker 1: In that same time, the Fed funds rate has only
Speaker 1: moved down about fifty basis points at least since the
Speaker 1: beginning of this year. So we've had a substantial financial
Speaker 1: move in market determined rates. I think some of it
Speaker 1: is global liquidity, but some of it is increased pessimism
Speaker 1: about future growth, mainly due to trade tensions and and no,
Speaker 1: I don't. I don't think the Fed has to chase
Speaker 1: uh that move, but I think it did tell me
Speaker 1: that substantial move tell me that the setting of the
Speaker 1: FED funds rate was probably too tight in July and September.
Speaker 1: It may still be too tight, but that's a judgment
Speaker 1: I want to make as as we go through the
Speaker 1: next few weeks. Given the investors are so certain of
Speaker 1: a rate cut, do you risk maybe a reductive the
Speaker 1: taper tantrum if you don't ratify with it. So I
Speaker 1: think the one thing you've heard me say before, market
Speaker 1: expectations can change on a dime. UH. And I don't
Speaker 1: think my job is to satisfy the markets. It is
Speaker 1: to figure out whether we've got the right policy setting,
Speaker 1: particularly a setting that fosters you can I'm a growth also. UH.
Speaker 1: Other part of my job, by the way, is to
Speaker 1: call out it's not just monetary policy that has been
Speaker 1: a cause of this slowdown, and monetary more than monetary.
Speaker 1: Monetary policy is going to be needed if we're going
Speaker 1: to grow faster. And I'm talking about growing the workforce, UH,
Speaker 1: improving UH trade UH and de escalating trade tensions and
Speaker 1: also other moves on education, skills trained, and other things
Speaker 1: that would increase our ability to grow. The minutes of
Speaker 1: your September meeting show a discussion about whether to put
Speaker 1: something in the statement or publicly suggest when you would
Speaker 1: end this cutting cycle. Do we get something like that? Uh,
Speaker 1: I'm not necessarily sure that that's appropriate. I think when
Speaker 1: you start hearing people like me and others say I'm
Speaker 1: agnostic about whether we move from here, that would tell
Speaker 1: you that if nothing changes, we're gonna stay where we are.
Speaker 1: But but uh, I think we're We've got so much
Speaker 1: uncertainty and so much policy uncertainty. I think it would
Speaker 1: be wise for us not to over telegraph where we
Speaker 1: are in the in the cycle. I have said though,
Speaker 1: that I thought that this, uh, this cutting we're doing
Speaker 1: should be limited, restrained, and modest, and not the start
Speaker 1: of a full fledged cutting cycle. I still believe that
Speaker 1: well in your SAU note, as the Chairman did just
Speaker 1: a few days ago, that growth is being affected by
Speaker 1: slowing economies elsewhere and trade tensions in particular. So I
Speaker 1: have to ask a question I get asked all the
Speaker 1: time by people on Wall Street, what is the FED
Speaker 1: get out of cutting rates? Because We're not suffering from
Speaker 1: an aggregate demand shortfall here, how do you help? So?
Speaker 1: I do think when rates are this low UH fed
Speaker 1: funds cuts, maybe the marginal additional effect might be less
Speaker 1: than it would be if rates were higher credit conditions
Speaker 1: were tighter. But that doesn't mean that cutting the Fed
Speaker 1: Funds rate doesn't have an impact. It does. There's still
Speaker 1: a substantial number of borrowers that borrow based on the
Speaker 1: short term rate UH. And in addition, I've been concerned
Speaker 1: about the shape of the yield curve, particularly if the
Speaker 1: Fed Funds rate is above the tenure Treasury UH and
Speaker 1: there's a substantial gap it, it has a tendency to
Speaker 1: make it harder to bar short and lend long. And
Speaker 1: I think that if it was prolonged, would eventually cause
Speaker 1: a tightening and financial conditions. So sometimes when you're cutting rates,
Speaker 1: there is a short term positive economic effect, but there's
Speaker 1: also you have to look over the horizon, particularly UH
Speaker 1: as to whether you think there's some distortion in the
Speaker 1: curve that I think suggests our policy settings too tight. Well,
Speaker 1: you're not concerned about running out of ammunition when we
Speaker 1: do face it down town, I'm I'm, I'm worried about
Speaker 1: that argument, but I'd rather use ammunition when it matters most.
Speaker 1: And I've said a number of times, if we wait
Speaker 1: and withhold our ammunition and wait to see a broader
Speaker 1: slowing in the economy, I we wait for this slowing
Speaker 1: to reach the consumer, and then we have a more
Speaker 1: severe slowing, we will have waited too long, and that
Speaker 1: all the ammunition we have I don't think will be
Speaker 1: enough to arrest that slowing. I think moving modestly now
Speaker 1: gives us the best chance to avoid a more severe slowing.
Speaker 1: And that's why I want to use the ammunition now,
Speaker 1: even though yes, it means we'll have a little less
Speaker 1: ammunition for later. We're speaking with Robert Capitlan, the president
Speaker 1: of the Dallas Fed, on Blueberg Television and Radio worldwide.
Speaker 1: Dallas Fed specialty is trade. So given the fact that
Speaker 1: everybody is talking about that as the source of our problems,
Speaker 1: can you quantify what it means? Is it a headwind?
Speaker 1: Is it an anchor? If they reach some kind of deal,
Speaker 1: does the economy turn around? If they don't, does it tank?
Speaker 1: So here's the here's the confusing or vexcine thing about trade.
Speaker 1: If you just took the amount of goods we're talking
Speaker 1: about UH and and save visa v s in China
Speaker 1: and other countries, and multiplied the potential tariff on those goods,
Speaker 1: you'd say the impact on GDP growth in the the United
Speaker 1: States should be very modest. Here's there's a second order effect, though,
Speaker 1: we believe at the Dallas FT is far more substantial,
Speaker 1: and that's the impact of trade uncertainty on business investment
Speaker 1: UH and and on manufacturing. And what do I mean
Speaker 1: by that? UH. A lot of these trade relationships, particularly
Speaker 1: as I've mentioned before with Mexico, our our logistics supply
Speaker 1: chain relationships that are critical to the country U S.
Speaker 1: M c A isn't yet ratified. But the uncertainty we've
Speaker 1: had first good part of this year about trade with
Speaker 1: Mexico we think took the wind out of business investment.
Speaker 1: And this trade dispute with China, which we think is
Speaker 1: very appropriate. UH. Intellectual property rights, technology transfer mean more
Speaker 1: to us probably than the size of the trade deaf
Speaker 1: sit UH strategically, but the uncertainty about that relationship and
Speaker 1: UH and news of new events that occur every week
Speaker 1: or two that change the view on this, we we
Speaker 1: find are causing businesses to say let's just time out,
Speaker 1: let's just put business investment on hold. I'm not going
Speaker 1: to cancel it, but let's put on hold for this year,
Speaker 1: maybe all of next year. And that's why you're seeing
Speaker 1: business decon direct investments so weak. Now, that's not a
Speaker 1: huge part of g d P business direct investment, but
Speaker 1: if that slows, it can start to seep in to
Speaker 1: other parts of the economy. So it's the second and
Speaker 1: maybe the third order effects from trade uncertainty and trade
Speaker 1: tensions that I think have a more significant effect on
Speaker 1: the economy, which is harder to measure. It's time when
Speaker 1: businesses are planning for you suggest they're gonna stay on hold.
Speaker 1: So what we're seeing now, the kind of growth one
Speaker 1: point seven to is what we get. Our forecast for
Speaker 1: this year, at least for the second half of the
Speaker 1: year is one point seven Uh. Maybe it will be
Speaker 1: in that neighborhood for I'm not sure what we see
Speaker 1: that will make it better than say one or three
Speaker 1: quarters to two percent. Uh. And yeah, most businesses I
Speaker 1: talked to right now are want to stay nimble and
Speaker 1: they realize that there could be new policy pronouncements any time.
Speaker 1: And with that amount of uncertainty. They're not cutting back
Speaker 1: their business, but they're putting new projects on hold. And
Speaker 1: the other thing they're doing is watching very carefully if
Speaker 1: there's a broader slowing, and if there's a broader slowing
Speaker 1: they see saying the consumer, I think they're at least
Speaker 1: on their toes that they will take further action, and
Speaker 1: that would cause even a further slowing. So I think
Speaker 1: we're in a fragile period in here, which is why
Speaker 1: I'm glad the FED has taken some action in July
Speaker 1: and September. But I think this could go either way.
Speaker 1: We can avert a more severe slowdown, but I think
Speaker 1: the jury is out right now. In the minutes, UH,
Speaker 1: you've got a report on what happened with REPO, because
Speaker 1: it's been just a day or two before you met UH,
Speaker 1: and yet you didn't discuss what to do. The chairman
Speaker 1: this week said you've reached some decisions that you're going
Speaker 1: to move forward. So did you have a conference call
Speaker 1: or something in between and make decisions and set things up.
Speaker 1: So I'm not going to disclose things that haven't been
Speaker 1: publicly disclosed, other than to say UH, at the time
Speaker 1: of the f o MC meeting in September, we announced
Speaker 1: these daily repo facilities, and just for people who are listening,
Speaker 1: what that basically does is helped distribute a repo across
Speaker 1: the system, i e. If big banks aren't lending their
Speaker 1: reserves and overnight in the overnight funding markets, a standing
Speaker 1: repo facility or an over daily repo facility has the
Speaker 1: purpose of getting rid of those frictions. So we've been
Speaker 1: doing that every day. We are having more deliberations. I
Speaker 1: don't want to foreshadow those, but we'll be making some
Speaker 1: announcements in the very near future, not just about REPO,
Speaker 1: but also about increasing the size of our balance sheet
Speaker 1: in a way that improves the reserve levels UH, especially
Speaker 1: in light of increase US Treasury issuance, tax payments, and
Speaker 1: other frictions that we're seeing. So I think that we
Speaker 1: believe and I believe there's a need to do both
Speaker 1: REPO and increase the size of the balance sheet to
Speaker 1: some extent in order to raise the reserve levels. And
Speaker 1: and UH and and we've lost reserve since early September,
Speaker 1: mainly because of tax payments and because the Treasury issuance.
Speaker 1: We need to restore some of what we've lost. J
Speaker 1: Pal said you're not allowed to finish your interviews without saying,
Speaker 1: but it's not que it's not quee uh. And he's
Speaker 1: right to say that, and it's and it's it's correct
Speaker 1: that that's not the case because we're just buying bills.
Speaker 1: If we do this, whatever we announce will just be
Speaker 1: buying bills, whereas QI historically has been buying securities out
Speaker 1: along the curve in order to lower those term rates
Speaker 1: in order to incentivize maybe mortgage lending and risk taking.
Speaker 1: This will be just related to bills and primarily targeted
Speaker 1: the overnight funding markets and making sure we can appropriately
Speaker 1: set the FED funds rate in the target range. Probert Camplin,
Speaker 1: thank you very much for joining us this morning. Thanks
Speaker 1: from the Dallas Fed. We'll send it back to you.
Speaker 1: I my great work. As always splinder set it sitting
Speaker 1: down with the Dallas FED President, Mr Robert Camplin. Thanks
Speaker 1: for listening to the Bloomberg Surveillance podcast. Subscribe and listen
Speaker 1: to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform
Speaker 1: you prefer. I'm on Twitter at Tom Keane Before the podcast,
Speaker 1: you can always catch us worldwide. I'm Bloomberg Radio eight