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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Always

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Speaker 1: with Michael McKee. Daily we bring you insight from the

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Speaker 1: best in economics, finance, investment, and international relations. Find Bloomberg

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Speaker 1: Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course,

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Speaker 1: on the Bloomberg. Michael McKee is near the Bay of Fundy.

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Speaker 1: He's like in another time zone. He's so Canadian in Maine.

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Speaker 1: He's at Camp Kotak, of course, and his first interview

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Speaker 1: is an important interview. Here's Michael McKee with a guy

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Speaker 1: formally at the Atlanta Fed and now with Cumberland Advisors,

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Speaker 1: Robert Eisenbeiss on Jobs Bob. The jobs report on Friday.

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Speaker 1: How key is it to a FED that seems to

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Speaker 1: be unsure about whether they want to raise rates or not. Well,

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Speaker 1: I think they would like to see a positive number,

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Speaker 1: a bigger number, more consistent with what they saw the

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Speaker 1: most recent release, as opposed to the thirty eight thousand.

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Speaker 1: I think that will provide at least some sense then

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Speaker 1: of what momentum looks like in the marketplace for jobs,

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Speaker 1: because that's such a critical element of what they're concerned

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Speaker 1: about in assessing the growth prospects for the economy, particularly

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Speaker 1: on the heels of the slow growth number that came

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Speaker 1: out for the second quarter. Do you believe that second

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Speaker 1: quarter number, Well, it's not three uh, and it's not

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Speaker 1: likely to be revised up to three uh. So you know,

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Speaker 1: we've had three quarters in a row now where the

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Speaker 1: number has been below two. In fact, hardly bigger than one.

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Speaker 1: And so uh. You know, I think that's a source

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Speaker 1: of concern when you're looking at momentum in the economy.

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Speaker 1: I don't see the kind of growth that some people

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Speaker 1: seeing in the third quarter, particularly when you look at

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Speaker 1: corporate earnings and some of the other numbers that have

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Speaker 1: come out in the meantime. Well, the bizarre thing was

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Speaker 1: that consumer spending was four percent, and so how do

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Speaker 1: you square that with a slowing economy? Well, I understand that,

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Speaker 1: but a good port some portion of that consumer spending

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Speaker 1: came out of uh savings and not out of income,

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Speaker 1: and so that probably can't be sustained. And when you

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Speaker 1: put that together with the automobile numbers, which were pretty

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Speaker 1: dismal for the last month, that says the consumer really

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Speaker 1: has pulled back on one of the big purchases that

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Speaker 1: have been driving UH and been a significant component of

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Speaker 1: consumer spending the last several months. We'll bring it back

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Speaker 1: to jobs. Everybody's going to be looking at the wage component.

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Speaker 1: What are you expecting If the economy is growing slowly

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Speaker 1: and if the number is in fact what it appeared

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Speaker 1: to be, then I don't see a lot of opportunity

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Speaker 1: for a significant gaining wages. The thing about the wage

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Speaker 1: number is the aggregate number is one thing, but when

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Speaker 1: you look at particular sectors, it's the skilled workers that

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Speaker 1: are getting the increases, not the people who are essentially

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Speaker 1: in the service sectors where most of the jobs are

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Speaker 1: being created. So you know there's a gap there between

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Speaker 1: what's happening in the service sector, the low productivity kind

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Speaker 1: of jobs. Those people aren't getting the wage increases, and

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Speaker 1: that's a huge proportion of the job gains that we've seen.

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Speaker 1: So the Phillips curve doesn't hold at this point. I

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Speaker 1: don't think it ever held, to be honest with you.

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Speaker 1: I think it may have been a statistical relationship at

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Speaker 1: one time, but it hasn't been a reliable indicator for

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Speaker 1: any particularly I have a basic fundamental problem and thinking

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Speaker 1: that inflation is a real side phenomenon. So the idea

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Speaker 1: that labor markets get tight, that wages are built up,

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Speaker 1: then people have to pass those wages on in the

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Speaker 1: form where's money in this equation, I'm sort of followed

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Speaker 1: Milton Freeman, who thinks that uh, money, too much money

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Speaker 1: chasing too few goods is where you get inflation. Inflation

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Speaker 1: is not a real side phenomenon. Well, that's an interesting

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Speaker 1: observation in a time when the FED is in theory

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Speaker 1: trying to pump money into the economy, but is basically

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Speaker 1: just boosting reserves, not cash exactly. And there's some interesting

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Speaker 1: nuances there when you think that the reserves are in

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Speaker 1: foreign institutions. Uh. And because of the fact that they

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Speaker 1: can get a ninety basis point differential as opposed to

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Speaker 1: holding reserves at a negative rate in in their central

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Speaker 1: bank in Europe or in Japan, or a positive fifty

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Speaker 1: basis points in the US, that really essentially means that

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Speaker 1: they want to hold reserves at the FED the only

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Speaker 1: account for nine of the depart it. So uh and

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Speaker 1: you put together that together with the fact that those

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Speaker 1: reserves meet the liquidity coverage ratio constraints, they have a

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Speaker 1: big incentive just to hold those reserves, and they're being

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Speaker 1: sterilized by the combination of the fact that they're not

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Speaker 1: significant players in the US, You've got the zero interest

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Speaker 1: rate policy going on in the rest of the world,

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Speaker 1: and you've got this regulatory phenomena with liquidity coverage ratio

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Speaker 1: to put a premium on assets like US treasuries and

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Speaker 1: deposits at the FED. So, bottom line, you come back

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Speaker 1: to it, do you maybe have a four point eight

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Speaker 1: four point seven unemployment rate, you're close to full employment,

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Speaker 1: But do you get any signs out of the jobs

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Speaker 1: report that the other part of the Fed's mandate, inflation

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Speaker 1: is starting to rise. Well, if you look at where

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Speaker 1: the PC is, and some people get confused, they think

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Speaker 1: it's the core PC, it's not the core PC, which

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Speaker 1: is the Fed's target, it's the headline numbers. You will

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Speaker 1: know that's down at under one at this juncture, and

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Speaker 1: there's not a lot of momentum coming from that side

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Speaker 1: of the equation at this point. I did find it

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Speaker 1: interesting on the ride up here to hear that the

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Speaker 1: unemployment rates in a number of the major cities in

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Speaker 1: Maine are three are lower substantially below even the national rate.

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Speaker 1: I was quite surprised to hear that one of the

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Speaker 1: last question, because Tom wants to know what kind of

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Speaker 1: fish do you think you're gonna be able to catch

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Speaker 1: this weekend. I'm going to catch every kind that's out here.

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Speaker 1: That's my that's my goal. I want to catch a

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Speaker 1: salmon again. I want to catch a lake trout if

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Speaker 1: we can. But I think if we can get some

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Speaker 1: good white perch to eat, I think that will satisfy

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Speaker 1: the Alright, Tom, there you go, bye byes and advice

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Speaker 1: from Cumberland Advisors. We're working to triangulate our satellites. One

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Speaker 1: A pos In of the Peterson Institute. Yes, this has

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Speaker 1: been an historic day and an important day. Adam Posen

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Speaker 1: on June seven, within the shock and awe and debris

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Speaker 1: of Brexit, spoke at the ls OF after the referendum.

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Speaker 1: Now what, Dr Posen, did we get the now what?

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Speaker 1: This morning? We got some of the now what? We

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Speaker 1: got the immediate now what, which is, as every reasonable

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Speaker 1: economist thought, and as the Carney in the NBC rightly forecast,

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Speaker 1: this is a huge negative shock to the to the

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Speaker 1: UK economy and in the short run you're going to

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Speaker 1: be having a recession. The Bank of England is forecasting

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Speaker 1: they narrowly dodge in recession because of what the stimulus

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Speaker 1: they did today. I hope they're right. I think you're

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Speaker 1: still going to get a little bit of a recession.

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Speaker 1: But you know, this is the short term impact. The

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Speaker 1: long term impact, which you've been covering, is about the

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Speaker 1: change in British fundamentals about their access to markets, their competitiveness. So,

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Speaker 1: as Governor Carney acknowledged, this is only a out off

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Speaker 1: setting some of the panic and uncertainty. Now, it's not

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Speaker 1: going to change the fundamentals. Buried in any intermediate macrobook

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Speaker 1: is the guestimate, the probability, the fan distribution of these

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Speaker 1: moving parts today, without question, the mystery is the future

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Speaker 1: inflation path that Governor Karney's gonna have to enjoy. People

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Speaker 1: cautious would suggest we may see more or higher inflation

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Speaker 1: than what b o E laid out today. What is

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Speaker 1: the risk of higher inflation which gives you higher nominal

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Speaker 1: g d P, which gives guys like you a struggle,

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Speaker 1: gives a central bankers a struggle because in the end

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Speaker 1: you have this sort of chasing your tail. If inflation

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Speaker 1: expectations are well anchored, as you've heard the phrase meaning

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Speaker 1: that when stuff happens in the short term, the long

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Speaker 1: term financial market and the household expectations do not shift,

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Speaker 1: so like when you can get away with easier policy.

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Speaker 1: So like, while I was on the MPC in two

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Speaker 1: thousand and two thousand and eleven, inflation and UK temporarily

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Speaker 1: shot up to five percent. But I and a few

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Speaker 1: others said, look, everybody knows that said Barry, we can

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Speaker 1: do soft policy. It's not going to hurt inflation coming down,

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Speaker 1: and it didn't. The trick for the Bank of England

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Speaker 1: for the MPC this time through is this is such

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Speaker 1: a fundamental shift in the way the UK is being

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Speaker 1: run and its economic prospects and the readjusting the currency

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Speaker 1: may be permanent or at least lasting, that you you

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Speaker 1: may see a higher inflation passed through. So this this

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Speaker 1: could mean, I mean, you know, the governor references as

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Speaker 1: you you know, this could mean that you know, a

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Speaker 1: year or two down the road, inflation is well over target.

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Speaker 1: And this is why I had said earlier. You know,

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Speaker 1: I thought they might be hesitant to cut and they

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Speaker 1: may have to reverse themselves. But you know, reversing yourself

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Speaker 1: is not the worst thing in the world. On this

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Speaker 1: super Thursday. We're talking with Adam posing He is the

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Speaker 1: president of the pe An Institute for International Economics. And

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Speaker 1: if you'll indulge me for a moment here, Tom, I

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Speaker 1: want to note the pressions of one William fitz Simmons,

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Speaker 1: and name that will be familiar to many of our

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Speaker 1: listeners on Bloomberg twelve dred in Boston. He's, of course

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Speaker 1: the long time director of admissions at Harvard College, and

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Speaker 1: back in three when he was sifting through applications, he

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Speaker 1: flagged to accept both Adam Posen and Mark Karney admitted

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Speaker 1: them to the class of eight at Harvard College. Marcarney

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Speaker 1: economics concentrator at imposing government concentrator. And it's great to

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Speaker 1: have you with us. Let me the differences. Karney got

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Speaker 1: a real job. Yeah, Carney is much more ready for

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Speaker 1: prime time than I am. And he also played hockey

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Speaker 1: and I was just a nerd in them in the dorm.

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Speaker 1: You've met it Winder from time to time. So Bill

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Speaker 1: picks better with Carney. Thanks for that. Let me let

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Speaker 1: me ask you just about the context we got from

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Speaker 1: Governor Carney today. He said that this is a response

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Speaker 1: that will make this process of negotiation, transition, ultimately breaktit

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Speaker 1: is going to make it more likely to be a success.

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Speaker 1: This this was the context in which this decision was made.

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Speaker 1: Talk about the case that he made two reporters there

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Speaker 1: after the release of this new policy today, I think

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Speaker 1: Governor Arney in the NPC had a very good case

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Speaker 1: to make because they got it broadly right. They said, look,

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Speaker 1: we're not making any specific predictions about what the nature

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Speaker 1: of the U e U UK deal will be on trade.

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Speaker 1: We're just assuming it's going to be less free trade

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Speaker 1: than it was, and we're assuming there's going to be

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Speaker 1: uncertainty dragging down investment in a huge range of industries

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Speaker 1: and companies, which is absolutely reasonable. And they said rightly

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Speaker 1: that we have to get out in front of this

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Speaker 1: because the decline in all the forward looking indicators is

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Speaker 1: as bad or worse than what we saw No. Eight

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Speaker 1: as a question of change, not not level, and again

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Speaker 1: that's absolutely right. And then the third thing that they

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Speaker 1: did that Kearney I think was very strong on. Governor

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Speaker 1: was Carney was very strong on rightly so. And I

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Speaker 1: used to say the same thing too much less effect

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Speaker 1: when I was there. If you can't whine about what

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Speaker 1: happens to small savers interest rates or two small banks profitability,

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Speaker 1: or even large banks profitability, because what you're facing is

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Speaker 1: putting millions of people out of work, and what that

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Speaker 1: does not only to those people in the economy, but

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Speaker 1: what that does ultimately to asset price values through a

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Speaker 1: number of channels, including the political channel, is much worse

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Speaker 1: for savers than if you don't act so on all

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Speaker 1: these key issues. I think the governor set out what

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Speaker 1: the NPC was doing, and they were right. There are

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Speaker 1: some things on the operational side where I'm not sure

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Speaker 1: they did the best they could, but that second order,

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Speaker 1: they did the right thing. Dr Posen, you mentioned earlier

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Speaker 1: the idea that they can always reverse This brings up

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Speaker 1: this this interesting word asymmetric to review. The Bank of

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Speaker 1: Japan got bold raised rates I'm gonna say fifteen years

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Speaker 1: ago and got crushed, and they had with great humility,

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Speaker 1: they had to lower rates again. Now this is the opposite, Carnie.

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Speaker 1: He is lowering rates and he has a luxury of

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Speaker 1: raising them, you know, etcetera. Help help me here with

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Speaker 1: that asymmetry that he faces. Now it's a really good point, Tom.

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Speaker 1: There's a certain amount of gamesmanship, and I know you

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Speaker 1: didn't mean this way. I don't want to think of

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Speaker 1: it as sort of like people are playing in a

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Speaker 1: round track exactly exactly. I know you meant it that way.

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Speaker 1: I just want to be clear because you know, any

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Speaker 1: time central bank makes an announcement on pop monetary policy,

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Speaker 1: and it doesn't matter if you're at the zero or

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Speaker 1: bound or not, although it's exacerbated when you're this close

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Speaker 1: to zero. There's always a question of, well, they're doing something.

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Speaker 1: A are they doing that because the forecast is so

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Speaker 1: much worse than we thought, and so therefore it's more

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Speaker 1: a bad news message than a good news message. And

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Speaker 1: be they're doing something? Is this all they can do?

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Speaker 1: What are they going to do next? And again those

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Speaker 1: two questions are inevitable for markets and from expectations, but

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Speaker 1: you've got to try to figure out how to manage something.

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Speaker 1: So will your example the Bank of Japan was it

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Speaker 1: is actually in terms of form is the same, but

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Speaker 1: it's actually very different because they just fundamentally blew the forecast.

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Speaker 1: Let me go, no, I I just because of time, Adam,

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Speaker 1: I think this question is so important to Anna Schwartz,

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Speaker 1: to Milton Freeman, to Richard Timberlake of the Georgia School.

