Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley.
Speaker 1: We bring you insight from the best in economics, finance, investment,
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Speaker 1: to the Door. Usually rock stars in at nine thirty
Speaker 1: in the morning, but Mr Wisenthal has greeted us this
Speaker 1: morning on this important story. I just got all flamed up.
Speaker 1: Somebody called a currency. I said, no way, there's no
Speaker 1: way this is a currency. Our article even says it's
Speaker 1: going to be based off securities. Is it a currency?
Speaker 1: It's currency ish? Yeah, Jamie Diamond doesn't care about ish.
Speaker 1: Jerome Paul and Randy Quarrels at the FED don't care
Speaker 1: about ish. Why is Zuckerberg different from anybody else that's
Speaker 1: going down in flames? There is going to be a
Speaker 1: thing called libra. Presumably you will have a wallet that
Speaker 1: has an X number of libra in it, So in
Speaker 1: that sense, it's that's I say, it's currency issue. On
Speaker 1: the other hand, it's backed by traditional financial assets probably
Speaker 1: no FIAD currencies and government bonds and banks. And if
Speaker 1: you think about it. If you look at your any
Speaker 1: wallet that we use that's digital, or any credit card
Speaker 1: or anything, what is it but a digital number that's
Speaker 1: represented by something mrez. Today the French finances are saying,
Speaker 1: yeah right, I'm in name the country. I've got five
Speaker 1: two thousand dollars I got to get into the United States.
Speaker 1: This sounds like a gift from God. I think that, Um,
Speaker 1: you know, this is the key thing, which is that
Speaker 1: traditional cryptocurrencies, they're designed to be decentralized permission lists so
Speaker 1: that I can send something to your design is an
Speaker 1: agent for criminals. This I just put it the nice way,
Speaker 1: but you put it the This is clearly not Morning TV.
Speaker 1: We're not nice. This is not designed for that. And
Speaker 1: they make very clear in the white paper and their
Speaker 1: documents that anyone dealing with this, any exchanges that listed
Speaker 1: wallets have to deal with traditional banking regulations, which means
Speaker 1: that it's much less like a traditional cryptocurrency as we
Speaker 1: know them, and much more like a lot of the
Speaker 1: payment apps that we use. Let's bring in yes, no,
Speaker 1: the nice one, the nice one who's in the doghouse, Joe,
Speaker 1: because I'm the one calling it prick cryptocurrency on air
Speaker 1: and Tom was like, no, it's not a currency. But
Speaker 1: actually what it means is I'm going to have a
Speaker 1: mobile phone. I'll be able to use a pacement system.
Speaker 1: So for the nerds out there, we can call it whatever,
Speaker 1: you know, the digital wallet package that Facebook is going
Speaker 1: to introduce, whatever Tom wants. But is it going to
Speaker 1: get traction? And when can you find out whether there's
Speaker 1: going to be traction? Isn't the first two months? Six months?
Speaker 1: Does it take longer? I mean, here's the thing, and
Speaker 1: this is the bold case, which is that there is
Speaker 1: no entity in the entire world that has Facebook size
Speaker 1: and global distribute and that is an enormous leg up.
Speaker 1: And so you have these aiment networks all around the
Speaker 1: world like and Paso or wheat Chad or Venmo or
Speaker 1: PayPal or whatever. It's fragmented. However, there's just no entity
Speaker 1: that exists that is huge virtually everywhere, essentially everywhere outside
Speaker 1: of China the way that Facebook is. So if you
Speaker 1: were able to layer on top of that a payment
Speaker 1: network in theory that could be really big and unify
Speaker 1: global payments in a way that nothing else quite has before,
Speaker 1: that would be I would say, is this right is
Speaker 1: this a medium for payments? Right? And if if it
Speaker 1: is a medium for payments, does it cut out the
Speaker 1: riff raff that Tom was talking about. I mean it
Speaker 1: is a medium for payments. It will attempt to cut
Speaker 1: out the riff raff because there's money backed up by
Speaker 1: traditional financial institutions. Because a libra is backed up by
Speaker 1: dollars and pounds and euros and yen or whatever in
Speaker 1: a bank, they're going to have to comply with traditional
Speaker 1: anti money laundering regulations, anti capital control or capital control regulations.
Speaker 1: If it were to turn out that well could use
Speaker 1: liber to evade these things, then I think regulators would
Speaker 1: attempt to shut down the project pretty quickly. Okay, but
Speaker 1: but I'm holding up in my phone, Joe Wist, I
Speaker 1: want to go to Sebastian galley on this zell from
Speaker 1: a bunch of banks. I can move money around already
Speaker 1: with banks. Why do I need this, Sebastian? Why do
Speaker 1: we need facebook coin? Because you want to avoid capital controls?
Speaker 1: And what when may happen? Is my words that continue. Yeah,
Speaker 1: it's not it's not pretty. In essence, it makes sense
Speaker 1: to have a unit of transaction, but that's called the
Speaker 1: dollar and that's what we use worldwide. So if you
Speaker 1: try to replace it by something else which is linked
Speaker 1: implicitly to the dollar, maybe so some other things you're
Speaker 1: trying to get some of that liquidity out. It might
Speaker 1: work in some small economies such as for example, you're
Speaker 1: sitting in Believia or something like this, there's a lot
Speaker 1: of demand for dollars, then that might be a lot
Speaker 1: of demand for lebos. Always gonna ask Mr Marcus today,
Speaker 1: I mean, I think the Bloomberg coverage and this has
Speaker 1: been very responsible. What are you gonna ask Mr Marcus today?
Speaker 1: I mean, I'm gonna ask him exactly about that. So
Speaker 1: if ah, someone in Bolivia or Venezuela or anywhere wants
Speaker 1: to obtain libra for the purpose of say moving money
Speaker 1: in and out of the country, of aiding in capital controls,
Speaker 1: whatever it is, how are they going to stop it?
Speaker 1: Will this currency be able to be used for that?
Speaker 1: Because if not, or if it can't be stopped, then
Speaker 1: I think the law enforcement in those countries is not
Speaker 1: going to be very happy. Joe. He's going to regulate
Speaker 1: this thing? Is that you know central banks? Is it?
Speaker 1: We don't know? Right? I mean, that is the Tacebook
Speaker 1: isn't going to regulate themselves, right, I mean that's the issue.
Speaker 1: So Tom held up his zel app, which is designed
Speaker 1: to be intro the U S and the regulative. It's
Speaker 1: designed to give money to children, but it's all based
Speaker 1: in US banks, and the regulators of a US based
Speaker 1: payment app are pretty straightforward. It's US regulators, it's the
Speaker 1: FED and so forth. But when you start thinking about
Speaker 1: how something like that could be made equivalent on a
Speaker 1: global scale, I think the regulatory thicket that Facebook and
Speaker 1: Bucking into is gonna be pretty unimaginable. Thank you so much.
Speaker 1: I think we need to find someone expert on monetary theory,
Speaker 1: linking it into the economy, linking it into what we
Speaker 1: do every day that also has a good understanding of
Speaker 1: Germanic culture and society, and possibly also as an expert
Speaker 1: on presidential tweets and and maybe worked at a central
Speaker 1: bank once upon a time. That would be good, fantastic bio.
Speaker 1: Please to say we found someone that fits it, ad
Speaker 1: impose it. Peterson Institute President. He joins us from Central Portugal.
Speaker 1: Good day to Adam's gonna have an empty office. Good
Speaker 1: day John, Good day, Good day Tom. Thank you can
Speaker 1: we start with the prospect of an emptier office over
Speaker 1: at the piece of Peterson Institute. It wasn't missed by
Speaker 1: many people that actually Olivia Blanche delivered the opening speech
Speaker 1: in Central Political yesterday evening Adam. There are some chats
Speaker 1: that perhaps he could be maybe in the running to
Speaker 1: be the next DCP president. Your thoughts on the Adam,
Speaker 1: He would obviously deserve it if they were willing to
Speaker 1: excuse me, if they were willing to consider academics. Um,
Speaker 1: but they're clearly not. It's it's clearly among people who
Speaker 1: are already central bank governors in the Eurosystem, or maybe
Speaker 1: deputy governors. So in an ideal world, yeah, I would
Speaker 1: give up the office of Olivier and or let him
Speaker 1: use my office to be west. But um, but that's
Speaker 1: not running. We have our textbooks, Dr Posen. None of
Speaker 1: what's on my Bloomberg screen is in the textbooks. And
Speaker 1: it's not funny. We've got an economic theory in search
Speaker 1: of a solution, butter stuff against the financial system in crisis.
Speaker 1: Are you surprised that we're back to queue ta contrast
Speaker 1: think whatever it is que five plus? Um, Yeah, I'm
Speaker 1: not surprised, Tom, because We've a number of us have
Speaker 1: been worrying rightly that when we get to the next recession,
Speaker 1: whatever it is, that there wasn't much room to do
Speaker 1: with normal interest rate cuts. And some of us at
Speaker 1: least have been arguing for some times that QUI should
Speaker 1: never have been as demonized as it was. The sad
Speaker 1: part is what you say. It's not even the YO curve.
Speaker 1: It's just at the ten year rate is so low,
Speaker 1: and as Larry Summers and others have argued, that represents
Speaker 1: just total lack of investment appetite, total lack of private
Speaker 1: sector growth momentum. I think that's the reality. That's not
Speaker 1: a monetary reality, that's an overall reality. And I mean
Speaker 1: you wanted to weigh in on the president's thoughts this morning,
Speaker 1: so for our listeners that might be just tuned in,
Speaker 1: I'll repeat the tweet from the president in the last hour.
Speaker 1: Mary drag just announced more stimulus could come, which immediately
Speaker 1: dropped the Europe against the dollar, making it unfairly easier
Speaker 1: for them to compete against the United States. They have
Speaker 1: been getting away with this for years, along with China
Speaker 1: and others. Adam, your thoughts, Yeah, it's it's about as
Speaker 1: unfounded as the average prisoner. Trump tweet regrettably, Um, you know,
Speaker 1: the US FED cut rates and did quee in two
Speaker 1: thousand eight, nine ten, and the rest of the world screamed,
Speaker 1: oh my god, Brazil, India, China, you're unfairly cutting the
Speaker 1: dollar against US. And no, they were just the US
Speaker 1: FED was doing the right thing, looking after its own economy.
Speaker 1: What the e c B did, it wasn't targeted at
Speaker 1: the U S. It wasn't targeted a trade. Was Mario
Speaker 1: draggy constraining his successor and setting forward the fact that
Speaker 1: the ECB will continue to pursue a reflationary policy. And
Speaker 1: I think that was exactly the right thing to do.
Speaker 1: And it would be much worse for the U S
Speaker 1: if you could if the EU didn't do that, if
Speaker 1: the Euro Area didn't do that and fell into trouble,
Speaker 1: you'd lose a lot more net exports to Europe and
Speaker 1: you lose a lot more asset values. I'm sorry just
Speaker 1: to jump in Sonia and we spoke Sebastian Galley of
Speaker 1: No Day Arrestment Management. That thinks perhaps the president isn't
Speaker 1: entirely off base. If we recall when the ECB adopted
Speaker 1: a negative deposit, right, it was to look at the
Speaker 1: X channel, and there's some belief this morning that maybe
Speaker 1: that's the primary tool once again to get inflation expectations higher.
Speaker 1: What are your thoughts on the ATOM. Well, they're not
Speaker 1: directly intervening, let alone manipulating currencies. They're setting a domestic
Speaker 1: monetary policy. If it has an effect on the exchange trade,
Speaker 1: it's then up to the Federal Reserve and the Bank
Speaker 1: of Japan and for that matter, the People's Bank of
Speaker 1: China to decide. Okay, given that the should we react
Speaker 1: and so there's nothing the ECB prevents other other central
Speaker 1: banks from loosening as well. And imposing whether this folks
Speaker 1: appears into the thrilled he could be with us, and
Speaker 1: we see markets on the move. A two year yield
Speaker 1: not back to a one eightiot but one point eight one,
Speaker 1: lowered by a solid six basis points. I'm watching. Yeah,
Speaker 1: it has not moved. That is the headline one O
Speaker 1: eight twenty nine. Slightly strong. Yeah, and adam posing within
Speaker 1: all of this talk of economics is the real economy
Speaker 1: in rule one Friedrich Kayak as you've got to clear
Speaker 1: out the debris. Maybe with Schumpeter, there's got to be
Speaker 1: a little bit of creative destruction of bad debt gone wrong.
Speaker 1: Are we suffering for the fact we haven't cleared out
Speaker 1: the ills of two thousand eight. I think we're suffering
Speaker 1: more from the fact that we started having ills in
Speaker 1: two thousand four. Toms as many people, including John Fernaldo
Speaker 1: used to be at the FED San Francisco, have argued,
Speaker 1: you know, the productivity growth rate in the US down
Speaker 1: shifted and in the rest of the Western world and
Speaker 1: Japan down shifted roughly around two thousand four, and we're
Speaker 1: still suffering for the fact that we haven't found something
Speaker 1: the next big thing in Michael Lewis terms to invest
Speaker 1: in and yeah, there's probably some some some detritus in
Speaker 1: the economy. But on the other hand, you've got monopoly
Speaker 1: oligopoly issues which are regulatory. They're not because of low rates,
Speaker 1: I think. So. I know people keep going back to that,
Speaker 1: But like a Neil cash App said at the FED
Speaker 1: conference in Chicago a week ago, I keep quoting people
Speaker 1: because I want to say I'm not out on a
Speaker 1: limb here. Uh, A new Caship of Chicago said, you know,
Speaker 1: we we had a supervisory regulatory problem. So let's do
Speaker 1: that better. Let's not screw around with monetary policy. Okay,
Speaker 1: when you look at the mix of Stewart in right now,
Speaker 1: it seems like it's a technology overlay that everybody's dealing with,
Speaker 1: whether it's Europe or the United States, and that do
Speaker 1: we just have to get used to one and a
Speaker 1: half percent growth? I mean? Is that? I mean in
Speaker 1: President Trump's defense is a politician, he can't he can't
Speaker 1: get elected on one and a half or even two
Speaker 1: point zero percent growth. Agreed, And in that sense, I'm
Speaker 1: not denying President Trump the right to complain and moan.
Speaker 1: I get nickers less in a twist about him yelling
Speaker 1: at the Fed than people do, because I remember past
Speaker 1: presidents yelling at the Fed as they didn't do things
Speaker 1: they like. So that's fine, that's fair game, as long
Speaker 1: as the markets and the average voter realized that's just
Speaker 1: a politician trying to increase his election chances. The important
Speaker 1: point is exactly what you said, Tom, that we are
Speaker 1: unfortunately going to have to continue to get adapt to
Speaker 1: a world where, for at least the foreseeable future, we're
Speaker 1: not going to be seeing an engine of growth like
Speaker 1: we did, and as Olivia Blanchard, who you mentioned not
Speaker 1: for ECB but for brilliant analysis, did with another colleague
Speaker 1: of ours. You know, Japan has coped, and part of
Speaker 1: how Japan coped is that that ongoing fiscal stimulus, ongoing
Speaker 1: easy money, because the alternative was a cratering Do you
Speaker 1: see evidence that your colleague Olivier Blanchard, who wants to
Speaker 1: goose things up to a four percent level, can that
Speaker 1: reflation end with economic growth? It can, It can't sustain
Speaker 1: it forever. I mean Olivier himself and certainly I and
Speaker 1: anybody else is not going to tell you that pure
Speaker 1: inflation is going to buy you anything. But what you
Speaker 1: can do is say, I'm not gonna worry about inflation
Speaker 1: in a world where there's so much deflationary low growth pressure,
Speaker 1: and I'm gonna try to push up growth through useful
Speaker 1: public investment. And as in the case of the e CP,
Speaker 1: to me, the biggest news from the Druggy statement was
Speaker 1: a very clear emphasis on a symmetric approach to the
Speaker 1: inflation target, that they'll have to overshoot someday to make
Speaker 1: up for the low inflation. Now, these are the elements
Speaker 1: of a sensible policy. Adam posing, thank you so much
Speaker 1: to thank you attitude for international economic We are thrilled
Speaker 1: to bring you a gentleman from a military family. Uh.
Speaker 1: And John McCain gets all the press of Late John
Speaker 1: McCain of Admiral's back fourteen generations. I think they were
Speaker 1: Bunker Hill or one of those battles. Is well. He
Speaker 1: has a grandson of Herbert McCrystal, with tours of duty
Speaker 1: including the Panama Zone. Your father was born in the
Speaker 1: Panama Zone. You did a number of tours of duty
Speaker 1: in Vietnam and then you wandered in and you be
Speaker 1: in a storied career, Generalman Crystal with the Special Forces?
Speaker 1: What was the first day like of Special Forces? And
Speaker 1: I believe Fort Bragg, Well, that's true. I left the
Speaker 1: eighty second Airborne as a lieutenant joined Special Forces and
Speaker 1: it was disappointing because this was and special Forces was
Speaker 1: a few years after Vietnam and it was a shadow
Speaker 1: of what it had rightly, and so I for much
Speaker 1: of my career was about rebuilding our special operating forces
Speaker 1: and watching what they to what they've become today. Edmirald
Speaker 1: Stravitas wrote a book about all you guys in your
Speaker 1: favorite books. What's the book right now the politicians need
Speaker 1: to read who were talking about military action in the
Speaker 1: Middle East, What's the book they need to read right now?
