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Speaker 2: Joining us right now.
Speaker 3: Phil Corporeal is with JP Morgan as well.
Speaker 2: Your midyear review.
Speaker 3: You got to be coming out with fifty sixty seventy pages.
Speaker 3: What's the paragraph that you most debated about? You get
Speaker 3: twenty people in a room. What was that single paragraph
Speaker 3: on page thirty two where there was JP Morgan collegial debate.
Speaker 2: It had to be the federal reserve over the next
Speaker 2: six to twelve months. I mean there's still a camp
Speaker 2: for us that believe that it's a federal reserve that's
Speaker 2: going to be on hold. And then there's still a
Speaker 2: camp that believes that this inflation could be a little
Speaker 2: bit stickier that would have to force them to move
Speaker 2: and that has acid allocation implications. Tom. But I will
Speaker 2: say there's been so much headline around how much is
Speaker 2: their price to move? Nine of the eighteen last week
Speaker 2: believe that they should be moving rates higher. I keep
Speaker 2: going back though, to the fact that this market, via
Speaker 2: the ten year note, which I think is the most
Speaker 2: important rate on the whole Yell curve, has given the
Speaker 2: Federal Reserve a vote of confidence in terms of them
Speaker 2: achieving their price stability mandate. The ten year Treasury rate
Speaker 2: today right now is lower than where they came out
Speaker 2: on last Wednesday when they were supposedly hawkish. Now they
Speaker 2: moved the che year note up, for sure, but again
Speaker 2: I think the ten year note is the most important
Speaker 2: rate on the curve, and then the volatility of that rate,
Speaker 2: the move index is back to where we were before
Speaker 2: r N. And if you think about capital market activity, confidence,
Speaker 2: even the housing market, low volatility on the ten year note,
Speaker 2: I think is a really good backdrop for taking risk.
Speaker 4: Bulls out there will suggest that we've seen peak great
Speaker 4: peak inflation.
Speaker 2: Yes, are you in that camp? We are, so, we
Speaker 2: believe primarily from the fact that we sit here today
Speaker 2: on June twenty third, and oil prices are around seventy
Speaker 2: five dollars, and they got as high as one hundred.
Speaker 2: Gas prices were up at four dollars and fifty cents.
Speaker 2: They're now down at about three dollars and ninety cents.
Speaker 2: So that move alone, Paul, leads us to believe that
Speaker 2: we saw a peak.
Speaker 5: Now.
Speaker 2: Could there be some stickiness in service sector inflation? Sure,
Speaker 2: I mean that's why the Federal Reserve is an easing
Speaker 2: policy like they thought they were three months ago. But
Speaker 2: I think that's okay. Service sector inflation is okay if
Speaker 2: it's emblematic of a resilient consumer. And Paul, as you know,
Speaker 2: the US consumer is the most important thing to get right.
Speaker 2: If you can get the US consumer right, you can
Speaker 2: get all of your acid allocation right.
Speaker 4: Just filled up the VESTPA over the weekend three dollars
Speaker 4: and eighty seven cents for both gallons two gallon.
Speaker 3: That's going to take me for the rest of the summer.
Speaker 4: Exactly. So what are we doing here as to maybe
Speaker 4: kind of asset allocation here as we think back that,
Speaker 4: you know, the back half of the year here.
Speaker 2: Yeah, So, Paul, we still believe in the AI trade
Speaker 2: irrespective of what's happening in places like Korea overnight. I
Speaker 2: keep going back to that stat that there's a thirty
Speaker 2: percent increase in the supply for semiconductor chips and a
Speaker 2: seventy percent increase in the demand, Right, that's economics one.
Speaker 2: One that those earnings we think are sustainable. But at
Speaker 2: the same time, one of the things that's becoming front
Speaker 2: and center is a sector that's actually negative year to date,
Speaker 2: that little sector called financials. So financials for US, three
Speaker 2: things really point us that way in terms of the
Speaker 2: acid allocation and the rotation. The first an inflection and earnings.
Speaker 2: Second is a buyback and a dividend story that looks
Speaker 2: really unique. And then the third goes back to the consumers.
Speaker 2: I just mentioned loan growth and if we're putting geopolitics
Speaker 2: in the rear view mirror, okay, that's one of the
Speaker 2: assumptions we have to make here. That then gives you know,
Speaker 2: that long world story.
Speaker 3: So Gale and Greenspan nineteen seventies. Loan growth, how is
Speaker 3: long growth?
Speaker 2: Yeah, so in terms of what the growth the overall economy.
Speaker 3: I mean, it's such an old school thing to say,
Speaker 3: is there demand for loans?
Speaker 2: Yeah, so that we think that there is going to
Speaker 2: be incremental demand for loans because the US consumer stays afloat.
Speaker 2: That's what it comes down to. So if they're demanding that,
Speaker 2: and again this goes back to the tenure. Note this
Speaker 2: goes back to the volatility of rates. Capital markets activity
Speaker 2: happens when people aren't nervous about moves higher and rates. So, Tom,
Speaker 2: if we're of the view peak rates, peak inflation in
Speaker 2: the second quarter, and that means you can see some
Speaker 2: incremental loan growth into the back half of the year
Speaker 2: in a sector that again is negative year to day.
Speaker 2: So that's the relative value opportunity Tom, that we're looking for.
Speaker 4: What are we doing in a fixed income market here?
Speaker 4: I just sit in a two year and get four
Speaker 4: spot two on a two year treasury? I mean, do
Speaker 4: I take credit risk.
Speaker 2: Above and beyond that? Yeah, So that's a really good question.
Speaker 2: We think that the ten you note probably settles at
Speaker 2: the end of the year around four and a half
Speaker 2: to four point six percent, So basically where we are
Speaker 2: where we are today. The real problem for me is
Speaker 2: people believing that they're getting the risk free rate, the
Speaker 2: federal funds rate in their checking account savings, got some
Speaker 2: money market funds, Paul. The average yield on checking savings
Speaker 2: and money markets in this country is fifty two basis
Speaker 2: prides right, fifty two bases much you could throw a
Speaker 2: dart at any asset class this year and beat fifty
Speaker 2: two basis points, so within fixed income. Again, if we
Speaker 2: saw peak rates, if we saw peak inflation in the
Speaker 2: second quarter, extending out of cash into anything you mentioned
Speaker 2: the two year and old. Okay, even even short duration
Speaker 2: credit makes sense.
Speaker 3: I'm looking at Cathay Pacific, just out, folks. This is
Speaker 3: the giant Hong Kong. I had a huge affiliation with
Speaker 3: him years ago when I used to go there all
Speaker 3: the time. Paul Cathay Pacific to cut fuel search charges
Speaker 3: for flights July Rar, I mean the micro data where
Speaker 3: this keeps going. And to me, Phil, it's a calendar item.
Speaker 3: We mentioned this with Robert Teeter. I'm sorry, nine days
Speaker 3: before the end of every single quarter. Everybody has a
Speaker 3: Bart Simpson cow about earnings and revenues. It's not if
Speaker 3: a sophisticated but it's a calendar item. OMG, We're all
Speaker 3: gonna die. That's the basic idea.
Speaker 2: Yeah, so that's that's one hundred percent the case. By
Speaker 2: the way, speaking of earnings, Tom, six straight quarter of
Speaker 2: double digit earnings. Yeah, it's like the opposite of the
Speaker 2: model again that going forward we do have doubleged earnings
Speaker 2: growth into twenty seven, but six straight quarters we're not modeling.
Speaker 2: We're not modeling that, Tom, but it's kind of the
Speaker 2: opposite of a bubble. Like if I just look at
Speaker 2: the S and P five hundred pe ratio, it's lower
Speaker 2: today than where we were coming into the year. Earnings
Speaker 2: have completely dominated the total return on both the index
Speaker 2: level as well as the information technology level. So it's
Speaker 2: pretty nice fundamental story combined with the evaluation Sloy. We
Speaker 2: have to match those two things up to be bullsh
Speaker 2: on the market.
Speaker 3: Sill Cam Pouriel, Chief Investor Strategy is GP Morgan Wealth
Speaker 3: the Management. Stay with us. More from Bloomberg Surveillance coming
Speaker 3: up after this.
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Speaker 3: Shuning so Ellen Fraser a partner and energy expert burringa
Speaker 3: partners out of the United Kingdom. Ellen, can you just
Speaker 3: say simply we remove the peak and petroleum prices and
Speaker 3: we have a new regime now of getting back to normal.
Speaker 2: Yeah, soundy?
Speaker 6: That would be the hope. I think there is so
Speaker 6: much economic and political pressure to make sure from all sides, frankly,
Speaker 6: that Straight stays open and all of the trade flows
Speaker 6: get back to normal. Certainly, the markets are pricing in
Speaker 6: an expectation that we're getting back to some level of normal.
Speaker 6: Let's be real about it. There's quite a rocky road ahead.
Speaker 6: We've seen that in the last couple of weeks. We've
Speaker 6: seen that, you know, persistently over the last few months
Speaker 6: around a deal or no deal, straight open or straight not.
Speaker 6: And it's really, you know, really critical that we get
Speaker 6: back to reliable flows given where stock levels are more
Speaker 6: generally but trending in the right direction, I think, is
Speaker 6: the overall summary.
Speaker 4: Ellen, what do we know about damage done to some
Speaker 4: of the energy infrastructure in that part.
Speaker 5: Of the world.
Speaker 6: Yeah, the energy infrastructure damage was quite early on in
Speaker 6: the conflict, so we saw ras Laffan taking a hit,
Speaker 6: we saw some other facilities taking the hit even actually
Speaker 6: the Sidi pipeline took a hit at one point as well,
Speaker 6: and that Sidi pipeline being quite important because it's the
Speaker 6: one of the key routes out of the Strait should
Speaker 6: they actual straight be closed. It's an overlandpe line into
Speaker 6: the Red Sea, so it offers a bit of an
Speaker 6: alternative flow. Some of those areas of damage will be
Speaker 6: relatively easy to get restored, and there will have been
Speaker 6: activity on that already some of them. However, and certainly
Speaker 6: you know that the Razlafan timings they quoted when it
Speaker 6: first happened three to five years to get that facility
Speaker 6: back up and running. Now every bit of pressure, economic
Speaker 6: pressure and political pressure will be on them to get
Speaker 6: that up and running more quickly, So that three to
Speaker 6: five year timeline is probably worst case scenario. But there's
Speaker 6: absolutely no doubt there has been some structural damage and
Speaker 6: that will take time to get back to normal.
Speaker 3: Well than all your knowledge found in physics at Manchester, Alan,
Speaker 3: can you say that we underestimate their ability to rebuild
Speaker 3: and heal and frankly to do new projects as well.
Speaker 3: I mean, basically the history of these people is so
Speaker 3: they have to build something, they get it done, don't they.
Speaker 6: That's exactly right. You know, a very very resourceful set
Speaker 6: of nations over there, and frankly, they have significant assets
Speaker 6: behind them, and they have significant incentives to get that
Speaker 6: oil back on the water, get the gas back on
Speaker 6: the water, and all of the other products that have
Speaker 6: been impacted as well, and they can pour resource into it,
Speaker 6: and they're happy to buy resource from elsewhere as well.
Speaker 6: We've seen that, you know, even just simple things like
Speaker 6: the World Cup, the amount of effort that went into
Speaker 6: building the infrastructure in very short timelines, sometimes with some
Speaker 6: negative consequences in terms of human rights, etc. But you
Speaker 6: know they will get it done, you know, at quite
Speaker 6: an interesting pace.
Speaker 3: Ellen, Thank you for the brief. Alan Fraser with us
Speaker 3: from Brewing of Partners. Stay with us. More from Bloomberg
Speaker 3: Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us Live
Speaker 1: weekday afternoon from seven to ten am Eastern Listen on
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Speaker 3: We now commence a three hour interview. Gary Gensler joins
Speaker 3: us now. He's a former chairman of the Securities Exchange Commission,
Speaker 3: a modest tenure of duty at the Gulben Sachs as
Speaker 3: well and critically long ago and far away writing legislation
Speaker 3: sarbains Oxley is well well well over twenty years ago. Gary,
Speaker 3: I've been dying to talk to you. I read all
Speaker 3: the wonderful comments on this life of Alan Greenspan, and
Speaker 3: I get the criticism about interest rate dynamics in two
Speaker 3: thousand and five, two thousand and six and that, But
Speaker 3: I'm going to go to a guy that you have
Speaker 3: a nodding acquaintance with, one S. Johnson up at MIT.
Speaker 3: I've quoted this many times, folks, Simon Johnson and his
Speaker 3: magisterial thirteen Bankers the SEC not Gainst's sec Final Rule
Speaker 3: Alternative net capital requirements for broker dealers that are part
Speaker 3: of consolidated supervised Entities August twenty, two thousand and four.
Speaker 3: Gary Gensler. We can criticize Chairman Greenspan, but he had
Speaker 3: a lot of help in screwing us up into the
Speaker 3: financial crisis, didn't he.
Speaker 7: Well, there was a broad miss I don't know how
Speaker 7: else to say it. Policymakers across the spectrum and the
Speaker 7: American public paid the price, and we exported by the
Speaker 7: way that crisis around the globe. But in terms of
Speaker 7: Allen himself, I worked with them closely in the late
Speaker 7: nineteen nineties. Actually met Allen in the nineteen eighties at
Speaker 7: a wonderful dinner at Larry and Billy Tish's house in
Speaker 7: the mid nineteen eighties, and Alan was a dedicated economist,
Speaker 7: a dedicated public servant, and looked none of us get
Speaker 7: everything right. And yes, in those key years going into
Speaker 7: that OA crisis, there was too much leverage being built
Speaker 7: up in the housing market, too much leverage being built
Speaker 7: up in the financial markets.
Speaker 3: One final question in Sherman green Smith, just is Paul
Speaker 3: and I feel the news flow right now. Gary Gensler
Speaker 3: is just so important. He was in my estimated market economist.
Speaker 3: I love what Greg Yips said, more accountant than theorists.
Speaker 3: Do we need more central bankers steeped in trucking data
Speaker 3: in Nebraska? I mean, do we need a more of
Speaker 3: a tinge of Alan Greenspan in our future economist types?
Speaker 7: Well, I'll tell you the other thing about Alan, having
Speaker 7: worked closely with him for three or four years, maybe
Speaker 7: not as closely as others. He also was really steeped
Speaker 7: in the financial market. So there's all sorts of different
Speaker 7: types of economists.
Speaker 8: And we've had leaders of the Federal Reserve that were lawyers.
Speaker 7: We've had leaders of the Federal Reserve that have come
Speaker 7: from all sorts of places. William McChesney Martin famously, from
Speaker 7: the nineteen fifties and sixties had run the New York
Speaker 7: Stock Exchange. Alan understood markets. He was a young guy.
Speaker 7: He used to trade futures in the old Chicago Mercantil
Speaker 7: type of futures markets. And I remember conversations with Alan
Speaker 7: about futures in the nineteen nineties, and then when I
Speaker 7: took the role at the Commodity Futures Trading Commission, Allan
Speaker 7: and I would sometimes get on the phone and he said, well,
Speaker 7: this is how futures markets really work, and this is
Speaker 7: how energy markets and he'd beg into the backwardization of
Speaker 7: the markets. That was remarkable about Alan. I think he
Speaker 7: had a sense of financial markets. He had too much
Speaker 7: of a trust, though in them to right themselves when
Speaker 7: they were in balances, and there were big imbalances he
Speaker 7: navigated during the Internet enthusiasm, but he didn't quite navigate
Speaker 7: that on the house markets.
Speaker 3: Paul Sweeney, you get lucky. You have Gary Genslron and
Speaker 3: moments ago across the Bloomberg is a five trunch SpaceX benchmark,
Speaker 3: dead offering right, perfect timing.
Speaker 4: Gary, We're at a time here in the markets here
Speaker 4: where we're getting just these mega IPOs SpaceX, you know,
Speaker 4: they went public, and we've got Anthropic and Open Aiet's
Speaker 4: send a signal to you and to others about where
Speaker 4: we are in this market cycle.
Speaker 7: Well, I think so you used the word signal. I
Speaker 7: use the word Tell Simon Johnson, who you mentioned earlier.
Speaker 7: He and I do this podcast and we just put
Speaker 7: one out on the mega IPOs just this morning on
Speaker 7: power and consequences. And I think the overall equity markets,
Speaker 7: like Alan kreen Spence nineteen nineties, equity markets is funding
Speaker 7: this big burst of infrastructure built in AI seven hundred
Speaker 7: and fifty billion dollars this year, up threefold in just
Speaker 7: two years. And to scale that, that's about two and
Speaker 7: a half percent of our gross domestic product. And so
Speaker 7: then you have like Space Echo public and maybe Anthropic
Speaker 7: and Open AI.
Speaker 8: We'll see.
Speaker 7: I think that's somewhat of a tel Google raising eighty
Speaker 7: five billion, and the markets have to digest this, and
Speaker 7: then there's valuation questions. You know, I at one hundred
Speaker 7: and one hundred and forty times revenues without earnings. So
Speaker 7: this will all sort out, but it also might be
Speaker 7: six months from now we look back. It was fine,
Speaker 7: but there's an equal and better chance that six months
Speaker 7: from now we look back, we say, as all those
Speaker 7: venture capitalists and sovereign wealth funds starts selling those shares,
Speaker 7: that you see a downward pressure on the not just SpaceX,
Speaker 7: but the whole market.
Speaker 4: You're up there at MIT, Gary, and as I understand,
Speaker 4: there's some pretty good engineers and computer geeks up there
Speaker 4: as well. What is kind of your understanding? What's the
Speaker 4: understanding up there at MIT just about AI today? Because
Speaker 4: initially we in the marketplace, we just said, let's just
Speaker 4: buy the chips, but there's more to it than that.
Speaker 4: Market seems to be trying to discern some winners and losers.
Speaker 4: How do you guys think about that?
Speaker 7: Look, there's thousands of remarkable research scientists and faculty here,
Speaker 7: so I can speak for.
Speaker 8: Just maybe myself, and I think.
Speaker 7: AI is the most transformative technology of our times. But
Speaker 7: we've had this before. If you go back over the
Speaker 7: last two hundred years from canals to the Internet to
Speaker 7: this and what happens, and Ray Dalio talks about this too.
Speaker 7: We get an over enthusiastic financial market support, and then
Speaker 7: at some point we build so much infrastructure we have
Speaker 7: a reckoning and I think that's what you learn from history,
Speaker 7: is that we tend to have reckonings. Now, is it
Speaker 7: a calamitous reckoning like with railroads in the eighteen seventies
Speaker 7: where we had disastrous recessions? Is the reckoning like after
Speaker 7: the nineteen twenties we had a big boom on.
Speaker 8: Electrification mostly in utilities.
Speaker 7: Or is it like the Internet where you have a
Speaker 7: modest reckoning, still a recession. And that's so AI is transformative.
Speaker 8: One last thing, Paul, I think of.
Speaker 7: It a little bit like a parlay bat. You know
Speaker 7: those the prediction markets. You have to have two things.
Speaker 7: You have to have AI hyperscalers and open AI be
Speaker 7: able to build the revenues. Right now they don't have
Speaker 7: the revenues. And two, you need to build productivity in
Speaker 7: the economy enough for the capital markets to overlook all
Speaker 7: the disruption, all the companies that are going to be
Speaker 7: disrupting value with a successful AI.
Speaker 3: We continue with Gary against the former chairman of the
Speaker 3: Securities Exchange Commission as commitment to Sloan, where he's won
Speaker 3: a couple like student trophies. Is that right, I didn't
Speaker 3: fall asleep in his class trophy.
Speaker 8: Doesn't wonderful. Tom, You're two kind.
Speaker 3: He does a wonderful podcast as Simon Johnson. I want
Speaker 3: to go two questions here very quickly.
Speaker 2: A lot of people.
Speaker 3: Went retail on bitcoin and they enjoyed buying it one
Speaker 3: hundred or one hundred and ten. What do you say
Speaker 3: to the retail crew that have losses in bitcoin?
Speaker 7: Look, markets both trade on sentiment and fundamentals, and the
Speaker 7: challenge for those purchasers who are is what are the
Speaker 7: fundamentals we were just talking about that is with SpaceX.
Speaker 7: But there's a real business there. I mean Elon Musk
Speaker 7: has built a real business. It's just a question of
Speaker 7: where do you value it?
Speaker 8: Here?
Speaker 7: The EBB and flow of any purchaser of bitcoin has
Speaker 7: to think, all right, what are the real use cases?
Speaker 7: And particularly to be even more careful with the rest
Speaker 7: of that asset class crypto. It's like meme stocks. You
Speaker 7: have to be very careful that you're not trading just
Speaker 7: on sentiment.
Speaker 3: I'll refrain from editorial lensing here for Tom. I've got
Speaker 3: to chart from Jeff Jacobson. Thank you zero Hedge for this.
Speaker 3: Gary Gensler, to me, it's manipulated. They do an IPO
Speaker 3: which is five percent of the SpaceX float. They trunch
Speaker 3: it out August eleven, twenty one, September ten, September twenty five,
Speaker 3: they get fifty percent of the stock out October ten.
Speaker 3: They finally get out to sixty percent of the stack
Speaker 3: out December ninth. Is it just a manipulation of folding
Speaker 3: the trend the stock into the public in a way
Speaker 3: that keeps the fervor up. It doesn't seem like the
Speaker 3: old days where a company went public.
Speaker 7: Well, so here's the other thing. Nasdaq made an accommodation
Speaker 7: in how they do their index, the NASTAK one hundred
Speaker 7: and Once there's thirty percent of that stock outstanding, which
Speaker 7: might happen as soon as mid August after the earnings release.
Speaker 7: Once that happens, the entire free float is count it
Speaker 7: into the indexes, which put out Elon's forty fifty eight
Speaker 7: percent might fold into the indexes, and then there's a buy.
Speaker 7: But here's the other side. I caught the great rebalancing
Speaker 7: all those venture capitalists and sovereign wealth funds. They're going
Speaker 7: to want to take risk off the page. I mean, Tom,
Speaker 7: They're not going to want to just leave their profits
Speaker 7: in and say, let's let's go for more. They got
Speaker 7: to take you know, a third, a half, maybe three
Speaker 7: quarters of the risk off the page, and so there's
Speaker 7: going to be a lot of selling pressure too as
Speaker 7: these lockups come off.
Speaker 4: Gary, as we think about the continued rollout of AI
Speaker 4: across the economy, what do you think the regulatory framework
Speaker 4: should be going forward?
Speaker 7: Look, I think with any great technology, a society adapts
Speaker 7: and says, listen, there's public goods and we have to
Speaker 7: promote them.
Speaker 8: We call it responsible AI.
Speaker 7: I started doing work on this years ago and tried
Speaker 7: to move the ball on that even at the Securities
Speaker 7: and Exchange Commission. I think the most it's happening is
Speaker 7: at the States about protecting people against bias, protecting people's privacy.
Speaker 7: Of course, the accuracy of it, but when the algorithms
Speaker 7: are making decisions on our behalf, who gets healthcare, who
Speaker 7: gets a job, who gets credit, it's important that they
Speaker 7: are accurate. And I think that right now this current
Speaker 7: president is more into let's just support a competition with China.
Speaker 7: Let's you know, as they say, just take off the
Speaker 7: regulatory guard rails. And yet I think society is reacting
Speaker 7: and starting to say, what about my kids? What about addiction,
Speaker 7: what about the use of this, what about my lost
Speaker 7: job potential?
Speaker 8: Maybe?
Speaker 7: And so it will be a very interesting next several
Speaker 7: years in terms of the politics.
Speaker 3: Of all this, Paul, what's it like working Simon Johnson?
Speaker 3: I mean, I've known him for years, We're quite close,
Speaker 3: et cetera. But I'm not in the trenches where gunstlers
Speaker 3: to walk in the room with the Nobel Laurier. What's
Speaker 3: it like working He's Johnson?
Speaker 7: It's fabulous. He's a very gracious colleague. He's got a
Speaker 7: fertile mind, I mean his mind just I mean, how
Speaker 7: did he come up with those ideas in the nineteen
Speaker 7: nineties working with Drona s and Oaklow and Jim Robinson.
Speaker 7: It led to that Nobel prize. But it's a remarkable collaboration.
Speaker 7: Sometimes sometimes we in the classroom have to make room
Speaker 7: for each each of us. And he's he's a remarkable
Speaker 7: chalkboard teacher as well.
Speaker 8: This is a secret of his.
Speaker 7: But he loves being at the chalkboard and summarizing things
Speaker 7: and then bringing students into that conversation.
Speaker 3: Here at MIT, Stanley Fisher has a great story. Gary
Speaker 3: of Samuelson was so angry at his incompetence that he
Speaker 3: ripped the chalk out of Stanley Fisher's heads threw it
Speaker 3: across the room. Some of that some of the intensity
Speaker 3: at the Massachusetts Institute of Technology. Their next podcast will
Speaker 3: be how to Fix the Red Sox. Gary Gensler is
Speaker 3: a former chairman of the SEC, and we greatly appreciate
Speaker 3: remembrance for the life of Allen Greenspan. Stay with us.
Speaker 3: More from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
Speaker 1: weekday afternoons from seven to ten am Eastern Listen on
Speaker 1: Apple Karplay and Android Auto with the Bloomberg Business app,
Speaker 1: or watch us live on YouTube.
Speaker 3: William Dudley is a different FED president, Yes, of the
Speaker 3: New York Fed and all, but far more. He built
Speaker 3: Goldman Sachs Economics with Ed McKelvey and the rest of
Speaker 3: Young Yanah. At the time, Bill Dudley joins us this
Speaker 3: morning to me Bill Dudley, and the phrase I've always
Speaker 3: used is chart paragraph, chart, And it was a people
Speaker 3: like Hymen and Yardnni at CJ. Lawrence. It was the
Speaker 3: Bear Stearns combine with mail pass and writing, but more
Speaker 3: than anyone. It was Goldman Sachs chart paragraph chart. Alan
Speaker 3: Greenspan loved that at the end of the day, he
Speaker 3: was a market economist, a ween to data.
Speaker 8: Do we have anyone that can be like.
Speaker 3: Alan green Span in our future or was he a
Speaker 3: one off in the history of our economics?
Speaker 5: Well, if you're here, it takes up a long potential
Speaker 5: times of I'm sure we'll see someone similar to green
Speaker 5: Span in the future. But you're right. He was a
Speaker 5: different type of FED chairman because not only was he
Speaker 5: very knowledgeable about economics, but he wasn't academic, and so
Speaker 5: he was basically going from the data to the decision
Speaker 5: making rather than from the model to the decision making.
Speaker 5: And so sometimes when the world changed, he got it
Speaker 5: right before anybody else did. The best example, of course,
Speaker 5: was the late nineteen nineties when there was the three
Speaker 5: Boom and greenspand held off on tightening entree policy. So
Speaker 5: I think he was, you know, an exceptional exceptional chairman,
Speaker 5: both in terms of his understanding of economics, his openness
Speaker 5: to data, his willingness to you know, change his mind
Speaker 5: and update is his forecast. I think the only really
Speaker 5: you know, blind spot was really his views about financial
Speaker 5: stability and regulation. His view was always, you know, we
Speaker 5: can't identify bubbles in real time, so all we can
Speaker 5: clean up after the fact. And obviously the Great Financial
Speaker 5: Crisis showed that cleaning up after the fact is always
Speaker 5: it's not always the right approach.
Speaker 3: Well did you get into your excellence at Berkeley and
Speaker 3: to say, okay, it is about the regulation decision. Are
Speaker 3: we making the same mistakes today that the critics say
Speaker 3: were made in five six?
Speaker 5: I don't see the same kind of problems. Number one,
Speaker 5: in terms of, you know, the market having a lot
Speaker 5: of assumptions that will ultimately turn out to be wrong.
Speaker 5: I mean, if you look at two thousand and six,
Speaker 5: two thousand and seven, there was all these assumptions triple
Speaker 5: A CDOs are safe housing, markets can never decline on
Speaker 5: a national basis. You know, you know, there were just
Speaker 5: a lot of assumptions that turned out some prime lending
Speaker 5: is not risky. All those assumptions turned out to be
Speaker 5: dramatically wrong. So I think, you know, I think there's
Speaker 5: risk of financial stability today, obviously in the non bank
Speaker 5: financial sector. But the other thing is we have a
Speaker 5: much more robust regulatory regime. I know, I know we're
Speaker 5: in the process of dismantling that to a degree. I
Speaker 5: think it's important that we don't throw the baby out
Speaker 5: with the bathwater. But you know, we did learn a
Speaker 5: lot of good lessons from the financial crisis that I
Speaker 5: think means that the financial system fundamentally is stronger than
Speaker 5: it was back then. All that.
Speaker 4: Putting all that together, Bill, what do you think the
Speaker 4: legacy is for mister Greenspan? With our little bit of
Speaker 4: a hindsight.
Speaker 5: Here, I think he's obviously going to go down in
Speaker 5: history as a great central banker, also go down as
Speaker 5: someone who was really politically adept. I mean, he navigated
Speaker 5: through democratic and Republican administrations really well and didn't have
Speaker 5: the kind of conflicts that a lot of other central
Speaker 5: bankers have run into, like J. Powell, for example. So
Speaker 5: I think that combination of good economic intuition, reliance on data,
Speaker 5: ability to navigate through Washington really well is pretty special.
Speaker 5: I just wish he'd done a little bit better on
Speaker 5: the financial stability regulatory side. If you did that, he
Speaker 5: sort of get straight.
Speaker 4: A's let's fast forward to today, mister Walsh. We did
Speaker 4: hear from Kevin Walsh last week for the first time
Speaker 4: as chairman of the FED.
Speaker 3: What were your takeaways?
Speaker 5: Well, I think the big takeaway is number one that
Speaker 5: it's going to be a different regime under Kevin Walsh.
Speaker 5: You know, so the regime change that he promised is
Speaker 5: in the process of happening. You just tell it right
Speaker 5: off the bat with the very very much shortened statement,
Speaker 5: I think, and the getting rid of four guides I
Speaker 5: think is completely appropriate.
Speaker 3: But I'm pretty.
Speaker 5: Nervous about his views about not communicating at all about
Speaker 5: how the FED is likely to react if the economic
Speaker 5: circumstances has changed. This reliant on the markets views to
Speaker 5: sort of guide policy, I think is a mistake. The
Speaker 5: FED Reserve needs to set monetary policy, not financial markets.
Speaker 5: And then if you're relying on the on the markets,
Speaker 5: how do you make the decision? Markets basically don't price
Speaker 5: to what they think the FED should do. They priced
Speaker 5: to what the Fed what they think the Fed will do.
Speaker 5: So if you're relying on the market, you're sort of
Speaker 5: you have this indeterminacy about what you should do. So
Speaker 5: I think so I think that's a mistake. I think,
Speaker 5: you know, I think transparency, I think it is very
Speaker 5: helpful in terms of the conduct of monitary policy, because
Speaker 5: you do want markets to think along with the FED
Speaker 5: when you know strong economic report comes out. You want
Speaker 5: the markets to reprice in terms of their expectation about
Speaker 5: the monetary policy path. But to do that well, you
Speaker 5: need good community, good communication. Market understand the fed's Monterrey
Speaker 5: policy reaction from you. So I think the risk here
Speaker 5: is Kevin is throwing out the baby with the bath water.
Speaker 5: I have no problem getting rid of afford guys, but
Speaker 5: don't throw out information about the Fed's Monterrey policy reaction
Speaker 5: function at the same time. And I think he did
Speaker 5: that at the press conference because he was asked very explicitly,
Speaker 5: what would how you didn't want to tighten Nentre palsy,
Speaker 5: and he really want to answer the question. I mean, obviously,
Speaker 5: obviously answer would be if inflation stays longer for higher
Speaker 5: than I expect, then we'll obviously have to tighten Mantrey palsy.
Speaker 5: Or if the economy is stronger than what we expect,
Speaker 5: then obviously I'll advise up my estimate of a neutral
Speaker 5: mantary policy. But he refused to answer those questions, and
Speaker 5: I think that's maybe okay for the first press conference,
Speaker 5: but I don't think that can be sustained over time.
Speaker 3: Dudley fired up. That's what we're saying right now, William
Speaker 3: Dudley with it. Soon we continue, the former president of
Speaker 3: the New York Fed. You're sitting there, Bill, all fired up,
Speaker 3: and everybody knows I agree with you on this. I
Speaker 3: mean to be polite about it. The heritage of your
Speaker 3: shop called Goldman, Sachs and Hosius has carried this forward.
Speaker 3: Is a disinflation narrative? Is the big shock after this
Speaker 3: war with West Texas? Intermediate to seventy one forty nine?
Speaker 3: So I could get with constructive news is sixty nine handle.
Speaker 3: Here are we prepared, Bill Dudley for the disinflation narrative
Speaker 3: that could come.
Speaker 5: Well, there's going to be a disinflation narrative really next month, rightway,
Speaker 5: when we get the PC and CPI data for June.
Speaker 5: Because obviously oil prices and gasoline prices have come down
Speaker 5: this month. But I think that you have to look
Speaker 5: in the broader context, what's the pressure on resources? More broadly,
Speaker 5: we still have a lot of price pressures, like for example,
Speaker 5: chip prices going up really rapidly. And I think the
Speaker 5: fundamental question really for the Mantre policy. Outlook is the
Speaker 5: question is Mantre policy actually restricted today? And my own
Speaker 5: personal view is that there's not much evidence of that.
Speaker 5: I mean, we've had the Mantre policy at this setting
Speaker 5: or tighter for three years, and yeah, we're still at
Speaker 5: an unplaying rate consistent with full employment. So if Madre
Speaker 5: policy isn't restrictive, then why do you need to cut rates?
Speaker 4: What's the next data point bill that you think the
Speaker 4: market should really be focusing on.
Speaker 5: I think the layer market is really important here. I mean,
Speaker 5: I think if the economy is strong enough to keep
Speaker 5: the payrolls growing like the pace they've done over the
Speaker 5: last few months, the unemployment rates flat to declining, you know,
Speaker 5: that's going to continue to push the FED in the
Speaker 5: direction of thinking that they need to tighten Mandre policy.
Speaker 5: I don't know, I'm a little uncertain about, you know,
Speaker 5: how fast Madre policy is titan it's likely to occur,
Speaker 5: or what that probability is, because it's not clear how
Speaker 5: much commitment Kevin Walsh has to actually doing it. I mean,
Speaker 5: the talk is cheap. Of course, everybody's in favor of
Speaker 5: price stability, but the question is what are you actually
Speaker 5: prepared to do to achieve that outcome, and I don't
Speaker 5: think we really know that at this point. I mean,
Speaker 5: you couldn't you couldn't have obviously said the opposite. I'm
Speaker 5: not in favorite price stability, so it's not really clear
Speaker 5: that there's a lot of content in that statement.
Speaker 3: Just valuable. Thank you so much, Bill Dudley with as
Speaker 3: a former president New York Fed in remembrance of the
Speaker 3: life of Alan Greenspan.
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