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Speaker 1: The the idea here of the courage and will to

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Speaker 1: get out front is what we saw today, the most

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Speaker 1: ex ante call you've ever seen in central banking versus

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Speaker 1: what everybody does is go ex post and wait for

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Speaker 1: the fact to occur. It's up there, and you're again

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Speaker 1: you're right to frame it in the way that Freedman

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Speaker 1: and Schwartz did in terms of the US FED failing

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Speaker 1: to get out ahead of the Great Depression. Um, it's

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Speaker 1: up there and it's it gives one hope, not just

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Speaker 1: about the Bank of England, but the people really have

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Speaker 1: learned something from the crisis. Adam Posing, thank you so much,

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Speaker 1: an historic day. Really appreciate Dr posens a continued intelligence

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Speaker 1: in um humility, David Girth that he brings to this

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Speaker 1: mystical alchemy and art. The Bank of England has made

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Speaker 1: a decision. It has reverberated around the world, including Mark

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Speaker 1: Kearney's Canada almost to Canada's Michael McKee with a set

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Speaker 1: of economists and as Mike said to me this morning,

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Speaker 1: they are absolutely riveted on the ramifications of Bank of

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Speaker 1: England to the United Kingdom and also to the rest

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Speaker 1: of the world. Here's Michael McKee in conversation with Megan mccartell.

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Speaker 1: Your initial reaction to the Bank of England decision. The

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Speaker 1: Bank of England absolutely had to cut rates, otherwise markets

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Speaker 1: would have been massively disappointed. UM. But expanding kiwie and

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Speaker 1: buying corporate bonds in particular I don't think will help

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Speaker 1: a whole lot UM. Much like the e CBS, Bank

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Speaker 1: of England can't do much about the credit demand problem UM,

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Speaker 1: and so I think that's so much bigger issues than

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Speaker 1: the credit supply problem, particularly for corporates. What about the

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Speaker 1: idea that three members dissented from the corporate bond buying

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Speaker 1: I think that might be part of what's behind it.

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Speaker 1: I mean, corporate borrowing costs are already pretty low in

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Speaker 1: the UK UM. And what's more, actually corporates are borrowing

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Speaker 1: straight from banks through loans rather than issuing debt in

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Speaker 1: the markets for the most part anyhow, So I don't

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Speaker 1: think they're expanding kiwi UM will help a whole lot.

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Speaker 1: I think of funding for lending scheme might have been

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Speaker 1: a lot more useful, and that might be what's behind

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Speaker 1: those three dissensions. Well, do you think that this is

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Speaker 1: basically Carney throwing the kitchen sink at things to sort

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Speaker 1: of psychologically overwhelm the market. That could be it. He

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Speaker 1: also announced term lending, which could help a bit in

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Speaker 1: terms of passing on the rate cut from the banks

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Speaker 1: to the end user to some degree. But you know,

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Speaker 1: he could have done a lot more. I think of

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Speaker 1: funding for lending scheme would have been more useful. But

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Speaker 1: maybe he's holding something back for the next time around. Well,

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Speaker 1: they did say that they expect another cut by the

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Speaker 1: end of the year, and their forecasts are based on

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Speaker 1: just a ten basis point base rate by the end

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Speaker 1: of the year. Yeah. Their GDP forecasts um include growth though,

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Speaker 1: and I think that that's probably pretty optimistic. So I

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Speaker 1: think that the Bank of England will end up having

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Speaker 1: to do more than they're currently expecting. Your call would

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Speaker 1: be for a recession. Yeah, I think the UK will

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Speaker 1: be in recession next year, probably not this year, but

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Speaker 1: I don't expect growth of two percent this year like

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Speaker 1: the Bank of England. Now, they're also reasonably optimistic about

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Speaker 1: keeping the inflation rate up. You think they get a

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Speaker 1: boost from the pound falling. They might get a slight boost,

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Speaker 1: but you know, inflation has been incredibly difficult UM to

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Speaker 1: find anywhere UM, particularly in the Western world, and I

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Speaker 1: don't think that the UK is probably going to be

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Speaker 1: immune from that. Now, what do you think overall of

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Speaker 1: the British economic outlook after Brexit? UM. I think that

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Speaker 1: post Brexit, actually it might look a little bit less

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Speaker 1: bad than it currently does, just because there's so much

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Speaker 1: uncertainty right now. So I don't know why anyone would

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Speaker 1: invest in the UK given that it's completely unclear what

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Speaker 1: their rights to the company would be investing there. So

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Speaker 1: you might get a little bit of a bounce back

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Speaker 1: once we figure out what bredsit actually looks like. UM.

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Speaker 1: But no matter what, I think it will be a

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Speaker 1: headwind on the economy. I think that whatever deal the

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Speaker 1: UK ends up with UM, and it will probably be

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Speaker 1: a free trade agreement in my view, UM, it won't

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Speaker 1: be quite as good as the deal that the UK

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Speaker 1: had as any member. So at this point would a

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Speaker 1: fiscal measure help the British economy? Yeah, in the UK

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Speaker 1: as everywhere else, the fiscal stimulus will help and I

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Speaker 1: think we'll probably get that UM in the autumn budget,

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Speaker 1: so it'll be a couple more months. But UM I

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Speaker 1: do think that will come through UM and that would

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Speaker 1: be a boon to the economy. But an economy that's

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Speaker 1: facing massive headwinds, how much of a boost can they get.

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Speaker 1: You still see recession even if they're adding fiscal stimulus YEP.

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Speaker 1: I think even with a fiscal stimulus, which I do expect, UM,

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Speaker 1: the hit to investment UM and also to consumer demand

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Speaker 1: just based on confidence will overwhelm that. So I still

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Speaker 1: think the UK will go into a session. You've been

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Speaker 1: watching the Monetary Policy Committee for years? How do you

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Speaker 1: grade Mark Arney and his handling of UH pre Brexit

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Speaker 1: and post Brexit? I think Mark Arney, I mean he

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Speaker 1: hasn't had to do a whole lot. The Bank of

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Speaker 1: Indian has kept rates exactly where they were up until today,

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Speaker 1: you know, for years. UM. I think mccarney's had a

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Speaker 1: lot of difficulties with Ford guidance. I think he's had

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Speaker 1: a lot less success than say Jenny Yellen. UM. I

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Speaker 1: was surprised that he didn't actually act right after Brexit,

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Speaker 1: that he waited to see what the impact of the

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Speaker 1: Brexit referendum on the economy was before he went in

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Speaker 1: and acted. UM. And I think he'll have to do more.

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Speaker 1: So I think this might help on the margins, but

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Speaker 1: it's certainly no silver bullet. Well is he basically the

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Speaker 1: only one standing between Britain and the deluge as it were?

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Speaker 1: Absolutely I think um. For a while he was also

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Speaker 1: the only political leader we had in the UK UM

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Speaker 1: as the Leave campaign's leadership all sort of crumbled and

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Speaker 1: so Mark Kearney has been the only leadership that the

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Speaker 1: UK has had. Now, of course there's a new Prime Minister,

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Speaker 1: so that's helped UM. But he's certainly well trusted UM

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Speaker 1: and that you know, credibility is the currency of central bankers,

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Speaker 1: so that will certainly help. Does he stay on? I

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Speaker 1: think he will. Yeah, I think he'll stay on. UM.

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Speaker 1: We all hope he stays on. At least Megan Green,

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Speaker 1: I said Megan mccartell, I mixed my Megan's up. Excuse me,

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Speaker 1: Megan mccartell a blow review. Uh And and I got

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Speaker 1: that rom Megan Green with manual life, with a terrific

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Speaker 1: background and David what's great about her. She's got the

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Speaker 1: London rather United Kingdom education, so she really has an

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Speaker 1: interesting manual life Canadian thing going, the Johnny Hancock thing

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Speaker 1: going in Boston and also her foundation in England, so

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Speaker 1: she's really something to talk to her. She's been back

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Speaker 1: and forth across the across the Pond a number of times.

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Speaker 1: I've talked to her through the years, and just an

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Speaker 1: incredibly great resource. Thanks for listening to the Bloomberg Surveillance podcast.

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Speaker 1: Subscribe and listen to interviews on iTunes, SoundCloud, or whichever

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Speaker 1: podcast platform you prefer. I'm on Twitter at Tom Keane,

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Speaker 1: Michael McKee is at Economy Before the podcast. You can

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Speaker 1: always catch us worldwide. I'm Bloomberg Radio