WEBVTT - U.S. Markets Are Ignoring Risks, Yale's Roach Says 0:00:00.120 --> 0:00:02.920 Brought you by Bank of America Mary Lynch. Investing in 0:00:03.000 --> 0:00:07.800 local communities, economies and a sustainable future. That's the power 0:00:08.080 --> 0:00:12.360 of global connections, Mary Lynch, Pierce Fenner and Smith Incorporated 0:00:12.760 --> 0:00:27.400 member s I p C. Welcome to the Bloomberg Surveillance Podcast. 0:00:27.840 --> 0:00:31.520 I'm Tom Keene with David Gura. Daily we bring you 0:00:31.560 --> 0:00:36.600 insight from the best in economics, finance, investment, and international relations. 0:00:37.000 --> 0:00:41.600 Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and 0:00:41.680 --> 0:00:49.120 of course, on the Bloomberg We've been aving this morning 0:00:49.120 --> 0:00:53.680 a spirited discussion with Stephen Roach of Yale University his 0:00:53.800 --> 0:00:56.760 wonderful book The Next Asia Francine. Why don't you jump 0:00:56.800 --> 0:00:59.080 in here with Dr Roach? I was you know, I 0:00:59.120 --> 0:01:01.960 guess got so much FaceTime with him on television. Why 0:01:01.960 --> 0:01:04.160 don't you lead it off here this morning? Oh? Thank 0:01:04.200 --> 0:01:07.080 you so much, Tom. Gentlemen, Tom, Stephen Roaches want to 0:01:07.120 --> 0:01:09.640 hear once a year. I'm going to take advantage of 0:01:09.680 --> 0:01:12.240 the Stephen Roach. Um. It was great to speak to 0:01:12.280 --> 0:01:15.319 you on TV a little bit earlier from Yale University, 0:01:15.360 --> 0:01:18.160 from our uh Morganstown. They give me a sense of 0:01:18.200 --> 0:01:20.960 what you're seeing out there that the market is miss pricing. 0:01:21.520 --> 0:01:23.679 So we're seeing a little bit of movement on yield's 0:01:24.000 --> 0:01:27.600 political concerns, We're seeing a little bit of dollar movements 0:01:27.720 --> 0:01:30.759 up higher, and yet we don't really have the economic 0:01:30.840 --> 0:01:35.240 plan of President Trump yet. Well you're getting close, Francine. 0:01:35.280 --> 0:01:41.920 I mean, the markets are ignoring, possibly miss pricing or 0:01:41.959 --> 0:01:47.119 possibly brilliant in being able to anticipate what these policies 0:01:47.200 --> 0:01:51.040 are going to look like. And there's there's a fair 0:01:51.080 --> 0:01:56.560 amount of uncertainty that will be resolved in the in 0:01:56.600 --> 0:02:01.840 the next few months over the direction of fiscal policy, 0:02:02.080 --> 0:02:07.480 which is very very important for the market outlook, but 0:02:07.600 --> 0:02:13.160 for this whole um complex of geopolitical, global trade and 0:02:13.520 --> 0:02:20.000 political shifts that are at risk I think of coming 0:02:20.000 --> 0:02:23.840 into focus, uh in a way that leads to a 0:02:23.919 --> 0:02:29.600 very disturbing conclusion for the global economy and the markets 0:02:29.639 --> 0:02:33.960 that ultimately will be shaped by the global economic backdrop. So, 0:02:34.720 --> 0:02:38.160 you know, markets are it's a one way bet right 0:02:38.200 --> 0:02:43.760 now in terms of US equities, the dollar, and implications 0:02:43.880 --> 0:02:49.120 for other major currencies around the world. Uh. And uh, 0:02:49.320 --> 0:02:53.639 you know, the history of markets suggests that one way 0:02:53.720 --> 0:02:59.960 bets don't always end in a particularly easy fashion. Why Mark, 0:03:00.000 --> 0:03:02.200 It's largely ignoring all the risks out there at the moment. 0:03:04.600 --> 0:03:08.840 It's um you know, it's it's a study in human 0:03:08.880 --> 0:03:13.760 behavior of belief in um. Uh. You know, the message 0:03:14.639 --> 0:03:19.920 as opposed to the reality. We've had a real political 0:03:20.000 --> 0:03:25.280 upheaval in the United States, followed by similar uh disruptive 0:03:25.280 --> 0:03:30.880 political events in the UK and potentially in in in Europe. 0:03:31.639 --> 0:03:36.000 Uh and uh. As those political upheavals sort of shatter 0:03:36.040 --> 0:03:38.480 our view, the markets want to say, wait, oh, wait 0:03:38.480 --> 0:03:41.600 a second. You know the guy is pro growth and 0:03:41.720 --> 0:03:44.160 growth is good, and you know we'll but we'll buy 0:03:44.200 --> 0:03:49.800 growth and uh, you know, it's a it's a knee jerk. Ultimately, 0:03:49.880 --> 0:03:54.360 I think an overly simplistic assessment of the prospects that 0:03:54.400 --> 0:03:56.600 are out there. Is it a guilded age? And do 0:03:56.640 --> 0:03:58.600 you see any end of the guilded age? I go 0:03:58.640 --> 0:04:01.120 back to the backdrop. The president has that bright gold 0:04:01.160 --> 0:04:03.440 back drop. I know we got that idea from you 0:04:03.480 --> 0:04:06.800 when you used to give press conferences in China. But 0:04:07.840 --> 0:04:11.960 the idea of a gilded age gold back dropper or others, 0:04:12.240 --> 0:04:13.840 how do you get out of that? How did we 0:04:13.880 --> 0:04:16.680 get out of the first guilded age? I believe we 0:04:16.680 --> 0:04:20.080 did it with the war. Yeah again, Tom, You know, 0:04:20.160 --> 0:04:24.680 these periods of excess don't always uh, and in a 0:04:25.279 --> 0:04:31.960 in a rather comfortable way given given the widening income 0:04:31.960 --> 0:04:36.359 and equalities, the polarization society and political systems, there's a 0:04:36.360 --> 0:04:40.359 lot of tension that is building right now. Uh. And 0:04:41.720 --> 0:04:45.320 you you combine that with a theme we talked about 0:04:45.400 --> 0:04:52.479 on television this morning, this um America first emphasis on protectionism, 0:04:52.720 --> 0:04:58.680 and it does have some unfortunate antecedents in a in 0:04:58.720 --> 0:05:01.080 a darker period. It in our his from the talk 0:05:01.080 --> 0:05:03.800 of the moment, and folks well deserved. I can't say 0:05:03.920 --> 0:05:09.640 enough about commentary magazine Nicholas Eberstat, where he talks about 0:05:09.680 --> 0:05:13.440 the cultural fabric Steve Roach of America, even going into 0:05:13.440 --> 0:05:17.760 our new reduced life expectancies ever so slightly there. I 0:05:17.760 --> 0:05:21.120 don't want to overplay that the opioid crisis that that's 0:05:21.120 --> 0:05:25.240 so much of America is facing. Is it a miserable 0:05:25.360 --> 0:05:31.880 century that we're in? Well, you know, I've certainly been 0:05:31.880 --> 0:05:37.560 accused of being um from time to time, overly negative 0:05:37.600 --> 0:05:39.640 in my assessment of the world. But even I am 0:05:39.680 --> 0:05:43.839 not gonna extrapolate for an entire century. I think what 0:05:44.520 --> 0:05:49.800 the Everstat piece UM identifies are some real tensions in 0:05:49.880 --> 0:05:54.480 the social, political, and economic fabric that must be addressed. Yeah, 0:05:54.480 --> 0:05:56.520 I'm Francy. I want to point out that Dr Roach 0:05:56.720 --> 0:06:01.440 is pushed more than anybody breathing against hard landing in China. 0:06:01.720 --> 0:06:04.839 He loves to play the doom and gloom pessimist that 0:06:04.880 --> 0:06:08.360 he is, but he's been the arch China optimist all 0:06:08.400 --> 0:06:13.440 the way. Yeah, and you still are. But we're looking. So. 0:06:13.520 --> 0:06:16.120 I have a Bloomberg story today which is amongst our 0:06:16.160 --> 0:06:19.240 top breads for our Bloomberg terminal customers, and it's saying 0:06:19.560 --> 0:06:22.440 China maybe about to embark on a very ambitious and 0:06:22.560 --> 0:06:26.560 very perilous campaign to convince investors that they shouldn't depend 0:06:26.560 --> 0:06:30.600 on a bailout when markets go south. How do they 0:06:30.680 --> 0:06:34.760 convince investors that China is safe when it comes to 0:06:34.800 --> 0:06:38.640 their investments? Well, what type of investments are you? Are 0:06:38.680 --> 0:06:45.839 you referring to, like domestic investment for asset management products, right, 0:06:45.920 --> 0:06:50.919 which may make it clear that they don't have government guarantees. Well, 0:06:51.320 --> 0:06:55.359 you know, there there certainly are some moral hazard risks 0:06:55.520 --> 0:06:59.160 in China, whether it's the wealth management products which has 0:06:59.760 --> 0:07:03.960 been very very popular in UM the last few years. 0:07:04.279 --> 0:07:09.320 UM or whether it's the the state on enterprises which 0:07:09.360 --> 0:07:15.920 continue to get um enormous support from the government. And 0:07:15.760 --> 0:07:19.800 in both of those areas, I think, um, if the 0:07:19.840 --> 0:07:23.040 government is going to put a floor under the uh, 0:07:23.080 --> 0:07:26.720 the asset values, it's also going to interfere with the 0:07:26.760 --> 0:07:29.680 efficient allocation of capital, which China needs to go to 0:07:29.680 --> 0:07:33.880 the next step of its development journey. So I wouldn't say, uh, 0:07:34.240 --> 0:07:39.120 you know, this is particularly good news for a rebalanced, 0:07:39.200 --> 0:07:42.920 more of a market driven Chinese economy going forward. If 0:07:42.960 --> 0:07:46.600 in fact this is correct, is it a zero some society? 0:07:46.600 --> 0:07:48.280 I want to come back and talk about the bigger 0:07:48.280 --> 0:07:51.920 immigration picture and some trade theory here. But you know, 0:07:51.960 --> 0:07:54.640 going back to Ricardo, we all read it cover to cover. 0:07:54.720 --> 0:07:57.000 It was always a difficult read. I thought to read 0:07:57.040 --> 0:08:00.520 the original Ricardo. But from the original Ricard to where 0:08:00.560 --> 0:08:03.800 we are now, is it a zero sum society? Is 0:08:03.840 --> 0:08:08.680 it just mercantilism that's going on? Well, you know, the 0:08:09.280 --> 0:08:15.120 big globalization debate talks about you know, massive poverty reduction 0:08:15.920 --> 0:08:19.880 over the last fifty years, and um, that is there's 0:08:19.920 --> 0:08:24.600 nothing zero sum about that. That's a positive sum development. 0:08:24.760 --> 0:08:27.720 And and you know, as poverty has been reduced and 0:08:27.840 --> 0:08:31.560 his education levels and once impoverished countries are increasing and 0:08:31.640 --> 0:08:34.760 work where skills are growing, then there's a lot of 0:08:34.800 --> 0:08:37.880 competition to do the things that we used to do 0:08:37.960 --> 0:08:40.640 and we used to do alone. And you know that, 0:08:40.920 --> 0:08:45.480 coupled with a secular decline in our manufacturing sector, has 0:08:45.640 --> 0:08:50.320 created this drumbeat for viewing the world in a tougher 0:08:50.480 --> 0:08:53.920 zero some way, and that's unfortunate. David G. Francie Laquire 0:08:54.520 --> 0:08:57.839 very kindly has come in for our American four day 0:08:57.840 --> 0:09:01.920 work week. Um, Steve Roach with this, Stephen, it is 0:09:02.000 --> 0:09:05.160 the President's day. I believe the papers is February twenty seconds. 0:09:05.200 --> 0:09:07.839 You know the number of younger people, Stephen Roach, that 0:09:07.960 --> 0:09:11.600 don't know. February twelve is Lincoln's birthday and today is 0:09:11.679 --> 0:09:15.880 the first President's birthday. It's just because you get both 0:09:15.920 --> 0:09:20.760 those days off. We were in school. Martin van Buren 0:09:20.800 --> 0:09:22.240 did that. That was when you were in fifth or 0:09:22.280 --> 0:09:25.800 sixth grade? Was no, I voted for him? I'm sure 0:09:25.840 --> 0:09:28.839 you did. Time. I just need to correct one answer 0:09:28.880 --> 0:09:32.480 to the question Francy asked me on the wealth management 0:09:32.480 --> 0:09:36.640 issue in China. I misheard her question. It looks on 0:09:36.679 --> 0:09:38.760 the basis of the story that the government is going 0:09:38.800 --> 0:09:42.400 to really introduce more of a two way risk perception 0:09:42.440 --> 0:09:44.839 into these markets. That's a good thing. And I think 0:09:44.880 --> 0:09:47.760 I missed it and said the office okay, okay, well 0:09:47.800 --> 0:09:50.120 that's a good We call that a surveillance correction, which 0:09:50.120 --> 0:09:52.439 we do I do too often. Fancy has never made 0:09:52.440 --> 0:09:56.960 a mistake in her years here. That would be true, 0:09:57.240 --> 0:09:59.880 um Our President. I just got a note from Mike 0:10:00.000 --> 0:10:04.320 Well in Austin and he says, dr Roach, please discuss 0:10:05.280 --> 0:10:09.719 the border tax. It's tossed around like you know, a 0:10:09.800 --> 0:10:14.679 tequila whatever one of Michael and Austin's parties and sware's 0:10:15.240 --> 0:10:18.680 what does a border text due to this nation and 0:10:18.760 --> 0:10:22.920 due to the fabric of our trade, it's it's another 0:10:23.200 --> 0:10:27.280 you know, in this long stream of protectionist moves Michael 0:10:27.360 --> 0:10:36.320 in Austin. It taxes imports UH and UH subsidizes exports. 0:10:36.320 --> 0:10:43.200 So it's a functional equivalent of raising the price of 0:10:43.280 --> 0:10:46.280 goods that we purchased from overseas under the guise of 0:10:46.360 --> 0:10:51.120 well everybody does it, well people, not everybody does it 0:10:51.600 --> 0:10:55.240 in in the fashion that's being contemplated by the tax 0:10:55.280 --> 0:10:58.600 reform measures of the U. S. House of Representatives. UH. 0:10:58.640 --> 0:11:01.240 And so when you you couple this with the the 0:11:01.360 --> 0:11:06.440 other UM initiatives that are being talked about, whether it's 0:11:06.800 --> 0:11:13.720 currency manipulation, charges outright tariffs on major training partners, backing 0:11:13.760 --> 0:11:20.720 away from TPP, renegotiating NAFTA, building a wall, the America 0:11:20.880 --> 0:11:27.880 first mantra of protectionist trunk administration UH. It's it's part 0:11:27.960 --> 0:11:31.480 and parcel of the same UH story and inward looking 0:11:31.559 --> 0:11:37.000 isolationist America that UH is not facing up to the 0:11:37.040 --> 0:11:40.680 consequences of what this means for the prices of goods 0:11:41.040 --> 0:11:46.680 purchased UH in UM Walmart's either UH in stores or 0:11:46.720 --> 0:11:51.520 online or uh in in in broader platforms. So this 0:11:51.600 --> 0:11:56.320 is a real reversal of the forces that have been 0:11:56.360 --> 0:12:01.360 shaping and driving America's role in the global economy over 0:12:01.400 --> 0:12:05.200 the last thirty five forty years. Stephen, is there one 0:12:05.360 --> 0:12:09.280 initiative from the new administration that you would applaud or 0:12:09.320 --> 0:12:13.880 that or that you would use well and and they 0:12:13.920 --> 0:12:18.920 haven't really rolled out fancying any initiatives yet that we 0:12:19.000 --> 0:12:22.520 can speak to. There's there's been a lot of feelers 0:12:22.640 --> 0:12:28.000 and ideas that they've talked about. And so when when 0:12:28.040 --> 0:12:31.760 the President gives his State of the Union message next 0:12:31.800 --> 0:12:34.120 week to the Congress will have a little bit more 0:12:34.200 --> 0:12:40.080 clarity in terms of concrete proposals that he's looking for. 0:12:41.720 --> 0:12:44.000 Can they do anything? Is there anything the good that 0:12:44.040 --> 0:12:48.480 could come out of the tax reform? Well, you know, 0:12:48.679 --> 0:12:53.199 I personally, I think that the the debate that we're 0:12:53.240 --> 0:12:55.360 having right now in tax reform in the United States 0:12:55.400 --> 0:13:01.319 putting the relief of corporate America ahead of the UH 0:13:02.080 --> 0:13:07.120 the queue here is is misplaced. UH. Corporate profit tax 0:13:07.240 --> 0:13:13.240 Corporate profits are are high, corporate profit taxes are low 0:13:13.400 --> 0:13:17.679 if you look at them historically. UH, there's an image 0:13:17.720 --> 0:13:23.360 that UM is being painted of a US business sector 0:13:23.400 --> 0:13:26.440 that's lost its competitive edge, that we just you know, 0:13:26.480 --> 0:13:30.200 have dropped the ball, and that's why we need protection. Yet, 0:13:30.320 --> 0:13:32.920 if you look at the results of the World Economic 0:13:33.000 --> 0:13:37.160 Forums competitiveness sweepstakes, we're at number three. We're behind Switzerland 0:13:37.320 --> 0:13:40.840 and Singapore, but you know, big deal, and we've been 0:13:40.880 --> 0:13:43.720 a number three for a decade. We we don't score 0:13:43.760 --> 0:13:46.600 well on taxes, but we score well on innovation in 0:13:46.640 --> 0:13:51.160 our market structures, and UH, you know, we're as competitive 0:13:51.200 --> 0:13:54.160 today as we have been UH in in a long time. 0:13:54.200 --> 0:14:00.320 We don't need special uh protectionist measures to UM UH 0:14:00.920 --> 0:14:03.719 enhance our role in the global economy. Steven Rhodes, thank 0:14:03.720 --> 0:14:06.320 you for the time to the dr Roach is at 0:14:06.559 --> 0:14:22.520 Yale University, and this is a great pleasure. He has 0:14:22.600 --> 0:14:26.080 single handedly taken credit for the victory of the Chicago 0:14:26.760 --> 0:14:31.640 uh Cubs joining us. He is Chicago, Sam Zell, where 0:14:31.640 --> 0:14:33.600 were you in the Chicago Cubs? Were you at the 0:14:33.600 --> 0:14:37.760 park the night they wont No, I don't. I thank 0:14:37.800 --> 0:14:41.120 you for the for the compliment. I don't take any 0:14:42.320 --> 0:14:45.640 role in that. I owned the Cubs for a while. Yeah, 0:14:45.680 --> 0:14:48.640 for a cup of coffee. You owned him. And it's 0:14:48.680 --> 0:14:53.480 just great for the city and terrific, terrific for this 0:14:53.520 --> 0:14:55.920 is an historic day, and like there's always good days 0:14:56.000 --> 0:14:57.680 to talk to Sam's l and you and I should 0:14:57.680 --> 0:15:00.400 talk about commercial real estate. We should t talk about 0:15:00.400 --> 0:15:03.200 internal rates and return Maybe we'll get to that. I'm 0:15:03.200 --> 0:15:05.480 looking at the cover of the New York Times or 0:15:05.520 --> 0:15:09.600 the cover of Chicago Tribune. Your parents showed up in 0:15:09.720 --> 0:15:13.640 Chicago from Poland two years before you were born, right 0:15:14.440 --> 0:15:17.480 four months four months before you were born. You you 0:15:17.600 --> 0:15:22.720 grew up in all American immigrant household with great academic 0:15:22.760 --> 0:15:27.800 achievement in etcetera. Through your filter, how do you observe 0:15:28.280 --> 0:15:34.800 Trump immigration policy. Well, I'm a big fan of immigration. 0:15:36.320 --> 0:15:42.040 I believe that immigration is a self selective process. So 0:15:42.800 --> 0:15:46.400 in effect, the people who have the guts to leave 0:15:46.480 --> 0:15:52.520 where they are and start anew our entrepreneurial stronger and 0:15:52.520 --> 0:15:55.840 have been the core of what I built this country. 0:15:55.880 --> 0:16:00.400 Can you affect policy as a president suggests to throw 0:16:00.520 --> 0:16:04.960 the bums out and keep the grain producer from Poland 0:16:05.360 --> 0:16:08.760 that prospered in Chicago. And I believe your sister was 0:16:08.800 --> 0:16:12.480 a valedictorian as well. How do you keep the zells 0:16:12.600 --> 0:16:15.080 and throw the bums out at the same time, I 0:16:15.120 --> 0:16:19.560 think my parents came to this country legally. They followed 0:16:19.560 --> 0:16:22.880 all the procedures and they did what it took to 0:16:23.000 --> 0:16:28.320 get a visa. I think the importance and of America 0:16:29.360 --> 0:16:32.000 in the past and in the future is all about 0:16:32.040 --> 0:16:37.640 the rule of law. And consequently, I think we can't 0:16:37.640 --> 0:16:42.000 we can't have a two systems where half two people 0:16:42.920 --> 0:16:47.440 apply and and become uh Green card or whatever, and 0:16:47.480 --> 0:16:51.840 others just do it so illy like. That's the challenge 0:16:52.080 --> 0:16:54.840 and it's a serious conundrum. Mr. So let me bring 0:16:54.840 --> 0:16:57.600 in my colleague in London, Francing Laqui, with us this morning. 0:16:57.640 --> 0:17:00.360 Francing Hi, Sam's l I see it tire with exit. 0:17:00.400 --> 0:17:02.440 I hear it is here with marine lupin in France. 0:17:02.960 --> 0:17:05.520 Why is it easy and why is it acceptable now 0:17:05.920 --> 0:17:11.479 to bash the foreigner. I don't think that this is 0:17:11.520 --> 0:17:14.520 a bashing of a foreigner. As far as the United 0:17:14.560 --> 0:17:18.040 States is concerned, I think the challenge in the United 0:17:18.080 --> 0:17:24.240 States is what do we do to quote, make our 0:17:24.359 --> 0:17:28.719 country a rule of law and have everybody abide by 0:17:28.760 --> 0:17:32.199 the same rules. I think that's the issue in the 0:17:32.320 --> 0:17:36.159 United States. I don't think it is foreigner versus the 0:17:36.200 --> 0:17:39.320 anti foreigner, but what do the economics tell us? So 0:17:39.480 --> 0:17:42.359 I'm looking at some research saying that actually some of 0:17:42.400 --> 0:17:46.600 the moves the crackdown on undocumented immigrants, first of all, 0:17:46.640 --> 0:17:49.840 will strain a very tight US job market, but also 0:17:49.880 --> 0:17:53.080 would cost economy some five trillion dollars over ten years. 0:17:54.440 --> 0:17:58.080 I'm not familiar with the statistics that you're referring to, 0:17:59.040 --> 0:18:01.640 but I would yes to you that I could come 0:18:01.720 --> 0:18:06.800 up with other statistics that would show other objectives. I 0:18:06.840 --> 0:18:09.960 think when it's all said and done, the question is 0:18:10.440 --> 0:18:15.399 what is or isn't legal? And you know what precedent 0:18:15.520 --> 0:18:20.600 do we say? Uh? In the past, we've had administrations 0:18:20.640 --> 0:18:25.000 that have ignored the issue. That's why we have as 0:18:25.040 --> 0:18:28.840 many illegal immigrants in this country as we have. I 0:18:28.880 --> 0:18:30.840 could go for hours with you, but I've got to 0:18:30.880 --> 0:18:34.440 ask about commercial real estate. Your first property was until 0:18:34.480 --> 0:18:38.960 you don't right, um afrihanah, Yeah, I mean a few 0:18:39.080 --> 0:18:42.560 a few years ago. Can you do commercial real estate 0:18:42.600 --> 0:18:46.320 in the financial distortion of our low rate environment? Or 0:18:46.480 --> 0:18:50.480 is commercial real estate heading for another crisis because money 0:18:50.560 --> 0:18:54.439 is free? Um? I think the answer is yes, you 0:18:54.520 --> 0:18:57.719 can be in the real commercial real estate business in 0:18:57.800 --> 0:19:05.080 this environment. I think low interest rates might encourage people 0:19:05.119 --> 0:19:08.080 to do things they shouldn't do. I think the issue 0:19:08.160 --> 0:19:13.399 in commercial real estate today is not rights but availability. 0:19:13.520 --> 0:19:18.399 And we are growing our commercial real estate size in 0:19:18.440 --> 0:19:23.280 this country very significantly. I mean we're I think in 0:19:23.359 --> 0:19:27.760 two thousand and sixteen we uh started three hundred and 0:19:27.800 --> 0:19:32.560 seventy eight thousand multi families. I believe if it's not 0:19:32.680 --> 0:19:36.920 the largest single year in history, that we're seeing that 0:19:36.960 --> 0:19:39.600 in New York City right now, Sam's I gotta ask 0:19:39.680 --> 0:19:43.359 one final question. The bloodshed and your Chicago is a 0:19:43.480 --> 0:19:46.959 national tragedy. Everybody's focused on it. Take me away from 0:19:47.000 --> 0:19:51.280 the political rhetoric, what do the people of Chicago want 0:19:51.480 --> 0:19:56.239 is a solution to the gang violence in Chicago. I 0:19:56.280 --> 0:20:03.080 think the in the whole issue is extremely overstated. Yes, 0:20:03.359 --> 0:20:08.959 there is very serious gang violence. It's very serious, uh 0:20:09.800 --> 0:20:15.200 killing of people. But the impact on the rest of Chicago, 0:20:15.400 --> 0:20:21.159 other than this very narrow area is relatively limited. So 0:20:21.240 --> 0:20:24.159 I think it's much more a story of the press 0:20:24.600 --> 0:20:28.560 than it is, uh, you know, some kind of degradation 0:20:28.640 --> 0:20:33.800 of the city. The city is operating beautifully and frankly 0:20:33.880 --> 0:20:36.360 it's one of the best places in the country. List 0:20:36.720 --> 0:20:38.320 to speak to you. Sam's eel on this day of 0:20:38.320 --> 0:20:42.040 an immigration to paid across all of America. Mr zell 0:20:42.920 --> 0:20:54.120 is from Chicago, brought you by Bank of America. Mary 0:20:54.200 --> 0:20:58.520 Lynch dedicated to bringing our clients insights and solutions to 0:20:58.600 --> 0:21:02.119 meet the challenges of a transforming world. That's the power 0:21:02.240 --> 0:21:08.199 of global connections. Marylynch, Pierce Federan Smith Incorporated, Member s 0:21:08.240 --> 0:21:14.520 I P. C. Francine. I see negative yields and I 0:21:14.560 --> 0:21:19.440 see a little bit of migration negative in Switzerland is well. 0:21:19.480 --> 0:21:23.359 And the linkage to euro what would it mean for 0:21:23.440 --> 0:21:28.080 a parody euro Franccene, Well, I would mean that people 0:21:28.320 --> 0:21:31.240 believe that the Fed is ready to hike rates pretty soon, 0:21:31.280 --> 0:21:34.440 and they believe that something ugly will rear its head 0:21:34.520 --> 0:21:38.720 here in Europe. So what would it take political risk people, 0:21:38.760 --> 0:21:41.600 I guess getting you know, freaked out about the Eurozone 0:21:41.640 --> 0:21:44.879 possibly breaking apart, or the election of Marine le Pin 0:21:45.040 --> 0:21:47.440 or something happening in grease. Yeah, I like the way 0:21:47.480 --> 0:21:49.280 you put that in this, folks. It's not just about 0:21:49.320 --> 0:21:53.680 the euro, but it's always pairs in dollar strength. Off 0:21:53.720 --> 0:21:57.879 of February one is two point one percent up on 0:21:58.000 --> 0:22:00.480 d X well excuse me, yes, and d X y 0:22:00.880 --> 0:22:03.639 the blended currency. So we're not out to the dollar 0:22:03.720 --> 0:22:05.520 strength at the end of the year, but we're getting 0:22:05.520 --> 0:22:08.920 there quickly. Stewart, where they're where this with b mp 0:22:09.560 --> 0:22:13.080 uh Perry, but inequities and deruveds right now all of 0:22:13.119 --> 0:22:16.600 a sudden, negative rates Again, is this negative rate conversation 0:22:17.040 --> 0:22:20.040 different than the negative rate conversation of a year ago? 0:22:20.600 --> 0:22:22.120 You know, Tom, thanks for having me on. I think 0:22:22.119 --> 0:22:24.280 it really is, especially because now we're in an environment 0:22:24.320 --> 0:22:26.440 where potentially, you know, over the last few years it's 0:22:26.440 --> 0:22:29.280 been a policy divergence environment where we have really the 0:22:29.280 --> 0:22:32.479 FED being the only bank heading towards normalization. But now 0:22:32.480 --> 0:22:35.399 we're in a situation where um, yes, there's a you know, 0:22:35.440 --> 0:22:38.280 access risk premium embedded in a lot of these zero 0:22:38.280 --> 0:22:41.560 assets because of the French election, other things kind of 0:22:41.600 --> 0:22:44.360 on the horizon, the German election, the Dutch election, etcetera. 0:22:44.440 --> 0:22:46.359 But you know, as we go to the end of 0:22:46.400 --> 0:22:48.320 this year, we're going to see that the Bank of 0:22:48.400 --> 0:22:52.199 Japan is uh, you know, potentially raising its tenure target, 0:22:52.440 --> 0:22:57.240 the ECB is potentially tapering towards you know, kind of 0:22:57.359 --> 0:23:00.280 picking up that conversation in September and December, and we're 0:23:00.280 --> 0:23:01.840 in a we're in an environment where it's really a 0:23:01.880 --> 0:23:04.040 two sided coin, what rather than a one sided coin 0:23:04.080 --> 0:23:06.720 for the last few years. I mean, I mean within 0:23:06.880 --> 0:23:10.480 this is the whole jumble of oil and the equities. 0:23:10.480 --> 0:23:14.840 But the overwhelming observation is equities are a movie shot. 0:23:14.920 --> 0:23:18.280 I mean, that's your specific focus. When we talk about 0:23:18.320 --> 0:23:24.240 convexity or acceleration in a given curve. How accelerated is 0:23:24.280 --> 0:23:27.520 equity the equity vector right now? Is it like you've 0:23:27.560 --> 0:23:31.040 never seen or is it just another bowl market? So 0:23:31.400 --> 0:23:33.120 I think one way that we gauge this is kind 0:23:33.119 --> 0:23:35.280 of you know, when we get to these levels that 0:23:35.320 --> 0:23:37.040 are so elevated, we go back all the way to 0:23:37.040 --> 0:23:39.520 the basics and think, Okay, let's look at earnings expectations, 0:23:39.520 --> 0:23:42.000 and let's look at multiples um and then compare that 0:23:42.040 --> 0:23:43.840 to where where we are on a spot level right now. 0:23:43.880 --> 0:23:46.560 And what surprises me is that the dividend futures, which 0:23:46.920 --> 0:23:49.320 are a great way to kind of gauge the market's 0:23:49.400 --> 0:23:52.520 risk adjested expectation of earnings over the next few years. Uh, 0:23:52.640 --> 0:23:55.719 these have actually outple formed equity spot market. So if 0:23:55.760 --> 0:23:59.200 you look at the dividend futures contract, it's pricing in 0:23:59.320 --> 0:24:02.359 eight point three present a competent annual growth rate. So 0:24:02.480 --> 0:24:06.000 if we apply that to earnings, we get to somewhere 0:24:06.000 --> 0:24:08.040 around a hundred forty dollars a share. And if we 0:24:08.040 --> 0:24:11.359 apply a seventeen a half multiple to the equity market, 0:24:11.760 --> 0:24:14.600 we get to something like now that gives us about 0:24:14.600 --> 0:24:17.120 three and a half percent outside. So I think we're 0:24:17.160 --> 0:24:20.160 getting to fully priced. But if you kind of put 0:24:20.200 --> 0:24:22.119 all these things together, if you have a constructive view 0:24:22.160 --> 0:24:25.160 on tax reform, then the equity market still makes sense 0:24:25.160 --> 0:24:27.680 at this point, right your how do you model the 0:24:27.720 --> 0:24:29.600 trade war? Right? And what I kind of understand is 0:24:29.640 --> 0:24:31.920 the market doesn't seem correlated anymore. You have a two 0:24:32.000 --> 0:24:37.439 year yield in Germany at a record level in negative territory, 0:24:37.560 --> 0:24:40.359 and then on the flip side you have these record 0:24:40.440 --> 0:24:43.399 highs for U S equities. It makes little sense if 0:24:43.440 --> 0:24:47.320 you look at risk capitite. Yeah, no, I understand that, 0:24:47.320 --> 0:24:48.760 And I think part of this has to do with 0:24:48.760 --> 0:24:52.159 the fact that UM, head of Brexit, for instance, all 0:24:52.240 --> 0:24:55.639 risk assets around the world, UM, We're sorry, access risk 0:24:55.640 --> 0:24:57.680 premium was kind of price into all assets around the world, 0:24:57.760 --> 0:24:59.639 and that's what's happening right now. So that's what's happening. 0:24:59.680 --> 0:25:01.960 You see in the V two x curve in eurostocks, 0:25:01.960 --> 0:25:04.880 which is essentially eurostox equivalent of the Vick's futures curve. 0:25:05.119 --> 0:25:06.960 You also see it in German to your yields, but 0:25:07.040 --> 0:25:09.680 you don't see it in US equities because potentially the 0:25:10.040 --> 0:25:13.359 spillover from a French election fallout or something like that 0:25:13.640 --> 0:25:16.359 is not necessarily apparent on how that would happen in 0:25:16.359 --> 0:25:18.159 the U S at least, So I think this is 0:25:18.200 --> 0:25:19.640 a really good way to think about it, at least 0:25:19.680 --> 0:25:22.280 as far as kind of pricing this excess premium V 0:25:22.359 --> 0:25:25.760 two x March April May calendar spread. So if you 0:25:25.800 --> 0:25:28.080 look at the two times the April contract, one times 0:25:28.080 --> 0:25:30.280 the March contract, and one times the May contract is 0:25:30.280 --> 0:25:32.920 pricing at thirteen points. Ahead of Brexit, that was only 0:25:32.960 --> 0:25:35.640 pricing at eight points. So what is that signal? So 0:25:35.680 --> 0:25:38.960 the market is extremely concerned about a fallout from a 0:25:39.000 --> 0:25:41.280 French election, but only in European assets. That's not being 0:25:41.280 --> 0:25:43.520 priced into the U S curve. That's not being priced 0:25:43.520 --> 0:25:45.919 into really anything else outside of Europe. All right, but 0:25:45.960 --> 0:25:47.840 how do you measure if you look at earnings and 0:25:48.080 --> 0:25:50.959 let's not talk about tariffs, but let's just talk about 0:25:51.000 --> 0:25:54.679 a dollar strength. Let's talk about people being a nervy 0:25:54.720 --> 0:25:58.000 in America first, actually meaning France first and UK first. 0:25:58.400 --> 0:26:02.920 That should automatically impact your models when looking at earnings. No, exactly, 0:26:02.960 --> 0:26:05.399 So you know, I think the rule of thumb that 0:26:05.400 --> 0:26:07.440 we operate with is an increase in the trade weighted 0:26:07.480 --> 0:26:10.760 dollar of one percent yields roughly in earnings response in 0:26:10.800 --> 0:26:15.280 the negative side of just under fifty basis points. So um, 0:26:15.480 --> 0:26:17.600 that was a key concern. However, what I think is 0:26:17.640 --> 0:26:20.440 different now than versus maybe a few months ago when 0:26:20.440 --> 0:26:23.040