Speaker 1: That's great, that's a great question. Um, nothing jumps out
Speaker 1: of me, although I would probably read a book on
Speaker 1: World War two because when you talk about a war,
Speaker 1: you talk about something that's going to change the world,
Speaker 1: you better understand what it costs. Ed would be my
Speaker 1: choice or general. You've ented civilian life. You've not done
Speaker 1: what most generals do, which is going to advise companies
Speaker 1: and people and organizations on geopolitics. You're running your own
Speaker 1: firm and you're helping business understand the importance of leadership
Speaker 1: changing the hierarchy to better suit their needs. Walk us
Speaker 1: through your framework for thinking about this and what you're
Speaker 1: teaching people right now. It came from an experience that
Speaker 1: we had in Iraq where we had a purpose built
Speaker 1: counter terrorism force that was really operating our industrial age processes,
Speaker 1: top down command and control hierarchy, and we ran into
Speaker 1: a complex environment in which our kind of interac was
Speaker 1: very different. That's exactly what business is running into now.
Speaker 1: They're not competing against the big competitor they used to
Speaker 1: have their competing against a thousand linked together all the
Speaker 1: one consciously linked competitors from garages to small startups, and
Speaker 1: so as a consequence, size is no longer protection. It's
Speaker 1: not a mote to competition. So leaders have got to
Speaker 1: lead differently, organizations got communicate differently. Really, the core of
Speaker 1: this is about how you create shared consciousness in an organization.
Speaker 1: So the contextual understanding that used to be resident only
Speaker 1: in the C suite is now down everywhere, so you
Speaker 1: can make decisions closer to the point of action. You
Speaker 1: are a student of leadership. I hope you don't mind
Speaker 1: me saying so, both in terms of the military leadership
Speaker 1: and in terms of leadership in the business world. Who
Speaker 1: should we be learning from Well, I think first is
Speaker 1: go back and understand that leadership requires character. At the
Speaker 1: end of the day, if you don't have integrity, if
Speaker 1: you don't have the kinds of things that you can
Speaker 1: admire and trust, you're going to be building everything on
Speaker 1: a very weak foundation. I like to go back to
Speaker 1: leaders like uh Thomas Jefferson, George Washington, Abraham Lincoln. Those
Speaker 1: are the names we all know, but peel back some
Speaker 1: of the mythology about him and see how they really operated.
Speaker 1: The one who jumped out in our recent book is
Speaker 1: Martin Luther King Jr. Because although we think of him
Speaker 1: as this wonderful orator who stood on uh steps of
Speaker 1: the Lincoln Memorial in nineteen sixty three and give I've
Speaker 1: had a dream, actually he was a roll up your
Speaker 1: sleeves kind of leader who performed multiple roles for the
Speaker 1: civil rights movement that were very practical. He was jail
Speaker 1: twelve times, and so other than being a symbol, he
Speaker 1: was a practical leader who built teams. One final question
Speaker 1: general the attack jour is the offense against Iran. What
Speaker 1: does our naivete about defensing against or offensing against Iran? Yeah,
Speaker 1: I think Iran's behavior in the Middle East needs to
Speaker 1: be stopped and competed against. But if we talk about
Speaker 1: invading or starting a major warriors, talking about an action
Speaker 1: that would unite eighty million Iranians, they are a sovereign
Speaker 1: nation that would defend itself to the death, and so
Speaker 1: you have to ask yourself what comes next? You have
Speaker 1: a first strike, then what And so I think it's
Speaker 1: a much bigger prospect, and I'm not sure how it
Speaker 1: would end up. I'm sure that we could defeat Iran.
Speaker 1: But what we like there's a pentagon. I have a
Speaker 1: voice with this administration to address the then what's I
Speaker 1: can't speak from inside the room. I certainly hope that
Speaker 1: they do. General McCrystal, Thanks General, thank you. This morning,
Speaker 1: on the American economy, Lindsay Pegit joins us with stif
Speaker 1: Thrilled that she could join us this morning. Lindsey, I
Speaker 1: want to cut right to the chase. Your numbers for
Speaker 1: American economic growth? Can you make a forecast now? Or
Speaker 1: is it so jumbled your hesitant to look out one year? Well,
Speaker 1: it is difficult to look out one year because the
Speaker 1: data is not all pointing in one direction. But of course,
Speaker 1: to be fair, the data very rarely points in one
Speaker 1: direction to make it easy for economists. But what we
Speaker 1: do see is that there's very clearly evidence of the weakness,
Speaker 1: not just bubbling under the surface, but gaining momentum. Underneath
Speaker 1: the surface. We see business investment losing momentum, business confidence
Speaker 1: beginning to wane, manufacturing taking ahead. Even the consumer, with
Speaker 1: last week's better than expected retail sales report, is still
Speaker 1: on very uneven footing at best. So this is painting
Speaker 1: a pretty a pretty negative picture for the second quarter,
Speaker 1: particularly rested to that above trapped growth rate we saw
Speaker 1: at the start of the year. Lindsay, does the Federal
Speaker 1: Reserve disappoint tomorrow? Well, it's going to be very difficult
Speaker 1: for the Federal Reserve. I don't think that they change
Speaker 1: policy in any way, so keeping rates unchanged. But it's
Speaker 1: going to come down to the comments. It's going to
Speaker 1: come down to the tone of the statement, and if
Speaker 1: they failed to tweak at the tone to a more
Speaker 1: debbish position, that will disappoint the market. But I do
Speaker 1: think that Powell has at least opened the door for
Speaker 1: the conversation of a race. As we saw he removed
Speaker 1: that patient language from his earlier comments just a few
Speaker 1: weeks ago at that Fed Listens event. What is your
Speaker 1: twelve month forward economic growth? Is it above two? No?
Speaker 1: It's not. In fact, I don't think the longer run
Speaker 1: growth rate for the account is above Okay, what's your
Speaker 1: number for twelve months forward? I think that we're looking
Speaker 1: at one five percent? Okay, fine, that's the JP Morgan's
Speaker 1: with Lindsay, I like that. Great. What is Powell waiting for?
Speaker 1: I mean, I sound like President Trump. But if you're
Speaker 1: modeling and other adults are modeling, lindsay sub two g
Speaker 1: d P, why why do they need to be patient? Well,
Speaker 1: I think the sun has a historical position of waiting
Speaker 1: until the data very clearly shows that the economy is
Speaker 1: essentially falling off of a cliff. But we also know
Speaker 1: that historically the said weights too late and then when
Speaker 1: they begin to cut rape, they're unable to stave off
Speaker 1: that weakness. So I'm not sure if the fund is
Speaker 1: relying on very antiquated models that's telling them to take
Speaker 1: this more patient stance, or this could be more of
Speaker 1: a political posturing. They don't want to be seen as
Speaker 1: cowing to the whims of the market or political pressures
Speaker 1: out of the administration in lindsay, did President dragging ramp
Speaker 1: up the pressure for chair and power tomorrow or did
Speaker 1: he reduce some of it? How do you frame that
Speaker 1: this morning for our listeners? Well, it's uh, it's difficult
Speaker 1: because the ECB is certainly taking a much more a
Speaker 1: patient stance without even using the word patient. And so
Speaker 1: I do think that when we look out to our
Speaker 1: developed counterparts that are saying, look, rave cuts are are
Speaker 1: on the table. That's that's part of our policy going forward.
Speaker 1: We see the b o J still actively engaged in
Speaker 1: asset purchases. It's very difficult for the Fed to continue
Speaker 1: to push against that string, not only on a relative basis,
Speaker 1: but on a nominal basis when we see such clear
Speaker 1: weakness in the fundamentals. As we talked about some of
Speaker 1: those growth fundamentals, we didn't even mention the weak levels
Speaker 1: of inflation we're seeing in the US. Lindsay, thank you,
Speaker 1: So it was Stephile we try to give you the
Speaker 1: best in conversation. Adam posing this morning was just brilliant
Speaker 1: with the Peterson Institute on what's left in the tool
Speaker 1: hit for central bankers. We now give you, without question,
Speaker 1: the interview of the day on price change. Twenty one
Speaker 1: years ago, almost to the day, Gary Shilling put out
Speaker 1: a small blue book. It was called inflation, Yeah, big deal,
Speaker 1: but it had a secondary headline, as is the vogue
Speaker 1: that was stunning, Lee prescient, Why it's coming, whether it's
Speaker 1: good or bad, and how it will affect your investments,
Speaker 1: business and personal affairs. It is the call of a generation.
Speaker 1: Gary Shilling on less inflation and lower yields. Dr Shilling
Speaker 1: wonderful to have you with us today. I gotta go
Speaker 1: to the headline right now, price up, yield down, and
Speaker 1: you say yields are gonna go ever lower? Yeah, I
Speaker 1: think so. I think we're going to go to one
Speaker 1: on the ten year treasury. How do we get there?
Speaker 1: Is it a yield mover? Is it just price and
Speaker 1: insatiable demand for bonds? Well, it's a combination of things.
Speaker 1: That's the fact that we have low inflation and very
Speaker 1: well could have deflation. We're probably entering a recession now,
Speaker 1: which has always beneficial to treasuries. Knocks down, knocks down inflation,
Speaker 1: makes them a safe haven. Uh. The yield as low
Speaker 1: as they are in this country are higher than almost
Speaker 1: any other major sovereign. Uh. There's and there's says there's
Speaker 1: there's simply the attraction that that people say, where else
Speaker 1: am I going to go now with money? But you know,
Speaker 1: it's interesting. I think that the bond market is telling
Speaker 1: you the economy is a lot weaker than the stock market.
Speaker 1: And I think the history says that bond investors have
Speaker 1: a better view of what's going on in stock investors. Well,
Speaker 1: there's a split there right now going on futures up eighteen,
Speaker 1: the Dow futures up thousand to seventies seven. Can you
Speaker 1: participate in equities this morning? Um, well, we're doing in
Speaker 1: our portfolios defensively, things like utilities and consumer stables. Um. Yeah,
Speaker 1: I think you have some participation. But our principal interests
Speaker 1: are long treasuries, and I like the thirty year zero bond.
Speaker 1: You get the most bang per buckets were given a
Speaker 1: decline in interest ration, you get much more price appreciation.
Speaker 1: As you know, Tom, since I've owned treasury bonds for
Speaker 1: only one reason, appreciation, I couldn't care less. Fourteen point
Speaker 1: six percent. Fourteen point six percent. Yeah, and you still
Speaker 1: own the same paper you own back then, Well, you
Speaker 1: have to roll it over. I mean, there isn't an
Speaker 1: issue that was Okay, this is important. We're gonna rip
Speaker 1: up the scripture. This is so important. The institutional shell
Speaker 1: game now is to roll it over. And they're saying
Speaker 1: to themselves, we're at three percent coupon and we're gonna
Speaker 1: go down to a two point eight percent coupon at
Speaker 1: some point that game ends, right, Well, sure, and I
Speaker 1: think I think it ends to say when you get
Speaker 1: to two percent on the thirty year bond. Uh. But
Speaker 1: at that point it depends whether you go whether they're
Speaker 1: whether attractive or not. And you know, is the appreciation
Speaker 1: game would be over there? That's fine, But what's the
Speaker 1: price to our economy to have a two thirty year piece?
Speaker 1: Well that that's a very interesting point because, uh, unless
Speaker 1: the FED wants to go negative on on rates and
Speaker 1: the FED doesn't. They've seen that with the e c
Speaker 1: B and they and the Bank of Japan, and what happens.
Speaker 1: People don't borrow to spend. They save more because their
Speaker 1: assets are not giving them a return for their retirement
Speaker 1: or whatever. So they want to go negative. There's zero bounds,
Speaker 1: so push the FED in a bind. And and of
Speaker 1: course there was an interesting study by the FED Board
Speaker 1: economists last year where they basically said, quantitative easing again,
Speaker 1: is the only answer. Is there a physics to quantitative easy?
Speaker 1: We should point out the dcor Schilling enjoys a shingle
Speaker 1: in physics as well. I mean, if I look at
Speaker 1: the inertial force of monetary policy, the reaction functions, I
Speaker 1: get it. Is there a physics to quantitative easing? Is
Speaker 1: there a a theory you can lean Uh? Maybe a
Speaker 1: law of diminishing returns. I don't. I mean, I guess
Speaker 1: it's gonna be QA sank. According to Mario Draggy this morning,
Speaker 1: tenure yield two point zero three epercent as well, Japan's
Speaker 1: buying apple shares or whatever they're doing by an equity equivalent.
Speaker 1: This isn't in your textbooks from Amherst a few years ago,
Speaker 1: is it? No, it isn't. And you know, one of
Speaker 1: the interesting things now is the FED and Phil Graham
Speaker 1: had a had a piece in today's journal on this.
Speaker 1: The Feed is being forced to lower the rate they
Speaker 1: pay banks on reserves because that's a better deal now
Speaker 1: than than what is the appropriate Ben Bernanke says, the
Speaker 1: banks are the appropriate, uh support that we need for
Speaker 1: the economy to have a supportive financial system to help us.
Speaker 1: What is the best FED policy prescription now? For Jamie Diamond, Well,
Speaker 1: the best policy for him would would be obviously a
Speaker 1: positive Yeel curve because if we have that, but banks
Speaker 1: for some extent, yeah, well slightly but still suffer from this.
Speaker 1: But you know, I think that I think the what
Speaker 1: what we really scene, uh in the last thirty years,
Speaker 1: is the FED becoming the great supporter of equities um.
Speaker 1: They certainly did this coming out of the Great Recession
Speaker 1: with knocking yields down to basically zero and then quantitative easing,
Speaker 1: and then we got the green Span put, we got
Speaker 1: the Bernankee put, the yelling put, and now it looks
Speaker 1: like we have the power put. And it seems as
Speaker 1: all the FED looks on their number one job is
Speaker 1: supporting equities, and they look on that as the as
Speaker 1: the indicative the economy. But what it does, tom, it
Speaker 1: gives you a big build up to a big decline.
Speaker 1: Green Span said, you don't worry about you don't worry
Speaker 1: about accesses and so on. You clean up the mess
Speaker 1: after the bubble breaks. Well, it was a big bubble
Speaker 1: that to break the bubble and clean up the mess
Speaker 1: and a aken basis, we have to clear the market,
Speaker 1: don't we. We do have to clip. But but you
Speaker 1: know what, You've got two ways of doing and you
Speaker 1: can do this step by step as you go along,
Speaker 1: which creates discipline in the system, the fear versus greed,
Speaker 1: or you can do what we did earlier, will simply
Speaker 1: let it run, Let it run, let it run. You
Speaker 1: build up a huge thing. In that case, it was
Speaker 1: subprime mortgage lending and then you have a huge collapse,
Speaker 1: a huge catharsis. Now. I would prefer the step by
Speaker 1: step keeping things in line, but the Fed seems to
Speaker 1: be on this track now where they don't want to
Speaker 1: they don't want to disturb things, and inevitable is a
Speaker 1: big build up and then a crash. I don't see
Speaker 1: the crash coming now. I don't see the mechanism, but
Speaker 1: human nature hasn't changed. It's there somewhere. How do you
Speaker 1: respond to Barclay's and David blench Flower yesterday telling us
Speaker 1: they need to get away from a green spannion measured
Speaker 1: and get back to an Arthur Burnsey and fifty basis
Speaker 1: point rate cut at some point? Is it good to
Speaker 1: get off the measured track? Uh? If you need that
Speaker 1: kind of if you need that kind of shock, if
Speaker 1: you need to do we need that kind of shock
Speaker 1: right now? Not right now? No, but but you very
Speaker 1: well could. I mean, you know the thing about the economies,
Speaker 1: you never know where you are now until much later.
Speaker 1: It wasn't until December of two thousand and eight that
Speaker 1: the National Bureaue Economic Research, which is the official arbitry
Speaker 1: of recessions, declared that the business had peaked a year
Speaker 1: earlier in December of oh seven, And of course with
Speaker 1: the delays of revisions and so on, you never know
Speaker 1: where you are. So it really means the FED is
Speaker 1: always behind the curve when they're reacting to the economy
Speaker 1: as that goes along. One final question. You've written numerous
Speaker 1: times for Bloomberg Opinion on China. Do we underestimate China's
Speaker 1: resiliency as an economy? On No, I don't think so.
Speaker 1: I think I think China has got a lot of
Speaker 1: problems now. They have a top down economy, and it's
Speaker 1: sort of like the FED. You know, it's one of
Speaker 1: these things that works until it doesn't work. Uh. In
Speaker 1: a democratic system you can have gradual changes. We see
Speaker 1: that in India, we see that in the US, we
Speaker 1: see that in the UK. But in China is one
Speaker 1: of these deals where the guys on top control it,
Speaker 1: and she is putting in more and more controls. Uh.
Speaker 1: They're even watching school teachers, everybody for the government. And
Speaker 1: that works until you until it just it just blows up.
Speaker 1: Look what's happening in Hong Kong. You've got over a
Speaker 1: million people in the streets. It's it's a it's a
Speaker 1: it's a different system, but it's it's much less orderly
Speaker 1: in the in the long run, I gotta get more questions,
Speaker 1: but we don't any time. Dr Schilling with us today.
Speaker 1: I throw his book at the young Deflation, Why it's coming,
Speaker 1: whether it's good or bad, and how it will affect
Speaker 1: your investments, business and personal affairs. It's just out twenty
Speaker 1: one years ago. We're looking for the fourth of July movie.
Speaker 1: Here two thousand markets thirty at the anniversary. Thanks for
Speaker 1: listening to the Bloomberg Surveillance podcast. Subscribe and listen to
Speaker 1: interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer.
Speaker 1: I'm on Twitter at Tom Keane before the podcast. You
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio.