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Speaker 1: Who you put your trust in matters. Investors have put

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Speaker 1: their trust in independent registered investment advisors to the tune

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Speaker 1: of four trillion dollars. Why learn more and find your

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Speaker 1: independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast.

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Speaker 1: I'm Tom Keane. Always with Michael McKee. Daily we bring

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Speaker 1: you insight from the best in economics, finance, investment, and

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Speaker 1: international relations. Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com,

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Speaker 1: and of course on the Bloomberg And now joining us

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Speaker 1: from the Amber Study Forum in Shinobia, Jacob Frankel. He's

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Speaker 1: a former David Rockefeller Professor at the University of Chicago,

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Speaker 1: Governor of the Bank of Israel, and now of course

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Speaker 1: with JP Morgan, International Professor Franko. Thank you so much

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Speaker 1: for joining us this morning. I want to go to

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Speaker 1: brexit on a first order condition. We have endless guests

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Speaker 1: telling us the current account deficit dynamics of the United

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Speaker 1: Kingdom are key. You are truly one of the experts

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Speaker 1: in the world. Honest, are you concerned about the depths

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Speaker 1: or the duration of a current account deficit in England? Well,

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Speaker 1: obviously a count account deficit if they are too long

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Speaker 1: and too large, are not very sustainable. But I should

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Speaker 1: say that in contrast with the original initial Doomsday's predictions,

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Speaker 1: the world has not gone under and Europe has not

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Speaker 1: gone under. I believe that what is happening now is

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Speaker 1: the start of the realization that Europe needs the UK

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Speaker 1: capital market at least as much as any if not

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Speaker 1: moll then the UK capital markets and needs Europe. So

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Speaker 1: I believe and that common sense will prevail as the

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Speaker 1: negotiations move on. Mr Franco. When I look at negative rates,

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Speaker 1: Stanley Fisher was quite outamant. It's been an interesting and

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Speaker 1: important experiment. Do you agree with the Vice chairman that

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Speaker 1: nations should continue to study negative rates, do negative rates

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Speaker 1: and even distribute them more across their societies. Well. I

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Speaker 1: always agree with steleficial about issues that are of great interest,

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Speaker 1: and it is an interesting experiment and experience. I do

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Speaker 1: hope that it will not become a generalized picture of

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Speaker 1: the world financial markets. Negative interest rates are not healthy

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Speaker 1: for the financial system, and low interest rates are also

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Speaker 1: not healthy for a sustainable financial system. We have had

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Speaker 1: a very significant period of this location in the world economy,

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Speaker 1: monetary policy all over the world has been exceedingly expensive

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Speaker 1: and in fact very very productively saving the world from

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Speaker 1: a deep precession. But now is the time to agree

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Speaker 1: that monetary policy should not be the only game in town.

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Speaker 1: That interest rates should aim to be normalized, and that's

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Speaker 1: where we should want Mr Franco I expect to Jean

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Speaker 1: Platricia earlier from Chernobia as well. We speak to politicians

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Speaker 1: on a daily basis, and everyone agrees that it shouldn't

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Speaker 1: be the only game in town. But they've agreed on

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Speaker 1: this for the last four years. What needs to change

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Speaker 1: so that central banks really aren't the only game in town. Well,

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Speaker 1: when you started being the only game in town, you

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Speaker 1: were the savior. But over time these things that are

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Speaker 1: not sustainable cannot continue forever. Everyone recognizes that the name

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Speaker 1: of the game for the resuming of economic growth and

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Speaker 1: read an increased productivity, which has been a long term

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Speaker 1: problem with US, cannot be solved by monetary policy. That's

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Speaker 1: where fiscal policy, that's where structural policies is called in.

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Speaker 1: So yes, because of responsibility of the central banks, they

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Speaker 1: have been acting, but we should not overwhelden them because

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Speaker 1: they are not equipped to be able to do what

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Speaker 1: it takes to improve productivity. Here in Chernobio, a lot

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Speaker 1: of the discussion was placed on education, on training and

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Speaker 1: removing distortions. That's the name of the game. And therefore

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Speaker 1: why by looking at the coin under the lamp post

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Speaker 1: is not the solution. It's a timeline issue and it's

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Speaker 1: always been the case. Jacob Frankel that we have seen

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Speaker 1: also a lot of thinkers around the world talking about

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Speaker 1: changing mandates of central banks. We've talked about to changing

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Speaker 1: the mandate of a two percent target translation. Certainly that's

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Speaker 1: one of the papers that got a lot of traction

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Speaker 1: in the US two weeks ago. Do we need to

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Speaker 1: think about central banks differently? Do we need to reset

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Speaker 1: everything we know about what they can do can't do

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Speaker 1: under mandate? I did not hear each world of the question,

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Speaker 1: but if you were talking about the mandates of central banks,

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Speaker 1: the nature of the economies have changed, and the mandate

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Speaker 1: of central banks, accordingly have now expanded themselves from dealing

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Speaker 1: with price stability to also focusing on financial stability. And

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Speaker 1: if you're focusing on financial stability, you should realize that

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Speaker 1: the success of central bank cannot be judged only in

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Speaker 1: terms of arresting inflation, but also in terms of securing

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Speaker 1: the stability of the financial system. Zero interest rates will

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Speaker 1: not secure the stability of the financial system. In fact,

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Speaker 1: it may create bubbles and disconnections between the real economy

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Speaker 1: and the financial economy. Frank I got one more question.

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Speaker 1: You are the heritage of the University of Chicago, the

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Speaker 1: Chicago of Rock and Roger, and the Chicago of Luigis

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Speaker 1: and Galis, Randall, Krasner and others. Are guys like you

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Speaker 1: paying enough attention to the financial and the banking system.

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Speaker 1: Are economists like Bruce Kasman Are they working in a

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Speaker 1: vacuum where they should pay attention to the banks like

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Speaker 1: deeutgea bank, like Commerce Bank and the others. Absolutely, the

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Speaker 1: role of the banks are critical for the for the

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Speaker 1: functioning of the modern economy. And I think that's one

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Speaker 1: of the points that we need to keep in mind

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Speaker 1: all the time. When you are having uncertainty in the

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Speaker 1: regulatory framework, well, you are having policies that are forcing

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Speaker 1: a change in the business model of the financial industry

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Speaker 1: where you put insurance companies on the tremendous strain. The

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Speaker 1: issue is not what happens to this sector or not there,

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Speaker 1: but rather the recognition that without a healthy financial system

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Speaker 1: you will not have a growing economy. And that's one

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Speaker 1: of the points that the populism does not realize. If

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Speaker 1: you want to have growth and employment, you must have

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Speaker 1: strong banks and well funking banking system. Listen, folks. Jacob

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Speaker 1: Frankel said what I'm not allowed to say, but Professor

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Speaker 1: Frankel can say as for us. He is the chairman

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Speaker 1: of JP Morgan International. Jacob Frankel of Chicago. Javid gurin

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Speaker 1: term King Job's day, but also occurring in important conversation,

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Speaker 1: and Vladivostock our editor in chief, John Michael twait Uh

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Speaker 1: in conversation with the President of the Russian Federation. The

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Speaker 1: backdrop here is so much about Russia and international relations.

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Speaker 1: Here is Vladimer Putin on the young leadership of Saudi Arabia.

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Speaker 1: As far as I'm aware, Mr Salmon, it's it's Emputy,

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Speaker 1: crown Prince. But that's a detail. He's a very energetic

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Speaker 1: state figure, and we really have struck up a good

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Speaker 1: relationship night. Clearly, this is a man who knows what

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Speaker 1: he wants and knows how to achieve his goals. But

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Speaker 1: at the same time, I think He's a very reliable

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Speaker 1: partner with whom you can reach agreements and can be

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Speaker 1: certain that those agreements will be honored. Uh. And there

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Speaker 1: is Vladimir Putin in conversation with our John Michael and

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Speaker 1: not joining us. Really thrilled to bring you this morning,

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Speaker 1: the former Undersecretary of State for Political Fairs, Ambassador Tornado,

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Speaker 1: and of course our ambassador to Degrees Nick Burns. Ambassador Burns,

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Speaker 1: Good morning, um, Vladim. Morning for Vladimir Putin has evolved

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Speaker 1: since the collapse of Yeltsin in nineteen nine. Let us

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Speaker 1: begin with his power, because power is everything within Russian history.

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Speaker 1: Is he powerful to the Russian people without question? You remember,

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Speaker 1: he came to power because he was able to put

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Speaker 1: down some of the terrorist threat that had bedeviled Russia

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Speaker 1: and the late nineteen nineties. He was he was security minded,

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Speaker 1: He restored a sense of honor I think for the

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Speaker 1: Russian people, um and security in late nineteen nineties and

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Speaker 1: just before and after nine eleven. That's how he made

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Speaker 1: his mark in Russian politics and his Russian president. But

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Speaker 1: of course he's also i think become more popular because

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Speaker 1: of his nationalist policies. The invasion policies to which we object,

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Speaker 1: the invasion of Georgia in two thousand and eight, and

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Speaker 1: of course the invasion and illegal occupation and annexation of

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Speaker 1: Crimea and two thousand fourteen. These have boosted his popularity, ratings,

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Speaker 1: his support among the Russian public because they're is being

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Speaker 1: highly nationalists and supporting this vision that Russia should be

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Speaker 1: the strongest country in this region. Now, we Americans reject this,

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Speaker 1: but Russian politics of question plays out in an entirely

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Speaker 1: different stage. Ambassador, let me bring in David. David, Ambassador,

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Speaker 1: you you were on a study group with retired General

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Speaker 1: Jim Jones looking at the role of NATO, and you

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Speaker 1: had strong words for Russia. You said, Russia is acting

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Speaker 1: in an assertive and predatory fashion. It is redividing Europe.

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Speaker 1: You've given us the domestic outlook on Vladimir Putin. What

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Speaker 1: is the broader western international outlook on the role he's

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Speaker 1: he's playing right now and what NATO has been doing,

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Speaker 1: indeed should be doing to counter that. Well. Putin is

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Speaker 1: deeply distrusted now in Europe certainly and in North America

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Speaker 1: because of the invasion of of Crimea, because of the

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Speaker 1: division of the Donbass region and in southeastern Ukraine. He

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Speaker 1: divided Ukraine as well as occupied Crimea. And you've seen

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Speaker 1: now these major economic sanctions put on Putin by the

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Speaker 1: European Union, by the Narited States and Canada. Those sanctions

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Speaker 1: are going to remain, and so he's an isolated figure

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Speaker 1: as he goes to the g twenties sunnt Uh in

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Speaker 1: Seina in a couple of days. He's obviously someone who's

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Speaker 1: trying to get out from under those sanctions. NATO has

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Speaker 1: had to respond in a very tough way because in

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Speaker 1: addition to those two occupations in in Crimea and I

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Speaker 1: talked about and the other part of Ukraine, he's been

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Speaker 1: pressuring the Baltic States, Estonia at Latvia and Lithuania and Poland.

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Speaker 1: They're all NATO members. So NATO has moved four battalions

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Speaker 1: of troops in one battalion each into each of those

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Speaker 1: countries in order to say to Putin, you can't cross

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Speaker 1: this line because this is NATO territory. And General Jones

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Speaker 1: and I, General Jim Jones and I had let an

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Speaker 1: Atlantic Council study on NATO which asserted that we need

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Speaker 1: to rebuild American military power in Europe, we certainly need

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Speaker 1: to protect those countries from Putin. I think he's a

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Speaker 1: he's a cynical leader, he's opportunistic, but he respects power,

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Speaker 1: and so if we project power in Europe, he's going

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Speaker 1: to have to respect that. Ambassador, I look at an

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Speaker 1: eight hundred thirty three mile border between Finland and Russia

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Speaker 1: that Americans are largely ignorant of state and now the

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Speaker 1: tension of the Baltic States in Scandinavia with Vladimir Putin well,

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Speaker 1: in addition to his predatory policies in Georgia and Ukraine,

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Speaker 1: the Russian military has been very active in the Baltic region.

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Speaker 1: In the Baltic Sea. They've been buzzing NATO aircraft and

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Speaker 1: NATO vessels. There's been a lot of reports of Russian

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Speaker 1: submarines active in places like Stockholm, and so now you

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Speaker 1: see in northern Europe in countries that were formally neutral

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Speaker 1: during the Cold War, Sweden and Finland in particular, they're

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Speaker 1: not joining NATO, but they're very close military partners of

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Speaker 1: NATO because they fear a research in Russia and they

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Speaker 1: understand that the only power in the world that can

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Speaker 1: really block Russia and contain Russian power is the United States,

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Speaker 1: and the United States of course projects power in Europe

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Speaker 1: through the NATO Alliance. So it's been marketable to see

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Speaker 1: this change of opinion in Europe. There was a time,

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Speaker 1: of course, ten fifteen years ago, a lot of anti Americanism.

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Speaker 1: Not so much now European countries understand the US is important,

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Speaker 1: important to their security. Too short of a visit today,

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Speaker 1: Nicholas Burns, thank you so much. Ambassador Burns. Aren't Furnimer,

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Speaker 1: Ambassador to Greece. Who you put your trust in matters.

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Speaker 1: Investors have put their trust in independent registered investment advisors

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Speaker 1: to the tune of four trillion dollars. Why they see

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Speaker 1: their role is to serve, not sell. That's why Charles

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Speaker 1: Schwab is committed to the success of over seven thousand

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Speaker 1: independent financial advisors who passionately dedicate themselves to helping people

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Speaker 1: achieve their financial goals. Learn more and find your independent

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Speaker 1: advisor dot com. We now welcome on Bloomberg Radio and

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Speaker 1: Bloomberg Television worldwide David Gura and Tom Keenan with us

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Speaker 1: as always. Some asked capital with a spiffy one year

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Speaker 1: track record with the Janison Constrained Fund. When William gross bill.

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Speaker 1: You're generating almost equity like returns. How are you doing that? Well?

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Speaker 1: It takes a little bit of leverage, does it not?

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Speaker 1: Or a lot of luck? And in this case, you know,

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Speaker 1: the unconstrained fund as our most unconstrained funds, and there

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Speaker 1: are many hedge funds, so you know, have a little

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Speaker 1: bit of leverage and you know, i'd say that Jenison

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Speaker 1: constraint is UH is levered two to one, and so

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Speaker 1: you can take advantage of the low borrowing rate and

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Speaker 1: lever a little bit to produce equity like returns. I mean,

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Speaker 1: that's basically what Bridgewater suggests. Do they not? Well? Within

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Speaker 1: that is you've got to work within a FED millie.

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Speaker 1: You does this job's report today with the churn of it,

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Speaker 1: with yields in a little bit, with the ends stronger?

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Speaker 1: Does this signal of FED that needs to move in

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Speaker 1: September or November? No one talking about that? Or do

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Speaker 1: we wait for the end of the year December or not? Yeah?

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Speaker 1: I heard you you and David Tom talking about it,

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Speaker 1: and it's hard to gauge it initially, but I agree

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Speaker 1: we're sort of we're sort of arguing about the number

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Speaker 1: of angels on ahead of a pen here. Um, we

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Speaker 1: had twenty thousand upwards revision and this was about twenty

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Speaker 1: thousand light And you know, the it's a little bit

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Speaker 1: below the six and twelve month average I guess of

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Speaker 1: job creation. But um, I think September is on. I

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Speaker 1: don't think it's a hundred percent on, but I think

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Speaker 1: it's close to a d percent. I think Janet Yelling

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Speaker 1: told us, not just in Jackson whole, but in other places,

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Speaker 1: that she looks at jobs, jobs and jobs, and that

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Speaker 1: g d P is not on the top of her list.

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Speaker 1: And if if these types of jobs don't do it,

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Speaker 1: I'm not quite sure what does, right, uh, David Gura

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Speaker 1: three months moving average two hundred thirty two thousand, non

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Speaker 1: firm perils. That's a ginormous number. Six months a little

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Speaker 1: less one seventy five. But critically, David Gura, the one

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Speaker 1: year moving average two hundred and four thousand, not firm

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Speaker 1: pay rolls. Then I want to ask you, after the

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Speaker 1: last job's number came out to fifty thousand, you said

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Speaker 1: that's good job growth, but you were not satisfied that

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Speaker 1: it was going to lead to a September hike. What's

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Speaker 1: changed your calculus. What's made you think now that September

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Speaker 1: could be on the table. Well, I think just Fed speak.

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Speaker 1: I mean I listened to Yellen, and I listened to

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Speaker 1: stand Fisher, and you know, basically at Jackson Holt, Yellen

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Speaker 1: said that if things continue as they as they are continuing. Yes,

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Speaker 1: you just pointed out the two hundred thousand is the

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Speaker 1: twelve month every time jobs. But you know, I would

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Speaker 1: say that she would think that this is a continuation

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Speaker 1: of a positive trend that promotes a basis point hike.

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Speaker 1: It's almost been a year. Um. I think that's a

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Speaker 1: gradual type of slope. I think Fisher, you know, seconded

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Speaker 1: her motion, so to speak, and and maybe even up

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Speaker 1: to a little bit in terms of his hawkishness. And

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Speaker 1: so uh, those two drive it, and I think September

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Speaker 1: is the one undone for the year. Bill. I want

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Speaker 1: to head now to something that I think is absolutely crucial,

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Speaker 1: which is do you suggest that the FED and economists

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Speaker 1: worldwide are ignoying the financial and banking system with all

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Speaker 1: the challenges you see, particularly in European banking. Do they

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Speaker 1: have to does the FED have to fold in negative

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Speaker 1: rates their central bank actions with the somewhat desperation in

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Speaker 1: financial instability of our banking system. Yeah, I was hoping

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Speaker 1: you'd ask that question. That's a great question, to be fair.

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Speaker 1: Jillian Ted brings out a nice article today in the

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Speaker 1: Financial Times. But you know, I've been on this before,

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Speaker 1: and so have you. Um. You know, I suspect that

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Speaker 1: Jackson hold where they talked about monetary challenges and new

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Speaker 1: UH modeling perhaps going forward, that they they didn't really

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Speaker 1: look at the effect on the financial economy, and they

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Speaker 1: didn't in two thousand and six and two thousand and

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Speaker 1: seven and two thousand and eight. They didn't know what

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Speaker 1: was going on. They didn't read Minsky, so to speak.

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Speaker 1: Minsky had written ten, fifteen, twenty years before that the

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Speaker 1: real economy and the financial economy are intimately connected. And

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Speaker 1: we saw that, you know, with Layman. And so now

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Speaker 1: your question is you know they really look at the

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Speaker 1: effect on the financial economy. I would say that, you know,

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Speaker 1: in the terms of the real economy, they've lowered their

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Speaker 1: long term growth assumption, they've lowered our star, which basically

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Speaker 1: is the long term real neutral interest rate, etcetera, etcetera.

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Speaker 1: But they didn't investigate, you know, the effect of our

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Speaker 1: star on financial asset prices. We know that it probably

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Speaker 1: affects tips prices and probably bond prices, but how does

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Speaker 1: it affect equity risk preaming? How does it affect equity

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Speaker 1: and an high yield bond sprints? No discussion whatsoever that

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Speaker 1: in terms of potential asset bubbles from these new our

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Speaker 1: star and other lower growth estimates on the long term,

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Speaker 1: Mr Gross have opinion down in this is absolutely critical.

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Speaker 1: Domini Constant at Deutsche Bank is adamant that this is

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Speaker 1: a central bank regime that will shift to a discussion

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Speaker 1: of financial instability. When you're on your desk at Janis,

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Speaker 1: when you got your three Bloombergs and your Monro trader

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Speaker 1: fired up looking at the financial system. Does Bill Gross

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Speaker 1: suggest we will see financial instability in the next year, Well,

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Speaker 1: I think it's a definite possibility because we have growing leverage,

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Speaker 1: not necessarily in the United States, let's be fair, although

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Speaker 1: on the corporate ide yes, but we have substantial leverage

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Speaker 1: in China, and China's the economic engine, and to the

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Speaker 1: extent that the financial leverage in China at some point

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Speaker 1: presents a problem, and even Chinese officials suggest that that's

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Speaker 1: a possibility. That leverage is high. Yes, that you know,

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Speaker 1: in two thousand and seven eight it was the subprime

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Speaker 1: so to speak, that wrote the camel's back. Yeah, that

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Speaker 1: China's leverage is huge and amos and much bigger than

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Speaker 1: the subprime. So yeah, I would suggest a financial moment

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Speaker 1: is possible because wherever there is leverage and high leverage

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Speaker 1: and historically high leverage, you know, there's the possibility of

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Speaker 1: a moment. And uh, Mensky pointed that out. He said,

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Speaker 1: stability leads to instability, and we've got stability now. But uh,

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Speaker 1: there's a definite questionist whether interest rates in a negative camp. Uh,

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Speaker 1: you know, produce instability and asset prices and therefore potential

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Speaker 1: popping the bubbles fil very quickly here what about savers?

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Speaker 1: Tom asked stand Fisher about the financial sector. He asked

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Speaker 1: him about savers as well. Uh, I remember very vividly

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Speaker 1: stand Fishers saying in economics there are trade offs. To

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Speaker 1: what degree do you think the f WEMC is paying

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Speaker 1: attention to how savers are suffering right now? Well? I

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Speaker 1: mentioned that, David, and I'm struck by that. I'm stunned

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Speaker 1: by that, and basically said savers will have to wait

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Speaker 1: and and yell and said, savers will have to wait.

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Speaker 1: And I suppose you know, in the ordinary scheme of

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Speaker 1: things that perhaps that's logical. It basically means, let's get

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Speaker 1: the economy, you know, on a straightforward movement. But you know,

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Speaker 1: savers can uh can start saving two or three years

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Speaker 1: from now with a more attractive interest rate. Okay, Mr

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Speaker 1: Gross has agreed to be with us today for one thousand,

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Speaker 1: four hundred thirty eight minutes, or at least till he

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Speaker 1: gets his decision right. I was on the edge, Bill Gross.

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Speaker 1: Joe it was like on the edge of Joe Granville.

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Speaker 1: I mean not broken watch. Yeah, broken watch, I mean

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Speaker 1: great respect for that. And folks, is hearkens back many

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Speaker 1: many decades to my ute and uh when Joseph Granville

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Speaker 1: about being right twice a day, Bill Gross, I would

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Speaker 1: suggest you've actually been relatively nuanced in your uproar about

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Speaker 1: central banks in general and their limited tool kit to

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Speaker 1: solve real economy effects. The heart of that and the

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Speaker 1: heart of your let me get the number again one thousand,

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Speaker 1: four hundred thirty eight minutes, is you need fiscal policy

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Speaker 1: to help you out. Do you see any indication that

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Speaker 1: the fiscal authorities will come to the rescue. Well not yet,

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Speaker 1: And there are many other advocates now relative to a

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Speaker 1: year or two years ago, Tom and the press and

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Speaker 1: on your program and so on, so that I think

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Speaker 1: the mood is beginning to shift. But politically is what

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Speaker 1: we have to worry about, and I suppose we'll see

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Speaker 1: that to some extent in the US election. But but

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Speaker 1: fiscal spending, whether it be for infrastructure which everyone seems

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Speaker 1: to support, or you know other you know types of spending,

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Speaker 1: you know, I think is essential. We we all sort

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Speaker 1: of know the government spending. Perhaps it's not as productive

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Speaker 1: as private spending, but when the private sector basically leaves

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Speaker 1: a hole, as Kines would have argued back in the

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Speaker 1: thirties and the fourties, then it's up to the government,

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Speaker 1: at least temporarily to fill that hole. And I think

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Speaker 1: you know, legislation like in Germany where they basically mandated

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Speaker 1: a balanced budget, and the shift of other European countries

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Speaker 1: in that direction. You know, basically it's hard to reverse.

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Speaker 1: But I think ultimately, if if monetary policy is basically

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Speaker 1: you know, played out, and I think it is, um

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Speaker 1: I think right should be higher, not lower than you know,

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Speaker 1: fiscal spending. Hopefully productive spending fills in some of the gap,

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Speaker 1: but there are, as Summers would point out, and as

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Speaker 1: I pointed out, with a new normal, there are structural

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Speaker 1: problems that will you know, promote a lower real growth

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Speaker 1: rate going forward that is almost unavoidable. Bill. Let's talk

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Speaker 1: about growth in your most recent investment outlook what you

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Speaker 1: talked about with our college Eric s Chatsker a couple

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Speaker 1: of days ago. Golf is the theme you and John

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Speaker 1: Riding both we're just speaking with talking about golf and

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Speaker 1: economics here. But you said that practice can't buy you

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Speaker 1: a hole in one. You look at Janet Yellen as

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Speaker 1: a forecaster, perhaps one of the most practiced forecasters out there.

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Speaker 1: She's got to be concerned with where she sees growth

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Speaker 1: right now at one point year over year. How sympathetic

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Speaker 1: are you to her as she's weighing that as she

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Speaker 1: and the committee way a rate rise. Well, I'm very

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Speaker 1: sympathetic because I know that the Fed and other central

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Speaker 1: banks and most of the economic society is dependent upon models.

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Speaker 1: We look to history to foretell the future. But I

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Speaker 1: think the problem is is that when you get to

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Speaker 1: the zero bund in the negative interest rate levels where

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Speaker 1: thirteen trillion dollars worth of sovereign debt is in a

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Speaker 1: negative camp and really isn't an asset, but it's a

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Speaker 1: liability for those that hold those particular pieces of paper

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Speaker 1: that you know that the rules perhaps change. We see

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Speaker 1: that in science, you know, with the Newtonian physics and

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Speaker 1: the law of small objects which Einstein initiated, and so

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Speaker 1: you know, zero percent interest rates can change things and

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Speaker 1: change models. And I don't think because that's a subjective

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Speaker 1: type of thought and not subject to you know, historical

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Speaker 1: modeling more than five or six years. I think it's

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Speaker 1: very difficult for them, and I'm sympathetic, but I think

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Speaker 1: we need new thinking. And that supposedly was what the

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Speaker 1: Jackson Hole, you know, symposium was all about, but I

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Speaker 1: saw very little of that. Did you talk about expanding

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Speaker 1: that tool kid often? You said Kevin Warsh's work at

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Speaker 1: at Stanford on that going back to Jackson Hole and

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Speaker 1: the conversation there about negative rates didn't come up in

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Speaker 1: Janet Yellen's speech at all. Stan Fisher told Tom that

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Speaker 1: he was watching it from sort of theoretical vantage going

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Speaker 1: forward here when you look back at Jackson Hole, when

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Speaker 1: you look back at what you've heard here over these

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Speaker 1: last few weeks from policy makers. What's your sense of

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Speaker 1: how they're weighing negative interest rates, if at all, What

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Speaker 1: what role that's playing in the tool kid if any? Well,

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Speaker 1: I don't think they do. I mean some such as

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Speaker 1: you know Kiroda and Japan are beginning to suggest that

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Speaker 1: maybe negative interest rates have a negative type effect, But

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Speaker 1: I don't think they do. And you mentioned Kevin Warsh

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Speaker 1: you know, I think you know he had the courage

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Speaker 1: to challenge the current FEDS orthodoxy that believes that lower

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Speaker 1: and lower interest rates and negative interest rates elevate asset prices,

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Speaker 1: which in turn stimulates economic growth and inflation. And he

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Speaker 1: said in his op ed, I think it was very mentally,

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Speaker 1: very vocal, like all of his out of office so

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Speaker 1: to speak, he said, the FED needs new thinking. Um,

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Speaker 1: he said, uh, you know the Williams types of proposals

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Speaker 1: where you increase the inflation target the three or four

429
00:26:22,320 --> 00:26:25,280
Speaker 1: percents that are to focus on nominal GDP. He said,

430
00:26:25,280 --> 00:26:27,280
Speaker 1: they were band aids. And he said, uh, you know,

431
00:26:27,320 --> 00:26:30,960
Speaker 1: we really need some new thinking. My addition to the

432
00:26:30,960 --> 00:26:33,080
Speaker 1: new thinking has been what I've been talking about for

433
00:26:33,080 --> 00:26:35,840
Speaker 1: six to twelve months is that these interest rates are

434
00:26:36,040 --> 00:26:39,280
Speaker 1: have a negative effect, and that they should gradually raise

435
00:26:39,440 --> 00:26:42,399
Speaker 1: interest rates, and perhaps more gradually than they're thinking about.

436
00:26:42,680 --> 00:26:44,159
Speaker 1: Right Bill, I want to get to the heart of

437
00:26:44,200 --> 00:26:47,080
Speaker 1: the matter and bring it back to bond management and investment.

438
00:26:47,640 --> 00:26:50,639
Speaker 1: No one has been smarter on this than V Body

439
00:26:50,720 --> 00:26:54,760
Speaker 1: of Boston University. He was way out front on a

440
00:26:54,840 --> 00:26:59,760
Speaker 1: reduced real rate, reduced nominal yield compression in all, how

441
00:27:00,000 --> 00:27:04,600
Speaker 1: are you going to manage how do institutional portfolios like

442
00:27:04,640 --> 00:27:08,840
Speaker 1: pension funds with long term obligations manage? And how do

443
00:27:08,920 --> 00:27:14,919
Speaker 1: our viewers and listeners manage given lower for longer, longer, longer, longer.

444
00:27:15,320 --> 00:27:18,760
Speaker 1: V Body of Boston University nailed this. It's as V

445
00:27:18,920 --> 00:27:21,919
Speaker 1: Body world, how do we manage our way through it?

446
00:27:22,960 --> 00:27:26,520
Speaker 1: You accept the new world, tom uh. You know, basically,

447
00:27:26,640 --> 00:27:29,159
Speaker 1: up until now, the fight has been on, and the

448
00:27:29,640 --> 00:27:32,119
Speaker 1: direction of the fight and the you know, the temper

449
00:27:32,160 --> 00:27:35,440
Speaker 1: of the fight has been to increase risk and to

450
00:27:35,480 --> 00:27:40,200
Speaker 1: increase leverage in order to maintain a semblance of historical returns.

451
00:27:40,280 --> 00:27:43,320
Speaker 1: I think let's go to pension funds. I think what

452
00:27:43,359 --> 00:27:47,320
Speaker 1: they've done, you know, basically, is reduced by a little

453
00:27:47,359 --> 00:27:50,360
Speaker 1: bit um. You know by twenty five basis points their

454
00:27:50,640 --> 00:27:53,520
Speaker 1: assumption in terms of long term return on assets. And

455
00:27:53,800 --> 00:27:55,960
Speaker 1: what does that do do for them? You know, it

456
00:27:56,040 --> 00:27:59,720
Speaker 1: basically does very little. Doesn't force them to make additional contributions.

457
00:27:59,760 --> 00:28:02,960
Speaker 1: Does forced the state or the entity to increase taxes

458
00:28:03,000 --> 00:28:06,359
Speaker 1: in order to fill the whole, and so that along

459
00:28:06,400 --> 00:28:09,280
Speaker 1: with accounting changes and so on. It's deferred, defer, defer,

460
00:28:09,760 --> 00:28:13,679
Speaker 1: I think what pension funds, what savers, what investors have

461
00:28:13,840 --> 00:28:16,159
Speaker 1: to do is simply accept that it's a new world

462
00:28:16,240 --> 00:28:20,440
Speaker 1: and base their spending assumptions, their taxation um and other

463
00:28:20,560 --> 00:28:23,800
Speaker 1: policies on the fact that it's not a ten percent world.

464
00:28:24,080 --> 00:28:26,560
Speaker 1: It's a forti five percent world at best. It's a

465
00:28:26,600 --> 00:28:30,160
Speaker 1: four or five percent world at best. You can't capture

466
00:28:30,240 --> 00:28:34,240
Speaker 1: that with sovereign, full faith and credit. Where does Bill

467
00:28:34,280 --> 00:28:37,600
Speaker 1: Gross go or where do our viewers and listeners grow

468
00:28:38,000 --> 00:28:40,400
Speaker 1: in the new world that Janet Yelling and others have

469
00:28:40,480 --> 00:28:43,720
Speaker 1: given us. Well, it's very difficult. Let's put it this way.

470
00:28:43,760 --> 00:28:48,120
Speaker 1: All assets basically are volatility related. We know a Treasury

471
00:28:48,120 --> 00:28:51,120
Speaker 1: bill has no volatility and that's why it yields so little.

472
00:28:51,400 --> 00:28:54,720
Speaker 1: But basically, longer term bonds, even sovereign bonds, you know,

473
00:28:54,840 --> 00:29:00,520
Speaker 1: yield more basically equity risk premiums and douce a volatility component.

474
00:29:00,600 --> 00:29:04,239
Speaker 1: And so you know, measuring engaging volatilely going forward and

475
00:29:04,280 --> 00:29:07,360
Speaker 1: taking advantage of it is perhaps one way, but it

476
00:29:08,000 --> 00:29:10,200
Speaker 1: is a dangerous way. It's like what we talked about

477
00:29:10,240 --> 00:29:13,280
Speaker 1: before in terms of stability and instability. One of these days,

478
00:29:14,000 --> 00:29:17,240
Speaker 1: volatility instead of the VIX at twelve will be the

479
00:29:17,360 --> 00:29:20,440
Speaker 1: vix at twenty and the seller of volatility will come

480
00:29:20,520 --> 00:29:23,440
Speaker 1: up short. So everything is dangerous in this type of world.

481
00:29:23,640 --> 00:29:26,760
Speaker 1: How do we continue to earn ten percent? We don't.

482
00:29:26,880 --> 00:29:28,680
Speaker 1: We look for four to five, and we do it,

483
00:29:29,080 --> 00:29:31,440
Speaker 1: you know, with as little risk as possible. Bill Gross,

484
00:29:31,760 --> 00:29:35,200
Speaker 1: thank you so much for your one thousand four minutes.

485
00:29:36,240 --> 00:29:39,760
Speaker 1: The two precious minutes. Will get to that another time.

486
00:29:40,120 --> 00:29:43,120
Speaker 1: Mr Gross is with Jana's Capital, and I can't say

487
00:29:43,320 --> 00:29:46,800
Speaker 1: enough about all of his essays, and the recent one

488
00:29:47,240 --> 00:29:52,240
Speaker 1: is absolutely scathing about where we are in this odd,

489
00:29:52,280 --> 00:30:11,840
Speaker 1: great distortion. It is a most interesting day, a nuanced day,

490
00:30:12,520 --> 00:30:16,200
Speaker 1: with the job's report most research reports saying this is

491
00:30:16,240 --> 00:30:18,600
Speaker 1: a fed that will wait. We'll see how that moves forward,

492
00:30:19,560 --> 00:30:22,000
Speaker 1: agreeing with Vice Chairman Fisher that they will look at

493
00:30:22,040 --> 00:30:24,920
Speaker 1: the data. Is the data comes in, we take a

494
00:30:25,000 --> 00:30:26,640
Speaker 1: reading on that, which is what you do with the

495
00:30:26,640 --> 00:30:30,520
Speaker 1: engineer from Penn. Scott Mather joins us now from Pimco. Scott,

496
00:30:30,560 --> 00:30:33,760
Speaker 1: good morning, good morning. You take a reading on the data.

497
00:30:34,280 --> 00:30:37,720
Speaker 1: Does your world change with his job's reward? Uh? I

498
00:30:37,800 --> 00:30:40,640
Speaker 1: don't think the world changes. We obviously it's a kind

499
00:30:40,680 --> 00:30:43,040
Speaker 1: of a weak report across the board, so it doesn't

500
00:30:43,200 --> 00:30:45,600
Speaker 1: it doesn't change our view that we've had that September

501
00:30:45,680 --> 00:30:48,920
Speaker 1: is very unlikely. But then that makes December of course

502
00:30:49,000 --> 00:30:51,640
Speaker 1: much more likely after that, so you know, the markets

503
00:30:51,640 --> 00:30:53,440
Speaker 1: beginning to price that in. I think there's only a

504
00:30:53,560 --> 00:30:57,040
Speaker 1: you know, small, you know, teens sort of market price

505
00:30:57,160 --> 00:30:59,640
Speaker 1: in terms of probability for September, and we think that's

506
00:30:59,680 --> 00:31:03,800
Speaker 1: probably right. Why is no one talking about November? Well, certainly,

507
00:31:04,040 --> 00:31:05,800
Speaker 1: you know, moving a few days before the election would

508
00:31:05,800 --> 00:31:07,840
Speaker 1: seem to be uh, probably not something that FED would

509
00:31:07,840 --> 00:31:09,479
Speaker 1: want to do. So I think that's the markets right

510
00:31:09,520 --> 00:31:12,480
Speaker 1: to say that's just extremely unlikely. When I look at

511
00:31:12,520 --> 00:31:16,120
Speaker 1: Scott Man others centered around a three months moving average

512
00:31:16,120 --> 00:31:20,560
Speaker 1: and non firm payrolls that anyone would agree is miraculous

513
00:31:20,600 --> 00:31:25,400
Speaker 1: two d thirties, some thousand people. The fact is we're

514
00:31:25,440 --> 00:31:31,480
Speaker 1: getting good economic data within some selected data that's pretty moldy.

515
00:31:31,760 --> 00:31:35,920
Speaker 1: What is wrong with a hundred and fifties some thousand, Yeah,

516
00:31:36,000 --> 00:31:38,240
Speaker 1: nothing is wrong with that. That's actually, you know, that's

517
00:31:38,320 --> 00:31:40,640
Speaker 1: that's a pretty good level. You know, we should be

518
00:31:40,680 --> 00:31:43,200
Speaker 1: expecting that number to drop closer to a hundred thousand

519
00:31:43,240 --> 00:31:44,560
Speaker 1: by the end of the year the Fed does, and

520
00:31:44,600 --> 00:31:46,600
Speaker 1: then at that point that will be a very good number.

521
00:31:47,000 --> 00:31:50,080
Speaker 1: So what we're seeing is a handoff from job creation

522
00:31:50,600 --> 00:31:53,440
Speaker 1: two wages, and that's that's what should be happening. It

523
00:31:53,520 --> 00:31:56,120
Speaker 1: is happening. It's happening more slowly than many people thought.

524
00:31:56,120 --> 00:31:57,840
Speaker 1: But you know, just look at the data we got

525
00:31:57,920 --> 00:32:00,160
Speaker 1: last week, which sort of confirms that unit lay per

526
00:32:00,240 --> 00:32:02,760
Speaker 1: costs are much higher than we thought. So you're getting

527
00:32:02,800 --> 00:32:05,320
Speaker 1: these these confirming signals that are telling you that the

528
00:32:05,400 --> 00:32:07,479
Speaker 1: labor market is getting tighter and tighter, and you have

529
00:32:07,520 --> 00:32:10,000
Speaker 1: to expect the number of jobs created per month they're

530
00:32:10,000 --> 00:32:12,160
Speaker 1: going to continue to drop per month, that that moving

531
00:32:12,160 --> 00:32:14,200
Speaker 1: average should be coming down pretty sharply. But you know,

532
00:32:14,200 --> 00:32:16,400
Speaker 1: it's not necessarily a bad thing for you know, for

533
00:32:16,480 --> 00:32:19,080
Speaker 1: or a bad reflection on the economy. I guess to

534
00:32:19,080 --> 00:32:23,920
Speaker 1: to Tom's point, not a terrible number. The FED has

535
00:32:23,960 --> 00:32:27,720
Speaker 1: indicated that it doesn't need a mega number here to move.

536
00:32:27,840 --> 00:32:29,600
Speaker 1: So if you if you look at the economy as

537
00:32:29,600 --> 00:32:31,480
Speaker 1: a whole and what's put in place here, why isn't

538
00:32:31,480 --> 00:32:34,440
Speaker 1: this enough? Do you think? Well, we've seen you know,

539
00:32:34,480 --> 00:32:37,640
Speaker 1: I call it the Fed's campaign of forward misguidance, and

540
00:32:38,000 --> 00:32:40,800
Speaker 1: I think that continues. So if you just you know,

541
00:32:41,560 --> 00:32:43,640
Speaker 1: looked at what they've said for the last couple of years,

542
00:32:43,680 --> 00:32:45,640
Speaker 1: of course this type of number would keep you know,

543
00:32:45,920 --> 00:32:47,720
Speaker 1: the FED would be moving. They would have moved already.

544
00:32:48,200 --> 00:32:50,120
Speaker 1: But there's a big difference between you know, what they

545
00:32:50,160 --> 00:32:53,560
Speaker 1: say and what they've been doing. So, uh, you know,

546
00:32:53,640 --> 00:32:56,080
Speaker 1: what it appears to us like is is that the

547
00:32:56,080 --> 00:33:00,960
Speaker 1: FED is trying to engineer an overshoot of inflation. They

548
00:33:00,960 --> 00:33:02,760
Speaker 1: can't say that, they won't say that, but they would

549
00:33:02,760 --> 00:33:04,920
Speaker 1: be very happy and everything they're doing rather than what

550
00:33:04,960 --> 00:33:08,400
Speaker 1: they're saying, suggest that's that's what they're trying to accomplish.

551
00:33:08,440 --> 00:33:10,680
Speaker 1: We think they'll get their wish because you know, inflation

552
00:33:10,800 --> 00:33:13,600
Speaker 1: is headed up, wages are headed up. We think you'll

553
00:33:13,640 --> 00:33:17,120
Speaker 1: see headline CPI going to the FEDS target. Uh, you know,

554
00:33:17,160 --> 00:33:18,720
Speaker 1: at the end of this year, beginning of next year,

555
00:33:19,080 --> 00:33:21,400
Speaker 1: so they be you know, and at that point they'll

556
00:33:21,400 --> 00:33:23,160
Speaker 1: be running out of excuses for not moving. They may

557
00:33:23,200 --> 00:33:26,160
Speaker 1: have to move quite a bit faster because that that

558
00:33:26,200 --> 00:33:28,200
Speaker 1: will probably make them nervous, even though that's what they're

559
00:33:28,240 --> 00:33:29,960
Speaker 1: they're trying to accomplish, it will certainly make them a

560
00:33:30,000 --> 00:33:32,200
Speaker 1: little bit more nervous given how far away they are

561
00:33:32,240 --> 00:33:35,160
Speaker 1: from neutral. What's your sense of of of their awareness

562
00:33:35,240 --> 00:33:38,640
Speaker 1: of what's going on with other central banks and the

563
00:33:38,640 --> 00:33:41,280
Speaker 1: policy that they're implementing, and and also with the markets.

564
00:33:41,280 --> 00:33:43,640
Speaker 1: We've been talking all morning about the comments that stand

565
00:33:43,640 --> 00:33:47,480
Speaker 1: fish are made about the FEDS awareness of market movement

566
00:33:47,520 --> 00:33:49,760
Speaker 1: based on what the FED has been doing here. I

567
00:33:49,760 --> 00:33:52,560
Speaker 1: know you've written extensively about about negative interest rates. What's

568
00:33:52,560 --> 00:33:56,520
Speaker 1: your sense of the FEDS awareness of that engagement with that. Well,

569
00:33:56,560 --> 00:33:58,959
Speaker 1: it would seem that that they're influenced by that. I mean,

570
00:33:59,000 --> 00:34:02,240
Speaker 1: there's a few a fear of diverging too sharply from

571
00:34:02,280 --> 00:34:04,680
Speaker 1: what other major central banks in the world they're doing.

572
00:34:05,200 --> 00:34:08,440
Speaker 1: And it's increasingly clear that there's going to be ongoing easing,

573
00:34:08,440 --> 00:34:10,839
Speaker 1: probably additional moves coming from the Bank of Japan. We've

574
00:34:10,880 --> 00:34:13,279
Speaker 1: seen recent moves from the Bank of England, and we're

575
00:34:13,320 --> 00:34:15,920
Speaker 1: likely to see something soon from from the cp So

576
00:34:16,239 --> 00:34:18,919
Speaker 1: you know that's probably uh that weighs on them pretty heavily,

577
00:34:18,960 --> 00:34:21,040
Speaker 1: you know, should they be diverging so sharply. They worry

578
00:34:21,080 --> 00:34:23,480
Speaker 1: about that right now. They're sort of a cozy club

579
00:34:23,520 --> 00:34:26,560
Speaker 1: of central bank thinking that keeps them on hold. But

580
00:34:27,200 --> 00:34:29,160
Speaker 1: you know, I just noticed as folks have been a

581
00:34:29,200 --> 00:34:31,799
Speaker 1: little remiss and this today girls doing such a good job.

582
00:34:31,840 --> 00:34:34,279
Speaker 1: I don't have to focus on it, Okay, usually do

583
00:34:34,320 --> 00:34:38,840
Speaker 1: with McKee Scott Mather. Joe Lavorgna points out the mother

584
00:34:38,920 --> 00:34:41,719
Speaker 1: of all statistics I've just noted. I'm sorry didn't get

585
00:34:41,800 --> 00:34:48,640
Speaker 1: this earlier. Average weekly hours declined. That is that's jaw

586
00:34:48,760 --> 00:34:51,799
Speaker 1: dropping to see. Yeah, that's the most important thing out

587
00:34:51,800 --> 00:34:54,560
Speaker 1: of this employment report, and that's that's what you know,

588
00:34:55,520 --> 00:34:58,920
Speaker 1: conveys perhaps the level of weakness that you know, that

589
00:34:58,920 --> 00:35:00,960
Speaker 1: will catch the Fed's eye. So that's why it's extremely

590
00:35:01,000 --> 00:35:02,759
Speaker 1: unlikely that they go in September. They're gonna want to

591
00:35:02,760 --> 00:35:05,680
Speaker 1: see more data, as they say. Yeah, and David Gurrl,

592
00:35:05,719 --> 00:35:08,960
Speaker 1: I do a three month movie average of of average

593
00:35:09,000 --> 00:35:12,200
Speaker 1: weekly hours except for one moment in early two thousand

594
00:35:12,200 --> 00:35:17,840
Speaker 1: and fourteen, we are back to two thousand eleven. No, Scott,

595
00:35:18,120 --> 00:35:21,560
Speaker 1: correct me if I'm wrong. No other statistic matters that.

596
00:35:21,680 --> 00:35:25,040
Speaker 1: That's just front and center. We think that's true out

597
00:35:25,040 --> 00:35:28,360
Speaker 1: of this employment report for sure. Yeah, I wonder when

598
00:35:28,400 --> 00:35:30,880
Speaker 1: you when you dig into this and when here we

599
00:35:30,920 --> 00:35:32,799
Speaker 1: are beginning to do that ourselves here just came out

600
00:35:32,840 --> 00:35:34,960
Speaker 1: a little while ago, and you look at its sector

601
00:35:34,960 --> 00:35:37,600
Speaker 1: by sector, you see diminishment in in the energy sector

602
00:35:37,640 --> 00:35:40,840
Speaker 1: as well. As you're strategizing as you're looking at the

603
00:35:40,880 --> 00:35:44,880
Speaker 1: portfolio there, what what's the role of energy right now? Uh,

604
00:35:45,080 --> 00:35:47,440
Speaker 1: you know, playing in the economy generally, And when you

605
00:35:47,440 --> 00:35:50,800
Speaker 1: look at the employment landscape as well, well, they the

606
00:35:51,360 --> 00:35:53,640
Speaker 1: drag on the economy from the big drop in energy

607
00:35:53,640 --> 00:35:56,120
Speaker 1: prices and the and the drop in business investment is

608
00:35:56,200 --> 00:35:59,880
Speaker 1: behind us. So increasingly it's just a non factor going forward.

609
00:36:00,000 --> 00:36:02,040
Speaker 1: It's not it's not subtracting from growth the way it was,

610
00:36:02,360 --> 00:36:04,719
Speaker 1: and we've probably seen as much of a boost to

611
00:36:04,800 --> 00:36:07,839
Speaker 1: consumption as we're likely to see from the consumers. So

612
00:36:08,280 --> 00:36:09,839
Speaker 1: we think it's pretty much a non factor. And if

613
00:36:09,840 --> 00:36:11,960
Speaker 1: oils in the forty to fifty dollar range, which is

614
00:36:12,000 --> 00:36:14,200
Speaker 1: sort of what we expect, you know, it's it's it's

615
00:36:14,239 --> 00:36:17,360
Speaker 1: just rather unimportant to the outlook. Scott Mothers, thank you

616
00:36:17,400 --> 00:36:19,680
Speaker 1: so much to the PIMCO this morning. Greatly appreciate it.

617
00:36:20,440 --> 00:36:25,279
Speaker 1: Chief Investment Officer US Course Strategies. Thanks for listening to

618
00:36:25,320 --> 00:36:31,480
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud,

619
00:36:31,800 --> 00:36:35,759
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at

620
00:36:35,800 --> 00:36:40,600
Speaker 1: Tom Keane, Michael McKee is at Economy Before the podcast.

621
00:36:40,680 --> 00:36:50,879
Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio. Who

622
00:36:51,000 --> 00:36:54,680
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623
00:36:54,680 --> 00:36:58,040
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625
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