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Speaker 1: Brought you by Bank of America, Mary Lynch. Investing in

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Speaker 1: local communities, economies and a sustainable future. That's the power

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Speaker 1: of global connections. Mary Lynch, Pierce Fenner, and Smith Incorporated

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Speaker 1: member s I p C. Welcome to the Bloomberg Surveillance Podcast.

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Speaker 1: I'm Tom Keene with David Gura. Daily we bring you

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Speaker 1: insight from the best in economics, finance, investment, and international relations.

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

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Speaker 1: of course on the Bloomberg Kate Moore twins us Now

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Speaker 1: in our Bloomberg eleven three of Studio Che's Black Rocks

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Speaker 1: chief equity strategis, let's start with the FED. We're looking

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Speaker 1: ahead to this meeting next week. Give us a sense

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Speaker 1: here of of just sort of how the market is

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Speaker 1: preparing for what seems like a likely increase in rates

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Speaker 1: next week. I have to say that the signals we

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Speaker 1: got from yelling last week we're pretty encouraging. From our perspective.

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Speaker 1: We had very much many of the investors of Black

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Speaker 1: Rock where in this camp that the FED should be moving,

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Speaker 1: and that if they didn't move, to actually signal something

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Speaker 1: I think, um perhaps not too positive. I'm going to

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Speaker 1: be careful about the way I say that. You know

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Speaker 1: that they were paralyzed frankly instead of being able to

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Speaker 1: really react to the data. And what we think is

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Speaker 1: pretty strong momentum on the macro and I think that's

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Speaker 1: strong momentum on the macro and UH and kind of

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Speaker 1: the broad based strong data is reflected I think in

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Speaker 1: you know, equity market performance recently. So look at twenty

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Speaker 1: five basis points out of March doesn't really mean a

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Speaker 1: lot for equity markets at something Tom and I were

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Speaker 1: talking about a little while ago. It certainly shouldn't affect

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Speaker 1: the interest expense for most US companies. It's really a

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Speaker 1: question of you know, what does the FED signal at

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Speaker 1: the March meeting. Is there a change in their tone

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Speaker 1: about the pace? And you know, what are the implications

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Speaker 1: in for the yield curve, which I think if we

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Speaker 1: get a little bit of steepening after um what we've

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Speaker 1: seen in the first part of this year would be

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Speaker 1: a nice boost another tailwind to financials, which I'd really

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Speaker 1: like to see lead the market in two thousand seventeen.

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Speaker 1: Talk about change in tone, I mean, we talked with

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Speaker 1: Michael Farolo. We talked with Steve Raschido yesterday from Zoo

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Speaker 1: just about what we saw last week, got their reaction

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Speaker 1: to the pivot that we saw from FED policy makers

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Speaker 1: last week. As a strategist, what did you make of

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Speaker 1: what they had to say? The quantity of speeches and

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Speaker 1: how quickly many of them seemed to turn a little

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Speaker 1: brander comes to mind. Chiefly, Yeah, there are people who

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Speaker 1: are much more in the know when it comes to

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Speaker 1: those leaves, reading those tea leaves and being able to

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Speaker 1: analyze the change in tone. But what I can say

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Speaker 1: from my colleagues of Black Rock who have worked at

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Speaker 1: the FED and who are what I would put in

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Speaker 1: that camp up in the know, you know. They remarked

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Speaker 1: frankly that this really was a pivot, particularly from the chair,

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Speaker 1: towards a more kind of committee based leadership as opposed

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Speaker 1: to just you know, hear my views, And I think

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Speaker 1: this is really kind of signaling what the FED might

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Speaker 1: look like as we get into the transition phase over

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Speaker 1: the next couple years. Two thousands seventeen eighteen. I mentioned

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Speaker 1: the vix here in that eleven range, we see all

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Speaker 1: of that complacency, complacency continuing. What do you what do

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Speaker 1: you make of that, the fact that it's continued to

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Speaker 1: sort of hovers the right word if it's down that

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Speaker 1: that low, but that it stayed where it is. It's

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Speaker 1: a great question around of volatility. Because this was a

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Speaker 1: discussion we had earlier this week. Someone said to me, Hey, look,

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Speaker 1: realized Ball, not just the VIX. You know, is that

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Speaker 1: exceptionally low levels? You know? Is is everyone just complacent?

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Speaker 1: But I want to remind everyone in August, when everyone

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Speaker 1: was paralyzed and concerned about the U. S Election and

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Speaker 1: so much uncertainty, realized Ball and the VIX we're both

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Speaker 1: at acception the little low levels. So um, I would

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Speaker 1: I would classify that period as not complacent. And I

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Speaker 1: think it's hard to say that these measures of volatility

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Speaker 1: right now are indicating complacency. How David stole my question?

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Speaker 1: Good morning everyone, Kate More from black Rock. Kate, the

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Speaker 1: VIX average years of forty VIX means a lot of

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Speaker 1: anks markets going to you know what, um, a VIX

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Speaker 1: of twelve, eleven, ten, and a few prints of nine

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Speaker 1: means great complacency. Is there much difference do you interpret

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Speaker 1: between eleven and a twelve or eleven and a ten

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Speaker 1: VIX is there a lot of information to lean there.

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Speaker 1: People are dying to be able to interpret a one,

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Speaker 1: you know point moved to a tenth of a point. Yeah,

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Speaker 1: it's something incredibly important, but I know I can't really

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Speaker 1: think about what it means. And what I would also

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Speaker 1: say is I don't know that these low levels of

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Speaker 1: volatility are actually complacency. For me, it feels more like paralysis.

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Speaker 1: This is like a great confusion with what to do

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Speaker 1: in the market. You know, people want to participate without

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Speaker 1: really increasing their active bets. They want to make sure

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Speaker 1: that they're not missing out, but are scared of really

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Speaker 1: swinging for the fences when there's still so much political

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Speaker 1: and policy uncertainty to scare help equity investors, might you know,

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Speaker 1: you climb the wall of worry. It's a it's a

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Speaker 1: good cliche. It's been good for equity investors recently, you know, uh,

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Speaker 1: the fact that there hasn't been a strong, powerful consensus

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Speaker 1: to put all risks on where there has been a

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Speaker 1: more balanced debate about whether or not equities are overpriced,

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Speaker 1: or whether or not the move is sustainable, or how

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Speaker 1: much of it is due to Trump versus fed versus

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Speaker 1: growth versus fundamentals, and if there's lots of discussion around

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Speaker 1: what is motivating or not the market, that actually is

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Speaker 1: quite healthy. When everyone's in the same camp, I get uncomfortable.

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Speaker 1: You know, I know that you like healthcare. Just reading

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Speaker 1: the notes, it seems like you like healthcare. I was.

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Speaker 1: I was looking yesterday after we had the announcement of

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Speaker 1: this new plan from Paul Ryan and his colleagues Republicans

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Speaker 1: in the House. Um, we had a tweet from the

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Speaker 1: President about a drug costs and we saw healthcare stocks

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Speaker 1: go down. Is politics still the chief driver here? And

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Speaker 1: we were talking about the central bank, It seemed like

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Speaker 1: for a couple of days here that was coming to

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Speaker 1: the four again as as a principal driver of of

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Speaker 1: of the markets. Um, and then seems like was turned

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Speaker 1: on its head again over these last couple of days. Yeah, politics,

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Speaker 1: I think has the ability to to cause pockets to

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Speaker 1: the market, um, you know, upside kind of air pockets,

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Speaker 1: and then also deflationary pockets as well. But I don't

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Speaker 1: think on a kind of a if you think about

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Speaker 1: this on a moving average, whether it's a four week

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Speaker 1: moving average or even a three month moving average, that

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Speaker 1: politics alone can drive the markets you know, one of

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Speaker 1: my big arguments was that the the market run we

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Speaker 1: saw on the fourth quarter was not really just about Trump.

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Speaker 1: Some of it was about expectations around uh, you know,

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Speaker 1: less stringent or right sizing of the regulatory environment, but

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Speaker 1: a lot of it also had to do with really

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Speaker 1: starting to price in the good news on on macro

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Speaker 1: and that the solid story on earnings and um actually

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Speaker 1: really acknowledging that, you know, that the U. S economy

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Speaker 1: and US companies were in good shape. And so it

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Speaker 1: was just a politics can cause people to stop participating

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Speaker 1: in the market, and uh, I don't I don't know

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Speaker 1: that it's going to be enough to really derail the

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Speaker 1: whole equity market at this point, here are a few

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Speaker 1: weeks into this this new administration. I wonder attitudinally what

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Speaker 1: Wall Streets relationship to to Washington is at this point.

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Speaker 1: Is there curiosity about what's happened? Is there a disregard

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Speaker 1: for what's happening because not a lot of substance has

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Speaker 1: happened yet. Just what do you on Wall Street make

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Speaker 1: of of what's happening Washington, d C? Are we getting

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Speaker 1: any better and understanding what's happening in Washington? The big

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Speaker 1: question that most of our investors have is what is

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Speaker 1: the timing of changes in policy? Because we know we

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Speaker 1: have to get through confirmation hearings. We know that the

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Speaker 1: Affordable Care Act of Replacement is very top on the priority,

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Speaker 1: but then tax policy and infrastructure policy and other parts

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Speaker 1: of fiscal policy are a big question mark, and there's

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Speaker 1: been a real challenge I think for investors to to

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Speaker 1: really you know, stick to a timeline or you know,

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Speaker 1: be able to invest based on that timeline and price

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Speaker 1: that into equities into earning. So from that perspective, I

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Speaker 1: would say, um, you know, we're paying very close attention

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Speaker 1: to what's happening in d C, but it's it's a

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Speaker 1: difficult to to really reflect that in your positions. That's

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Speaker 1: so interesting, you know, Tom, I was talking to somebody

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Speaker 1: who was a former chief of staff to to Max

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Speaker 1: Bochus yesterday, and you get the sense that, um, while

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Speaker 1: they have an idea of how this is supposed to go,

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Speaker 1: this time is somehow different that you're looking at a

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Speaker 1: timetable for a tax from you're looking at a time

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Speaker 1: for regulatory reform, and it's hard to say that it's

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Speaker 1: going to proceed apace in the way that it has

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Speaker 1: in the past. But your world, I mean, I get

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Speaker 1: the idea of politics. The president puts out a tweet,

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Speaker 1: stocks move your adult world of a three year time

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Speaker 1: frame is removed from politics. It's about GDP. It's about

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Speaker 1: creating revenues, creating cash flow. Right, can you stay a

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Speaker 1: bull looking at flat growth rates or even added at

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Speaker 1: higher growth rates? So free cash flow, I think we

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Speaker 1: can be bullish over the next few years as long

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Speaker 1: as businesses are not derailed. It feels like this administration

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Speaker 1: in d CD in general, the the entire um consider

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Speaker 1: Republican Party, it feels very strongly about stepping away from

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Speaker 1: involvement in multiple different industries and that if we can

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Speaker 1: unleash a little bit of our favorite phase, uh, animal spirits.

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Speaker 1: If if we can make that happen um, then whatever

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Speaker 1: is happening in in DC may not be as consequential.

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Speaker 1: So this is I mean, Tommy, you're asking a great question.

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Speaker 1: But from my perspective, companies are just waiting for the

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Speaker 1: green light and they're starting to get a flicker of

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Speaker 1: that right now. Cap were with us with black Rock.

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Speaker 1: What an underperformance all in all by international stocks in

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Speaker 1: this great bull market and then and my experiences they

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Speaker 1: make it all back in one year. Is that what

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Speaker 1: we're gonna see here is out performance of large cap

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Speaker 1: foreign stocks and frankly m stocks as well. Yeah, so

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Speaker 1: let me separate out the non US developed markets as

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Speaker 1: from emerging markets because I think we're on two different

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Speaker 1: paths here. UM. We're actually constructive on both groups and

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Speaker 1: technically have a neutral rating on US equities UH in

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Speaker 1: large part because of valuation and frankly positioning, both of

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Speaker 1: which are signaling to US UM that the market is

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Speaker 1: very well owned and the upside maybe more constrained. But

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Speaker 1: so when we think about non US developed markets, and

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Speaker 1: here's an interesting bed. You know, we both we have

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Speaker 1: benefits from both currency as well as kind of the

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Speaker 1: cyclical upswing, and we're seeing in you know, upgrades to

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Speaker 1: earnings in Europe and Japan in a way that we

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Speaker 1: haven't seen for multiple different years. Neither feels exceptionally well

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Speaker 1: owned UM and multiples are not demanding for either European

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Speaker 1: or Japanese equities. So there's kind of a lot of

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Speaker 1: boxes that get ticked. But I will know these are

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Speaker 1: not necessarily long term structural trades for US to touch.

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Speaker 1: Structural investments. This is more of like a you know,

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Speaker 1: shorter term call. So I think Tom your point here

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Speaker 1: about you know, do we get a snap in a

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Speaker 1: in a year's time or over the period of a

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Speaker 1: couple of quarters um in question. I think that's that's

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Speaker 1: pretty relevant when it comes to emerging markets though. This

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Speaker 1: is a critical point for US. We upgraded emerging markets

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Speaker 1: last summer um on on a variety of different basis.

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Speaker 1: You know, emerging markets have already gone through what was

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Speaker 1: a very difficult period for earnings. There's been significant improvement,

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Speaker 1: particularly for some I'm thinking about this in China, for

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Speaker 1: some of the state controlled companies in terms of their

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Speaker 1: margins um you know, much more disciplined cappex actually really

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Speaker 1: significant earnings momentum, valuations not demanding, and it is an

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Speaker 1: asset class that is just largely ignored. The underperformance over

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Speaker 1: the last few years has left um, you know it

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Speaker 1: out of most people's portfolios. So the solid global macro

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Speaker 1: picture plus all this fundamental improvement and impressive or part

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Speaker 1: of me like a not extended valuations and very little

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Speaker 1: ownership kind of altics the boxes for e M. I've

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Speaker 1: been paying attention to China this week as we have

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Speaker 1: this National People's Congress going on, and you have this

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Speaker 1: great note about investing in China, and I just think

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Speaker 1: that there's such a hurdle to doing that just because

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Speaker 1: people don't know how to get into that marketing outline.

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Speaker 1: The ways in which people do, and I thought it

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Speaker 1: was most fascinating is the way that you look at

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Speaker 1: black Rock looks at big data here, and that's not

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Speaker 1: just information on the companies, per say, but satellite data

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Speaker 1: and cell phone chat all this stuff. Right, How hard

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Speaker 1: is it to invest in China at this point? And

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Speaker 1: you're you're optimistic about it. You say, if you can

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Speaker 1: figure out the way, and it's it's worth doing. Yea.

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Speaker 1: So we have both fundamental kind of scientific ways to

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Speaker 1: analyze Chinese equities. The fundamental stuff is it seems more traditional,

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Speaker 1: but actually you get great, great alpha from really understanding

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Speaker 1: policy and the implications and the timeline for for some

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Speaker 1: of the supplied supply side reforms in which companies are

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Speaker 1: are really performing. But you're right, the big data stuff

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Speaker 1: is exceptionally interesting, looking at credit card data, looking at

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Speaker 1: keyword searches and topics in you know, chat rooms, finding

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Speaker 1: out where the money is actually flowing and really being

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Speaker 1: able to track consumer behavior. You know, it can really

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Speaker 1: help you discern the winners and the losers and be

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Speaker 1: positioned for that once the earnings actually come through. So

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Speaker 1: where's the opportunity there in? Is it in new industries?

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Speaker 1: Is it in the the old stuff manufacturing what we

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Speaker 1: associate with the traditional old industries of China? Are you

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Speaker 1: looking at newer stuff? At I t at at? Well,

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Speaker 1: this is what's so cool about investing in China and

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Speaker 1: the reason why we wrote this piece is that the

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Speaker 1: opportunities are both in kind of old economy as well

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Speaker 1: as new economy parts of the market. It's not just

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Speaker 1: tech and healthcare in parts of the consumer, but it's

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Speaker 1: also some of the more cyclical sectors and the heavy

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Speaker 1: industry and manufacturing and industrials that are going through big

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Speaker 1: reforms as it was mentioned, cutting cappecs and really improving

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Speaker 1: their margins where there's a decent amount of upside. So um,

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Speaker 1: this is kind of the first time in multiple years

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Speaker 1: we can say that where the breadth of opportunity is

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Speaker 1: quite large. Thank you for being ready to see and

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Speaker 1: giving us perspective to this unloved bullmark. Is it's still

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Speaker 1: an unlova bull market. It's it's hard to it's hard

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Speaker 1: to tell how unloved it is UM. But my general

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Speaker 1: feeling is there's a lot more room for people to

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Speaker 1: put on equity risk, especially considering the amount of flows

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Speaker 1: we see into bond funds even in two thousand seventeen. Uh,

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Speaker 1: there's a lot of room for just modest reallocation. And

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Speaker 1: I would say specifically for institutional investors and pension funds,

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Speaker 1: they're all behind. I mean, they're all on a panic

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Speaker 1: on a on an alpha basis that it happens well,

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Speaker 1: there's a lot of talk about like I want to

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Speaker 1: mitigate the risk in my portfolio, and the easiest way

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Speaker 1: they think about doing that is reducing equity exposure. But

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Speaker 1: you and I both know, or all three of us

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Speaker 1: know that UM equities are not the only risk acid class.

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Speaker 1: That kind of anything you're investing right now has some

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Speaker 1: degree risk, particularly if we continue to normalize rates. Kate Moore,

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Speaker 1: thank you so much. With black block, Thomas I said,

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Speaker 1: we're a waiting here an interview our David Westar colleage.

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Speaker 1: David Weston in Washington, d C. Scheduled to talk to

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Speaker 1: the Commerce Secretary the Commerce secretary. I believe he's a

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Speaker 1: thirty eight commerce secretary, and it's usually it's a business

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Speaker 1: position at somebody. Ms Pritzker was a commerce secretary for

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Speaker 1: President Obama, and there's been other He's a little different.

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Speaker 1: He's a very successful gentleman from New Jersey, went to

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Speaker 1: Xavier in New York City, and then of course onto Yale,

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Speaker 1: where he's been a substantial philanthropist. But what's great if

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Speaker 1: you look at his Wikipedia, David, there's a single sentence

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Speaker 1: he's a Democrat, long, long time Democrat. Yeah, and it's

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Speaker 1: a very interesting position for Mr Ross to assist the

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Speaker 1: president with um the different twists in turns of what

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Speaker 1: will be a Trump business stance. And I think that's

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Speaker 1: a little would you agree, David, it's a little a

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Speaker 1: little unclear right now unclear. And he's been on the

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Speaker 1: job just over a week here again taking up that

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Speaker 1: mantle as Secretary of Commerce for President Donald Trump. Let's

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Speaker 1: go back to yesterday, Way back at yesterday, you announced

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Speaker 1: a very big arrangement with a Chinese company, almost a

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Speaker 1: billion dollar fine actually for violenting sanctions with Iran. Explained

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Speaker 1: to us that transaction and how that fits in a

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Speaker 1: Chinese trade policy or does it at all? Is it

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Speaker 1: just a one off? Well, people don't realize that, but

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Speaker 1: Commerce Department has many, many divisions, one of which is

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Speaker 1: the Bureau of Industrial Security, and I'm wearing their little

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Speaker 1: lapelp and now in honor of what they did yesterday.

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Speaker 1: The job of that group is to make sure that

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Speaker 1: sensitive materials, particularly highly technological materials, don't get into the

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Speaker 1: wrong hands. ZTE had the exact opposite game plan. They

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Speaker 1: were dealing repeatedly with Iran, repeatedly with North Korea, and

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Speaker 1: despite the sanctions in both cases. So this a case

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Speaker 1: been going on for quite a few years, and I'm

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Speaker 1: very proud that the Department only has twenty agents in

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Speaker 1: that particular segment. And this is not the only case.

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Speaker 1: You're going to see more cases because there have been

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Speaker 1: other violators of the sanctions. And you and the President

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Speaker 1: of pretty pretty outspoken about our relations with China when

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Speaker 1: it comes to trade. Is there a special particular focus

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Speaker 1: of Commerce on these sorts of possible violations for Chinese companies, well,

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Speaker 1: for any companies. It's We're not discriminating against the Chinese.

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Speaker 1: Anybody who violates the sanctions, we will deal with harshly.

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Speaker 1: So let's turn out of Mexico and NAFTA, another very

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Speaker 1: big item on the agenda. It's been clear the Presidence

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Speaker 1: may be very clear he wants to renegotiate NAFTA. As

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Speaker 1: you go into this negotiations, there's also this proposal for

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Speaker 1: a border adjustment at tax up on the hill. Unclear

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Speaker 1: what the White House's position is is I understand unclear

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Speaker 1: what your position is. How do you make assumptions about

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Speaker 1: ord adjustment tax as you negotiate with Mexico? Do you

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Speaker 1: assume there will be one, there won't be one, or

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Speaker 1: do you wait? Well, the kinds of things we have

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Speaker 1: to deal with in the Mexican and Canadian negotiations are

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Speaker 1: really not related to the border adjustable tax. The genesis

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Speaker 1: of the border adjustable taxes as much the need for

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Speaker 1: revenue as part of the new tax bill as it

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Speaker 1: is anything else. It's not intended principally as a trade activity.

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Speaker 1: Will obviously have an impact on trade, but that's not

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Speaker 1: its main origin. So the Mexican situation is the following.

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Speaker 1: It's an old treaty. Our economy is very different from

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Speaker 1: what it was when that treaty was entered into you

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Speaker 1: didn't have the whole digital economy services when not nearly

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Speaker 1: as important as they are now. And further, we've now

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Speaker 1: had decades of experience with the treaty. Very hard to

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Speaker 1: get several thousand page document right at inception, and there

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Speaker 1: are some things in it that we missed. There were

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Speaker 1: some things in it that we're not done correctly to

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Speaker 1: begin with, and a lot of things that might have

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Speaker 1: been okay back then but don't work now. So there's

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Speaker 1: a lot to fix. And both the Canadian government and

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Speaker 1: the Mexican government have said things like that to say

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Speaker 1: it has an old treaty, there's room for a negotiation.

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Speaker 1: There are gifts and takes we can have. That's one model.

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Speaker 1: Another model is we have a substantial trade deficit with Mexico.

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Speaker 1: We have to fix which one is driving the department

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Speaker 1: commerce both. So are you really targeting the trade deficit

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Speaker 1: because if you look at trade deficit actually has not

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Speaker 1: risen with Mexico over the course of NAFTA. The imports

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Speaker 1: and the exports of both increased, but the overall trade

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Speaker 1: deficit hasn't changed much. But why are not true pre

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Speaker 1: enoft we regularly had a trade surplus with Mexico. Now,

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Speaker 1: we regularly have a substantial trade deficit with Mexico, so

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Speaker 1: it's it's not true that pre NAFTA and post NAFTA,

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Speaker 1: there's no change the big change. So one of your

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Speaker 1: goals is to reduce, if not eliminate, that trade deficit

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Speaker 1: with Mexico. Absolutely, we think there's no logical reason why

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Speaker 1: one country, namely the US, needs to have the trade

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Speaker 1: deficit that roughly equals the combined trade surplus of the

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Speaker 1: rest of the world. It's not our fate in life

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Speaker 1: that we have to absorb all the net exports from

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Speaker 1: everyone else. In order to get those sorts of concessions

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Speaker 1: out of Mexico. There will have to be some threats.

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Speaker 1: I don't think it's too strong word made about tariffs,

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Speaker 1: whether it's border adjustment tax or something else. Could that

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Speaker 1: really disrupt trade overall with Mexico? What does it mean

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Speaker 1: for example a general motors? Well, first of all, I'm

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Speaker 1: not a very threatening figure, so I don't know about

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Speaker 1: the word threat. But the reality is the Mexicans, no,

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Speaker 1: the Canadians know. Everybody knows times of different, we are

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Speaker 1: going to have new trade relations with people, and they

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Speaker 1: all know they're going to have to make concessions. The

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Speaker 1: only question is what's the magnitude and what's the form

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Speaker 1: of the concessions, And told the President repeatedly he's made

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Speaker 1: my job a lot easier by softening up the adverse parties. Well,

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Speaker 1: could be better than going into a negotiation where the

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Speaker 1: fellow on the other side knows he has to make concessions.

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Speaker 1: What is the time horizon now, when would you expect

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Speaker 1: the negotiations to begin and how quickly would you like

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Speaker 1: to get them resolved? Well, I'd like to get the

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Speaker 1: results tomorrow. But that's not the way that the world works.

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Speaker 1: We're now in the early stages of the t p

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Speaker 1: A process, the Trade Promotion Authority, the so called fast track,

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Speaker 1: and that process, by its own nature, has a couple

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Speaker 1: of months starting point before anything very serious happened. So

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Speaker 1: you're talking the probably the latter part to this year

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Speaker 1: before real negotiations get underway. So you know from your

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Speaker 1: your prior roles. As I said, a very successful investor

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Speaker 1: business really doesn't like uncertainty when they make investment decision.

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Speaker 1: They like to know what's happening. There's a lot of

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Speaker 1: urgency and a part of American business and financial markets

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Speaker 1: failitor to get this thing resolved. To know what we're

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Speaker 1: dealing with, Well, they don't have any more sense of

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Speaker 1: urgency than I do. And you're well aware the President

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Speaker 1: has a well documented sense of urgency as well. We're

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Speaker 1: here with you as Secretary of Commerce, Wilbert Ross, and

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Speaker 1: we want to welcome once again our Bloomberg radio audience

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Speaker 1: as well as TV. So we're gonna get this done

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Speaker 1: as quickly as we can. Do you have a sense

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Speaker 1: at this point of what the major sticking points are

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Speaker 1: likely to be? Do you have targets? For example, rules

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Speaker 1: of origin, environmental restrictions. There have been a list of

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Speaker 1: things that people have suggested should be taken a look at. Well,

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Speaker 1: there were roughly twenty chapters to the original left and

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Speaker 1: there are several chapters that need to be added because

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Speaker 1: of the digital economy and other things that have developed subsequently.

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Speaker 1: So the myriad points of discussion that will come. Which

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Speaker 1: ones will bear the most fruit is a little bit

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Speaker 1: premature to discuss, but there's a lot of meat to

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Speaker 1: be dealt with as you go into these negotiations. How

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Speaker 1: mindful are you of the possibility of what the markets

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Speaker 1: talk about as a trade war where sanctions would be

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Speaker 1: taken that might escalate go to w t oh, there

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Speaker 1: would be reciprocal sanctions, things like that. How mindful are

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Speaker 1: you of that danger. Well, we're in a trade war.

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Speaker 1: We've been in a trade war for decades. That's why

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Speaker 1: we have a deficit. The differences. Our troops are now

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Speaker 1: coming to the ramparts. That's the only change. But but

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Speaker 1: it sounds like it's gonna be a shooting war. Now, no,

432
00:23:44,480 --> 00:23:46,879
Speaker 1: it's not gonna be a shooting war. If people know

433
00:23:47,000 --> 00:23:49,359
Speaker 1: you have the big bazooker, you probably don't have to

434
00:23:49,480 --> 00:23:52,840
Speaker 1: use it. So you were reasonably confident will come up

435
00:23:52,880 --> 00:23:56,320
Speaker 1: with a revised and after that will substantial reduce trade

436
00:23:56,320 --> 00:24:00,159
Speaker 1: deficit with Mexico within the year. Well, I think the

437
00:24:00,240 --> 00:24:05,440
Speaker 1: negotiations hopefully won't take more than a year. How long

438
00:24:05,480 --> 00:24:09,040
Speaker 1: it will take to implement them and to get the reductions,

439
00:24:09,080 --> 00:24:13,840
Speaker 1: that's a different question. These are very complicated issues. For example,

440
00:24:13,880 --> 00:24:16,679
Speaker 1: you mentioned rules of origin, and that certainly will be

441
00:24:16,720 --> 00:24:21,200
Speaker 1: a big topic. But you have to be mindful also

442
00:24:21,280 --> 00:24:24,800
Speaker 1: of the supply chains that have developed and to the

443
00:24:24,880 --> 00:24:29,960
Speaker 1: degree that a transition geographic transition is needed that takes

444
00:24:29,960 --> 00:24:32,720
Speaker 1: some time. Well, you mentioned the supply change, which is

445
00:24:32,800 --> 00:24:34,360
Speaker 1: very much on the minds of a lot of US

446
00:24:34,400 --> 00:24:36,360
Speaker 1: business as you know. I mean, I'll pick on Mary

447
00:24:36,400 --> 00:24:38,800
Speaker 1: Barges because she has spoken out about this, and GM

448
00:24:38,800 --> 00:24:42,320
Speaker 1: has a particularly complicated situation with shipping parts back and

449
00:24:42,359 --> 00:24:45,240
Speaker 1: forth across the border. Um to what extent are you

450
00:24:45,320 --> 00:24:47,879
Speaker 1: hearing from US business and are they play a constructive

451
00:24:47,960 --> 00:24:50,080
Speaker 1: role in saying this is how you could accomplish your

452
00:24:50,119 --> 00:24:52,399
Speaker 1: goals but consistent with what we need to do as

453
00:24:52,440 --> 00:24:56,080
Speaker 1: a business. Well, they're all nervous because, as you mentioned,

454
00:24:56,200 --> 00:25:00,440
Speaker 1: uncertainty is the big curse of any business, but it's

455
00:25:00,440 --> 00:25:04,360
Speaker 1: a big curse of government to government doesn't like uncertainty

456
00:25:04,440 --> 00:25:08,840
Speaker 1: anymore than business leaders do. So we will try to

457
00:25:08,880 --> 00:25:12,520
Speaker 1: get it resolved as rapidly as we can, and we

458
00:25:12,600 --> 00:25:17,080
Speaker 1: will be consulting with the industries that could be affected.

459
00:25:17,600 --> 00:25:21,919
Speaker 1: Part of this whole tp A process is consultation with

460
00:25:22,000 --> 00:25:27,160
Speaker 1: the domestic industry, both getting recommendations from them as too

461
00:25:27,240 --> 00:25:32,080
Speaker 1: changes they would like, and hearing through the problems the

462
00:25:32,160 --> 00:25:36,000
Speaker 1: issues that some of the changes might create for them.

463
00:25:36,119 --> 00:25:38,200
Speaker 1: We tend to focus on Mexico, but of course NAFTA

464
00:25:38,280 --> 00:25:42,560
Speaker 1: is a trilateral agreement. Do you anticipate the negotiations will

465
00:25:42,600 --> 00:25:47,520
Speaker 1: be free part negotiations with people, you know, bartering across borders. Well,

466
00:25:47,560 --> 00:25:53,080
Speaker 1: the President has indicated his general preference for bilateral, but

467
00:25:53,680 --> 00:25:57,720
Speaker 1: we're open minded about the form in which the NAFTA

468
00:25:57,760 --> 00:26:01,840
Speaker 1: discussions will take. The most important thing is the end result,

469
00:26:02,359 --> 00:26:06,679
Speaker 1: not whether it's a bilateral or a trilateral arrangement. I

470
00:26:06,680 --> 00:26:09,040
Speaker 1: want to come back to border adjustment tax. Have you

471
00:26:09,119 --> 00:26:11,080
Speaker 1: taken a position? Do you have a view about the

472
00:26:11,119 --> 00:26:14,360
Speaker 1: border adjustment tax? Yes, my view is that I'm studying

473
00:26:14,359 --> 00:26:18,600
Speaker 1: it very carefully as it evolves, and as we get

474
00:26:18,640 --> 00:26:22,680
Speaker 1: to understand more the intricate details of it and how

475
00:26:22,720 --> 00:26:26,520
Speaker 1: it interacts with everything else, that's when we'll take a position.

476
00:26:26,720 --> 00:26:29,840
Speaker 1: And you suggested, as I understand quite correctly, that Speaker

477
00:26:29,920 --> 00:26:32,280
Speaker 1: Ryan has put this forward as a way in principle,

478
00:26:32,320 --> 00:26:35,160
Speaker 1: part of saving a lot of money for tax reform basically,

479
00:26:35,520 --> 00:26:38,760
Speaker 1: but it does have trade ramifications. It will affect trade

480
00:26:38,760 --> 00:26:43,240
Speaker 1: flows that you must be analyzing. Oh, absolutely, anything that

481
00:26:43,440 --> 00:26:48,400
Speaker 1: affects what goes across the border clearly has a trade implication.

482
00:26:49,119 --> 00:26:51,760
Speaker 1: But it is meant to be part of an overall

483
00:26:51,880 --> 00:26:55,600
Speaker 1: tax package. And so you have several issues. One is

484
00:26:55,640 --> 00:26:59,040
Speaker 1: the question whether or not to do a border adjustable,

485
00:26:59,440 --> 00:27:02,720
Speaker 1: Second is what magnitude of it is needed, And then

486
00:27:02,840 --> 00:27:06,359
Speaker 1: third are the intricate details. How does it really work

487
00:27:06,880 --> 00:27:10,560
Speaker 1: if you're a solely domestic producer who does some exporting,

488
00:27:11,040 --> 00:27:14,160
Speaker 1: that's one set of facts. If you're mainly an import,

489
00:27:14,280 --> 00:27:18,119
Speaker 1: or a different one if you're both, even more complicated.

490
00:27:18,200 --> 00:27:22,320
Speaker 1: So it isn't a very simple thing to analyze. And

491
00:27:22,440 --> 00:27:26,399
Speaker 1: because it's so important in such large numbers, as you know,

492
00:27:26,960 --> 00:27:30,920
Speaker 1: they're talking about potentially a trillion dollars over a ten

493
00:27:31,000 --> 00:27:34,800
Speaker 1: year period. That's way too big a number to get wrong.

494
00:27:35,400 --> 00:27:38,160
Speaker 1: I want to turn out briefly to Germany because Chancellor

495
00:27:38,240 --> 00:27:41,840
Speaker 1: Markel will be visiting Washington next week. There's been some discussion,

496
00:27:42,160 --> 00:27:43,800
Speaker 1: not from you that I'm aware of, but some discussion

497
00:27:43,840 --> 00:27:46,560
Speaker 1: of administration about trade Germany where there is again a

498
00:27:46,600 --> 00:27:50,240
Speaker 1: trade deficit. Will that be on the agenda for discussions

499
00:27:50,400 --> 00:27:54,240
Speaker 1: with Angela Merkel? My guess is that those discussions will

500
00:27:54,280 --> 00:27:59,560
Speaker 1: be somewhat higher level than uh getting precisely into how

501
00:27:59,560 --> 00:28:02,960
Speaker 1: many of mobiles from Germany gets sold here. I'd be

502
00:28:03,119 --> 00:28:07,440
Speaker 1: very surprised if you got to that level of granularity

503
00:28:08,000 --> 00:28:12,480
Speaker 1: in the discussions um. It's also complicated in that Germany

504
00:28:12,600 --> 00:28:17,760
Speaker 1: is not a separate entity. Trade relations with the outside

505
00:28:17,800 --> 00:28:21,600
Speaker 1: world fundamentally come through the EU, so it's a little

506
00:28:21,600 --> 00:28:27,400
Speaker 1: more complicated structurally dealing anything with Germany then with say

507
00:28:27,480 --> 00:28:29,680
Speaker 1: Mexico or Canada. And this is the point that Peter

508
00:28:29,760 --> 00:28:32,000
Speaker 1: Navarro has a role on trade at the White House

509
00:28:32,040 --> 00:28:35,960
Speaker 1: maid when recently he actually criticized Germany saying they were

510
00:28:35,960 --> 00:28:38,760
Speaker 1: getting an advantage in trade because they're part of the Euro,

511
00:28:39,240 --> 00:28:41,880
Speaker 1: which is artificially law. Were a deutsch market again, it

512
00:28:41,920 --> 00:28:44,280
Speaker 1: would be high. Is that part of trade policy for

513
00:28:44,320 --> 00:28:49,240
Speaker 1: the US government? Well, currency is a factor in trade, clearly,

514
00:28:49,400 --> 00:28:53,280
Speaker 1: and for example with Mexico, the weakness of the paso

515
00:28:53,480 --> 00:28:58,080
Speaker 1: has been a significant factor in trade. Paso is way

516
00:28:58,160 --> 00:29:02,800
Speaker 1: down versus the dollar just this year, let alone prior years.

517
00:29:02,880 --> 00:29:08,320
Speaker 1: So sure that affects the relative competitiveness of countries. But

518
00:29:08,640 --> 00:29:10,360
Speaker 1: is a U S policy at this point that the

519
00:29:10,400 --> 00:29:13,960
Speaker 1: euro was two weak against the dollar. The currency matters

520
00:29:14,000 --> 00:29:18,240
Speaker 1: are mostly dealt with by treasury, not by commerce. And

521
00:29:18,360 --> 00:29:22,360
Speaker 1: my plates pretty full with what is on it, so

522
00:29:22,520 --> 00:29:26,719
Speaker 1: I'm not gonna go poaching food from other people's plate. Finally,

523
00:29:26,720 --> 00:29:29,640
Speaker 1: in Secretary, does it strike you as ironic. You mentioned

524
00:29:29,640 --> 00:29:32,440
Speaker 1: the pay SO being down this year. If you tracked

525
00:29:32,640 --> 00:29:35,400
Speaker 1: how Canada Trump did in the polls, it had a

526
00:29:35,440 --> 00:29:37,760
Speaker 1: direct relationships to pay so. A lot of the pace

527
00:29:37,800 --> 00:29:40,680
Speaker 1: of evaluation appears to be in response to President Trump

528
00:29:40,680 --> 00:29:44,520
Speaker 1: getting elected. Is it ironic that the more successful he is,

529
00:29:44,920 --> 00:29:47,040
Speaker 1: the more it drives down the pace so and exacerbates

530
00:29:47,080 --> 00:29:51,800
Speaker 1: the problem of the trade deficit. Well, that's a complicated equation.

531
00:29:52,480 --> 00:29:55,240
Speaker 1: I think what it does show is that markets tend

532
00:29:55,280 --> 00:29:59,760
Speaker 1: to adjust to realities. And as the probability of the

533
00:30:00,040 --> 00:30:04,840
Speaker 1: and From presidency grew clearly it had some implications for

534
00:30:05,160 --> 00:30:09,600
Speaker 1: Mexico and others. Uh and now that the Trump presidency

535
00:30:09,760 --> 00:30:15,480
Speaker 1: is a reality, it has even more clear implications. Wilbert Ross,

536
00:30:16,160 --> 00:30:19,680
Speaker 1: the Secretary of Commerce with our David Weston David guru

537
00:30:19,680 --> 00:30:24,080
Speaker 1: a most interesting there to hear the different themes, and

538
00:30:24,720 --> 00:30:27,160
Speaker 1: I like what he said at the end about complexity

539
00:30:27,200 --> 00:30:29,560
Speaker 1: and that a lot of these issues, instead of being

540
00:30:29,600 --> 00:30:32,120
Speaker 1: one idea or second idea, have a lot of complexity

541
00:30:32,120 --> 00:30:33,959
Speaker 1: to him. And he's still finding his way again. He's

542
00:30:33,960 --> 00:30:35,480
Speaker 1: spent on the jump for just eight days now. I

543
00:30:35,480 --> 00:30:37,760
Speaker 1: thought his answer to that question about chance that Angela

544
00:30:37,800 --> 00:30:39,880
Speaker 1: Merkel's visit to Washington was interesting. He said he had

545
00:30:39,880 --> 00:30:41,920
Speaker 1: a full plate and new death that they'll be dealing

546
00:30:41,920 --> 00:30:44,000
Speaker 1: with many of these issues in a in a granular sense,

547
00:30:44,240 --> 00:30:46,240
Speaker 1: but interesting to hear as he begins set his job

548
00:30:46,280 --> 00:30:56,720
Speaker 1: there in the Commerce Department. Brought you by Bank of

549
00:30:56,760 --> 00:31:00,800
Speaker 1: America Mary Lynch. Dedicated to bringing our client insights and

550
00:31:00,880 --> 00:31:05,040
Speaker 1: solutions to meet the challenges of a transforming world. That's

551
00:31:05,040 --> 00:31:10,320
Speaker 1: the power of global connections. Mary Lynch, Pierce federin Smith Incorporated,

552
00:31:10,480 --> 00:31:16,560
Speaker 1: Member s I p C. Lindsay Pisa is on the line.

553
00:31:16,560 --> 00:31:19,640
Speaker 1: She's the chief economist at Stephil Nicholas joins us now

554
00:31:19,680 --> 00:31:21,360
Speaker 1: and I want to read a line from one of

555
00:31:21,360 --> 00:31:23,920
Speaker 1: her most recent notes. She says, the Fed here is

556
00:31:23,920 --> 00:31:25,800
Speaker 1: going to pull the rug out from under the markets

557
00:31:25,840 --> 00:31:28,920
Speaker 1: certain expectation of a third rate hike come the fifteen.

558
00:31:29,040 --> 00:31:32,240
Speaker 1: She's in a small elite club here that also include

559
00:31:32,240 --> 00:31:34,520
Speaker 1: Steven Rishida, who we spoke to yesterday from from a Zooho.

560
00:31:34,520 --> 00:31:36,600
Speaker 1: Those who are not expecting the Fed to race rates

561
00:31:36,640 --> 00:31:39,400
Speaker 1: next week despite all that we heard from Fed governors,

562
00:31:39,400 --> 00:31:41,920
Speaker 1: Fed policy makers last week. Lindsey, good to talk to

563
00:31:41,960 --> 00:31:45,760
Speaker 1: you as always. What did you hear last week that

564
00:31:45,840 --> 00:31:48,720
Speaker 1: so many of your colleagues did not well. I think

565
00:31:48,760 --> 00:31:51,160
Speaker 1: the FED really set the stage for a near term

566
00:31:51,240 --> 00:31:54,600
Speaker 1: rate increase. They wanted to give themselves enough room that

567
00:31:54,880 --> 00:31:58,120
Speaker 1: if the data came in extremely strong over the coming

568
00:31:58,560 --> 00:32:01,240
Speaker 1: days and weeks, they would be able to pull the trigger.

569
00:32:01,280 --> 00:32:03,719
Speaker 1: But at the same time, I think really focusing on

570
00:32:03,800 --> 00:32:08,000
Speaker 1: Yellin's commentary was the key for the last couple of weeks.

571
00:32:08,000 --> 00:32:10,920
Speaker 1: She said, look what, there's no rush, We're not behind

572
00:32:10,960 --> 00:32:14,240
Speaker 1: the curve, And while she did warn about the risks

573
00:32:14,280 --> 00:32:18,040
Speaker 1: of waiting too long, she also said that there really

574
00:32:18,080 --> 00:32:21,080
Speaker 1: was no sense of immediacy at this point. A lot

575
00:32:21,080 --> 00:32:25,600
Speaker 1: of Feed officials are not overly concerned about inflation running

576
00:32:25,600 --> 00:32:29,400
Speaker 1: out of control, nor they overly impressed with the current

577
00:32:29,440 --> 00:32:32,600
Speaker 1: pace of the recovery, and so there still is this

578
00:32:32,760 --> 00:32:36,920
Speaker 1: veil of uncertainty coming from certainly fiscal policy in the US,

579
00:32:37,360 --> 00:32:42,600
Speaker 1: as well as anticipated volatility from geopolitical risks abroad with

580
00:32:42,640 --> 00:32:46,680
Speaker 1: the upcoming slew of international elections. So really right now,

581
00:32:46,720 --> 00:32:49,680
Speaker 1: there's there's no sense of pressure on the FED to

582
00:32:49,800 --> 00:32:52,960
Speaker 1: act sooner than later. But all of this commentary has

583
00:32:53,000 --> 00:32:55,640
Speaker 1: really set the market up to anticipate a rate hike.

584
00:32:56,040 --> 00:32:58,800
Speaker 1: Anytime the FED does decide that it's appropriate to pull

585
00:32:58,880 --> 00:33:01,160
Speaker 1: the trigger. So what do you then, of what stand Fisher,

586
00:33:01,200 --> 00:33:02,760
Speaker 1: the FED was your vice chair, had to say on

587
00:33:02,800 --> 00:33:05,560
Speaker 1: the same days as Janet Yelling the FED chair last week,

588
00:33:05,600 --> 00:33:07,840
Speaker 1: basically that we've had three months here of of not

589
00:33:08,040 --> 00:33:10,920
Speaker 1: one really bad piece of data. Maybe that's a big

590
00:33:11,000 --> 00:33:14,440
Speaker 1: enough motivating factor and above itself, well, I think that's

591
00:33:14,520 --> 00:33:16,520
Speaker 1: that's really what the market's been focusing on. We haven't

592
00:33:16,560 --> 00:33:19,560
Speaker 1: had any great news, but we also haven't had any

593
00:33:19,680 --> 00:33:23,000
Speaker 1: further bad news. And for the FED, I think they're

594
00:33:23,000 --> 00:33:25,440
Speaker 1: really focused on the ladder, saying, Okay, this may be

595
00:33:25,480 --> 00:33:28,160
Speaker 1: as good as it gets. We haven't seen another shoe drop,

596
00:33:28,640 --> 00:33:31,040
Speaker 1: and as long as we don't see any fear to

597
00:33:31,120 --> 00:33:34,160
Speaker 1: the downside, maybe we're not going to see any pick

598
00:33:34,240 --> 00:33:36,400
Speaker 1: up to the upside. But this may be the only

599
00:33:36,440 --> 00:33:40,000
Speaker 1: window of opportunity. But that being said, we really don't

600
00:33:40,040 --> 00:33:42,040
Speaker 1: want the FED to be looking at the data from

601
00:33:42,040 --> 00:33:45,400
Speaker 1: that standpoint. We want to make sure that policymakers are

602
00:33:45,480 --> 00:33:48,880
Speaker 1: making the decision to move forward with rate increases based

603
00:33:48,920 --> 00:33:52,520
Speaker 1: on the underlying strength of the economy, not the lack

604
00:33:52,560 --> 00:33:55,720
Speaker 1: of further weakness in the economy. Helt be here with

605
00:33:55,800 --> 00:33:59,760
Speaker 1: the market economics where these rates really matter, I think

606
00:33:59,760 --> 00:34:01,560
Speaker 1: every but he's sort of doing a parlor game on

607
00:34:01,600 --> 00:34:05,360
Speaker 1: March fifteen, because nobody cares about March fifteen. When does

608
00:34:05,400 --> 00:34:10,480
Speaker 1: it click in where higher rates impinge on the financial

609
00:34:10,560 --> 00:34:15,160
Speaker 1: system and impinge on GDP growth. Well, everyone's focused on

610
00:34:15,160 --> 00:34:17,000
Speaker 1: the idea of getting back to a new normal, and

611
00:34:18,239 --> 00:34:20,480
Speaker 1: what we don't know. We don't know where the new

612
00:34:20,480 --> 00:34:23,560
Speaker 1: normal is now. Historically we're talking about getting the funds,

613
00:34:23,840 --> 00:34:26,399
Speaker 1: the Fed funds right back over four but even Fed

614
00:34:26,440 --> 00:34:29,879
Speaker 1: officials themselves say the longer run rate on the Fed

615
00:34:29,920 --> 00:34:33,399
Speaker 1: fund level is likely to be below three percent. And

616
00:34:33,400 --> 00:34:36,200
Speaker 1: and furthermore, we talk about basis points. Yeah, it may

617
00:34:36,239 --> 00:34:39,240
Speaker 1: not matter on the short end, but interest rate sensitive

618
00:34:39,280 --> 00:34:41,640
Speaker 1: sectors are already going to feel the pinch. We're talking

619
00:34:41,640 --> 00:34:45,560
Speaker 1: about consumer credit, we're talking about housing. When we look

620
00:34:45,640 --> 00:34:49,959
Speaker 1: at potential first time home buyers, an additional increase in rates,

621
00:34:50,040 --> 00:34:53,480
Speaker 1: be that ten basis points, twenty basis points, that's going

622
00:34:53,560 --> 00:34:57,480
Speaker 1: to make it increasingly more difficult from an affordability standpoint.

623
00:34:57,719 --> 00:34:59,720
Speaker 1: Now we have seen the housing market kind of teeter,

624
00:35:00,160 --> 00:35:03,440
Speaker 1: I really know, significant upward moutmentum over the past twelve

625
00:35:03,480 --> 00:35:06,320
Speaker 1: to eighteen months, and again for the young twenties, someomethings,

626
00:35:06,320 --> 00:35:09,040
Speaker 1: the young thirties, some things that are born and used

627
00:35:09,080 --> 00:35:12,520
Speaker 1: to very low rates. Even a slow creep up in

628
00:35:12,600 --> 00:35:15,040
Speaker 1: the cost of financing at home will deter them and

629
00:35:15,120 --> 00:35:18,000
Speaker 1: keep them in the rental market. So the economy certainly

630
00:35:18,040 --> 00:35:22,360
Speaker 1: will feel the impact with even marginal small increases in

631
00:35:22,680 --> 00:35:24,640
Speaker 1: FED policy. What's your sense of what we're going to

632
00:35:24,719 --> 00:35:26,440
Speaker 1: hear from from the Labor Department this week as we

633
00:35:26,440 --> 00:35:29,560
Speaker 1: look at that panoply of economic data. Obviously the FED

634
00:35:29,680 --> 00:35:31,320
Speaker 1: is going to care what comes out of Labor Department

635
00:35:31,320 --> 00:35:34,600
Speaker 1: on on on Friday. What are you looking for? Absolutely,

636
00:35:34,600 --> 00:35:36,560
Speaker 1: this is a this is a key report which could

637
00:35:36,600 --> 00:35:39,680
Speaker 1: really make or break the Fed's decision, which again goes

638
00:35:39,719 --> 00:35:41,600
Speaker 1: back to the idea that the FED should not be

639
00:35:41,680 --> 00:35:44,319
Speaker 1: basing monetary policy on one data point. But we'll put

640
00:35:44,320 --> 00:35:47,239
Speaker 1: that argument aside. And really what we've seen in the

641
00:35:47,320 --> 00:35:49,759
Speaker 1: labor market has been disappointing as of late, at least

642
00:35:49,760 --> 00:35:52,640
Speaker 1: in my opinion, we saw an average about two d

643
00:35:52,719 --> 00:35:55,800
Speaker 1: and fifty thousand jobs added per month in two thousand

644
00:35:55,800 --> 00:35:58,719
Speaker 1: and fourteen. That's load to two thirty that's lowed to

645
00:35:58,840 --> 00:36:01,759
Speaker 1: one eighty and two thous than sixteen, So we're still

646
00:36:01,800 --> 00:36:05,200
Speaker 1: putting Americans back to work, but at a much slower pace. Now,

647
00:36:05,320 --> 00:36:09,040
Speaker 1: January's monthly employment report buck the trend. We saw a

648
00:36:09,120 --> 00:36:13,040
Speaker 1: night thousand increase, and the market seems to be thinking

649
00:36:13,040 --> 00:36:16,719
Speaker 1: that that one data point was an initiation of a

650
00:36:16,800 --> 00:36:21,640
Speaker 1: much stronger upward trend. I'm cautiously optimistic that we are

651
00:36:21,680 --> 00:36:25,000
Speaker 1: on this new path, but I don't necessarily expect a

652
00:36:25,040 --> 00:36:28,399
Speaker 1: continuation of above two thousand. But for the Fed, they're

653
00:36:28,440 --> 00:36:31,240
Speaker 1: going to be watching wages and that overall wage growth number.

654
00:36:31,400 --> 00:36:34,960
Speaker 1: And now it's seven oh to Wall Street time. We

655
00:36:35,080 --> 00:36:38,000
Speaker 1: begin our jobs coverage for Friday, and folks will have

656
00:36:38,000 --> 00:36:40,680
Speaker 1: our complete jobs day on Friday. We'll go beneath the

657
00:36:40,680 --> 00:36:44,600
Speaker 1: headline data, but we start with Lindsay PEXA. Right now, Lindzie,

658
00:36:44,640 --> 00:36:47,040
Speaker 1: help me here with what you just mentioned, which is

659
00:36:47,120 --> 00:36:51,480
Speaker 1: wage growth. UM Vice chairman Fishers suggests it's important, and

660
00:36:51,680 --> 00:36:54,080
Speaker 1: Hymen over to I s I, ever, course says it's

661
00:36:54,400 --> 00:36:57,840
Speaker 1: quote unquote the referee, what's it actually gonna be defined?

662
00:36:57,960 --> 00:37:01,759
Speaker 1: Right now? The wage growth that are yelling needs to

663
00:37:01,840 --> 00:37:05,520
Speaker 1: say all clear for a measured rate rise. Well, what

664
00:37:05,600 --> 00:37:07,879
Speaker 1: we want to see is an upward trajectory. So as

665
00:37:07,880 --> 00:37:10,560
Speaker 1: you know, last year we started to see wages creep high,

666
00:37:10,600 --> 00:37:14,399
Speaker 1: or we peeked up around to that was revised down

667
00:37:14,400 --> 00:37:17,719
Speaker 1: to two five, So that directional change really gave the

668
00:37:17,800 --> 00:37:20,640
Speaker 1: FED pause to say, wait a minute, are wages on

669
00:37:20,680 --> 00:37:23,759
Speaker 1: a broader base beginning to improve? Or did we see

670
00:37:23,800 --> 00:37:27,720
Speaker 1: really sectorial pressure where specific skills were in high demand

671
00:37:27,800 --> 00:37:32,560
Speaker 1: in low supply areas like I T craft, labor, engineering, accounting.

672
00:37:32,920 --> 00:37:35,360
Speaker 1: This was really accounting for that vast majority of the

673
00:37:35,440 --> 00:37:37,640
Speaker 1: run up last year. So the FED is going to

674
00:37:37,680 --> 00:37:40,560
Speaker 1: be watching this and saying two point five percent isn't bad,

675
00:37:40,880 --> 00:37:43,240
Speaker 1: But where do we go from here? Does it drop

676
00:37:43,280 --> 00:37:46,560
Speaker 1: down to two four to three in the center? Help me?

677
00:37:46,560 --> 00:37:49,040
Speaker 1: I get a ton of mail on this. What's normal

678
00:37:49,120 --> 00:37:53,240
Speaker 1: wage growth nominally or even on a real wage basis.

679
00:37:53,239 --> 00:37:58,680
Speaker 1: We're nowhere near real wage growth in this country, are we? Oh? No, absolutely,

680
00:37:58,719 --> 00:38:01,120
Speaker 1: We've been trending at two point one percent since the

681
00:38:01,200 --> 00:38:04,360
Speaker 1: end of the Great Recession. We should easily easily be

682
00:38:04,440 --> 00:38:07,560
Speaker 1: talking about above three percent, and we haven't been there,

683
00:38:07,560 --> 00:38:09,640
Speaker 1: and there's really no indication that we're going to get

684
00:38:09,640 --> 00:38:12,640
Speaker 1: back there. So looking at wage growth, it does suggest

685
00:38:12,640 --> 00:38:14,840
Speaker 1: that there's still an ample amount of slack in the

686
00:38:14,920 --> 00:38:17,120
Speaker 1: labor market now, whether or not you believe we're at

687
00:38:17,120 --> 00:38:21,200
Speaker 1: full employment at four point eight percent unemployment, looking at wages,

688
00:38:21,640 --> 00:38:24,360
Speaker 1: it's very clear that there is a significant amount of

689
00:38:24,560 --> 00:38:27,800
Speaker 1: under employment out in the economy. And for the FED,

690
00:38:27,920 --> 00:38:30,600
Speaker 1: it's not about that top line non farm payroll number.

691
00:38:30,840 --> 00:38:33,160
Speaker 1: It's about whether or not worth seeing wage growth because

692
00:38:33,200 --> 00:38:35,480
Speaker 1: that's going to be indicative of whether or not the

693
00:38:35,560 --> 00:38:38,239
Speaker 1: labor market is beginning to overheat and the FED needs

694
00:38:38,239 --> 00:38:43,000
Speaker 1: to respond appropriately with tighter monetary policy. Help me with investment,

695
00:38:43,040 --> 00:38:45,680
Speaker 1: are there any signs on the rise? In one theory

696
00:38:45,760 --> 00:38:50,680
Speaker 1: or lindsay, is that investment maybe going abroad. Well, investment

697
00:38:50,680 --> 00:38:53,120
Speaker 1: has been really the missing key to the recovery, as

698
00:38:53,160 --> 00:38:55,760
Speaker 1: we've seen. Looking at an index, I like to follow

699
00:38:55,840 --> 00:38:58,799
Speaker 1: durable goods orders excluding aircraft in defense. This is a

700
00:38:58,800 --> 00:39:02,080
Speaker 1: proxy that we use for business investment in that overall

701
00:39:02,120 --> 00:39:04,640
Speaker 1: growth component, and what we see is that this is

702
00:39:04,680 --> 00:39:07,440
Speaker 1: really trended negative at zero or negative for the past

703
00:39:07,480 --> 00:39:11,279
Speaker 1: twenty three consecutive months. So it's very clear that when

704
00:39:11,320 --> 00:39:16,000
Speaker 1: we look out to the future, if businesses are not developing, innovating, investing,

705
00:39:16,440 --> 00:39:18,600
Speaker 1: we really can't expect for the U. S economy to

706
00:39:18,680 --> 00:39:22,879
Speaker 1: expand above and beyond this too ish percent pace. Now,

707
00:39:22,920 --> 00:39:24,680
Speaker 1: we did see a bump up at the start of

708
00:39:24,680 --> 00:39:26,920
Speaker 1: the year, and that's very encouraging, but as we know,

709
00:39:27,000 --> 00:39:29,440
Speaker 1: one data point does not make a trend, and it

710
00:39:29,560 --> 00:39:32,000
Speaker 1: may be that this is a temporary bump based on

711
00:39:32,080 --> 00:39:36,160
Speaker 1: optimism of the Trump administration booing in a series of

712
00:39:36,200 --> 00:39:38,600
Speaker 1: pro growth policies. So we're going to need to see

713
00:39:38,600 --> 00:39:42,160
Speaker 1: those policies come to fruition in order to support that

714
00:39:42,239 --> 00:39:46,600
Speaker 1: type of elevated activity rather than rely on confidence maintaining

715
00:39:46,640 --> 00:39:50,960
Speaker 1: that that improvement longer term. But absolutely, businesses are right

716
00:39:51,000 --> 00:39:53,880
Speaker 1: now are a wash in cash. They have the capital

717
00:39:53,920 --> 00:39:57,000
Speaker 1: to put the work, but they're very hesitant still to

718
00:39:57,120 --> 00:40:01,680
Speaker 1: invest in equipment, structures and certainly high wage full time employees.

719
00:40:01,719 --> 00:40:03,560
Speaker 1: As we were just talking about, we just heard from

720
00:40:03,560 --> 00:40:05,600
Speaker 1: the Secretary of Commerce, Wilbur Ross, who was talking with

721
00:40:05,640 --> 00:40:07,640
Speaker 1: our colleague David Weston and Washington, d C. And one

722
00:40:07,680 --> 00:40:10,200
Speaker 1: thing that Secretary Ross said is that uncertainty is a

723
00:40:10,200 --> 00:40:13,279
Speaker 1: big curse for business. You look at the n f

724
00:40:13,320 --> 00:40:15,239
Speaker 1: i B survey of small businesses, though it seems like

725
00:40:15,239 --> 00:40:18,520
Speaker 1: there is a new and high sense of of optimism.

726
00:40:18,600 --> 00:40:21,600
Speaker 1: So why doesn't that soft data translate to to to

727
00:40:21,719 --> 00:40:27,440
Speaker 1: more certainty, more more, more capex spending, well, certainly uncertainty, regulation,

728
00:40:27,560 --> 00:40:30,279
Speaker 1: healthcare costs. These are the burdens that businesses have been

729
00:40:30,320 --> 00:40:34,360
Speaker 1: pointing to for years, and you're right, Usually, or typically,

730
00:40:34,360 --> 00:40:37,439
Speaker 1: we look at that survey data and eventually it does

731
00:40:37,560 --> 00:40:40,640
Speaker 1: translate into a change in behavior. But it's going to

732
00:40:40,719 --> 00:40:45,000
Speaker 1: take certainty of that optimism, so meaning that that optimism

733
00:40:45,040 --> 00:40:47,600
Speaker 1: is going to have to have some sort of firm

734
00:40:47,680 --> 00:40:49,880
Speaker 1: foundation that it is that it is going to be

735
00:40:49,960 --> 00:40:53,680
Speaker 1: translated into reality. And right now we're still hearing from

736
00:40:53,680 --> 00:40:56,000
Speaker 1: the White House, we're still hearing from our our officials

737
00:40:56,640 --> 00:40:58,880
Speaker 1: up in d C that these policies are going to

738
00:40:58,920 --> 00:41:01,600
Speaker 1: come down the pipeline, but we really don't have anything

739
00:41:01,719 --> 00:41:04,920
Speaker 1: firm yet to hang our hats on. So businesses, yes

740
00:41:04,960 --> 00:41:07,399
Speaker 1: that we ask them, we survey them, we talk to them,

741
00:41:07,400 --> 00:41:09,800
Speaker 1: are you ready? Are you poised to invest and hire?

742
00:41:10,239 --> 00:41:13,440
Speaker 1: And typically their answer does translate into a change in behavior,

743
00:41:13,719 --> 00:41:16,640
Speaker 1: but we need more. At this point. Optimism alone is

744
00:41:16,680 --> 00:41:19,759
Speaker 1: not going to or should say temporary optimism alone is

745
00:41:19,800 --> 00:41:22,840
Speaker 1: not going to change that behavior. Where is the change

746
00:41:22,880 --> 00:41:27,520
Speaker 1: of behavior for corporate officers other than they're bathing in

747
00:41:27,600 --> 00:41:31,800
Speaker 1: the great distortion both nominally and at a real rate position.

748
00:41:32,280 --> 00:41:35,319
Speaker 1: We've got to get rates back to normality before CFOs

749
00:41:35,440 --> 00:41:38,400
Speaker 1: at normal, don't we Well, even if rates are normal,

750
00:41:38,680 --> 00:41:43,200
Speaker 1: if the regulatory environments, if the fiscal environment is anti business,

751
00:41:43,560 --> 00:41:47,000
Speaker 1: there's still no incentive for businesses to invest and grow.

752
00:41:47,520 --> 00:41:49,239
Speaker 1: They want to make sure they know the rules of

753
00:41:49,280 --> 00:41:50,840
Speaker 1: the game. They want to make sure that the rules

754
00:41:50,840 --> 00:41:53,719
Speaker 1: of the game are fair, and without that, we're going

755
00:41:53,760 --> 00:41:56,640
Speaker 1: to see businesses maybe maybe up their investment a little bit,

756
00:41:56,960 --> 00:41:59,920
Speaker 1: but predominantly that investment is likely to go to automation

757
00:42:00,040 --> 00:42:03,760
Speaker 1: and technology, replacing the very jobs that we're talking about

758
00:42:03,800 --> 00:42:06,920
Speaker 1: saving through some of this more pro growth legislation. So

759
00:42:06,960 --> 00:42:08,880
Speaker 1: we have to be careful about the balance there that

760
00:42:08,920 --> 00:42:11,720
Speaker 1: we're looking for. The President hasn't been shy about saying

761
00:42:11,719 --> 00:42:13,640
Speaker 1: that the Secretary Ross is going to be a point

762
00:42:13,640 --> 00:42:17,400
Speaker 1: person for trade deals, trade negotiation, and raising objectives to

763
00:42:17,440 --> 00:42:20,120
Speaker 1: the objective objections to the w t O, And we

764
00:42:20,200 --> 00:42:22,240
Speaker 1: heard from him this morning. He said that several chapters

765
00:42:22,239 --> 00:42:24,799
Speaker 1: may be added to to NAFTA. He said he's still

766
00:42:24,880 --> 00:42:26,880
Speaker 1: unclear uncertain as to whether or not NAFTA is going

767
00:42:26,920 --> 00:42:28,920
Speaker 1: to remain a trilateral deal. And I found this to

768
00:42:28,960 --> 00:42:32,560
Speaker 1: be incredibly interesting, bringing us a dispatch here from the

769
00:42:32,560 --> 00:42:34,480
Speaker 1: front lines. He says that that we've been in a

770
00:42:34,520 --> 00:42:37,279
Speaker 1: trade war for decades now when you look at what

771
00:42:37,320 --> 00:42:39,520
Speaker 1: this administration is saying about trading the way that could

772
00:42:39,560 --> 00:42:42,759
Speaker 1: affect your forecast for the US economy. So what are

773
00:42:42,760 --> 00:42:46,879
Speaker 1: you taking into consideration. I think he's absolutely right, which

774
00:42:46,880 --> 00:42:49,359
Speaker 1: this is certainly not a free trade environment. It's more

775
00:42:49,360 --> 00:42:52,440
Speaker 1: of a managed trade environments. You look at these trade deals,

776
00:42:53,000 --> 00:42:55,359
Speaker 1: be that NAFTA, be that t p P, and these

777
00:42:55,400 --> 00:42:58,319
Speaker 1: are these are documents that are thousands of pages to

778
00:42:58,400 --> 00:43:00,800
Speaker 1: basically say to your trading partner, I'm going to remove

779
00:43:00,800 --> 00:43:03,240
Speaker 1: all barriers to the free flow of capital and goods.

780
00:43:03,280 --> 00:43:06,400
Speaker 1: That takes one to three pages, not thousands of pages.

781
00:43:07,080 --> 00:43:09,840
Speaker 1: And so it's very clear that each side is continuing

782
00:43:09,880 --> 00:43:13,040
Speaker 1: to try to manage the trade relationship to benefit the

783
00:43:13,120 --> 00:43:17,000
Speaker 1: most from that relationship. But anytime you talk about ramping

784
00:43:17,080 --> 00:43:20,600
Speaker 1: up those barriers again to capital to labor, to services

785
00:43:20,640 --> 00:43:24,720
Speaker 1: to goods crossing over borders, you're talking about a net

786
00:43:24,800 --> 00:43:29,040
Speaker 1: loss of overlying growth potential for those parties involved. So

787
00:43:29,080 --> 00:43:32,040
Speaker 1: certainly we don't want to move towards a more isolationist

788
00:43:32,160 --> 00:43:35,120
Speaker 1: or protectionist environment. We want to make sure that those

789
00:43:35,160 --> 00:43:39,000
Speaker 1: borders remain open to continue to grow the underlying economy

790
00:43:39,000 --> 00:43:44,360
Speaker 1: for everyone involved. Tell me about how net exports, folks

791
00:43:44,800 --> 00:43:48,160
Speaker 1: filter in to our GDP. Do you take everything in

792
00:43:48,320 --> 00:43:51,719
Speaker 1: summat together. Something that we're seeing in the literature is

793
00:43:51,800 --> 00:43:55,640
Speaker 1: exing out exports and just looking at domestic final sales,

794
00:43:55,680 --> 00:43:59,000
Speaker 1: which do you look at now? All in? Well, right now,

795
00:43:59,040 --> 00:44:01,760
Speaker 1: the typical number is all in. Absolutely when we report

796
00:44:01,800 --> 00:44:05,319
Speaker 1: GDP that includes the export number as well. But of course,

797
00:44:05,320 --> 00:44:07,200
Speaker 1: as economists, we go through and we dig through the

798
00:44:07,239 --> 00:44:10,480
Speaker 1: line items and we do look at final sales from

799
00:44:10,520 --> 00:44:14,480
Speaker 1: domestic purchasers. We do look at GDP less inventory, so

800
00:44:14,520 --> 00:44:17,440
Speaker 1: we try to get an idea of where the momentum

801
00:44:17,560 --> 00:44:20,239
Speaker 1: is coming from. But right now, when we talk about

802
00:44:20,280 --> 00:44:24,560
Speaker 1: typical GDP, the number reported on a quarterly basis UH

803
00:44:24,719 --> 00:44:27,319
Speaker 1: for the readers and listeners out there, yes, absolutely we

804
00:44:27,360 --> 00:44:31,080
Speaker 1: do include exports in that top line number along those lines.

805
00:44:31,120 --> 00:44:32,719
Speaker 1: So what did you make of what Peter Navarro had

806
00:44:32,719 --> 00:44:35,160
Speaker 1: to say this week at the nab econ Crusia in Washington,

807
00:44:35,160 --> 00:44:37,680
Speaker 1: c He talked about the role there of experts exports

808
00:44:37,719 --> 00:44:39,920
Speaker 1: on GDP and said the you know, the trade deficit

809
00:44:40,040 --> 00:44:42,160
Speaker 1: is incredibly important. Here something that he said, a lot

810
00:44:42,200 --> 00:44:46,719
Speaker 1: of academic economists here the the the PhD from Harvard

811
00:44:46,800 --> 00:44:48,880
Speaker 1: University saying, a lot of academic economist wouldn't it wouldn't

812
00:44:48,840 --> 00:44:51,640
Speaker 1: agree with him here? How important is the trade deficit?

813
00:44:51,719 --> 00:44:54,399
Speaker 1: How closely do you pay attention to it? The trade

814
00:44:54,440 --> 00:44:58,160
Speaker 1: deficences is important, um, And certainly we are a net

815
00:44:58,200 --> 00:45:01,799
Speaker 1: exporter of an number of goods. At the same time

816
00:45:01,800 --> 00:45:05,319
Speaker 1: we are a net importer of a tremendous amount of goods,

817
00:45:05,400 --> 00:45:07,600
Speaker 1: and so that there really isn't a simple way to

818
00:45:07,600 --> 00:45:09,120
Speaker 1: look at it to say we want to make sure

819
00:45:09,160 --> 00:45:12,120
Speaker 1: we get the trade deficit down to a certain range.

820
00:45:12,160 --> 00:45:14,760
Speaker 1: Now it has come into focus as of late because

821
00:45:14,800 --> 00:45:18,239
Speaker 1: this seems to be a project that President Trump wants

822
00:45:18,239 --> 00:45:23,320
Speaker 1: to tackle. But given our position with our global trading partners,

823
00:45:23,360 --> 00:45:25,760
Speaker 1: it's going to be very difficult to change that tide.

824
00:45:26,160 --> 00:45:28,279
Speaker 1: And and also the focus has really come down to

825
00:45:28,400 --> 00:45:32,359
Speaker 1: manufactured goods, the idea that the trade deficit represents a

826
00:45:32,400 --> 00:45:36,240
Speaker 1: loss of manufacturing production and capacity here in the US.

827
00:45:36,719 --> 00:45:38,879
Speaker 1: But again it's going to be very difficult to turn

828
00:45:38,920 --> 00:45:42,560
Speaker 1: that tide and return manufacturing jobs to the US. Given

829
00:45:42,600 --> 00:45:47,319
Speaker 1: the significant amount of technological progress and automation that has

830
00:45:47,360 --> 00:45:50,160
Speaker 1: occurred in this country that is really eroded as opposed

831
00:45:50,200 --> 00:45:54,239
Speaker 1: to trade that has really eroded the reliance on manufacturing

832
00:45:54,320 --> 00:45:57,399
Speaker 1: jobs since really the late nineties seventies. Let me ask

833
00:45:57,440 --> 00:46:01,040
Speaker 1: you lastly, you're just about energy and the relationship. When

834
00:46:01,040 --> 00:46:02,560
Speaker 1: you look at look at inflation, you look at the

835
00:46:02,640 --> 00:46:05,640
Speaker 1: role that energy is playing there. It's a real driver,

836
00:46:07,560 --> 00:46:11,920
Speaker 1: absolutely absolutely, uh. And energy has been one of the

837
00:46:12,120 --> 00:46:16,040
Speaker 1: saving graces, if you will, for the consumer low energy prices. Now,

838
00:46:16,040 --> 00:46:19,080
Speaker 1: remember this was supposed to be a very temporary drop

839
00:46:19,120 --> 00:46:22,879
Speaker 1: in energy prices, but we've seen now nearly two years,

840
00:46:22,880 --> 00:46:25,799
Speaker 1: more than two years of very low energy prices, which

841
00:46:25,800 --> 00:46:28,560
Speaker 1: has really helped sustain the consumer in the absence of

842
00:46:28,600 --> 00:46:31,480
Speaker 1: marginal income growth. So if we do start to see

843
00:46:31,480 --> 00:46:35,440
Speaker 1: a reversal in the energy market, eating into that that

844
00:46:35,560 --> 00:46:38,719
Speaker 1: additional ability for the consumer to spend, when we talk

845
00:46:38,760 --> 00:46:41,520
Speaker 1: about these tax increases, we have to put it in perspective.

846
00:46:41,920 --> 00:46:44,680
Speaker 1: Is that simply going to offset the loss of the

847
00:46:44,680 --> 00:46:48,200
Speaker 1: benefit that the consumer has been experiencing as a result

848
00:46:48,239 --> 00:46:50,880
Speaker 1: of these low energy prices, or will it simply be

849
00:46:50,920 --> 00:46:53,600
Speaker 1: a one for one trade off, leaving the consumer no

850
00:46:53,719 --> 00:46:57,640
Speaker 1: better off. Still at this very modest consumption pace, so

851
00:46:57,840 --> 00:46:59,840
Speaker 1: energy is going to play a very key role in

852
00:47:00,000 --> 00:47:02,680
Speaker 1: and not only determine the impact of physical policy, but

853
00:47:02,760 --> 00:47:05,200
Speaker 1: the longer term outlook for the US economy. Dr p

854
00:47:05,400 --> 00:47:07,000
Speaker 1: X so thank you so much, Lindsay px it with

855
00:47:07,080 --> 00:47:18,960
Speaker 1: step Nicholas. Thanks for listening to the Bloomberg Surveillance podcast.

856
00:47:19,320 --> 00:47:24,440
Speaker 1: Subscribe and listen to interviews on iTunes, SoundCloud, or whichever

857
00:47:24,600 --> 00:47:29,000
Speaker 1: podcast platform you prefer. I'm out on Twitter at Tom Keene.

858
00:47:29,080 --> 00:47:32,880
Speaker 1: David Gura is at David Gura. Before the podcast, you

859
00:47:32,920 --> 00:47:49,200
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio, brought you

860
00:47:49,280 --> 00:47:52,879
Speaker 1: by Bank of America. Mary Lynch. Dedicated to bringing our

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Speaker 1: clients insights and solutions to meet the challenges of a

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Speaker 1: transforming world. That's the power of global connection. Mary Lynch, Pierce,

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Speaker 1: Fenner and Smith Incorporated Member s I p C.