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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene with

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Speaker 1: David Gura. Daily we bring you insight from the best

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Speaker 1: of economics, finance, investment, and international relations. Find Bloomberg Surveillance

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Speaker 1: on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course

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Speaker 1: on the Bloomberg Right Now, Dr Post and Adam pose

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Speaker 1: it with us with the Peterson Institute, I'm gonna ask

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Speaker 1: one question and let truly one of our Washington experts

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Speaker 1: dive in here. Adam, the Peterson Institute will be writing

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Speaker 1: about tax reform. What tact will you take? Well, I

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Speaker 1: have to do the disclaimer. Our individual scholars take that,

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Speaker 1: each their own tack, but they're pretty much gonna all agree,

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Speaker 1: which is a This is much more about cuts than

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Speaker 1: reform of the tax system. Be the in line with

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Speaker 1: what you were saying on TV before, Tom, that the

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Speaker 1: claims of wage improvements and job improvements in the short

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Speaker 1: term vastly exaggerated. See there are a couple of good

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Speaker 1: things in there, like they moved somewhat towards territoriality, the

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Speaker 1: cutbacks and the mortgage interest deduction, um, the expensive investment.

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Speaker 1: But d as my colleague Jason Furman, among others, has

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Speaker 1: pointed out the question is what are those pay for

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Speaker 1: us paying for? And if they're just paying for heavily

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Speaker 1: tilted towards the rich on the personal tax side and

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Speaker 1: uh not terribly useful tax cuts on the corporate side,

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Speaker 1: it's not going to go very well for those of

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Speaker 1: us who live in high tax states like New York

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Speaker 1: and New Jersey the state and local tax uh deductions Washington,

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Speaker 1: you I noticed you did not mention that. Is that

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Speaker 1: one of the things that is bad or is that

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Speaker 1: actually more Again I I'm I'm not going to make

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Speaker 1: that the biggest bad thing, because that is more about

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Speaker 1: redistribution than about the economy as a whole, and it

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Speaker 1: is hitting the people who take deductions rather than the

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Speaker 1: standard deduction. That said, it's clearly a political move of

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Speaker 1: trying to starve the beast of state governments that hurts

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Speaker 1: people mostly in blue states, and that in particular is

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Speaker 1: going to make it harder for state governments to sustain

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Speaker 1: their tax rates and thus the size of their governments.

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Speaker 1: So I don't feel it as good. Um, But again,

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Speaker 1: this is ull getting away. The big picture thing is

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Speaker 1: that these these pay fors are not going to be

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Speaker 1: anywhere near enough for an economy basically full employment. And

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Speaker 1: what they're claiming is one point five trillion in deficit

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Speaker 1: increase at that state of affairs, which is already bad.

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Speaker 1: UM is probably going to be closer to two trillion plus.

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Speaker 1: So given the deficit implications of this proposal, you know

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Speaker 1: you've watched watching for a long time, how do you

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Speaker 1: write the chances of actual tax bill of any kind

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Speaker 1: getting through this Congress. I've been an outlier for some

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Speaker 1: months now because I've said a year ago September in

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Speaker 1: the forecast UM that the big economic policy of the

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Speaker 1: Trump administration, besides deregulation, which people overlook UM, is going

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Speaker 1: to be corporate tax cuts, and everything else will be

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Speaker 1: sort of secondary. And I was wrong about the timing

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Speaker 1: because like everybody else, I couldn't believe they'd fast around

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Speaker 1: for nine months before submitting a budget UM. But the

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Speaker 1: bottom line is that's what we're gonna end up with.

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Speaker 1: So I think it's plus chance it it gets approved,

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Speaker 1: and whatever else needs to be shed will be shed,

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Speaker 1: but the core of the tax changes for the corporate

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Speaker 1: statutory rate will remaind You glance at this how much

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Speaker 1: economic growth can Republicans model I understand in the heat

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Speaker 1: of the the moment, the camera lights around, they frame

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Speaker 1: a bigger number, But can you do you have a

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Speaker 1: working number where you can gross up g d P

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Speaker 1: off of the enthusiasm of tax cuts. Well, I tend

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Speaker 1: to um. There are people, as you mentioned earlier about

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Speaker 1: the Joint Joint Committee and Taxation, the CBO Congressional Budget

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Speaker 1: Office within the government, and then the Tax Center Urban

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Speaker 1: Brookings outside government, as well as the Tax Foundation that

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Speaker 1: do this stuff very carefully. But as a macro economist,

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Speaker 1: and it's it's consistent with their analyzes. You know, you're

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Speaker 1: adding to the deficit three quarters or percentage GDP a year,

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Speaker 1: probably closer to one percent, both on average, but then

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Speaker 1: maybe a little front loaded um. And some of the

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Speaker 1: investment stuff is particularly front loaded and it's impact. So

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Speaker 1: I could see you having a multiplier on that, given

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Speaker 1: that we're at full employment of you know, around point

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Speaker 1: six UM, you do a little dynamic scoring, you can

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Speaker 1: maybe push it up a little bit from there, I

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Speaker 1: don't think much more. So that gets you close to

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Speaker 1: three percent growth for the next couple of years, and

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Speaker 1: it's not sustainable. It's adding to the debt um, it's

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Speaker 1: not entirely efficient, and we'll see how much goes into

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Speaker 1: actual investment rather than to dividends. But leaving all that aside, Yeah,

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Speaker 1: I mean, it's better to be lucky than to be smart,

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Speaker 1: tom As, I certainly know, and I think the president

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Speaker 1: was in a sense lucky that he didn't get his

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Speaker 1: budget till now, because now the boom is probably gonna

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Speaker 1: be perfectly time for the two thousand election. Interesting, Adam posing,

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Speaker 1: thank you so much, very valuable on Bloomberg Television and

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Speaker 1: Bloomberg Radio today, Marty, what is what are you watching for?

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Speaker 1: Within you know, Craig Gordon and the whole team in

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Speaker 1: Washington working on this is what's the twister angle and

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Speaker 1: tax reform that that you're watching for? Well, I'm I'm

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Speaker 1: watching Paul Ryan. I mean the he is the tax wonky,

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Speaker 1: is the guy who everybody respects in terms of his

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Speaker 1: intellectual capacity on these issues and what he says if

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Speaker 1: he can bring his house along, because there are a

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Speaker 1: lot of divisions within his party as general, that's the

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Speaker 1: key for me. Interesting, And we'll overlay that politics, if

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Speaker 1: you will, with some of the analysis out of Washington particular.

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Speaker 1: Shout out to Urban Brookings and their Tax Policy Center worldwide.

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Speaker 1: This job's day, This is Bloomberg Helly now welcome. I'm

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Speaker 1: Bloomberg Television Worldwide and here on Bloomberg Radio. William Gross

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Speaker 1: he was very kind to be with us on FED

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Speaker 1: Day and reducts that with Janice Henderson. Right now, Bill,

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Speaker 1: you know, I really want to talk about the broader fabric.

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Speaker 1: We see the U six number coming to seven point nine.

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Speaker 1: Are we at a point where the financial crisis and

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Speaker 1: the labor crisis of that disaster is behind us? Well,

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Speaker 1: I think so. Um, you know, to the extent that

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Speaker 1: we've got a little room to to to lower if

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Speaker 1: a crisis appears over the horizon, to the extent that

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Speaker 1: quantitative eason might come back. You know, I think we've

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Speaker 1: got some ammunition. And in fact we do tom have

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Speaker 1: a decently as economists would call it, robust economy with

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Speaker 1: growth at three plus at least for the last two quarters,

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Speaker 1: despite these rather disappointing employment numbers. So I think we're

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Speaker 1: past the crisis certainly in most of the world, most

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Speaker 1: of the developed world, but we have a potential crisis

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Speaker 1: I think in Asia and China going forward. You were

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Speaker 1: more than generous to be with us here on FED Day.

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Speaker 1: I did ask you about your own Powell. I'll be

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Speaker 1: nice built you. Uh, maybe it's because of San Francisco

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Speaker 1: forty Niners are doing so poorly this year. But you

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Speaker 1: weren't polite about it. You didn't mince words. We thank

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Speaker 1: you for that. About the next chairman of the FED,

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Speaker 1: you heard him speak yesterday, how can economists assist assist

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Speaker 1: Jerome Powell to a better Fed? Well, I think a

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Speaker 1: certain kind of economists can assist Jerome Pile and that

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Speaker 1: that depends, of course, on the appointments going forward. Uh.

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Speaker 1: You know, Trump's got three and certainly four. I think

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Speaker 1: as Janet Yellen probably will resign as as uh FED

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Speaker 1: chairman and chairwomen do in tradition, and so he's got

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Speaker 1: four appointments going forward. He can pack the court, so

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Speaker 1: to speak, just my FDR. And it depends on his

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Speaker 1: appointments going forward, whether they're doves or hawks. And I

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Speaker 1: presume that there will be doves. And so what can

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Speaker 1: we learn from that when they're appointed? Uh, you know,

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Speaker 1: potentially you can learn in my view at least, that

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Speaker 1: there are subjective factors longer term structural factors such as

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Speaker 1: demographics at place, such as technology advancement and displacement of

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Speaker 1: labor at play, and ongoing globalization, so we can learn

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Speaker 1: from those things as opposed to the old fashion models

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Speaker 1: such as the tailor rule and others and the Phillips

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Speaker 1: curve that you know have been failing us for the

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Speaker 1: past ten, fifteen, twenty years. I hope he appoints someone

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Speaker 1: with a more subjective as opposed to a model driven view.

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Speaker 1: Here's the key question, Bill Gross, and we thank you

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Speaker 1: for joining us on radio and television this morning with

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Speaker 1: Janie Henderson. If we have low rate Janet, if we

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Speaker 1: have low rate j and we have yield curves flattening,

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Speaker 1: ten thirties flattening, twos tens flattening, what is that signal

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Speaker 1: to Bill Gross? If you see flatter yield curves in

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Speaker 1: the zeitgeist of a low rate central bank, well, I

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Speaker 1: flatter curve is not positive. And let's look at it

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Speaker 1: this way, since uh, you know, two thousand and eleven,

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Speaker 1: and that takes us way back. But you know, the

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Speaker 1: two ten curve was four and fifty basis points and

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Speaker 1: now it's a hundred or less, and so it's flattened considerably.

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Speaker 1: Since then, has ad made a difference. Not really, but

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Speaker 1: in my view, at some point it will. Typically, you know,

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Speaker 1: economists and stratagists say it's got to go flat before

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Speaker 1: a recession appears. I would say, in a highly leveled

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Speaker 1: economy with a lot of debt and that typifies the US,

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Speaker 1: that we don't have to go flat, that perhaps another

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Speaker 1: twenty basis points of tightening would be enough in order

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Speaker 1: to induce certainly a slowdown in the economy. And I

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Speaker 1: think central banks and the FED itself has to be

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Speaker 1: careful in terms of using historical standards to judge monetary policy.

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Speaker 1: I don't think they can raise interest rates too much

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Speaker 1: further before there's the potential to slow economic growth. This

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Speaker 1: is absolutely critical. Folks that Mr Gross's senor Jason, I

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Speaker 1: want you to come over here. We're doing this on

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Speaker 1: the fly and look, Jason, wheel around here, and I

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Speaker 1: want to show what Bill Gross is talking about. Right now,

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Speaker 1: here's the yield curve and down here are recessions. We're

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Speaker 1: coming in like this, and Bill Gross, where do we

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Speaker 1: get on the yield curve where it becomes a recession indicator?

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Speaker 1: Where at seventy two basis points, how many basis points

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Speaker 1: are we away where we flip from optimism to a

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Speaker 1: real concern about economic slowdown? Yeah, I think around four

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Speaker 1: year fifty year see your chart, But I know what

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Speaker 1: you're talking about, uh and uh you know that indicates

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Speaker 1: you know, perhaps another uh fifty basis points in terms

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Speaker 1: of FED funds and maybe ten basis points higher intends

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Speaker 1: to produce that type of number. You know. The critical

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Speaker 1: element and all of this is really the cost of

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Speaker 1: credit and what cost of credit? And we're talking about mortgages,

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Speaker 1: we're talking about corporate loans, we're talking about uh, you know,

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Speaker 1: government bonds. To a certain extent, the cost of credit

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Speaker 1: relative to UM you know, the nominal growth in GDP,

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Speaker 1: we have better nominal growth. We have four plus nominal

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Speaker 1: growth now. And the cost of credit, uh, you know

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Speaker 1: has been supportive of that's certainly quantitative easing has been

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Speaker 1: supportive of that to the extent that we don't have

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Speaker 1: QUI to the extent that interest rates go up by

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Speaker 1: four year fifty points in your curve flattens by thirty

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Speaker 1: or forty, then all of a sudden, the cost of

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Speaker 1: credit and the absence of credit growth UM as typified

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Speaker 1: by KWI become factors, and so I think I think

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Speaker 1: the Fed has careful. I know, I know they think

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Speaker 1: they have to be careful. I mean, we're gonna do this.

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Speaker 1: I'm gonna make a chart up here for Bloomberg Radio,

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Speaker 1: also for John Farroh. I'm gonna make up a chart

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Speaker 1: here to show that tip point of forty to fifty

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Speaker 1: basis points bill gross on tax reform. You've got to

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Speaker 1: live with it. Can you live with a one point

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Speaker 1: five trillion deficit add on? Or do you believe is

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Speaker 1: ad im posing believes adam posing that we could go

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Speaker 1: out to a to two trillion dollar add on? Well,

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Speaker 1: you know, here's here's a funny one, and it's, uh,

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Speaker 1: you know, I'm starting to rethink this time because we've

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Speaker 1: seen um, you know, not necessarily deficits expanding, but central

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Speaker 1: banks buying trillions and trillions of dollars worth of debt

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Speaker 1: and then recycling the interest rate back to the central government.

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Speaker 1: And so, you know, do deficits matter? I think ultimately

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Speaker 1: do they do. We talked a few days ago about

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Speaker 1: you know the present value of all of our liabilities,

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Speaker 1: including social security and Medicare and Medicaid. It's you know,

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Speaker 1: perhaps instead of eighteen trillion, it's perhaps seventy eight trillion.

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Speaker 1: Of course debt matters, but in the short term, I

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Speaker 1: don't think it matters that much. And uh, you know,

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Speaker 1: we're moving to a fiscally stimulative type of environment as

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Speaker 1: opposed to a monetary stimulative type of environment, and perhaps

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Speaker 1: that's what we need. But ultimately some a believer in

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Speaker 1: low debt as opposed to high debt. And it's incredible

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Speaker 1: to me you know this too, that the Republican orthodoxy

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Speaker 1: has simply changed from fiscal doves to fiscal hawks, and

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Speaker 1: to deficit deniers to deficit supporters. The entire party is

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Speaker 1: flip flopped, with Marty Schenker uh running all of our

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Speaker 1: economics that govern and now chief content officer for all

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Speaker 1: of Bloomberg News. Marty, what is your observation off the

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Speaker 1: jobs report? Before we get back to Bill Gross, Well,

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Speaker 1: I'm a little surprised that we hadn't heard from Donald

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Speaker 1: Trump tweeting on the uh numbers of the jobs report,

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Speaker 1: which he has not hesitated to take some credit for.

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Speaker 1: But I think he is on his way to Asia.

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Speaker 1: I think he's boarding a playing almost Hannolulu. Yeah, Bill

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Speaker 1: Gross with us with Janie Henderson has been very kind

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Speaker 1: to be with us, and I want to get back

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Speaker 1: to tax reform and its ramifications on the nation. But Bill,

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Speaker 1: there's a Bill Gross if people don't know. And I'm

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Speaker 1: not talking about your resurgence of the San Francisco forty

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Speaker 1: Niners and bringing Mr Garoppolo over from the New England

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Speaker 1: Patriots and the fact you can beat the cardinals and

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Speaker 1: the giants here in the coming days. I'm talking about

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Speaker 1: your article for the c FA Institute of a few

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Speaker 1: years ago, consistent alpha generation through structure. This is twelve

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Speaker 1: years ago, and it's a Bill Gross. I think that

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Speaker 1: a lot of our listeners don't know. We are seeing Bill,

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Speaker 1: a lot of black box theories of hedge funds blow up,

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Speaker 1: and we see it with challenging results. Maybe Ray Dalio

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Speaker 1: of Bridgewater, who I just had the great privileges speaking

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Speaker 1: to where it's really really hard now to make money

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Speaker 1: quantitative black box formulaic whether it's risk parity or this

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Speaker 1: that or the other thing. Is that from another bygone age,

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Speaker 1: or can those guys create alpha down the road? Well,

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Speaker 1: I I would agree with the premise of your question,

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Speaker 1: Tom that that it is getting much harder to generate alpha,

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Speaker 1: if only because returns certainly interest rates and potential equity

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Speaker 1: returns are lower. I mean, you know, information ratios of

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Speaker 1: the past were in part generated simply by bowl markets,

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Speaker 1: and now um as interest rate spreads are very narrow

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Speaker 1: and opportunities in my view, are limited. You know, alpha

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Speaker 1: generation becomes much more difficult affirm like PIMCO. I was

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Speaker 1: at PIMCO and we could generate hundred and fifty basis

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Speaker 1: points per year in alpha. You know, it becomes a

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Speaker 1: very challenged and I would say relative to that period

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Speaker 1: of time that an excellent manager that can generate basis

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Speaker 1: and so over the market is probably uh in a

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Speaker 1: good stead. So yeah, it's very difficult, and I think

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Speaker 1: the age of active management is it's not dead, but

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Speaker 1: it's certainly overpriced, and uh, we're gonna have to see

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Speaker 1: some changes going forward because they can't generate what they

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Speaker 1: used to generate in classy of you at Janice Henderson

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Speaker 1: mentioning your former employee as well as as we mentioned

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Speaker 1: Ray Delio at Bridgewater. If that's the case, if active

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Speaker 1: is a challenge, what needs to be the response, almost

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Speaker 1: from a portfolio structure basis, did just assume less diversification,

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Speaker 1: less theory and more let's take a chance. Well, no,

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Speaker 1: you know, I wouldn't advise that. I think that's what's occurring. Uh.

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Speaker 1: You know, individuals and pension funds and institutions are taking

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Speaker 1: more risk in order to generate what they hope for,

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Speaker 1: uh in terms of returns relative to their liabilities. Um,

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Speaker 1: it can only go so far. We know, spreads can

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Speaker 1: only go so tight before defaults tend to take over.

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Speaker 1: In the bond market. We know, I suppose in the

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Speaker 1: stock market that p s can only go so high

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Speaker 1: before you know, it becomes limited in terms of its

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Speaker 1: future expansion. And so yeah, i'd say, of you know,

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Speaker 1: we have a limited future in terms of expected returns,

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Speaker 1: and the response, as investors are are exhibiting is basically

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Speaker 1: to move into a lower feed product to uh take

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Speaker 1: away some of those returns from the managers as opposed

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Speaker 1: to themselves. Bill Morty Schanker, Here is their risk associated

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Speaker 1: with that search for alpha out in the marketplace? Well,

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Speaker 1: there always is. Anytime you move, anytime you move out

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Speaker 1: from a treasury build, there's risk. But I would say this, yes,

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Speaker 1: when when interest rates are basically zero and they are

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Speaker 1: or negative in Germany and other places, and that's certainly

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Speaker 1: very low. In the United States and elsewhere, Um, you know,

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Speaker 1: the risk is increased. I mean a thirty years swap.

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Speaker 1: Most of your listeners may not be uh you know,

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Speaker 1: appraised of this, but a thirty years swamp basically only

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Speaker 1: earns fifty basis points a year in terms of carry

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Speaker 1: whether close to a thirty year duration, it's a it's

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Speaker 1: an impossible situation unless basically interest rates stay the same.

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Speaker 1: So all markets are overpriced. I use the term fake

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Speaker 1: markets because uh you know, they're being generated by artificial

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Speaker 1: stimulation from central banks, which at some point will disappear.

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Speaker 1: It's not disappearing yet, but in two thousand and eighteen,

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Speaker 1: for instance, central banks stimulation check writing, quantitative easing UM

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Speaker 1: will go flat line as opposed to a trillion dollars

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Speaker 1: a year positive. And so there will be a point

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Speaker 1: where where risk enters the equation simply because monetary stimulation

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Speaker 1: slows down or even goes negative. If you were had

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Speaker 1: the ability to UH counsel Droomee Powell on policy prescriptions

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Speaker 1: going forward, what would what would those recommendations be? Well,

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Speaker 1: I would advise him to study UH some of his

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Speaker 1: own Fed research from the San Francisco FED, for instance,

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Speaker 1: where they've done historical studies for a long time in

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Speaker 1: terms of the neutral interest rate, and to try and

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Speaker 1: find and seek out and search as he moves higher. Uh,

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Speaker 1: you know, twenty five basis points for quarter. What that

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Speaker 1: neutral interest rate is that it used to be in

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Speaker 1: nominal terms around four percent and now perhaps with inflation

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Speaker 1: and one a half percent, is probably around two. But

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Speaker 1: that's a probably nobody knows. I would say, Mr Powell,

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Speaker 1: find that magical neutral interest rate which keeps inflation at

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Speaker 1: two percent or lower and growth at two percent or higher,

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Speaker 1: and uh, and tread carefully because it's uh, it's a

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Speaker 1: it's a changing number, and it's a it's a new

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Speaker 1: world in terms of credit, and keep reducing that balance sheet,

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Speaker 1: I would imagine, right, Well, I think that's okay. I'm

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Speaker 1: not a balance sheet fanatic in terms of reducing it.

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Speaker 1: I sort of think, Marty, that the balance sheet itself

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Speaker 1: at four trillion plus is really a reflection of the

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Speaker 1: leverage in our economy. We've got about sixty eight trillion

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Speaker 1: in terms of total credit and four and a half

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Speaker 1: trillion in terms of the FED balance sheet, And look

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Speaker 1: at that as a bank. Um, you know, with equity

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Speaker 1: capital maybe a five or six percent. You know, if

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Speaker 1: you reduce that by half, your you've got an equity

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Speaker 1: capitalization of two or three percent. We know banks don't

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Speaker 1: do well on that, so I'd say, I'd say leave

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Speaker 1: the balance you alone. It's okay, But they're they're gonna

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Speaker 1: go forward. Bill the President yesterday with Chairman Brady of

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Speaker 1: the House Ways and Means Committee, trotted out their card,

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Speaker 1: their tax reform card, which I'm sure Bill Gross will

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Speaker 1: be doing his taxes on, uh this year, the little

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Speaker 1: three by five card, making it simple and all that.

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Speaker 1: What is your process, what is your prospect for tax reform? What?

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Speaker 1: What do you how do you model it into your business?

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Speaker 1: And frankly, how should our listeners look at tax reform

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Speaker 1: out three four in six months? Well, first of all time,

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Speaker 1: in my view, it's not tax reform. It's tax cut

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Speaker 1: scuts cuts, and the cuts are basically pointed at corporations

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Speaker 1: as opposed to individuals. And we can talk about the

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Speaker 1: details and so on, but um, it's a corporate tax cut.

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Speaker 1: It's market friendly. I won't deny that it has been

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Speaker 1: market friendly, but most of the benefits go to the

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Speaker 1: corporations and individuals basically are flatline. Despite the claims, I

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Speaker 1: would say, this is the interesting argument that I'm seeing.

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Speaker 1: It's sort of like the Laffer curve uh being back,

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Speaker 1: but this time regarding wages. Their claim the Republicans claimed that, uh,

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Speaker 1: you know, if if you uh can can lower taxes,

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Speaker 1: you can raise wages. The old trickle down. And it's

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Speaker 1: supported by continuing studies by the Council of Economic Advisors, etcetera, etcetera.

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Speaker 1: Private economists such as Larry Summers and others. Uh. You know,

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Speaker 1: Summers said the other day that he would give an

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Speaker 1: F to F to any student who submitted a paper

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Speaker 1: supporting this logic. Um, so we have an ongoing debate.

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Speaker 1: I say, one chart and I'll finish with this. And

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Speaker 1: the answer, Uh, the the economist has a chart this

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Speaker 1: week which shows UH lowering corporate taxes in many countries

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Speaker 1: over many years. And basically it's a push in terms

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Speaker 1: of the wage gains for the population. And so, you know,

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Speaker 1: big arguments back and forth, but I suspect it's not

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Speaker 1: gonna help much into was a wage growth. We certainly

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Speaker 1: didn't see it today, did we. No, we did not

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Speaker 1: Bill thank you so much for coming prepared. Mr Garoffalo

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Speaker 1: is gonna make a difference for the forty Niners from

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Speaker 1: New England out to San Francisco. Yeah, I think so.

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Speaker 1: I think the Niners will win a game this year.

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Speaker 1: They may still get the first draft choice of the

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Speaker 1: Browns do the same. But I think next year it's

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Speaker 1: up better season. How can it be worse? Very good Bill, girls,

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Speaker 1: thank you for your attendance today and particularly joining us

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Speaker 1: a few days ago in five Day as well. We

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Speaker 1: greatly appreciate his perspective. He is with Janice Henderson over

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Speaker 1: the next half hour. We hope you regroup with us

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Speaker 1: on an extraordinary week of economics, finance investment. David gur Friends,

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Speaker 1: Laqua and I never a chance were humbled by the

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Speaker 1: quality of the guests. We get to speak with Vincent

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Speaker 1: Reinhart yesterday. It was a real high point. I thought

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Speaker 1: that Alan Blinder added value and fed day. We spoked

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Speaker 1: to Mr Gross twice, any number of other guests, and

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Speaker 1: it is wonderful to try to summarize the week with

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Speaker 1: Yacom Fells with Morgan Stanley for years, where he literally

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Speaker 1: founded with Steve Roach the zeitgeist of Morgan Stanley Economics.

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Speaker 1: He holds court at PIMCO is their global economic advisory

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Speaker 1: Yacom Fells. If you were to write for Monday morning,

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Speaker 1: what would your essay b on this historic week? Well, Tom,

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Speaker 1: what would my essay be? Well, first of all, I

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Speaker 1: would point out that the US economy, you know, if

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Speaker 1: you look at payrolls and the other economic data, is

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Speaker 1: really what I would call is so so economy. And

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Speaker 1: I say so so because the fat characterizes growth as solid.

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Speaker 1: That was the new language in the f O m

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Speaker 1: C statement. And they also said inflation is soft. So

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Speaker 1: we have a so so economy. And importantly we now

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Speaker 1: have a new fet chair who is very much like

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Speaker 1: the old Fat chair. So the Powell Fed, what would

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Speaker 1: the Power Fed look like? Well, it's probably going to

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Speaker 1: be like the Yelling Fed, just without Janet Yellen Um.

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Speaker 1: And then the big question that I would pose is

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Speaker 1: you know, how much of a tax cut will we get?

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Speaker 1: And is it a good idea to cut taxes in

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Speaker 1: the ninth year of an economic expansion when the labor

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Speaker 1: market is gradually running out of slack. I'm trying to

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Speaker 1: figure out which way to go here. Let's go to

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Speaker 1: tax reform, which of course, is the headlines today and

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Speaker 1: what everybody will be thinking about into the into the weekend.

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Speaker 1: If we have tax reform and you question the need

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Speaker 1: for it given the buoyant economy. If every single interview

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Speaker 1: we've talked about and talked to it says it's tax cuts, next,

428
00:25:50,520 --> 00:25:53,320
Speaker 1: tax reforms, is yakulm Fell is going to be writing

429
00:25:53,400 --> 00:25:58,480
Speaker 1: fiscal economics in eighteen or twenty four months. Well, look,

430
00:25:58,720 --> 00:26:01,960
Speaker 1: I think there is a need for tax reform, so um,

431
00:26:02,560 --> 00:26:04,200
Speaker 1: but I don't think there's a need for a big

432
00:26:04,240 --> 00:26:07,760
Speaker 1: tax cut. So tax cut the way I would define it,

433
00:26:07,840 --> 00:26:11,080
Speaker 1: that's just demand stimulus, and that's not what this economy

434
00:26:11,119 --> 00:26:14,160
Speaker 1: needs at this stage of the cycle. The tax reform,

435
00:26:14,280 --> 00:26:17,760
Speaker 1: a real tax reform that reduces marginal tax rates but

436
00:26:18,080 --> 00:26:20,879
Speaker 1: broadens the tax base and it's good for long term growth.

437
00:26:21,400 --> 00:26:24,080
Speaker 1: That's something we need. But unfortunately that's not what we're

438
00:26:24,080 --> 00:26:26,960
Speaker 1: likely to get. So much of this and this to

439
00:26:27,040 --> 00:26:29,840
Speaker 1: go to PIMCO and the new normal, the new neutral.

440
00:26:30,520 --> 00:26:32,639
Speaker 1: I'm I'm coined a phrase today. You can steal it

441
00:26:32,640 --> 00:26:34,840
Speaker 1: from a Yakom in the Royalty check. Will be great

442
00:26:35,400 --> 00:26:38,119
Speaker 1: for the new hockey skates the kids need, uh, the

443
00:26:38,200 --> 00:26:42,840
Speaker 1: new restrictive. Where is when do we get restrictive? How

444
00:26:42,840 --> 00:26:46,400
Speaker 1: can we have a new restrictive If people are criticizing

445
00:26:46,400 --> 00:26:50,080
Speaker 1: Governor Kearney for raising rates, and people out past December

446
00:26:50,160 --> 00:26:52,480
Speaker 1: say what will the US do? Do you know where

447
00:26:52,480 --> 00:26:57,040
Speaker 1: we get restrictive? Well, that's the one million dollar question

448
00:26:57,160 --> 00:27:00,359
Speaker 1: I think. I mean, nobody really knows where this famous

449
00:27:00,440 --> 00:27:03,400
Speaker 1: neutral rate is. Well, we think that, you know, it's

450
00:27:03,400 --> 00:27:06,560
Speaker 1: around two two and a half percent in nominal terms,

451
00:27:07,080 --> 00:27:10,160
Speaker 1: but there's huge uncertainty around that. You know, anybody who

452
00:27:10,160 --> 00:27:13,960
Speaker 1: has run these models that estimate the neutral rate knows

453
00:27:14,080 --> 00:27:17,560
Speaker 1: that it could easily be fifty or a hundred basis

454
00:27:17,600 --> 00:27:20,919
Speaker 1: points higher than that or lower than that. So, to

455
00:27:20,960 --> 00:27:23,520
Speaker 1: put it differently, we may already there's a there's a

456
00:27:23,560 --> 00:27:28,520
Speaker 1: possibility that were already pretty close to neutral and may

457
00:27:28,600 --> 00:27:31,159
Speaker 1: move into restrictive fairly soon. Because if you look at

458
00:27:31,200 --> 00:27:36,440
Speaker 1: the current situation, we have inflation core PC inflation running

459
00:27:36,440 --> 00:27:40,000
Speaker 1: at one point three percent. The Fed funds rate is

460
00:27:40,480 --> 00:27:44,600
Speaker 1: at one to one twenty five. So if you think

461
00:27:44,680 --> 00:27:48,240
Speaker 1: that the real neutral rate is around zero, then we're

462
00:27:48,280 --> 00:27:50,840
Speaker 1: not far away from that. So this is why I

463
00:27:50,880 --> 00:27:53,520
Speaker 1: think the FED and the power Fed will have to

464
00:27:53,600 --> 00:27:57,560
Speaker 1: treat very very cautiously as they raise interest rates, and

465
00:27:57,600 --> 00:27:59,760
Speaker 1: they will also have to factor in that they're running

466
00:27:59,760 --> 00:28:02,879
Speaker 1: down the balance sheet, which in itself you know, should

467
00:28:02,920 --> 00:28:07,359
Speaker 1: have a restrictive impact. So nobody knows where restrictive is.

468
00:28:07,560 --> 00:28:10,960
Speaker 1: But I think we may be closer than the consensus

469
00:28:11,000 --> 00:28:13,960
Speaker 1: things on a social basis. And I look at China

470
00:28:14,040 --> 00:28:18,359
Speaker 1: real rates as being higher, yahkunfels. Why can't we get

471
00:28:18,400 --> 00:28:24,760
Speaker 1: back to a nicely positive inflation adjusted rate, whether it's

472
00:28:24,880 --> 00:28:27,879
Speaker 1: FED funds target or three month or five year or

473
00:28:28,240 --> 00:28:30,800
Speaker 1: maybe I'll go out as first seven years. It's it

474
00:28:30,840 --> 00:28:33,760
Speaker 1: seems like the rules are broken, the model is broken,

475
00:28:34,119 --> 00:28:38,520
Speaker 1: and I can't get back to normal inflation adjusted interest rates. Well,

476
00:28:38,560 --> 00:28:41,080
Speaker 1: I don't think the rules are broken. I rather and

477
00:28:41,120 --> 00:28:43,360
Speaker 1: I don't think the model is broken. I rather think

478
00:28:43,360 --> 00:28:46,120
Speaker 1: the world has changed. And so I think what's weighing

479
00:28:46,160 --> 00:28:50,440
Speaker 1: down on his famous equilibrium interest rate and therefore also

480
00:28:50,440 --> 00:28:56,960
Speaker 1: on market interest rates. Are these secular structural forces demographics right, aging,

481
00:28:57,360 --> 00:29:01,960
Speaker 1: rising life expectancy which uses people to save more. And

482
00:29:02,080 --> 00:29:07,240
Speaker 1: we have another major global force technology and the third

483
00:29:07,240 --> 00:29:12,959
Speaker 1: one globalization, which both lead to higher desired saving and

484
00:29:13,080 --> 00:29:15,800
Speaker 1: lower desired investment. So this is weighing down on the

485
00:29:15,840 --> 00:29:18,760
Speaker 1: equilibrium interest rate, and then whenever central banks try to

486
00:29:18,960 --> 00:29:22,760
Speaker 1: hike their own rates above that equilibrium rate, then the

487
00:29:22,800 --> 00:29:25,640
Speaker 1: economy folters. So this is why I think we are

488
00:29:25,760 --> 00:29:29,040
Speaker 1: stuck in the new neutral right. There's no escape from

489
00:29:29,080 --> 00:29:32,840
Speaker 1: this saving blood. This is a wonderful and thoughtful conversation

490
00:29:33,000 --> 00:29:36,520
Speaker 1: with Pimco. Yakum Fells are Global Economic advisor. I want

491
00:29:36,560 --> 00:29:39,160
Speaker 1: to continue this discussion and we really center in on

492
00:29:39,280 --> 00:29:42,160
Speaker 1: the word that's percolating up for analysis for two thousand

493
00:29:42,160 --> 00:29:45,160
Speaker 1: and eighteen. It gets a little geeky nerdy, but I

494
00:29:45,200 --> 00:29:47,600
Speaker 1: really want you to stay with us, with the Yakam

495
00:29:47,600 --> 00:29:50,920
Speaker 1: Fells on the dynamics of capital, the dynamics of investment,

496
00:29:50,920 --> 00:29:53,880
Speaker 1: if you will, the dynamics of labor, and as he

497
00:29:53,920 --> 00:29:58,200
Speaker 1: mentioned this dynamic and this interesting human condition of our

498
00:29:58,240 --> 00:30:01,040
Speaker 1: new technologies, I guess it doved else where, the Apple

499
00:30:01,120 --> 00:30:04,160
Speaker 1: trotting out the new toy today Yacom fells with us

500
00:30:04,160 --> 00:30:07,120
Speaker 1: with Pimco. As I promised, we're gonna go back to

501
00:30:07,240 --> 00:30:12,400
Speaker 1: Robert Solo MT seven. I am using the phrase quote

502
00:30:12,520 --> 00:30:17,440
Speaker 1: technical change unquote is a shorthand expression for any kind

503
00:30:17,480 --> 00:30:23,040
Speaker 1: of shift in the production function. Yacom Fells, Robert Solo,

504
00:30:23,080 --> 00:30:25,280
Speaker 1: and we're honored that the Laureate has been with us

505
00:30:25,320 --> 00:30:30,080
Speaker 1: a few times over the years. Robert Solo's technical change

506
00:30:30,120 --> 00:30:33,920
Speaker 1: of nineteen fifty seven is that the same as Yakom

507
00:30:33,920 --> 00:30:40,960
Speaker 1: Fell's technology and technical change and innovation of two thousand seventeen. Well,

508
00:30:41,080 --> 00:30:45,280
Speaker 1: but definitely seeing a lot of technical change, tom Um.

509
00:30:45,320 --> 00:30:48,240
Speaker 1: I think what has changed over the past few decades

510
00:30:48,320 --> 00:30:51,840
Speaker 1: is that a lot of the innovation and the technological

511
00:30:51,960 --> 00:30:55,960
Speaker 1: change we are seeing is not showing up in productivity.

512
00:30:56,400 --> 00:31:01,080
Speaker 1: So we're seeing rapid technological change, but a lot of

513
00:31:01,160 --> 00:31:06,800
Speaker 1: that actually benefits us in our free time. It adds

514
00:31:06,840 --> 00:31:09,920
Speaker 1: to consumer surplus. We can do amazing things with those

515
00:31:09,960 --> 00:31:12,800
Speaker 1: new iPhones that you know, people have been rushing out

516
00:31:12,800 --> 00:31:18,040
Speaker 1: to buy today, But that really doesn't increase productivity in

517
00:31:18,080 --> 00:31:21,800
Speaker 1: the workplace. So we have this, you know, this, this

518
00:31:21,960 --> 00:31:25,040
Speaker 1: really big discrepancy, the gap that is opening up between

519
00:31:25,080 --> 00:31:31,400
Speaker 1: the pace of technological change and productivity in the economy

520
00:31:31,400 --> 00:31:34,480
Speaker 1: where we're not really seeing a pickup. And I think

521
00:31:34,560 --> 00:31:37,120
Speaker 1: that you know, I think will continue to live with

522
00:31:37,200 --> 00:31:41,640
Speaker 1: that gap, and it has some far reaching consequences because

523
00:31:41,720 --> 00:31:45,800
Speaker 1: lower productivity means our living standards are not rising. As

524
00:31:45,920 --> 00:31:50,760
Speaker 1: rapidly UM. It also means that we are seeing, to

525
00:31:50,880 --> 00:31:53,720
Speaker 1: go back to what we discussed earlier, we're seeing less

526
00:31:53,760 --> 00:31:58,840
Speaker 1: and less investment in real capital by these large superstar firms.

527
00:31:58,840 --> 00:32:01,360
Speaker 1: So they're not really investing in real capital, they're investing

528
00:32:01,360 --> 00:32:05,320
Speaker 1: in people and in ideas UM. And that means the

529
00:32:05,360 --> 00:32:09,480
Speaker 1: corporate sector has now become a net saver. This is

530
00:32:09,520 --> 00:32:13,320
Speaker 1: really new. So corporates, especially those large superstar firms, they

531
00:32:13,480 --> 00:32:17,920
Speaker 1: are saving more than they invest, so they add to

532
00:32:18,000 --> 00:32:21,360
Speaker 1: the savings glut. And this means that they contribute to

533
00:32:21,400 --> 00:32:24,320
Speaker 1: the low interest rate environment that we're stuck in. If

534
00:32:24,320 --> 00:32:28,040
Speaker 1: I look at the core function, labor productivity is something

535
00:32:28,080 --> 00:32:32,440
Speaker 1: to do with the output as compared to the labor input.

536
00:32:32,880 --> 00:32:36,520
Speaker 1: I'm holding my iPhone seven in my hand, and yesterday

537
00:32:36,520 --> 00:32:41,040
Speaker 1: I probably emailed the vicious boss that I work for

538
00:32:41,600 --> 00:32:46,720
Speaker 1: fourteen times. I'm certain, Yakum fels that's not in the statistics.

539
00:32:46,720 --> 00:32:51,440
Speaker 1: How does my use of my Apple iPhone affect the

540
00:32:51,560 --> 00:32:58,160
Speaker 1: nation's output volume and also it's calculation of labor input. Well,

541
00:32:58,200 --> 00:33:02,120
Speaker 1: the simple answer that it doesn't. Both both sides critically

542
00:33:02,120 --> 00:33:05,000
Speaker 1: doesn't show up. And the numerator of the denominator right

543
00:33:05,320 --> 00:33:08,080
Speaker 1: correct so you know, it may make you more happy

544
00:33:08,160 --> 00:33:10,600
Speaker 1: Tom to be able to do all these nice things

545
00:33:10,600 --> 00:33:13,280
Speaker 1: on your iPhone. But this doesn't show up in the

546
00:33:13,400 --> 00:33:16,440
Speaker 1: in the in the statistics, um, but it adds to

547
00:33:16,480 --> 00:33:19,760
Speaker 1: consumer surplus. So you know, our well being, you know,

548
00:33:19,800 --> 00:33:21,480
Speaker 1: if you want to call this well being, you know,

549
00:33:21,560 --> 00:33:24,120
Speaker 1: to be able to use all this information on the iPhone,

550
00:33:24,640 --> 00:33:27,160
Speaker 1: well being is increasing, but we're not capturing it. And

551
00:33:27,200 --> 00:33:31,239
Speaker 1: nobody's a labor communication. And you misunderstood me. I'm not

552
00:33:31,360 --> 00:33:35,960
Speaker 1: sending emails or tweets out my iPhone the which from Purdue.

553
00:33:36,160 --> 00:33:38,800
Speaker 1: She's the boy. She she's sending me. Granted, if she

554
00:33:38,840 --> 00:33:42,920
Speaker 1: sends me to Purdue football schedule, that's recreational. But if

555
00:33:42,920 --> 00:33:44,960
Speaker 1: she's yelling at me, telling me what to do, hate

556
00:33:45,000 --> 00:33:48,200
Speaker 1: mail and all that, that's labor input that's got to

557
00:33:48,240 --> 00:33:53,480
Speaker 1: be calculated. Doesn't it into hours worked? Uh no, it doesn't,

558
00:33:53,880 --> 00:33:56,080
Speaker 1: you know, it doesn't. I think she she can send

559
00:33:56,080 --> 00:33:58,479
Speaker 1: you more of those hate mails with the iPhone than

560
00:33:58,560 --> 00:34:01,160
Speaker 1: she could otherwise, But I think I don't think that

561
00:34:01,200 --> 00:34:04,320
Speaker 1: gets counted because she can just do more in every hour.

562
00:34:04,680 --> 00:34:07,760
Speaker 1: And so you know, maybe it's even just maybe it's

563
00:34:07,760 --> 00:34:11,480
Speaker 1: even substracting from from your productivity because I'm not sure

564
00:34:11,520 --> 00:34:15,240
Speaker 1: it helps you Tom. You know, folks, John, I gotta

565
00:34:15,239 --> 00:34:17,839
Speaker 1: get yacum fills as my agent. You are just dig

566
00:34:21,200 --> 00:34:24,319
Speaker 1: he can be my agent. Yeah, coom to productivity on

567
00:34:23,760 --> 00:34:27,160
Speaker 1: a on a larger scale. Does it fit into the

568
00:34:27,200 --> 00:34:31,200
Speaker 1: calculations of a given central bank or is it so esoteric?

569
00:34:31,400 --> 00:34:34,440
Speaker 1: Is for me and our listeners it is does it

570
00:34:34,480 --> 00:34:40,319
Speaker 1: really fit into what I'm gonna do decembert Well maybe not.

571
00:34:40,760 --> 00:34:43,800
Speaker 1: Maybe it doesn't matter for December thirteenth, but it matters

572
00:34:43,840 --> 00:34:47,879
Speaker 1: for central banks thinking on where they will end up

573
00:34:48,000 --> 00:34:51,399
Speaker 1: or where they where they want to end up, when

574
00:34:51,920 --> 00:34:55,720
Speaker 1: and when they get to neutral because low productivity growth

575
00:34:56,000 --> 00:34:59,080
Speaker 1: is one reason why the neutral rate of interest has

576
00:34:59,120 --> 00:35:02,360
Speaker 1: come down. So think for central banks it's a It

577
00:35:02,719 --> 00:35:05,960
Speaker 1: matters a lot what productivity growth does and what it

578
00:35:06,000 --> 00:35:08,839
Speaker 1: will what it will do in the future, because that

579
00:35:08,960 --> 00:35:12,520
Speaker 1: determines on where that famous neutral interest rate is. How

580
00:35:12,560 --> 00:35:15,200
Speaker 1: do you respond when a president of the United States

581
00:35:15,280 --> 00:35:17,040
Speaker 1: or a prime minister, I don't mean to pick up

582
00:35:17,120 --> 00:35:20,680
Speaker 1: Mr Trump within the politics, as we're going to get

583
00:35:20,719 --> 00:35:23,440
Speaker 1: to four percent g d P or a run ray

584
00:35:23,480 --> 00:35:27,439
Speaker 1: to three. How do you respond to that? Well, it's

585
00:35:27,440 --> 00:35:30,360
Speaker 1: easier set than done, you know, to get there. So

586
00:35:31,320 --> 00:35:34,600
Speaker 1: with a labor force, say here in the US, growing

587
00:35:34,680 --> 00:35:38,520
Speaker 1: at half a percent, you would need a big pick

588
00:35:38,600 --> 00:35:42,200
Speaker 1: up in productivity, and we just discussed that that's pretty unlikely.

589
00:35:42,360 --> 00:35:45,520
Speaker 1: So I would not try to get growth up there.

590
00:35:45,520 --> 00:35:47,759
Speaker 1: I think you could do it in the short term

591
00:35:48,040 --> 00:35:51,680
Speaker 1: if you if you do a big fiscal stimulus, but

592
00:35:51,800 --> 00:35:54,759
Speaker 1: the price to pay for that would be overheating and

593
00:35:54,800 --> 00:35:57,360
Speaker 1: probably a more aggressive FED, and then you end up

594
00:35:57,400 --> 00:35:59,600
Speaker 1: in a recession one or two years later. This has

595
00:35:59,640 --> 00:36:02,560
Speaker 1: been a very generous Yacolm Fells with us with PIMCO,

596
00:36:02,560 --> 00:36:06,000
Speaker 1: their Global Economic advisor. His writings you can see at

597
00:36:06,000 --> 00:36:08,600
Speaker 1: their website. I really can't say enough about the combination

598
00:36:09,080 --> 00:36:12,560
Speaker 1: of Professor Claire to Richard Clarida and Yacolm Fells at

599
00:36:12,600 --> 00:36:16,040
Speaker 1: PIMCO for trying to help you get your thoughts straightened

600
00:36:16,040 --> 00:36:19,359
Speaker 1: out here and particularly in the weekend reading. It's been

601
00:36:19,400 --> 00:36:22,719
Speaker 1: a seismic week for economics, finance, and investment. We're all

602
00:36:22,719 --> 00:36:25,759
Speaker 1: going to regroup over the UH the weekend and dive

603
00:36:25,800 --> 00:36:28,920
Speaker 1: into November. Really dive into November here. I feel in

604
00:36:29,680 --> 00:36:32,040
Speaker 1: Monday that dashed a year in and then into two

605
00:36:32,120 --> 00:36:34,839
Speaker 1: thousand eighteen. Of course, a lot of what we're gonna

606
00:36:34,920 --> 00:36:39,240
Speaker 1: do is on tax reform. Our team is really trying

607
00:36:39,280 --> 00:36:42,279
Speaker 1: to give you a perspective out of Washington from the

608
00:36:42,320 --> 00:36:45,640
Speaker 1: think tanks. We will lean on the Urban brook Urban

609
00:36:45,680 --> 00:36:50,600
Speaker 1: Brookings Text Policy Center. These are the experts across their

610
00:36:50,640 --> 00:36:55,440
Speaker 1: their bipartisan there there across all of the different political

611
00:36:55,520 --> 00:37:00,400
Speaker 1: regimes of Washington. UH Bill Gale and UH Eugene Jury,

612
00:37:00,520 --> 00:37:02,200
Speaker 1: of course has been on the show many times in

613
00:37:02,280 --> 00:37:05,960
Speaker 1: Howard Gleckman really providing in the trenches. Leadership for Tax

614
00:37:06,320 --> 00:37:09,160
Speaker 1: Policy Center. Will try to get their perspective over the

615
00:37:09,160 --> 00:37:12,919
Speaker 1: coming days on this incredibly important document. Whether you think

616
00:37:12,920 --> 00:37:16,560
Speaker 1: it's tax reform or if it's tax cuts, however you

617
00:37:16,560 --> 00:37:19,319
Speaker 1: want to look at it, whatever the politics is, it's

618
00:37:19,360 --> 00:37:24,320
Speaker 1: a convoluted and complex set of hopes by the GOP

619
00:37:24,960 --> 00:37:27,279
Speaker 1: and by the President, and we'll see where that at

620
00:37:27,360 --> 00:37:29,120
Speaker 1: least I'm sure we'll see a lot of writing on

621
00:37:29,120 --> 00:37:40,880
Speaker 1: that over the weekend. Thanks for listening to the Bloomberg

622
00:37:40,880 --> 00:37:47,239
Speaker 1: Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,

623
00:37:47,600 --> 00:37:51,440
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at

624
00:37:51,440 --> 00:37:56,160
Speaker 1: Tom Keene. David Gura is at David Gura before the podcast.

625
00:37:56,440 --> 00:38:02,920
Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio