Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene with
Speaker 1: David Gura. Daily we bring you insight from the best
Speaker 1: of economics, finance, investment, and international relations. Find Bloomberg Surveillance
Speaker 1: on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course
Speaker 1: on the Bloomberg Right Now, Dr Post and Adam pose
Speaker 1: it with us with the Peterson Institute, I'm gonna ask
Speaker 1: one question and let truly one of our Washington experts
Speaker 1: dive in here. Adam, the Peterson Institute will be writing
Speaker 1: about tax reform. What tact will you take? Well, I
Speaker 1: have to do the disclaimer. Our individual scholars take that,
Speaker 1: each their own tack, but they're pretty much gonna all agree,
Speaker 1: which is a This is much more about cuts than
Speaker 1: reform of the tax system. Be the in line with
Speaker 1: what you were saying on TV before, Tom, that the
Speaker 1: claims of wage improvements and job improvements in the short
Speaker 1: term vastly exaggerated. See there are a couple of good
Speaker 1: things in there, like they moved somewhat towards territoriality, the
Speaker 1: cutbacks and the mortgage interest deduction, um, the expensive investment.
Speaker 1: But d as my colleague Jason Furman, among others, has
Speaker 1: pointed out the question is what are those pay for
Speaker 1: us paying for? And if they're just paying for heavily
Speaker 1: tilted towards the rich on the personal tax side and
Speaker 1: uh not terribly useful tax cuts on the corporate side,
Speaker 1: it's not going to go very well for those of
Speaker 1: us who live in high tax states like New York
Speaker 1: and New Jersey the state and local tax uh deductions Washington,
Speaker 1: you I noticed you did not mention that. Is that
Speaker 1: one of the things that is bad or is that
Speaker 1: actually more Again I I'm I'm not going to make
Speaker 1: that the biggest bad thing, because that is more about
Speaker 1: redistribution than about the economy as a whole, and it
Speaker 1: is hitting the people who take deductions rather than the
Speaker 1: standard deduction. That said, it's clearly a political move of
Speaker 1: trying to starve the beast of state governments that hurts
Speaker 1: people mostly in blue states, and that in particular is
Speaker 1: going to make it harder for state governments to sustain
Speaker 1: their tax rates and thus the size of their governments.
Speaker 1: So I don't feel it as good. Um, But again,
Speaker 1: this is ull getting away. The big picture thing is
Speaker 1: that these these pay fors are not going to be
Speaker 1: anywhere near enough for an economy basically full employment. And
Speaker 1: what they're claiming is one point five trillion in deficit
Speaker 1: increase at that state of affairs, which is already bad.
Speaker 1: UM is probably going to be closer to two trillion plus.
Speaker 1: So given the deficit implications of this proposal, you know
Speaker 1: you've watched watching for a long time, how do you
Speaker 1: write the chances of actual tax bill of any kind
Speaker 1: getting through this Congress. I've been an outlier for some
Speaker 1: months now because I've said a year ago September in
Speaker 1: the forecast UM that the big economic policy of the
Speaker 1: Trump administration, besides deregulation, which people overlook UM, is going
Speaker 1: to be corporate tax cuts, and everything else will be
Speaker 1: sort of secondary. And I was wrong about the timing
Speaker 1: because like everybody else, I couldn't believe they'd fast around
Speaker 1: for nine months before submitting a budget UM. But the
Speaker 1: bottom line is that's what we're gonna end up with.
Speaker 1: So I think it's plus chance it it gets approved,
Speaker 1: and whatever else needs to be shed will be shed,
Speaker 1: but the core of the tax changes for the corporate
Speaker 1: statutory rate will remaind You glance at this how much
Speaker 1: economic growth can Republicans model I understand in the heat
Speaker 1: of the the moment, the camera lights around, they frame
Speaker 1: a bigger number, But can you do you have a
Speaker 1: working number where you can gross up g d P
Speaker 1: off of the enthusiasm of tax cuts. Well, I tend
Speaker 1: to um. There are people, as you mentioned earlier about
Speaker 1: the Joint Joint Committee and Taxation, the CBO Congressional Budget
Speaker 1: Office within the government, and then the Tax Center Urban
Speaker 1: Brookings outside government, as well as the Tax Foundation that
Speaker 1: do this stuff very carefully. But as a macro economist,
Speaker 1: and it's it's consistent with their analyzes. You know, you're
Speaker 1: adding to the deficit three quarters or percentage GDP a year,
Speaker 1: probably closer to one percent, both on average, but then
Speaker 1: maybe a little front loaded um. And some of the
Speaker 1: investment stuff is particularly front loaded and it's impact. So
Speaker 1: I could see you having a multiplier on that, given
Speaker 1: that we're at full employment of you know, around point
Speaker 1: six UM, you do a little dynamic scoring, you can
Speaker 1: maybe push it up a little bit from there, I
Speaker 1: don't think much more. So that gets you close to
Speaker 1: three percent growth for the next couple of years, and
Speaker 1: it's not sustainable. It's adding to the debt um, it's
Speaker 1: not entirely efficient, and we'll see how much goes into
Speaker 1: actual investment rather than to dividends. But leaving all that aside, Yeah,
Speaker 1: I mean, it's better to be lucky than to be smart,
Speaker 1: tom As, I certainly know, and I think the president
Speaker 1: was in a sense lucky that he didn't get his
Speaker 1: budget till now, because now the boom is probably gonna
Speaker 1: be perfectly time for the two thousand election. Interesting, Adam posing,
Speaker 1: thank you so much, very valuable on Bloomberg Television and
Speaker 1: Bloomberg Radio today, Marty, what is what are you watching for?
Speaker 1: Within you know, Craig Gordon and the whole team in
Speaker 1: Washington working on this is what's the twister angle and
Speaker 1: tax reform that that you're watching for? Well, I'm I'm
Speaker 1: watching Paul Ryan. I mean the he is the tax wonky,
Speaker 1: is the guy who everybody respects in terms of his
Speaker 1: intellectual capacity on these issues and what he says if
Speaker 1: he can bring his house along, because there are a
Speaker 1: lot of divisions within his party as general, that's the
Speaker 1: key for me. Interesting, And we'll overlay that politics, if
Speaker 1: you will, with some of the analysis out of Washington particular.
Speaker 1: Shout out to Urban Brookings and their Tax Policy Center worldwide.
Speaker 1: This job's day, This is Bloomberg Helly now welcome. I'm
Speaker 1: Bloomberg Television Worldwide and here on Bloomberg Radio. William Gross
Speaker 1: he was very kind to be with us on FED
Speaker 1: Day and reducts that with Janice Henderson. Right now, Bill,
Speaker 1: you know, I really want to talk about the broader fabric.
Speaker 1: We see the U six number coming to seven point nine.
Speaker 1: Are we at a point where the financial crisis and
Speaker 1: the labor crisis of that disaster is behind us? Well,
Speaker 1: I think so. Um, you know, to the extent that
Speaker 1: we've got a little room to to to lower if
Speaker 1: a crisis appears over the horizon, to the extent that
Speaker 1: quantitative eason might come back. You know, I think we've
Speaker 1: got some ammunition. And in fact we do tom have
Speaker 1: a decently as economists would call it, robust economy with
Speaker 1: growth at three plus at least for the last two quarters,
Speaker 1: despite these rather disappointing employment numbers. So I think we're
Speaker 1: past the crisis certainly in most of the world, most
Speaker 1: of the developed world, but we have a potential crisis
Speaker 1: I think in Asia and China going forward. You were
Speaker 1: more than generous to be with us here on FED Day.
Speaker 1: I did ask you about your own Powell. I'll be
Speaker 1: nice built you. Uh, maybe it's because of San Francisco
Speaker 1: forty Niners are doing so poorly this year. But you
Speaker 1: weren't polite about it. You didn't mince words. We thank
Speaker 1: you for that. About the next chairman of the FED,
Speaker 1: you heard him speak yesterday, how can economists assist assist
Speaker 1: Jerome Powell to a better Fed? Well, I think a
Speaker 1: certain kind of economists can assist Jerome Pile and that
Speaker 1: that depends, of course, on the appointments going forward. Uh.
Speaker 1: You know, Trump's got three and certainly four. I think
Speaker 1: as Janet Yellen probably will resign as as uh FED
Speaker 1: chairman and chairwomen do in tradition, and so he's got
Speaker 1: four appointments going forward. He can pack the court, so
Speaker 1: to speak, just my FDR. And it depends on his
Speaker 1: appointments going forward, whether they're doves or hawks. And I
Speaker 1: presume that there will be doves. And so what can
Speaker 1: we learn from that when they're appointed? Uh, you know,
Speaker 1: potentially you can learn in my view at least, that
Speaker 1: there are subjective factors longer term structural factors such as
Speaker 1: demographics at place, such as technology advancement and displacement of
Speaker 1: labor at play, and ongoing globalization, so we can learn
Speaker 1: from those things as opposed to the old fashion models
Speaker 1: such as the tailor rule and others and the Phillips
Speaker 1: curve that you know have been failing us for the
Speaker 1: past ten, fifteen, twenty years. I hope he appoints someone
Speaker 1: with a more subjective as opposed to a model driven view.
Speaker 1: Here's the key question, Bill Gross, and we thank you
Speaker 1: for joining us on radio and television this morning with
Speaker 1: Janie Henderson. If we have low rate Janet, if we
Speaker 1: have low rate j and we have yield curves flattening,
Speaker 1: ten thirties flattening, twos tens flattening, what is that signal
Speaker 1: to Bill Gross? If you see flatter yield curves in
Speaker 1: the zeitgeist of a low rate central bank, well, I
Speaker 1: flatter curve is not positive. And let's look at it
Speaker 1: this way, since uh, you know, two thousand and eleven,
Speaker 1: and that takes us way back. But you know, the
Speaker 1: two ten curve was four and fifty basis points and
Speaker 1: now it's a hundred or less, and so it's flattened considerably.
Speaker 1: Since then, has ad made a difference. Not really, but
Speaker 1: in my view, at some point it will. Typically, you know,
Speaker 1: economists and stratagists say it's got to go flat before
Speaker 1: a recession appears. I would say, in a highly leveled
Speaker 1: economy with a lot of debt and that typifies the US,
Speaker 1: that we don't have to go flat, that perhaps another
Speaker 1: twenty basis points of tightening would be enough in order
Speaker 1: to induce certainly a slowdown in the economy. And I
Speaker 1: think central banks and the FED itself has to be
Speaker 1: careful in terms of using historical standards to judge monetary policy.
Speaker 1: I don't think they can raise interest rates too much
Speaker 1: further before there's the potential to slow economic growth. This
Speaker 1: is absolutely critical. Folks that Mr Gross's senor Jason, I
Speaker 1: want you to come over here. We're doing this on
Speaker 1: the fly and look, Jason, wheel around here, and I
Speaker 1: want to show what Bill Gross is talking about. Right now,
Speaker 1: here's the yield curve and down here are recessions. We're
Speaker 1: coming in like this, and Bill Gross, where do we
Speaker 1: get on the yield curve where it becomes a recession indicator?
Speaker 1: Where at seventy two basis points, how many basis points
Speaker 1: are we away where we flip from optimism to a
Speaker 1: real concern about economic slowdown? Yeah, I think around four
Speaker 1: year fifty year see your chart, But I know what
Speaker 1: you're talking about, uh and uh you know that indicates
Speaker 1: you know, perhaps another uh fifty basis points in terms
Speaker 1: of FED funds and maybe ten basis points higher intends
Speaker 1: to produce that type of number. You know. The critical
Speaker 1: element and all of this is really the cost of
Speaker 1: credit and what cost of credit? And we're talking about mortgages,
Speaker 1: we're talking about corporate loans, we're talking about uh, you know,
Speaker 1: government bonds. To a certain extent, the cost of credit
Speaker 1: relative to UM you know, the nominal growth in GDP,
Speaker 1: we have better nominal growth. We have four plus nominal
Speaker 1: growth now. And the cost of credit, uh, you know
Speaker 1: has been supportive of that's certainly quantitative easing has been
Speaker 1: supportive of that to the extent that we don't have
Speaker 1: QUI to the extent that interest rates go up by
Speaker 1: four year fifty points in your curve flattens by thirty
Speaker 1: or forty, then all of a sudden, the cost of
Speaker 1: credit and the absence of credit growth UM as typified
Speaker 1: by KWI become factors, and so I think I think
Speaker 1: the Fed has careful. I know, I know they think
Speaker 1: they have to be careful. I mean, we're gonna do this.
Speaker 1: I'm gonna make a chart up here for Bloomberg Radio,
Speaker 1: also for John Farroh. I'm gonna make up a chart
Speaker 1: here to show that tip point of forty to fifty
Speaker 1: basis points bill gross on tax reform. You've got to
Speaker 1: live with it. Can you live with a one point
Speaker 1: five trillion deficit add on? Or do you believe is
Speaker 1: ad im posing believes adam posing that we could go
Speaker 1: out to a to two trillion dollar add on? Well,
Speaker 1: you know, here's here's a funny one, and it's, uh,
Speaker 1: you know, I'm starting to rethink this time because we've
Speaker 1: seen um, you know, not necessarily deficits expanding, but central
Speaker 1: banks buying trillions and trillions of dollars worth of debt
Speaker 1: and then recycling the interest rate back to the central government.
Speaker 1: And so, you know, do deficits matter? I think ultimately
Speaker 1: do they do. We talked a few days ago about
Speaker 1: you know the present value of all of our liabilities,
Speaker 1: including social security and Medicare and Medicaid. It's you know,
Speaker 1: perhaps instead of eighteen trillion, it's perhaps seventy eight trillion.
Speaker 1: Of course debt matters, but in the short term, I
Speaker 1: don't think it matters that much. And uh, you know,
Speaker 1: we're moving to a fiscally stimulative type of environment as
Speaker 1: opposed to a monetary stimulative type of environment, and perhaps
Speaker 1: that's what we need. But ultimately some a believer in
Speaker 1: low debt as opposed to high debt. And it's incredible
Speaker 1: to me you know this too, that the Republican orthodoxy
Speaker 1: has simply changed from fiscal doves to fiscal hawks, and
Speaker 1: to deficit deniers to deficit supporters. The entire party is
Speaker 1: flip flopped, with Marty Schenker uh running all of our
Speaker 1: economics that govern and now chief content officer for all
Speaker 1: of Bloomberg News. Marty, what is your observation off the
Speaker 1: jobs report? Before we get back to Bill Gross, Well,
Speaker 1: I'm a little surprised that we hadn't heard from Donald
Speaker 1: Trump tweeting on the uh numbers of the jobs report,
Speaker 1: which he has not hesitated to take some credit for.
Speaker 1: But I think he is on his way to Asia.
Speaker 1: I think he's boarding a playing almost Hannolulu. Yeah, Bill
Speaker 1: Gross with us with Janie Henderson has been very kind
Speaker 1: to be with us, and I want to get back
Speaker 1: to tax reform and its ramifications on the nation. But Bill,
Speaker 1: there's a Bill Gross if people don't know. And I'm
Speaker 1: not talking about your resurgence of the San Francisco forty
Speaker 1: Niners and bringing Mr Garoppolo over from the New England
Speaker 1: Patriots and the fact you can beat the cardinals and
Speaker 1: the giants here in the coming days. I'm talking about
Speaker 1: your article for the c FA Institute of a few
Speaker 1: years ago, consistent alpha generation through structure. This is twelve
Speaker 1: years ago, and it's a Bill Gross. I think that
Speaker 1: a lot of our listeners don't know. We are seeing Bill,
Speaker 1: a lot of black box theories of hedge funds blow up,
Speaker 1: and we see it with challenging results. Maybe Ray Dalio
Speaker 1: of Bridgewater, who I just had the great privileges speaking
Speaker 1: to where it's really really hard now to make money
Speaker 1: quantitative black box formulaic whether it's risk parity or this
Speaker 1: that or the other thing. Is that from another bygone age,
Speaker 1: or can those guys create alpha down the road? Well,
Speaker 1: I I would agree with the premise of your question,
Speaker 1: Tom that that it is getting much harder to generate alpha,
Speaker 1: if only because returns certainly interest rates and potential equity
Speaker 1: returns are lower. I mean, you know, information ratios of
Speaker 1: the past were in part generated simply by bowl markets,
Speaker 1: and now um as interest rate spreads are very narrow
Speaker 1: and opportunities in my view, are limited. You know, alpha
Speaker 1: generation becomes much more difficult affirm like PIMCO. I was
Speaker 1: at PIMCO and we could generate hundred and fifty basis
Speaker 1: points per year in alpha. You know, it becomes a
Speaker 1: very challenged and I would say relative to that period
Speaker 1: of time that an excellent manager that can generate basis
Speaker 1: and so over the market is probably uh in a
Speaker 1: good stead. So yeah, it's very difficult, and I think
Speaker 1: the age of active management is it's not dead, but
Speaker 1: it's certainly overpriced, and uh, we're gonna have to see
Speaker 1: some changes going forward because they can't generate what they
Speaker 1: used to generate in classy of you at Janice Henderson
Speaker 1: mentioning your former employee as well as as we mentioned
Speaker 1: Ray Delio at Bridgewater. If that's the case, if active
Speaker 1: is a challenge, what needs to be the response, almost
Speaker 1: from a portfolio structure basis, did just assume less diversification,
Speaker 1: less theory and more let's take a chance. Well, no,
Speaker 1: you know, I wouldn't advise that. I think that's what's occurring. Uh.
Speaker 1: You know, individuals and pension funds and institutions are taking
Speaker 1: more risk in order to generate what they hope for,
Speaker 1: uh in terms of returns relative to their liabilities. Um,
Speaker 1: it can only go so far. We know, spreads can
Speaker 1: only go so tight before defaults tend to take over.
Speaker 1: In the bond market. We know, I suppose in the
Speaker 1: stock market that p s can only go so high
Speaker 1: before you know, it becomes limited in terms of its
Speaker 1: future expansion. And so yeah, i'd say, of you know,
Speaker 1: we have a limited future in terms of expected returns,
Speaker 1: and the response, as investors are are exhibiting is basically
Speaker 1: to move into a lower feed product to uh take
Speaker 1: away some of those returns from the managers as opposed
Speaker 1: to themselves. Bill Morty Schanker, Here is their risk associated
Speaker 1: with that search for alpha out in the marketplace? Well,
Speaker 1: there always is. Anytime you move, anytime you move out
Speaker 1: from a treasury build, there's risk. But I would say this, yes,
Speaker 1: when when interest rates are basically zero and they are
Speaker 1: or negative in Germany and other places, and that's certainly
Speaker 1: very low. In the United States and elsewhere, Um, you know,
Speaker 1: the risk is increased. I mean a thirty years swap.
Speaker 1: Most of your listeners may not be uh you know,
Speaker 1: appraised of this, but a thirty years swamp basically only
Speaker 1: earns fifty basis points a year in terms of carry
Speaker 1: whether close to a thirty year duration, it's a it's
Speaker 1: an impossible situation unless basically interest rates stay the same.
Speaker 1: So all markets are overpriced. I use the term fake
Speaker 1: markets because uh you know, they're being generated by artificial
Speaker 1: stimulation from central banks, which at some point will disappear.
Speaker 1: It's not disappearing yet, but in two thousand and eighteen,
Speaker 1: for instance, central banks stimulation check writing, quantitative easing UM
Speaker 1: will go flat line as opposed to a trillion dollars
Speaker 1: a year positive. And so there will be a point
Speaker 1: where where risk enters the equation simply because monetary stimulation
Speaker 1: slows down or even goes negative. If you were had
Speaker 1: the ability to UH counsel Droomee Powell on policy prescriptions
Speaker 1: going forward, what would what would those recommendations be? Well,
Speaker 1: I would advise him to study UH some of his
Speaker 1: own Fed research from the San Francisco FED, for instance,
Speaker 1: where they've done historical studies for a long time in
Speaker 1: terms of the neutral interest rate, and to try and
Speaker 1: find and seek out and search as he moves higher. Uh,
Speaker 1: you know, twenty five basis points for quarter. What that
Speaker 1: neutral interest rate is that it used to be in
Speaker 1: nominal terms around four percent and now perhaps with inflation
Speaker 1: and one a half percent, is probably around two. But
Speaker 1: that's a probably nobody knows. I would say, Mr Powell,
Speaker 1: find that magical neutral interest rate which keeps inflation at
Speaker 1: two percent or lower and growth at two percent or higher,
Speaker 1: and uh, and tread carefully because it's uh, it's a
Speaker 1: it's a changing number, and it's a it's a new
Speaker 1: world in terms of credit, and keep reducing that balance sheet,
Speaker 1: I would imagine, right, Well, I think that's okay. I'm
Speaker 1: not a balance sheet fanatic in terms of reducing it.
Speaker 1: I sort of think, Marty, that the balance sheet itself
Speaker 1: at four trillion plus is really a reflection of the
Speaker 1: leverage in our economy. We've got about sixty eight trillion
Speaker 1: in terms of total credit and four and a half
Speaker 1: trillion in terms of the FED balance sheet, And look
Speaker 1: at that as a bank. Um, you know, with equity
Speaker 1: capital maybe a five or six percent. You know, if
Speaker 1: you reduce that by half, your you've got an equity
Speaker 1: capitalization of two or three percent. We know banks don't
Speaker 1: do well on that, so I'd say, I'd say leave
Speaker 1: the balance you alone. It's okay, But they're they're gonna
Speaker 1: go forward. Bill the President yesterday with Chairman Brady of
Speaker 1: the House Ways and Means Committee, trotted out their card,
Speaker 1: their tax reform card, which I'm sure Bill Gross will
Speaker 1: be doing his taxes on, uh this year, the little
Speaker 1: three by five card, making it simple and all that.
Speaker 1: What is your process, what is your prospect for tax reform? What?
Speaker 1: What do you how do you model it into your business?
Speaker 1: And frankly, how should our listeners look at tax reform
Speaker 1: out three four in six months? Well, first of all time,
Speaker 1: in my view, it's not tax reform. It's tax cut
Speaker 1: scuts cuts, and the cuts are basically pointed at corporations
Speaker 1: as opposed to individuals. And we can talk about the
Speaker 1: details and so on, but um, it's a corporate tax cut.
Speaker 1: It's market friendly. I won't deny that it has been
Speaker 1: market friendly, but most of the benefits go to the
Speaker 1: corporations and individuals basically are flatline. Despite the claims, I
Speaker 1: would say, this is the interesting argument that I'm seeing.
Speaker 1: It's sort of like the Laffer curve uh being back,
Speaker 1: but this time regarding wages. Their claim the Republicans claimed that, uh,
Speaker 1: you know, if if you uh can can lower taxes,
Speaker 1: you can raise wages. The old trickle down. And it's
Speaker 1: supported by continuing studies by the Council of Economic Advisors, etcetera, etcetera.
Speaker 1: Private economists such as Larry Summers and others. Uh. You know,
Speaker 1: Summers said the other day that he would give an
Speaker 1: F to F to any student who submitted a paper
Speaker 1: supporting this logic. Um, so we have an ongoing debate.
Speaker 1: I say, one chart and I'll finish with this. And
Speaker 1: the answer, Uh, the the economist has a chart this
Speaker 1: week which shows UH lowering corporate taxes in many countries
Speaker 1: over many years. And basically it's a push in terms
Speaker 1: of the wage gains for the population. And so, you know,
Speaker 1: big arguments back and forth, but I suspect it's not
Speaker 1: gonna help much into was a wage growth. We certainly
Speaker 1: didn't see it today, did we. No, we did not
Speaker 1: Bill thank you so much for coming prepared. Mr Garoffalo
Speaker 1: is gonna make a difference for the forty Niners from
Speaker 1: New England out to San Francisco. Yeah, I think so.
Speaker 1: I think the Niners will win a game this year.
Speaker 1: They may still get the first draft choice of the
Speaker 1: Browns do the same. But I think next year it's
Speaker 1: up better season. How can it be worse? Very good Bill, girls,
Speaker 1: thank you for your attendance today and particularly joining us
Speaker 1: a few days ago in five Day as well. We
Speaker 1: greatly appreciate his perspective. He is with Janice Henderson over
Speaker 1: the next half hour. We hope you regroup with us
Speaker 1: on an extraordinary week of economics, finance investment. David gur Friends,
Speaker 1: Laqua and I never a chance were humbled by the
Speaker 1: quality of the guests. We get to speak with Vincent
Speaker 1: Reinhart yesterday. It was a real high point. I thought
Speaker 1: that Alan Blinder added value and fed day. We spoked
Speaker 1: to Mr Gross twice, any number of other guests, and
Speaker 1: it is wonderful to try to summarize the week with
Speaker 1: Yacom Fells with Morgan Stanley for years, where he literally
Speaker 1: founded with Steve Roach the zeitgeist of Morgan Stanley Economics.
Speaker 1: He holds court at PIMCO is their global economic advisory
Speaker 1: Yacom Fells. If you were to write for Monday morning,
Speaker 1: what would your essay b on this historic week? Well, Tom,
Speaker 1: what would my essay be? Well, first of all, I
Speaker 1: would point out that the US economy, you know, if
Speaker 1: you look at payrolls and the other economic data, is
Speaker 1: really what I would call is so so economy. And
Speaker 1: I say so so because the fat characterizes growth as solid.
Speaker 1: That was the new language in the f O m
Speaker 1: C statement. And they also said inflation is soft. So
Speaker 1: we have a so so economy. And importantly we now
Speaker 1: have a new fet chair who is very much like
Speaker 1: the old Fat chair. So the Powell Fed, what would
Speaker 1: the Power Fed look like? Well, it's probably going to
Speaker 1: be like the Yelling Fed, just without Janet Yellen Um.
Speaker 1: And then the big question that I would pose is
Speaker 1: you know, how much of a tax cut will we get?
Speaker 1: And is it a good idea to cut taxes in
Speaker 1: the ninth year of an economic expansion when the labor
Speaker 1: market is gradually running out of slack. I'm trying to
Speaker 1: figure out which way to go here. Let's go to
Speaker 1: tax reform, which of course, is the headlines today and
Speaker 1: what everybody will be thinking about into the into the weekend.
Speaker 1: If we have tax reform and you question the need
Speaker 1: for it given the buoyant economy. If every single interview
Speaker 1: we've talked about and talked to it says it's tax cuts, next,
Speaker 1: tax reforms, is yakulm Fell is going to be writing
Speaker 1: fiscal economics in eighteen or twenty four months. Well, look,
Speaker 1: I think there is a need for tax reform, so um,
Speaker 1: but I don't think there's a need for a big
Speaker 1: tax cut. So tax cut the way I would define it,
Speaker 1: that's just demand stimulus, and that's not what this economy
Speaker 1: needs at this stage of the cycle. The tax reform,
Speaker 1: a real tax reform that reduces marginal tax rates but
Speaker 1: broadens the tax base and it's good for long term growth.
Speaker 1: That's something we need. But unfortunately that's not what we're
Speaker 1: likely to get. So much of this and this to
Speaker 1: go to PIMCO and the new normal, the new neutral.
Speaker 1: I'm I'm coined a phrase today. You can steal it
Speaker 1: from a Yakom in the Royalty check. Will be great
Speaker 1: for the new hockey skates the kids need, uh, the
Speaker 1: new restrictive. Where is when do we get restrictive? How
Speaker 1: can we have a new restrictive If people are criticizing
Speaker 1: Governor Kearney for raising rates, and people out past December
Speaker 1: say what will the US do? Do you know where
Speaker 1: we get restrictive? Well, that's the one million dollar question
Speaker 1: I think. I mean, nobody really knows where this famous
Speaker 1: neutral rate is. Well, we think that, you know, it's
Speaker 1: around two two and a half percent in nominal terms,
Speaker 1: but there's huge uncertainty around that. You know, anybody who
Speaker 1: has run these models that estimate the neutral rate knows
Speaker 1: that it could easily be fifty or a hundred basis
Speaker 1: points higher than that or lower than that. So, to
Speaker 1: put it differently, we may already there's a there's a
Speaker 1: possibility that were already pretty close to neutral and may
Speaker 1: move into restrictive fairly soon. Because if you look at
Speaker 1: the current situation, we have inflation core PC inflation running
Speaker 1: at one point three percent. The Fed funds rate is
Speaker 1: at one to one twenty five. So if you think
Speaker 1: that the real neutral rate is around zero, then we're
Speaker 1: not far away from that. So this is why I
Speaker 1: think the FED and the power Fed will have to
Speaker 1: treat very very cautiously as they raise interest rates, and
Speaker 1: they will also have to factor in that they're running
Speaker 1: down the balance sheet, which in itself you know, should
Speaker 1: have a restrictive impact. So nobody knows where restrictive is.
Speaker 1: But I think we may be closer than the consensus
Speaker 1: things on a social basis. And I look at China
Speaker 1: real rates as being higher, yahkunfels. Why can't we get
Speaker 1: back to a nicely positive inflation adjusted rate, whether it's
Speaker 1: FED funds target or three month or five year or
Speaker 1: maybe I'll go out as first seven years. It's it
Speaker 1: seems like the rules are broken, the model is broken,
Speaker 1: and I can't get back to normal inflation adjusted interest rates. Well,
Speaker 1: I don't think the rules are broken. I rather and
Speaker 1: I don't think the model is broken. I rather think
Speaker 1: the world has changed. And so I think what's weighing
Speaker 1: down on his famous equilibrium interest rate and therefore also
Speaker 1: on market interest rates. Are these secular structural forces demographics right, aging,
Speaker 1: rising life expectancy which uses people to save more. And
Speaker 1: we have another major global force technology and the third
Speaker 1: one globalization, which both lead to higher desired saving and
Speaker 1: lower desired investment. So this is weighing down on the
Speaker 1: equilibrium interest rate, and then whenever central banks try to
Speaker 1: hike their own rates above that equilibrium rate, then the
Speaker 1: economy folters. So this is why I think we are
Speaker 1: stuck in the new neutral right. There's no escape from
Speaker 1: this saving blood. This is a wonderful and thoughtful conversation
Speaker 1: with Pimco. Yakum Fells are Global Economic advisor. I want
Speaker 1: to continue this discussion and we really center in on
Speaker 1: the word that's percolating up for analysis for two thousand
Speaker 1: and eighteen. It gets a little geeky nerdy, but I
Speaker 1: really want you to stay with us, with the Yakam
Speaker 1: Fells on the dynamics of capital, the dynamics of investment,
Speaker 1: if you will, the dynamics of labor, and as he
Speaker 1: mentioned this dynamic and this interesting human condition of our
Speaker 1: new technologies, I guess it doved else where, the Apple
Speaker 1: trotting out the new toy today Yacom fells with us
Speaker 1: with Pimco. As I promised, we're gonna go back to
Speaker 1: Robert Solo MT seven. I am using the phrase quote
Speaker 1: technical change unquote is a shorthand expression for any kind
Speaker 1: of shift in the production function. Yacom Fells, Robert Solo,
Speaker 1: and we're honored that the Laureate has been with us
Speaker 1: a few times over the years. Robert Solo's technical change
Speaker 1: of nineteen fifty seven is that the same as Yakom
Speaker 1: Fell's technology and technical change and innovation of two thousand seventeen. Well,
Speaker 1: but definitely seeing a lot of technical change, tom Um.
Speaker 1: I think what has changed over the past few decades
Speaker 1: is that a lot of the innovation and the technological
Speaker 1: change we are seeing is not showing up in productivity.
Speaker 1: So we're seeing rapid technological change, but a lot of
Speaker 1: that actually benefits us in our free time. It adds
Speaker 1: to consumer surplus. We can do amazing things with those
Speaker 1: new iPhones that you know, people have been rushing out
Speaker 1: to buy today, But that really doesn't increase productivity in
Speaker 1: the workplace. So we have this, you know, this, this
Speaker 1: really big discrepancy, the gap that is opening up between
Speaker 1: the pace of technological change and productivity in the economy
Speaker 1: where we're not really seeing a pickup. And I think
Speaker 1: that you know, I think will continue to live with
Speaker 1: that gap, and it has some far reaching consequences because
Speaker 1: lower productivity means our living standards are not rising. As
Speaker 1: rapidly UM. It also means that we are seeing, to
Speaker 1: go back to what we discussed earlier, we're seeing less
Speaker 1: and less investment in real capital by these large superstar firms.
Speaker 1: So they're not really investing in real capital, they're investing
Speaker 1: in people and in ideas UM. And that means the
Speaker 1: corporate sector has now become a net saver. This is
Speaker 1: really new. So corporates, especially those large superstar firms, they
Speaker 1: are saving more than they invest, so they add to
Speaker 1: the savings glut. And this means that they contribute to
Speaker 1: the low interest rate environment that we're stuck in. If
Speaker 1: I look at the core function, labor productivity is something
Speaker 1: to do with the output as compared to the labor input.
Speaker 1: I'm holding my iPhone seven in my hand, and yesterday
Speaker 1: I probably emailed the vicious boss that I work for
Speaker 1: fourteen times. I'm certain, Yakum fels that's not in the statistics.
Speaker 1: How does my use of my Apple iPhone affect the
Speaker 1: nation's output volume and also it's calculation of labor input. Well,
Speaker 1: the simple answer that it doesn't. Both both sides critically
Speaker 1: doesn't show up. And the numerator of the denominator right
Speaker 1: correct so you know, it may make you more happy
Speaker 1: Tom to be able to do all these nice things
Speaker 1: on your iPhone. But this doesn't show up in the
Speaker 1: in the in the statistics, um, but it adds to
Speaker 1: consumer surplus. So you know, our well being, you know,
Speaker 1: if you want to call this well being, you know,
Speaker 1: to be able to use all this information on the iPhone,
Speaker 1: well being is increasing, but we're not capturing it. And
Speaker 1: nobody's a labor communication. And you misunderstood me. I'm not
Speaker 1: sending emails or tweets out my iPhone the which from Purdue.
Speaker 1: She's the boy. She she's sending me. Granted, if she
Speaker 1: sends me to Purdue football schedule, that's recreational. But if
Speaker 1: she's yelling at me, telling me what to do, hate
Speaker 1: mail and all that, that's labor input that's got to
Speaker 1: be calculated. Doesn't it into hours worked? Uh no, it doesn't,
Speaker 1: you know, it doesn't. I think she she can send
Speaker 1: you more of those hate mails with the iPhone than
Speaker 1: she could otherwise, But I think I don't think that
Speaker 1: gets counted because she can just do more in every hour.
Speaker 1: And so you know, maybe it's even just maybe it's
Speaker 1: even substracting from from your productivity because I'm not sure
Speaker 1: it helps you Tom. You know, folks, John, I gotta
Speaker 1: get yacum fills as my agent. You are just dig
Speaker 1: he can be my agent. Yeah, coom to productivity on
Speaker 1: a on a larger scale. Does it fit into the
Speaker 1: calculations of a given central bank or is it so esoteric?
Speaker 1: Is for me and our listeners it is does it
Speaker 1: really fit into what I'm gonna do decembert Well maybe not.
Speaker 1: Maybe it doesn't matter for December thirteenth, but it matters
Speaker 1: for central banks thinking on where they will end up
Speaker 1: or where they where they want to end up, when
Speaker 1: and when they get to neutral because low productivity growth
Speaker 1: is one reason why the neutral rate of interest has
Speaker 1: come down. So think for central banks it's a It
Speaker 1: matters a lot what productivity growth does and what it
Speaker 1: will what it will do in the future, because that
Speaker 1: determines on where that famous neutral interest rate is. How
Speaker 1: do you respond when a president of the United States
Speaker 1: or a prime minister, I don't mean to pick up
Speaker 1: Mr Trump within the politics, as we're going to get
Speaker 1: to four percent g d P or a run ray
Speaker 1: to three. How do you respond to that? Well, it's
Speaker 1: easier set than done, you know, to get there. So
Speaker 1: with a labor force, say here in the US, growing
Speaker 1: at half a percent, you would need a big pick
Speaker 1: up in productivity, and we just discussed that that's pretty unlikely.
Speaker 1: So I would not try to get growth up there.
Speaker 1: I think you could do it in the short term
Speaker 1: if you if you do a big fiscal stimulus, but
Speaker 1: the price to pay for that would be overheating and
Speaker 1: probably a more aggressive FED, and then you end up
Speaker 1: in a recession one or two years later. This has
Speaker 1: been a very generous Yacolm Fells with us with PIMCO,
Speaker 1: their Global Economic advisor. His writings you can see at
Speaker 1: their website. I really can't say enough about the combination
Speaker 1: of Professor Claire to Richard Clarida and Yacolm Fells at
Speaker 1: PIMCO for trying to help you get your thoughts straightened
Speaker 1: out here and particularly in the weekend reading. It's been
Speaker 1: a seismic week for economics, finance, and investment. We're all
Speaker 1: going to regroup over the UH the weekend and dive
Speaker 1: into November. Really dive into November here. I feel in
Speaker 1: Monday that dashed a year in and then into two
Speaker 1: thousand eighteen. Of course, a lot of what we're gonna
Speaker 1: do is on tax reform. Our team is really trying
Speaker 1: to give you a perspective out of Washington from the
Speaker 1: think tanks. We will lean on the Urban brook Urban
Speaker 1: Brookings Text Policy Center. These are the experts across their
Speaker 1: their bipartisan there there across all of the different political
Speaker 1: regimes of Washington. UH Bill Gale and UH Eugene Jury,
Speaker 1: of course has been on the show many times in
Speaker 1: Howard Gleckman really providing in the trenches. Leadership for Tax
Speaker 1: Policy Center. Will try to get their perspective over the
Speaker 1: coming days on this incredibly important document. Whether you think
Speaker 1: it's tax reform or if it's tax cuts, however you
Speaker 1: want to look at it, whatever the politics is, it's
Speaker 1: a convoluted and complex set of hopes by the GOP
Speaker 1: and by the President, and we'll see where that at
Speaker 1: least I'm sure we'll see a lot of writing on
Speaker 1: that over the weekend. Thanks for listening to the Bloomberg
Speaker 1: Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Keene. David Gura is at David Gura before the podcast.
Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio