1 00:00:10,039 --> 00:00:13,720 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Always 2 00:00:14,000 --> 00:00:17,560 Speaker 1: with Michael McKee. Daily we bring you insight from the 3 00:00:17,560 --> 00:00:22,760 Speaker 1: best in economics, finance, investment, and international relations. Find Bloomberg 4 00:00:22,840 --> 00:00:27,240 Speaker 1: Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course 5 00:00:27,760 --> 00:00:33,839 Speaker 1: on the Bloomberg Bill. A batter is chief economist at 6 00:00:33,880 --> 00:00:35,760 Speaker 1: City Group. To help us kick off our coverage and 7 00:00:35,760 --> 00:00:38,400 Speaker 1: given the market check I just did, perhaps no one 8 00:00:38,479 --> 00:00:44,160 Speaker 1: more appropriate than given his global coverage. Uh. In a way, 9 00:00:44,200 --> 00:00:47,360 Speaker 1: we seem to be decoupling Europe and China Asia in 10 00:00:47,440 --> 00:00:50,600 Speaker 1: different places in the economic cycle and most important in 11 00:00:50,640 --> 00:00:54,000 Speaker 1: the monetary policy cycle, or or are they? What are 12 00:00:54,000 --> 00:00:57,440 Speaker 1: the implications for a world in which the United States 13 00:00:57,520 --> 00:01:00,520 Speaker 1: is moving in a different direction than the other big 14 00:01:00,520 --> 00:01:06,240 Speaker 1: central banks. The degree of divergence is apparently diminishing, right 15 00:01:06,280 --> 00:01:08,400 Speaker 1: when the notion that the Fed is going to raise 16 00:01:08,480 --> 00:01:12,880 Speaker 1: anytime soon, I think has died the death so well, 17 00:01:13,360 --> 00:01:17,240 Speaker 1: the FED clearly is the running modest policy for a 18 00:01:17,319 --> 00:01:20,959 Speaker 1: country that is much following along in the recovery then 19 00:01:21,520 --> 00:01:23,840 Speaker 1: most of the rest of the world, and that still 20 00:01:23,959 --> 00:01:26,839 Speaker 1: has an underlying growth of I think just below two percent, 21 00:01:26,920 --> 00:01:30,600 Speaker 1: which is respectable by the standards of the advanced economies. Um, 22 00:01:30,880 --> 00:01:35,399 Speaker 1: it is not I think, a massive divergence any longer. 23 00:01:36,000 --> 00:01:39,480 Speaker 1: I doubt whether Europe and Japan can go down much 24 00:01:39,520 --> 00:01:41,440 Speaker 1: further in terms of rates. They may go to minus 25 00:01:41,480 --> 00:01:45,200 Speaker 1: fifty basis points. But that said, yes they are expanding 26 00:01:45,200 --> 00:01:48,480 Speaker 1: balance sheets, both in the Ural area and and in Japan. 27 00:01:48,920 --> 00:01:53,640 Speaker 1: But I think the degree of divergence really just reflects 28 00:01:53,880 --> 00:01:57,320 Speaker 1: the degree of divergence in the underlying economies, where the US, 29 00:01:58,320 --> 00:02:02,960 Speaker 1: despite being very unspected, actually is still clearly stronger than 30 00:02:04,200 --> 00:02:07,880 Speaker 1: the Eurozone, than the UK, or than Japan. We've seen 31 00:02:07,920 --> 00:02:12,320 Speaker 1: decoupling and monetary policy regimes before. Is this similar to 32 00:02:12,560 --> 00:02:15,000 Speaker 1: what we have had in the past in terms of 33 00:02:15,560 --> 00:02:19,120 Speaker 1: the economic cycle? Not really. First of all, the cycle 34 00:02:19,320 --> 00:02:22,520 Speaker 1: is very subdued, right. This is a seven year old 35 00:02:22,600 --> 00:02:26,359 Speaker 1: mediocre recovery in the US. Now in the euro Area 36 00:02:26,560 --> 00:02:29,440 Speaker 1: the recovery is barely two years old. I said that 37 00:02:29,600 --> 00:02:32,919 Speaker 1: virgins is much less intense than we have than they've 38 00:02:32,960 --> 00:02:36,680 Speaker 1: seen in the past, because nobody is in a particularly 39 00:02:36,760 --> 00:02:41,720 Speaker 1: strong or as of now, particularly weak position. The risks, 40 00:02:41,919 --> 00:02:45,880 Speaker 1: of course, all they're on the European side especially, and 41 00:02:45,919 --> 00:02:52,040 Speaker 1: we could see increased divergence if the consequence of Brexit, 42 00:02:52,240 --> 00:02:57,239 Speaker 1: the fear of Frexit, end of Italexit were to really 43 00:02:57,320 --> 00:03:00,839 Speaker 1: shape confidence asset markets there, and that case we could 44 00:03:00,880 --> 00:03:04,400 Speaker 1: well see, for instance, further rate cuts, significant right cuts 45 00:03:04,480 --> 00:03:06,399 Speaker 1: in the UK. After all, there's still at a half 46 00:03:06,440 --> 00:03:11,120 Speaker 1: percent for Banquet and so they have about hundred basis 47 00:03:11,200 --> 00:03:13,560 Speaker 1: points to go should they want to. We got Fraxit 48 00:03:13,760 --> 00:03:20,840 Speaker 1: and what you say Frexit means that France would leave 49 00:03:20,960 --> 00:03:24,960 Speaker 1: the EU. Well, Mrs la Penn, who as you know, 50 00:03:25,919 --> 00:03:30,840 Speaker 1: is at the moment close to leading or second in 51 00:03:30,880 --> 00:03:33,880 Speaker 1: the polls, has said bring on Brexit. It's a good 52 00:03:33,919 --> 00:03:37,000 Speaker 1: thing for France because should you elect me for president, 53 00:03:37,040 --> 00:03:41,200 Speaker 1: we have a referendum on on you membership. I really 54 00:03:41,560 --> 00:03:44,200 Speaker 1: don't think that it is likely as you will be president, 55 00:03:44,280 --> 00:03:46,600 Speaker 1: but it is more than a tale risk. In Italy, 56 00:03:46,640 --> 00:03:50,440 Speaker 1: the risk how much higher right Renzy may well lose 57 00:03:50,480 --> 00:03:54,400 Speaker 1: the referendum in October November. In that case, if you 58 00:03:54,400 --> 00:03:57,640 Speaker 1: will have to resign and we could end up with 59 00:03:57,760 --> 00:04:01,120 Speaker 1: a five star government. Michael McKee star can the professor 60 00:04:01,120 --> 00:04:06,400 Speaker 1: about it earlier? About the dots changing of the dots, uh, 61 00:04:06,680 --> 00:04:09,560 Speaker 1: you would seem to suggest that the dots don't really 62 00:04:09,600 --> 00:04:12,119 Speaker 1: matter At this point, the FED is on hold, and 63 00:04:12,480 --> 00:04:14,440 Speaker 1: you know what their view of what rates will be 64 00:04:14,480 --> 00:04:18,240 Speaker 1: in three years or more, I guess would be somewhat irrelevant. 65 00:04:18,440 --> 00:04:22,000 Speaker 1: You know, the dots have been so manifest you and 66 00:04:22,120 --> 00:04:27,960 Speaker 1: correlated with anything plausible for so long now that I 67 00:04:28,000 --> 00:04:33,760 Speaker 1: think people consider them to be ink spots rather than 68 00:04:33,880 --> 00:04:37,120 Speaker 1: I think meaningful information. Yes, the FED is on hold 69 00:04:37,560 --> 00:04:45,520 Speaker 1: at least until December. And you should the borrying scenarios 70 00:04:45,560 --> 00:04:49,800 Speaker 1: in the EU play out or should there be a 71 00:04:49,839 --> 00:04:53,560 Speaker 1: further slow than in China, both material risks then they 72 00:04:53,640 --> 00:04:56,680 Speaker 1: fed the current level of rates in the US. Maybe 73 00:04:56,680 --> 00:04:59,800 Speaker 1: I'll be disticcultly call high are you given what you were? Just? 74 00:05:00,200 --> 00:05:04,400 Speaker 1: Are you optimistic or pessimistic about the Great European Experiment? 75 00:05:04,800 --> 00:05:10,120 Speaker 1: It has brought peace for more than seventy years, and 76 00:05:10,240 --> 00:05:13,680 Speaker 1: it has contributor to prosperity. So I think it has 77 00:05:13,680 --> 00:05:19,680 Speaker 1: been an immenseally successful experiment. It needs radical overhaul if 78 00:05:19,680 --> 00:05:24,279 Speaker 1: it's going to meet the political needs and desires of 79 00:05:24,320 --> 00:05:29,120 Speaker 1: the European people. And the European political class is, as usual, 80 00:05:29,600 --> 00:05:31,680 Speaker 1: so far behind the curve that they're looking at their 81 00:05:31,720 --> 00:05:37,120 Speaker 1: own backsides, right, So um, I hope that reform in 82 00:05:37,360 --> 00:05:41,919 Speaker 1: and off the EU will be fast enough to prevent 83 00:05:42,040 --> 00:05:45,320 Speaker 1: a wholesale unraveling of the EU. But that is now 84 00:05:46,000 --> 00:05:49,760 Speaker 1: a more than a teal risk, Professor Powder, with great 85 00:05:49,839 --> 00:05:53,800 Speaker 1: honor to your academics. How far away are guys like 86 00:05:53,880 --> 00:05:57,480 Speaker 1: you from orthodoxy? It's a strange word. It's tossed around 87 00:05:57,920 --> 00:06:00,919 Speaker 1: like a bad cup of coffee at Bloomberg's surveillance. But 88 00:06:01,000 --> 00:06:05,520 Speaker 1: there's orthodox economics. Are we anywhere near it? Or is 89 00:06:05,600 --> 00:06:10,320 Speaker 1: everybody including sheer yell and flying blind look? In macroeconomics, 90 00:06:10,400 --> 00:06:15,960 Speaker 1: there is an academic orthodoxy which is still dominated by 91 00:06:16,360 --> 00:06:20,880 Speaker 1: what we call dynamic stochastic general equilibrium models, which is 92 00:06:21,040 --> 00:06:27,480 Speaker 1: a cloud cuckoo land usually idealized competitive economy. There's a 93 00:06:27,520 --> 00:06:31,680 Speaker 1: few little frictions thrown in to make it interesting. Um, 94 00:06:31,760 --> 00:06:34,720 Speaker 1: very far away from that. But if in the why 95 00:06:34,839 --> 00:06:40,760 Speaker 1: the sense of orthodoxy, I pick bits from Canjing economics, 96 00:06:40,760 --> 00:06:45,000 Speaker 1: from monetarism for Marxism, for that much, I beg Burrow 97 00:06:45,040 --> 00:06:49,160 Speaker 1: and Steel from all the orthodox economists, even sometimes from 98 00:06:49,200 --> 00:06:55,279 Speaker 1: this uh neoclassical rest respectations Chicago Minnesota School, which I 99 00:06:55,320 --> 00:06:58,360 Speaker 1: think is in many ways so dysfunctional, but it has 100 00:06:58,480 --> 00:07:04,440 Speaker 1: insights that despite the whole Enchilada. Being useless can help 101 00:07:04,760 --> 00:07:07,479 Speaker 1: your analysis, So you have to be eclectic in economics 102 00:07:08,360 --> 00:07:12,000 Speaker 1: these days you have to be particularly so. Tom Vilm 103 00:07:12,000 --> 00:07:14,400 Speaker 1: and I were talking about the thing that worries him 104 00:07:14,440 --> 00:07:18,360 Speaker 1: the most. Surprisingly, you were saying that you are worried 105 00:07:18,440 --> 00:07:21,960 Speaker 1: less about Brexit than about Italy. At this point, Brexit, 106 00:07:22,360 --> 00:07:25,480 Speaker 1: the damage is done. It's happened right in a way. 107 00:07:25,720 --> 00:07:30,240 Speaker 1: That's only upside now if Britain negotiates something better then 108 00:07:31,520 --> 00:07:34,080 Speaker 1: the w t O solution, which basically means that there's 109 00:07:34,080 --> 00:07:38,000 Speaker 1: no agreement on anything and they have, you know, roughly 110 00:07:38,080 --> 00:07:41,880 Speaker 1: free trade in physical goods and services and deeply restricted 111 00:07:41,960 --> 00:07:50,160 Speaker 1: trade in services and have no passporting, no mobility, that 112 00:07:50,160 --> 00:07:52,760 Speaker 1: would be the worst. If they get closer to Switzerland 113 00:07:52,840 --> 00:07:56,680 Speaker 1: or ideally the upan Economic Area solution that Norway has, 114 00:07:56,720 --> 00:08:01,200 Speaker 1: which is basically EU membership without saying decision making right 115 00:08:01,240 --> 00:08:03,640 Speaker 1: there would be unfortunate for Britain, but it would be 116 00:08:04,080 --> 00:08:07,040 Speaker 1: I think a good relative to where we are now, 117 00:08:07,080 --> 00:08:12,000 Speaker 1: So no downside in Britain, Italy and other There's an 118 00:08:12,000 --> 00:08:15,440 Speaker 1: anti EU and anti Euro movements in the Netherlands. In 119 00:08:15,440 --> 00:08:18,800 Speaker 1: France concerned me much more at this stage. The damage 120 00:08:18,840 --> 00:08:21,920 Speaker 1: is done in the United Kingdom, you say, but the 121 00:08:23,280 --> 00:08:26,080 Speaker 1: symptoms are yet to be felt. We're just starting to 122 00:08:26,120 --> 00:08:29,480 Speaker 1: see some economic data. Are you a city group calling 123 00:08:29,520 --> 00:08:33,439 Speaker 1: for a recession for the UN? I think the official 124 00:08:33,880 --> 00:08:38,160 Speaker 1: forecast is slightly strong. With any recession, we definitely see 125 00:08:38,200 --> 00:08:42,560 Speaker 1: a significantly lower path of actual output. I think that 126 00:08:42,760 --> 00:08:47,320 Speaker 1: especially if we get further rumblings about the scott sleeving 127 00:08:47,880 --> 00:08:52,320 Speaker 1: and or Northern Ireland, and if the talks or the 128 00:08:52,400 --> 00:08:57,439 Speaker 1: non talks between the EU and the UK um turn 129 00:08:57,679 --> 00:09:02,040 Speaker 1: more hostile and and comprom rising, then this could turn 130 00:09:02,320 --> 00:09:08,800 Speaker 1: into quite a deep and long lasting recession because uncertainty 131 00:09:08,840 --> 00:09:12,320 Speaker 1: about the eventure resolution would give way not to a 132 00:09:12,360 --> 00:09:16,120 Speaker 1: positive certainty, but to the certainty of allows the outcome. 133 00:09:16,360 --> 00:09:18,679 Speaker 1: Where's the consumer right now? I mean it is jobs day? 134 00:09:18,720 --> 00:09:24,839 Speaker 1: Where's the American consumer? I mean at sixty of the economy? 135 00:09:24,960 --> 00:09:29,160 Speaker 1: Is that how you get to an economic slowdown and recession? Well, clearly, 136 00:09:29,200 --> 00:09:33,240 Speaker 1: as long as the consumer keeps spending, the main chunk 137 00:09:33,760 --> 00:09:39,120 Speaker 1: driver of GDP is UH is invisible shape. And anticipate 138 00:09:39,200 --> 00:09:44,319 Speaker 1: that with jobs growth still reasonable, we expect you under 139 00:09:44,400 --> 00:09:50,560 Speaker 1: fifty K at eight thirty today, and with real wage 140 00:09:50,600 --> 00:09:56,800 Speaker 1: growth positive for once right, and with house prices still 141 00:09:56,920 --> 00:10:00,559 Speaker 1: up there and in fact rising, the main drivers off 142 00:10:01,600 --> 00:10:06,040 Speaker 1: consumer demand are still intact. So I don't see in 143 00:10:06,080 --> 00:10:11,040 Speaker 1: the US at the moment household consumption lead UM further 144 00:10:11,120 --> 00:10:17,199 Speaker 1: slow down. Recessions, however, almost invariably borne out of disappointing 145 00:10:17,200 --> 00:10:22,720 Speaker 1: capex or infantory accumulation. So there's certainly is room for 146 00:10:22,720 --> 00:10:25,439 Speaker 1: for his further slow down there if the bar is 147 00:10:25,440 --> 00:10:29,080 Speaker 1: about the US election become more prominent. We just have 148 00:10:29,160 --> 00:10:31,440 Speaker 1: one minute left, so very that's the only question we're 149 00:10:31,480 --> 00:10:33,840 Speaker 1: really asking about the jobs report today. But a quick analysis, 150 00:10:34,000 --> 00:10:37,719 Speaker 1: you talk about income gains, were expecting a year over 151 00:10:37,760 --> 00:10:41,079 Speaker 1: a year average hourly earnings up to two point seven percent, 152 00:10:41,440 --> 00:10:44,320 Speaker 1: like a cycle high. Is that because of minimum wage 153 00:10:44,440 --> 00:10:48,440 Speaker 1: or are we starting to see the declining unemployment rate 154 00:10:48,520 --> 00:10:53,960 Speaker 1: actually raise wages. I don't see that the aunapployment rate 155 00:10:53,960 --> 00:10:58,440 Speaker 1: would raise wage growth relatives to expect the inflation, and 156 00:10:58,880 --> 00:11:02,640 Speaker 1: so there has been some itightening there, but but not much. 157 00:11:02,679 --> 00:11:07,720 Speaker 1: I think it is simply the reflection of both cost push, 158 00:11:07,800 --> 00:11:13,000 Speaker 1: minimum wage, time affles and um the beginnings of the 159 00:11:13,000 --> 00:11:16,440 Speaker 1: Philipsko of reasserting itself. But it's still it's still very weak. 160 00:11:16,640 --> 00:11:20,240 Speaker 1: It's just the very low price inflation headlime price inflation 161 00:11:20,440 --> 00:11:24,200 Speaker 1: that turns on its very modest money wage growth into 162 00:11:25,120 --> 00:11:28,040 Speaker 1: rather you know, attractive real wage growth for the first 163 00:11:28,040 --> 00:11:30,760 Speaker 1: time that Mr Picaty wrote this book. He ends with 164 00:11:30,840 --> 00:11:33,800 Speaker 1: a final shot, I noticed that bill aboutter thank you 165 00:11:34,440 --> 00:11:36,640 Speaker 1: so much with sitting here. We greatly appreciate your time 166 00:11:36,679 --> 00:11:49,120 Speaker 1: on this job's day, Jim Blastman, where a serio JP 167 00:11:49,160 --> 00:11:53,080 Speaker 1: Morgan and not joining us bill gross of Jana's capital bill. 168 00:11:53,120 --> 00:11:55,959 Speaker 1: I guess this is a point where you smooth things out. 169 00:11:56,440 --> 00:11:59,520 Speaker 1: I'm looking at the three months moving average of a 170 00:11:59,600 --> 00:12:04,400 Speaker 1: hundred forty seven thousand. I guess that that stabilizes the 171 00:12:04,480 --> 00:12:07,679 Speaker 1: shock that we saw last months. Yeah, I think so. 172 00:12:08,280 --> 00:12:11,040 Speaker 1: You know, the Fed statement last month and then the 173 00:12:11,160 --> 00:12:15,120 Speaker 1: minutes suggested employment uncertainty, and as you smooth things out 174 00:12:15,160 --> 00:12:17,319 Speaker 1: for three months at uh you know, close to a 175 00:12:17,360 --> 00:12:19,319 Speaker 1: hundred and fifty thousand, I think that does it? I 176 00:12:19,360 --> 00:12:22,400 Speaker 1: mean the unemployment rate went up to uh the four nine, 177 00:12:22,440 --> 00:12:25,199 Speaker 1: did it not? The wages increased by a point one 178 00:12:25,240 --> 00:12:28,400 Speaker 1: as opposed to a point too, And so I think 179 00:12:29,160 --> 00:12:31,839 Speaker 1: things are not as hunky doria as two hundred and 180 00:12:31,880 --> 00:12:35,000 Speaker 1: eighty thousand might suggest, but you know, back to a 181 00:12:35,080 --> 00:12:38,559 Speaker 1: normalize one and fifty thousand. I think that it's nothing 182 00:12:38,600 --> 00:12:41,240 Speaker 1: to get excited about. It may not be something you 183 00:12:41,320 --> 00:12:44,200 Speaker 1: get excited about, but does it get anyone interested in 184 00:12:44,400 --> 00:12:46,640 Speaker 1: what Janet Yelling and company are going to do? Does 185 00:12:46,679 --> 00:12:50,000 Speaker 1: this change the calculation of when they might move at all? 186 00:12:50,080 --> 00:12:53,000 Speaker 1: For you? No, I don't. I don't think so. Um, 187 00:12:53,520 --> 00:12:56,160 Speaker 1: you know, they still have Brexit to to look into 188 00:12:56,200 --> 00:12:59,679 Speaker 1: the eyes, the whites of the Brexits eyes. I guess 189 00:12:59,679 --> 00:13:03,200 Speaker 1: they have problems with Italian banks, so the FED doesn't. 190 00:13:03,200 --> 00:13:05,520 Speaker 1: But the uh, the e c B and the EU 191 00:13:05,679 --> 00:13:11,360 Speaker 1: do the problems with the UK property mutual funds. Uh. 192 00:13:11,840 --> 00:13:15,280 Speaker 1: You know, there's a sense of illiquidity and markets and 193 00:13:15,280 --> 00:13:18,840 Speaker 1: and the FED of course is very obsessed and concerned 194 00:13:18,880 --> 00:13:24,080 Speaker 1: with markets to the extent that there's discord around the world. Um, 195 00:13:24,559 --> 00:13:26,480 Speaker 1: you know, I think the FED stays where it is. 196 00:13:26,520 --> 00:13:29,640 Speaker 1: They've wanted to raise interest rates, they did it once. 197 00:13:29,760 --> 00:13:34,000 Speaker 1: I think they want to have this believe that they'll 198 00:13:34,120 --> 00:13:37,520 Speaker 1: raise several times and therefore have a pretty positive yield curve, 199 00:13:37,520 --> 00:13:40,560 Speaker 1: which will help banks and insurance companies. But for the 200 00:13:40,559 --> 00:13:43,280 Speaker 1: most part, I don't think this changes much. Well, Just 201 00:13:43,320 --> 00:13:46,440 Speaker 1: to clarify, your call is for how many rate moves 202 00:13:46,520 --> 00:13:50,240 Speaker 1: this year, Well, the market, it only calls for a 203 00:13:50,280 --> 00:13:52,920 Speaker 1: half over the next twelve months and the twelve months 204 00:13:52,960 --> 00:13:56,600 Speaker 1: beyond that and another half, so twelve basis points each. 205 00:13:57,200 --> 00:14:01,079 Speaker 1: That's that's the market. I think they raise once or 206 00:14:01,120 --> 00:14:03,280 Speaker 1: try to raise once, and if they continue to get 207 00:14:03,559 --> 00:14:07,040 Speaker 1: employment numbers like this, and if they can get those 208 00:14:07,080 --> 00:14:10,920 Speaker 1: wages up, then you know, perhaps they'll have their chance 209 00:14:11,160 --> 00:14:13,600 Speaker 1: later in the year. I think they really do want 210 00:14:13,600 --> 00:14:16,520 Speaker 1: to raise rates. I think some of them, like Bullard 211 00:14:16,600 --> 00:14:20,440 Speaker 1: and Evans, have a sense that they need higher interest 212 00:14:20,520 --> 00:14:24,440 Speaker 1: rates in order to balance out the savings versus investment 213 00:14:24,440 --> 00:14:28,000 Speaker 1: element in the economy. And the markets come back right now. 214 00:14:28,000 --> 00:14:30,760 Speaker 1: We had stronger yen, and then we had weaker yen 215 00:14:30,840 --> 00:14:33,120 Speaker 1: off the shock of the report, a good report with 216 00:14:33,200 --> 00:14:36,920 Speaker 1: good revisions, and then we've got the end coming back again. 217 00:14:37,160 --> 00:14:41,440 Speaker 1: Bill gross without question, in our lifetimes, this is the 218 00:14:41,480 --> 00:14:45,880 Speaker 1: most priced of perfection bond market we've ever seen. Has 219 00:14:45,920 --> 00:14:49,320 Speaker 1: your day to day life changed when you see yells, 220 00:14:49,400 --> 00:14:53,880 Speaker 1: I mean the yield goes from one one. These are 221 00:14:54,080 --> 00:14:59,160 Speaker 1: shocking yields and shocking bond valuations. What are you doing 222 00:14:59,320 --> 00:15:02,120 Speaker 1: day to day within this milieu, Yeah, I agree with you. 223 00:15:02,160 --> 00:15:04,400 Speaker 1: I don't think it's priced to perfection. I'll change that 224 00:15:04,440 --> 00:15:06,560 Speaker 1: a little bit if you will permit me, Tom, It's 225 00:15:06,600 --> 00:15:10,520 Speaker 1: priced to absurdity. And and so you know, one knows 226 00:15:10,560 --> 00:15:14,120 Speaker 1: that twelve trillion dollars worth of sovereign bonds are in 227 00:15:14,240 --> 00:15:18,160 Speaker 1: negative yield space. One knows that in Germany that the 228 00:15:18,200 --> 00:15:21,880 Speaker 1: e c B can't really buy of German bonds because 229 00:15:21,880 --> 00:15:24,920 Speaker 1: they're yielding less than forty basis points. One knows in 230 00:15:25,000 --> 00:15:28,720 Speaker 1: Japan that almost everything, including the forty year j g B, 231 00:15:29,000 --> 00:15:32,240 Speaker 1: is at zero or less. And so it's an absurd market. 232 00:15:32,280 --> 00:15:35,600 Speaker 1: And what do you do is the question, Well, you 233 00:15:35,640 --> 00:15:40,480 Speaker 1: obviously don't buy those bonds that that's something that German 234 00:15:40,520 --> 00:15:43,800 Speaker 1: banks and insurance companies have to buy because they got 235 00:15:43,800 --> 00:15:45,640 Speaker 1: to put their money somewhere, And so you look for 236 00:15:45,720 --> 00:15:49,200 Speaker 1: substitutes and some some type of certainty. That the trick 237 00:15:49,280 --> 00:15:53,160 Speaker 1: in this business, Tom, is to buy the highest return 238 00:15:53,200 --> 00:15:56,840 Speaker 1: relative to the risk. I would say every essay class 239 00:15:56,920 --> 00:15:59,600 Speaker 1: is at risk. The question is which one is that 240 00:16:00,120 --> 00:16:04,760 Speaker 1: less risk? Right? I think? I think my dominant premise 241 00:16:05,040 --> 00:16:07,840 Speaker 1: is that central banks will continue to do what they 242 00:16:07,880 --> 00:16:10,840 Speaker 1: do despite the fact that I disagree with it. And 243 00:16:11,080 --> 00:16:15,720 Speaker 1: if that's the case, then the volatility of central bank positions, 244 00:16:15,840 --> 00:16:19,800 Speaker 1: the volatility of the policy rates around the world, in 245 00:16:19,880 --> 00:16:22,800 Speaker 1: the developed world, will stay relatively constant, and so you 246 00:16:22,880 --> 00:16:27,600 Speaker 1: want to take advantage of that by selling optionality around it. 247 00:16:27,880 --> 00:16:31,520 Speaker 1: That would include buying mortgages, that would include selling outright options, 248 00:16:31,560 --> 00:16:34,680 Speaker 1: that would include, you know, basically, look in your income 249 00:16:34,920 --> 00:16:37,520 Speaker 1: from something like one point four on our tenure to 250 00:16:37,880 --> 00:16:40,200 Speaker 1: something like five or six percent on our any right. 251 00:16:40,240 --> 00:16:42,840 Speaker 1: And to do a Janic's capital jargon alert folks, when 252 00:16:42,960 --> 00:16:48,000 Speaker 1: Mr Gross sells options those derivatives, that brings in an 253 00:16:48,120 --> 00:16:51,400 Speaker 1: income stream to his fund to keep him in chips. 254 00:16:51,440 --> 00:16:54,800 Speaker 1: Bill Gross, if I look at into the weekend and 255 00:16:55,000 --> 00:16:59,480 Speaker 1: into July into the second half, is Bill Gross looking 256 00:16:59,520 --> 00:17:02,960 Speaker 1: at jan Yellen's American world? And for that matter, a 257 00:17:03,080 --> 00:17:08,119 Speaker 1: troubled Europe is in equilibrium? Or are the dis equilibrium 258 00:17:08,440 --> 00:17:13,120 Speaker 1: so great that you need to be vigilant for exogenous shocks? Well? Yeah, 259 00:17:13,160 --> 00:17:16,359 Speaker 1: I think one must be prepared. And how fat is 260 00:17:16,400 --> 00:17:21,200 Speaker 1: that fat tail um? It's hard to say, but it uh, 261 00:17:21,240 --> 00:17:23,400 Speaker 1: you know, it doesn't approach a black swan, but maybe 262 00:17:23,880 --> 00:17:26,960 Speaker 1: a grace one. There are problems everywhere I talked about 263 00:17:27,000 --> 00:17:30,800 Speaker 1: the UK property situation. We know the Italian banks are 264 00:17:30,840 --> 00:17:34,840 Speaker 1: now asking for a bailout as opposed to a bail in. 265 00:17:35,520 --> 00:17:38,520 Speaker 1: We're not quite sure what's going on with China, but 266 00:17:39,200 --> 00:17:42,560 Speaker 1: you know, I observed that the Chinese stock markets, you know, 267 00:17:42,640 --> 00:17:47,480 Speaker 1: basically stay level throughout the entire night, each and every night, 268 00:17:47,520 --> 00:17:51,000 Speaker 1: and so one has to suspect that some uh something's 269 00:17:51,040 --> 00:17:55,080 Speaker 1: going on there. I simply think, yeah, that there's a 270 00:17:55,119 --> 00:17:59,640 Speaker 1: potential problems almost everywhere in a highly levered world. And 271 00:17:59,640 --> 00:18:01,800 Speaker 1: and that's the key, Tom, when you have a highly 272 00:18:01,880 --> 00:18:05,679 Speaker 1: leveled world and almost anything considera You know, Mike McKee 273 00:18:05,720 --> 00:18:07,160 Speaker 1: wants to get in here with a lot of questions. 274 00:18:07,240 --> 00:18:08,879 Speaker 1: Let me ask one more question before we go to 275 00:18:08,920 --> 00:18:12,480 Speaker 1: My colleague Bill Grows. Ambrose Evans Pritchard wrote a brilliant 276 00:18:12,600 --> 00:18:18,080 Speaker 1: article overnight in the Telegraph about China exporting their deflation 277 00:18:18,680 --> 00:18:22,879 Speaker 1: over to US. Is Janet Yellen running a non orthodox 278 00:18:23,040 --> 00:18:27,840 Speaker 1: policy because she's got to accept the disinflation from China 279 00:18:28,160 --> 00:18:31,280 Speaker 1: and the rest of a troubled economic world. Well, I 280 00:18:31,280 --> 00:18:33,920 Speaker 1: think she does. And certainly if she continues to talk 281 00:18:33,960 --> 00:18:38,080 Speaker 1: about raising interest rates, that would make it any even worse. Yes, China, 282 00:18:38,680 --> 00:18:41,720 Speaker 1: as they devalue by six or seven percent over the 283 00:18:41,800 --> 00:18:45,320 Speaker 1: last seven or eight months, maybe ten percent annualized, is 284 00:18:45,440 --> 00:18:50,080 Speaker 1: exporting deflation. And some investors don't quite understand how that 285 00:18:50,119 --> 00:18:53,320 Speaker 1: could be the case, but it basically means that, uh, yeah, 286 00:18:53,400 --> 00:18:57,600 Speaker 1: we can buy Chinese goods much cheaper than it basically 287 00:18:57,600 --> 00:19:02,240 Speaker 1: a roads our manufacturing basis, it becomes less competitive, etcetera, etcetera. 288 00:19:02,240 --> 00:19:04,919 Speaker 1: And so China exports their deflation to the rest of 289 00:19:04,960 --> 00:19:07,720 Speaker 1: the world, yelling how does she fight that? Well, she 290 00:19:07,960 --> 00:19:11,320 Speaker 1: certainly doesn't fight it with a stronger dollar and with 291 00:19:11,359 --> 00:19:14,280 Speaker 1: an interest rate hike, and so yeah, I think that 292 00:19:14,720 --> 00:19:18,639 Speaker 1: tempers her behavior certainly to some extent. I think what 293 00:19:18,840 --> 00:19:21,080 Speaker 1: all of our viewers and listeners want to know from 294 00:19:21,080 --> 00:19:25,840 Speaker 1: Bill Gross, including the institutional leads like Madame Legarde warning 295 00:19:25,920 --> 00:19:29,119 Speaker 1: yesterday with the i m F, is when this Alison 296 00:19:29,240 --> 00:19:36,240 Speaker 1: Wonderland world unwinds, will it unwind along smooth, predictable, dampen 297 00:19:36,600 --> 00:19:41,720 Speaker 1: reaction functions or will it unwind with ugly jump conditions 298 00:19:42,240 --> 00:19:44,480 Speaker 1: where there's real damage? Which way do you go in 299 00:19:44,520 --> 00:19:48,560 Speaker 1: that debate? Well, policy makers are trying to make it smooth, 300 00:19:48,560 --> 00:19:51,120 Speaker 1: are they not? And I have lost five or six 301 00:19:51,200 --> 00:19:55,520 Speaker 1: years with monetary stimulation and changing in rules at the 302 00:19:55,640 --> 00:19:58,320 Speaker 1: last minute. You know, right now, we've we've got UH, 303 00:19:58,960 --> 00:20:05,160 Speaker 1: you know, Germany basically suggesting the bail in UH could 304 00:20:05,200 --> 00:20:10,280 Speaker 1: be bail out for Italian banks under special circumstances. We've 305 00:20:10,280 --> 00:20:14,679 Speaker 1: we've got the UK property mutual funds basically changed in 306 00:20:14,680 --> 00:20:17,840 Speaker 1: your unit value or the worth of the fund by 307 00:20:17,920 --> 00:20:21,359 Speaker 1: fifteen or twenty percent overnight, simply to prevent you know, 308 00:20:21,960 --> 00:20:25,440 Speaker 1: money coming out, which to me is incredible. It makes 309 00:20:25,440 --> 00:20:28,520 Speaker 1: an investor say, what is my marketing worth? It was worth, 310 00:20:29,359 --> 00:20:31,480 Speaker 1: but I want to interrupt. There's a small time bond 311 00:20:31,480 --> 00:20:33,480 Speaker 1: manager out in the West coast, Mike, what does his name? 312 00:20:33,560 --> 00:20:36,640 Speaker 1: Good Luck? Remember him? There's a guy named good Luck 313 00:20:36,720 --> 00:20:39,440 Speaker 1: Bill Gross who's who's on West Coast time with you, 314 00:20:39,880 --> 00:20:43,320 Speaker 1: and he focuses on Deutsche Bank is a proxy for 315 00:20:43,359 --> 00:20:47,359 Speaker 1: the European banks. Would you consider the position Deutsche Bank 316 00:20:47,480 --> 00:20:51,080 Speaker 1: is in or if they have to structure cocoa hybrids 317 00:20:51,359 --> 00:20:54,560 Speaker 1: for the Italian banks to be the kind of jump 318 00:20:54,640 --> 00:20:59,600 Speaker 1: condition that leads to real instability. Well, it could be. 319 00:20:59,680 --> 00:21:03,320 Speaker 1: We we've known that Deutsche Bank is UH is a 320 00:21:03,359 --> 00:21:06,800 Speaker 1: wink link in the in the banking system, in your 321 00:21:06,960 --> 00:21:08,639 Speaker 1: land for a long long time, and we watched the 322 00:21:08,680 --> 00:21:11,960 Speaker 1: stock prices it thinks to eleven and ten, and we 323 00:21:12,080 --> 00:21:14,800 Speaker 1: know that there must be a hole there somewhere. We 324 00:21:14,840 --> 00:21:18,480 Speaker 1: know that Deutsche Bank is over hundreds of trillions of 325 00:21:18,520 --> 00:21:22,480 Speaker 1: dollars of derivatives, uh, some of which they've closed out, 326 00:21:22,520 --> 00:21:26,359 Speaker 1: but we don't know what's left. And so you know, 327 00:21:26,640 --> 00:21:30,320 Speaker 1: the Deutsche Bank was the best of German banking for 328 00:21:30,359 --> 00:21:32,359 Speaker 1: such a long time, but then it got caught in 329 00:21:32,400 --> 00:21:37,639 Speaker 1: the rush to derivative madness. And now we see the 330 00:21:37,680 --> 00:21:43,000 Speaker 1: problem so certainly. Uh, you know, certain Italian banks, Deutsche Bank, 331 00:21:44,240 --> 00:21:47,720 Speaker 1: the lack of confidence in policy makers as they change 332 00:21:47,800 --> 00:21:50,280 Speaker 1: the rules in order to support them. You know, all 333 00:21:50,680 --> 00:21:54,280 Speaker 1: all of these things, uh, you know, reduce confidence in 334 00:21:54,359 --> 00:21:59,280 Speaker 1: markets because investors know that artificial prices are the theme 335 00:21:59,320 --> 00:22:02,240 Speaker 1: of the day. One thing Bill that you've been comfortable 336 00:22:02,320 --> 00:22:05,919 Speaker 1: with in the recent quarters has been Mexico. If I 337 00:22:05,960 --> 00:22:09,199 Speaker 1: see a Brexit knock on effect in all the contagion 338 00:22:09,240 --> 00:22:12,440 Speaker 1: of Europe going over to a Mexican pace, So from 339 00:22:12,560 --> 00:22:16,600 Speaker 1: eighteen to a weaker nineteen, who knows where it's going. 340 00:22:17,000 --> 00:22:20,520 Speaker 1: Does even Bill Gross have to stop doing normal procedures 341 00:22:20,960 --> 00:22:24,480 Speaker 1: because of the butterfly effect of Brexit in Europe over 342 00:22:24,520 --> 00:22:28,160 Speaker 1: to an emerging market proxy like Mexico. Yeah, I think 343 00:22:28,200 --> 00:22:31,640 Speaker 1: that's very oppression, tom. I. I think Mexico is used 344 00:22:31,640 --> 00:22:34,600 Speaker 1: as a proxy for emerging markets. It's the best of 345 00:22:34,640 --> 00:22:38,560 Speaker 1: the emerging markets. It actually has half the debt relative 346 00:22:38,600 --> 00:22:42,480 Speaker 1: to GDP of the United States. But nonetheless Mexico and 347 00:22:42,520 --> 00:22:45,120 Speaker 1: the PACE, so you basically take it on the chin 348 00:22:45,240 --> 00:22:48,800 Speaker 1: when things start to go wrong. Um, what does that 349 00:22:48,840 --> 00:22:51,920 Speaker 1: mean in terms of policy? Well, we saw last week 350 00:22:51,960 --> 00:22:54,439 Speaker 1: that the Central Bank raised interest rates in order to 351 00:22:54,880 --> 00:22:57,919 Speaker 1: you know, basically support the pace so to some extent, 352 00:22:58,000 --> 00:23:00,560 Speaker 1: and so, yeah, you can expect some volatile reality there. 353 00:23:00,600 --> 00:23:05,040 Speaker 1: I would point out that the Mexican ten year tip 354 00:23:05,520 --> 00:23:11,520 Speaker 1: the linker, the inflation adjusted bond, basically yields three real 355 00:23:11,640 --> 00:23:15,159 Speaker 1: as opposed to you know, uh thirty five basis points 356 00:23:15,160 --> 00:23:17,640 Speaker 1: in the United States. That's it's huge spread. And so 357 00:23:18,080 --> 00:23:20,800 Speaker 1: uh yeah, you can adjust for the credit quality, but 358 00:23:20,920 --> 00:23:24,320 Speaker 1: it's a it's a value absent, uh, you know, a 359 00:23:24,680 --> 00:23:27,879 Speaker 1: rush to safety. We've seen a lot of people rushing 360 00:23:27,920 --> 00:23:30,879 Speaker 1: into corporate bonds as everybody in the world tries to 361 00:23:30,880 --> 00:23:34,080 Speaker 1: get some sort of yield. Here is that a smart 362 00:23:34,160 --> 00:23:37,159 Speaker 1: move at this point, or people taking too much of 363 00:23:37,359 --> 00:23:41,000 Speaker 1: a risk using it maybe as a proxy for sovereigns. Well, Mike, 364 00:23:41,400 --> 00:23:44,639 Speaker 1: you know, it's a quick formula. You figure out what 365 00:23:44,680 --> 00:23:46,600 Speaker 1: the spread is. Let's let's take high yield at four 366 00:23:47,000 --> 00:23:50,560 Speaker 1: fifty basis points. You figure out what the UH annualized 367 00:23:50,560 --> 00:23:53,600 Speaker 1: defaults will be in the recoveries let's say four percent 368 00:23:53,720 --> 00:23:56,960 Speaker 1: with a recovery of UH, you know, fifty percent, and 369 00:23:57,040 --> 00:23:59,520 Speaker 1: so that takes two points off to four and a half, 370 00:24:00,040 --> 00:24:02,919 Speaker 1: ves you two and a half percent UH relative to 371 00:24:03,960 --> 00:24:06,800 Speaker 1: your treasuries. Um. You know, that's not a bad deal, 372 00:24:06,840 --> 00:24:08,840 Speaker 1: but it's not the deal that investors think they're going 373 00:24:08,880 --> 00:24:11,720 Speaker 1: to get. And if we have problems elsewhere like we've 374 00:24:11,760 --> 00:24:13,840 Speaker 1: been talking about, then certainly those spreads are going to 375 00:24:13,920 --> 00:24:17,200 Speaker 1: widen out. I think it's obvious that when interest rates 376 00:24:17,200 --> 00:24:20,600 Speaker 1: are at zero or negative that that everything is tied together. 377 00:24:20,760 --> 00:24:22,280 Speaker 1: You know, the thigh bone and the knee bone and 378 00:24:22,400 --> 00:24:26,320 Speaker 1: hip bone, and jump bonds and stocks and negative interest 379 00:24:26,520 --> 00:24:29,160 Speaker 1: bonds are all tied together in some way. And so 380 00:24:29,359 --> 00:24:32,360 Speaker 1: you must assume, I think of that, that the high 381 00:24:32,440 --> 00:24:37,160 Speaker 1: yield bond areas artificially priced and at risk under certain circumstances, 382 00:24:37,240 --> 00:24:41,359 Speaker 1: I wouldn't buy them. Well, effectively, effect of fact, I'm 383 00:24:41,359 --> 00:24:47,800 Speaker 1: short them. I'm short them across all of categories of 384 00:24:47,800 --> 00:24:52,439 Speaker 1: of UH, corporate or just high yield. Now you know 385 00:24:52,520 --> 00:24:56,399 Speaker 1: there are C d X, which is an index of 386 00:24:56,640 --> 00:24:59,520 Speaker 1: high yield bonds, and U and I G c d x, 387 00:25:00,000 --> 00:25:02,760 Speaker 1: which is an index of investment grade bonds, and you 388 00:25:02,800 --> 00:25:06,159 Speaker 1: know those are derivatives that are easily traded. The I 389 00:25:06,359 --> 00:25:08,880 Speaker 1: G C d X trades at about a d basis 390 00:25:08,920 --> 00:25:12,400 Speaker 1: points the high yield you know, basically at about four five. 391 00:25:12,440 --> 00:25:16,040 Speaker 1: And so yes, when you when you buy protection as 392 00:25:16,040 --> 00:25:18,680 Speaker 1: opposed to sell protection, which I've done, that's the same 393 00:25:18,720 --> 00:25:22,679 Speaker 1: as shorting. Uh, then you're giving up that kerry, but 394 00:25:23,000 --> 00:25:25,560 Speaker 1: you're you're looking for a wideningess spreads. And I think 395 00:25:25,640 --> 00:25:28,600 Speaker 1: ultimately that's what happens in both of those markets with 396 00:25:28,640 --> 00:25:31,960 Speaker 1: the cost of money for banks trading it. Basically effectively, 397 00:25:31,960 --> 00:25:35,640 Speaker 1: thirty seven basis points is our corporate bonds the way 398 00:25:35,760 --> 00:25:40,200 Speaker 1: the channel for monetary policy. Now, well, um, they certainly 399 00:25:40,200 --> 00:25:43,640 Speaker 1: are are beginning to be uh with the ECB, are 400 00:25:43,680 --> 00:25:47,280 Speaker 1: they not? Stocks are the the st class of the day. 401 00:25:47,320 --> 00:25:49,880 Speaker 1: With the Swiss National Bank that we just found out 402 00:25:49,920 --> 00:25:54,320 Speaker 1: they have five hundred billion dollars worth of of stocks 403 00:25:54,359 --> 00:25:57,679 Speaker 1: around the world, including Apple and Johnson and Johnson. To me, 404 00:25:57,800 --> 00:26:02,119 Speaker 1: that's staggering. We've known that the Japanese by stocks, but 405 00:26:02,160 --> 00:26:05,280 Speaker 1: I never knew that the Swiss National Bank bought stocks. 406 00:26:05,720 --> 00:26:07,760 Speaker 1: You know, it's almost like a sovereign wealth fund, and 407 00:26:07,840 --> 00:26:12,399 Speaker 1: so um. You know that this entire market is distorted 408 00:26:12,480 --> 00:26:17,320 Speaker 1: by by cash flows that never have been well. Bill, 409 00:26:17,400 --> 00:26:19,080 Speaker 1: you know, I look at Swiss Frank and I think 410 00:26:19,080 --> 00:26:22,000 Speaker 1: if Bob Stinche d Ammer's Pierpont has been looking at Sterling, 411 00:26:22,160 --> 00:26:25,720 Speaker 1: Swissy is a proxy for safe haven versus all going 412 00:26:25,800 --> 00:26:28,520 Speaker 1: on in the United Kingdom. Bill, I think all of 413 00:26:28,560 --> 00:26:31,160 Speaker 1: our world would like to know. The Bloomberg surveillance world 414 00:26:31,400 --> 00:26:34,480 Speaker 1: would like to know what you were thinking in the 415 00:26:34,600 --> 00:26:39,400 Speaker 1: drama of the Brexit vote. What were you thinking as 416 00:26:39,400 --> 00:26:43,800 Speaker 1: you saw the United Kingdom shift to leave versus the 417 00:26:43,840 --> 00:26:47,960 Speaker 1: presumed remain. Well, I was watching that overnight, and of 418 00:26:48,000 --> 00:26:50,760 Speaker 1: what I was watching was that, you know, I had 419 00:26:50,800 --> 00:26:54,600 Speaker 1: some options on the U. S. Treasuries, both calls and puts, 420 00:26:54,720 --> 00:26:58,440 Speaker 1: and uh, you know that initially the the U. S. 421 00:26:58,480 --> 00:27:02,159 Speaker 1: Treasury who were declining and icen't declining too much. But 422 00:27:02,240 --> 00:27:06,159 Speaker 1: then all of a sudden, you know, as Brexit was winning, 423 00:27:06,720 --> 00:27:09,440 Speaker 1: treasuries went up and we're going up too much. So 424 00:27:09,840 --> 00:27:11,679 Speaker 1: you know, when you sell volatility, you want to you 425 00:27:11,680 --> 00:27:13,840 Speaker 1: don't want to sell as much volatility has happened on 426 00:27:13,880 --> 00:27:16,320 Speaker 1: that night, and it was a long night for me. 427 00:27:16,359 --> 00:27:19,560 Speaker 1: It turned out very well. But you know, that's that's 428 00:27:19,600 --> 00:27:24,000 Speaker 1: the problem with a with a sudden change there, there's 429 00:27:24,119 --> 00:27:28,200 Speaker 1: there's so many positions, there's so much leverage currency wise, 430 00:27:28,240 --> 00:27:31,639 Speaker 1: as you point out almost uh, you know, every five minutes, 431 00:27:31,840 --> 00:27:34,760 Speaker 1: Tom and your program your very currency related. And I 432 00:27:34,840 --> 00:27:38,119 Speaker 1: think that's that's good. They're huge currency positions that have 433 00:27:38,200 --> 00:27:41,840 Speaker 1: to be unwound and rebalanced there. They're huge positions in 434 00:27:41,920 --> 00:27:47,480 Speaker 1: terms of credit and treasuries. There's huge positions across boons 435 00:27:47,520 --> 00:27:50,520 Speaker 1: and j g bs and and the U S treasuries 436 00:27:50,560 --> 00:27:52,880 Speaker 1: and so you know all of this. When something happens, 437 00:27:53,480 --> 00:27:56,440 Speaker 1: you know, it induces lots of volatility and a lot 438 00:27:56,480 --> 00:27:59,080 Speaker 1: of lass taking on one side and profit taking on 439 00:27:59,119 --> 00:28:03,520 Speaker 1: the other. It it's not the way capitalism should be run. 440 00:28:04,280 --> 00:28:08,800 Speaker 1: It's a casino as opposed to a to a Midwestern 441 00:28:08,960 --> 00:28:12,520 Speaker 1: farm bill gross with us on Bluebirg Radio Worldwide. Michael 442 00:28:12,560 --> 00:28:15,439 Speaker 1: McKee step in here with the final to Mr Gross 443 00:28:15,480 --> 00:28:18,400 Speaker 1: as he goes back to the casino. I'm just curious 444 00:28:18,400 --> 00:28:22,960 Speaker 1: because the the geopolitical situation hasn't changed, and so people 445 00:28:23,000 --> 00:28:26,560 Speaker 1: are still going to be looking for yield in this casino. 446 00:28:26,640 --> 00:28:29,080 Speaker 1: Where are you most likely to lose? What's the most 447 00:28:29,200 --> 00:28:34,159 Speaker 1: vulnerable category, sovereign's high yield emerging market debt? Where do 448 00:28:34,200 --> 00:28:36,240 Speaker 1: you want to be the most careful? Well, anything with 449 00:28:36,280 --> 00:28:38,600 Speaker 1: a negative yield. I can guarantee you that a term 450 00:28:38,760 --> 00:28:42,200 Speaker 1: or there's a lot with a negative So yeah, yeah, 451 00:28:42,240 --> 00:28:45,760 Speaker 1: so that's that's pretty easy. Don't don't buy them expecting 452 00:28:45,880 --> 00:28:49,320 Speaker 1: negative yields to go even more negative, although that's certainly 453 00:28:49,360 --> 00:28:53,719 Speaker 1: been the case. So avoid those and avoid you know, 454 00:28:53,960 --> 00:28:57,680 Speaker 1: closely tied links to that. That would mean corporate bonds 455 00:28:57,680 --> 00:29:00,640 Speaker 1: that in some cases are trading their negative yields, corporate 456 00:29:00,640 --> 00:29:04,600 Speaker 1: spreads that are narrow you know, to me, the safest 457 00:29:05,480 --> 00:29:10,239 Speaker 1: situations in the marketplace are relatively safe arbitrage. Um. You know, 458 00:29:10,480 --> 00:29:14,720 Speaker 1: there's a case of s a B which is Miller 459 00:29:14,800 --> 00:29:18,800 Speaker 1: Brewing being bought by Annahouser Bush. It's a London based company. 460 00:29:19,160 --> 00:29:21,880 Speaker 1: It's got two or three percent over the next two 461 00:29:21,880 --> 00:29:25,440 Speaker 1: months annualized, it's an eight or nine percent type of deal. 462 00:29:25,480 --> 00:29:28,680 Speaker 1: But they've already raised sixty billion dollars. They're well on 463 00:29:28,720 --> 00:29:31,720 Speaker 1: their way to completing that merger. And so yeah, take 464 00:29:31,800 --> 00:29:35,520 Speaker 1: the take the safe arbitrarge deal and and forget about 465 00:29:35,520 --> 00:29:37,640 Speaker 1: the rest. Still, you have been more than kind to 466 00:29:37,680 --> 00:29:39,719 Speaker 1: devote this much time to us this morning. We'll let 467 00:29:39,720 --> 00:29:42,040 Speaker 1: you get back to the casino, as you call it, 468 00:29:42,400 --> 00:29:44,960 Speaker 1: a the congratulations bill. In the one year track record 469 00:29:45,000 --> 00:29:48,080 Speaker 1: of your unconstrained effort at Janice, it has been better 470 00:29:48,560 --> 00:29:51,040 Speaker 1: than good over twelve months for Mr Gross. Bill Gross 471 00:29:51,520 --> 00:30:03,440 Speaker 1: is with Janie Capital. And now, folks, very quickly here 472 00:30:03,240 --> 00:30:05,480 Speaker 1: we're gonna because we have Tobias for the rest of 473 00:30:05,520 --> 00:30:08,480 Speaker 1: the half hour, we're gonna totally rip up the script 474 00:30:09,000 --> 00:30:11,520 Speaker 1: and talk hockey, which is not you know, our audience 475 00:30:11,560 --> 00:30:15,200 Speaker 1: is like, Tom, don't do this. But to Tom's going 476 00:30:15,240 --> 00:30:19,480 Speaker 1: to bring up the trade. You are you are, folks 477 00:30:19,600 --> 00:30:22,720 Speaker 1: to put perspective when you see the New York Times 478 00:30:23,080 --> 00:30:26,160 Speaker 1: with the article of the Rangers beating the Canadians and 479 00:30:26,200 --> 00:30:28,680 Speaker 1: there's a guy in the front row against the glass 480 00:30:29,160 --> 00:30:31,880 Speaker 1: and Mr konan seats and he's got a Montreal Canadian 481 00:30:32,000 --> 00:30:36,520 Speaker 1: jersey on. That's Tobias Lefkovitch. That's how die hard you are. 482 00:30:37,120 --> 00:30:39,760 Speaker 1: This was the most shocking trade. Don't give credit to 483 00:30:39,800 --> 00:30:41,800 Speaker 1: the Rangers fans. They don't throw stuff at me, even 484 00:30:41,840 --> 00:30:43,920 Speaker 1: though I'm wearing my Canadian jersey. Maybe it's because the 485 00:30:44,000 --> 00:30:48,000 Speaker 1: John Beloto jersey. You traded your iconic defenseman, and many 486 00:30:48,080 --> 00:30:51,040 Speaker 1: hockey people say that was a good transaction. Look, I 487 00:30:51,920 --> 00:30:54,320 Speaker 1: think the stuff that we've seen in the press about 488 00:30:54,360 --> 00:30:56,960 Speaker 1: it has been you know, there was distraction in the 489 00:30:56,960 --> 00:30:59,880 Speaker 1: locker room, that kind of thing. There was clearly bad blood. 490 00:30:59,880 --> 00:31:02,320 Speaker 1: But between Terry Van which is a coach in the 491 00:31:02,360 --> 00:31:06,280 Speaker 1: John Managel Keys, and Mr Suban, I'm stunned by the trade. 492 00:31:06,280 --> 00:31:08,040 Speaker 1: And I like Shaye Webber. He's a great player, but 493 00:31:08,080 --> 00:31:11,320 Speaker 1: I just I don't know what version I was thinking 494 00:31:11,640 --> 00:31:14,560 Speaker 1: of his own ego. Yeah, well, we uh we we 495 00:31:14,640 --> 00:31:18,280 Speaker 1: need to point this out because lost in all of 496 00:31:18,280 --> 00:31:22,400 Speaker 1: what we're talking about today with the US numbers, I 497 00:31:22,440 --> 00:31:25,680 Speaker 1: think Mr Sheban contributed to this. The net change and 498 00:31:25,760 --> 00:31:32,840 Speaker 1: employment Canada loses. Canada loses. It's a lost seven hundred 499 00:31:32,920 --> 00:31:36,920 Speaker 1: jobs in June. The magnitude is completely different, but the 500 00:31:37,000 --> 00:31:39,880 Speaker 1: unemployment rate goes down to six point eight percent because 501 00:31:39,880 --> 00:31:42,880 Speaker 1: they get Mr Webber. And so we digress here, let's 502 00:31:42,880 --> 00:31:45,440 Speaker 1: get back to script numbers. You have to also keep 503 00:31:45,440 --> 00:31:47,720 Speaker 1: in mind Canada's a tenth the size of the US 504 00:31:47,800 --> 00:31:51,200 Speaker 1: SO and we've noticed that in the Stanley Cup Tobias left, 505 00:31:51,520 --> 00:31:54,200 Speaker 1: what is the groups? What is the city group surprise? 506 00:31:54,280 --> 00:31:57,760 Speaker 1: And next day right now, it's actually been improving UM 507 00:31:57,880 --> 00:32:01,320 Speaker 1: more recently. UM you know, some broad spectrum so it's 508 00:32:01,360 --> 00:32:03,920 Speaker 1: it's been kind of out of sync with the sense 509 00:32:04,040 --> 00:32:09,880 Speaker 1: of dire economic consequences that markets have been struggling with. UM. Now, 510 00:32:09,960 --> 00:32:12,000 Speaker 1: you have to be a little careful to see economic 511 00:32:12,000 --> 00:32:15,080 Speaker 1: surprising dex is I think somewhat misunderstood. It's created by 512 00:32:15,080 --> 00:32:19,000 Speaker 1: our effects guys UM and attracts trailing data as well 513 00:32:19,000 --> 00:32:22,520 Speaker 1: as future data, so there's a constant movement of that data. 514 00:32:22,560 --> 00:32:25,840 Speaker 1: There's this mean reversion aspect to it. Getting a little technical, 515 00:32:25,920 --> 00:32:28,360 Speaker 1: but you've got to be careful in how you read 516 00:32:28,360 --> 00:32:32,200 Speaker 1: the economic surprise Index as being indicative necessarily of an 517 00:32:32,200 --> 00:32:36,360 Speaker 1: improving or worse Well, I don't trade on it, but uh, 518 00:32:36,760 --> 00:32:39,480 Speaker 1: certainly the FETs traders use it. You know, a lot 519 00:32:39,800 --> 00:32:42,920 Speaker 1: these are you know, very smart quantitative mathematical guys in 520 00:32:42,960 --> 00:32:45,840 Speaker 1: short term creative. They're moving things pretty fast. They move 521 00:32:45,960 --> 00:32:49,040 Speaker 1: very fast, and you know little tweaks. Point three percent, 522 00:32:49,080 --> 00:32:52,160 Speaker 1: point four percent in a given day is huge currency. 523 00:32:52,520 --> 00:32:55,360 Speaker 1: The jobs report is the big number of the day, 524 00:32:55,400 --> 00:32:59,480 Speaker 1: two hundred and eighty seven thousand jobs created, totally shocking 525 00:32:59,600 --> 00:33:02,960 Speaker 1: everybody in the same way that it did last month. 526 00:33:03,560 --> 00:33:08,160 Speaker 1: UM Tobias left coaches with US. He's the chief equity 527 00:33:08,280 --> 00:33:12,840 Speaker 1: US equity strategist for City Group and UM. When when 528 00:33:12,880 --> 00:33:15,800 Speaker 1: something like that happens, I'm just curious, what do you 529 00:33:15,840 --> 00:33:19,200 Speaker 1: tell your traders on the floor to do in it? 530 00:33:19,400 --> 00:33:22,040 Speaker 1: It sort of reminds me and I use this this 531 00:33:22,320 --> 00:33:25,760 Speaker 1: allegory last week of the the airplane that NASA uses 532 00:33:25,760 --> 00:33:27,920 Speaker 1: when it goes up and then it drops immediately, so 533 00:33:28,000 --> 00:33:30,440 Speaker 1: people are waitless and on the trading floor there's got 534 00:33:30,440 --> 00:33:33,200 Speaker 1: to be about a minute or so of absolute weightlessness. 535 00:33:33,280 --> 00:33:36,320 Speaker 1: What is the price for this number? What are they 536 00:33:36,360 --> 00:33:38,960 Speaker 1: supposed to do? I think you're just sit back and 537 00:33:39,000 --> 00:33:41,200 Speaker 1: take a breath. You're just as much as you get 538 00:33:41,200 --> 00:33:43,880 Speaker 1: a shockingly bad number, you say, okay, what's in that number? 539 00:33:43,920 --> 00:33:46,160 Speaker 1: That probably explains it. So last month you said the 540 00:33:46,240 --> 00:33:49,880 Speaker 1: Verizon strike, Um, maybe there's some seasonals in there, and 541 00:33:49,880 --> 00:33:52,600 Speaker 1: and you know, is everything else falling apart? And in 542 00:33:52,600 --> 00:33:54,360 Speaker 1: the case of last month, we were looking at things 543 00:33:54,360 --> 00:33:57,960 Speaker 1: like hiring intentions, jobless claims, etcetera. Most of the data 544 00:33:58,080 --> 00:34:01,000 Speaker 1: was telling you this is somewhat of an aberant number. 545 00:34:01,040 --> 00:34:03,520 Speaker 1: It's not a it's not a pattern. And I would 546 00:34:03,600 --> 00:34:05,440 Speaker 1: probably say the same about it to an eight seven 547 00:34:05,480 --> 00:34:07,560 Speaker 1: thou Chob number. It's probably not the pattern. I don't 548 00:34:07,560 --> 00:34:10,360 Speaker 1: think it's there's quite the strength in the economy to 549 00:34:10,520 --> 00:34:13,719 Speaker 1: generate that kind of support. So the idea of averaging 550 00:34:13,719 --> 00:34:16,000 Speaker 1: out these and others and smoothing them is probably the 551 00:34:16,040 --> 00:34:19,960 Speaker 1: smartest way to approach it. Now, that's that's an investors perspective, 552 00:34:19,960 --> 00:34:22,480 Speaker 1: a trader's perspectives. I don't I can't think about what's 553 00:34:22,480 --> 00:34:25,680 Speaker 1: gonna happen in a month on a revision. Um, I've 554 00:34:25,680 --> 00:34:27,400 Speaker 1: got to think about what's gonna happen immediately. And the 555 00:34:27,440 --> 00:34:29,640 Speaker 1: market's going to trade in certain ways of bondields are 556 00:34:29,680 --> 00:34:31,800 Speaker 1: probably gonna go higher if everybody all of a sudden 557 00:34:31,800 --> 00:34:34,440 Speaker 1: believes there's a much stronger economy out there. And that's 558 00:34:34,520 --> 00:34:36,200 Speaker 1: kind of what's played out in the marketplaces seen the 559 00:34:36,239 --> 00:34:38,719 Speaker 1: currencies moved similarly to reflect that, Well, that's not the 560 00:34:38,760 --> 00:34:40,520 Speaker 1: way it's playing out right now. It's in your note. 561 00:34:40,600 --> 00:34:44,799 Speaker 1: Yield just went negative for briefly is now unchanged at 562 00:34:44,840 --> 00:34:48,719 Speaker 1: one thirty seven, So a quick knee jerk reaction, but 563 00:34:49,040 --> 00:34:52,520 Speaker 1: continued flattening tum. Yeah, it's it's a very nuanced tape 564 00:34:52,600 --> 00:34:55,560 Speaker 1: right now, futures of fourteen. But I'm watching the reason 565 00:34:55,600 --> 00:34:58,560 Speaker 1: I pause it. Focus is glued to the screen, watching 566 00:34:58,560 --> 00:35:02,200 Speaker 1: the nuances to bias. I believe you're in a world 567 00:35:02,200 --> 00:35:06,960 Speaker 1: where you care about persistency, a cash flow generated from 568 00:35:07,040 --> 00:35:13,600 Speaker 1: confident corporate officers doing investments for future revenues and the 569 00:35:13,719 --> 00:35:16,800 Speaker 1: cash wow can be now or you can discount the future. 570 00:35:17,000 --> 00:35:20,760 Speaker 1: Is your world turned upside down? Can you do normal 571 00:35:21,200 --> 00:35:26,600 Speaker 1: Tobias Levkovich work? You should, um, you know, not not 572 00:35:26,880 --> 00:35:29,680 Speaker 1: Tobias left which has worked with more traditional, you know, 573 00:35:29,760 --> 00:35:33,240 Speaker 1: capitalistic pricing model structures. You play the cards you're given. 574 00:35:33,360 --> 00:35:35,120 Speaker 1: You not played the cards that you wish you had. 575 00:35:35,600 --> 00:35:38,840 Speaker 1: So the environment is what it is. Um, Low yields 576 00:35:38,960 --> 00:35:41,840 Speaker 1: have some negative consequences. I think when you're trying to 577 00:35:41,920 --> 00:35:44,160 Speaker 1: build gross before you were talking about what it means 578 00:35:44,160 --> 00:35:46,040 Speaker 1: for pension funds in terms come, etcetera. But it also 579 00:35:46,120 --> 00:35:49,200 Speaker 1: means something about the present guy that future stream is 580 00:35:49,280 --> 00:35:52,040 Speaker 1: higher and therefore multiples are going to be higher in 581 00:35:52,080 --> 00:35:55,920 Speaker 1: an environment where low rates are persistent. The question that 582 00:35:56,000 --> 00:35:58,800 Speaker 1: you have and what we've seen in markets, are people 583 00:35:58,840 --> 00:36:01,880 Speaker 1: buying these kind of persistent, steady cash flow companies that 584 00:36:01,920 --> 00:36:04,640 Speaker 1: can pay have more dividends, and they're paying a lot 585 00:36:04,760 --> 00:36:07,680 Speaker 1: for what it's historically called defensive stocks. And once you 586 00:36:07,719 --> 00:36:10,600 Speaker 1: start paying a very hefty price for them, they aren't 587 00:36:10,640 --> 00:36:13,200 Speaker 1: that defensive anymore. They're actually more risky because of the 588 00:36:13,239 --> 00:36:16,360 Speaker 1: valuations on them. So I worry about people kind of 589 00:36:16,440 --> 00:36:19,600 Speaker 1: rushing into a particular that you call high quality minimum 590 00:36:19,680 --> 00:36:22,640 Speaker 1: vutility fund, which then buys a lot of utilities and 591 00:36:22,640 --> 00:36:25,440 Speaker 1: staples and things like that UM that have a nice 592 00:36:25,520 --> 00:36:28,360 Speaker 1: yield and comfort level if you want to call that that. 593 00:36:28,400 --> 00:36:31,480 Speaker 1: They can pertain that they maintain that yield, But what 594 00:36:31,560 --> 00:36:35,120 Speaker 1: are you paying for it? And investors aren't paying enough 595 00:36:35,160 --> 00:36:38,759 Speaker 1: attention to that to bias those stocks are priced at 596 00:36:38,840 --> 00:36:43,640 Speaker 1: nifty fifty levels. You're too young to remember this, I remember, 597 00:36:43,680 --> 00:36:46,719 Speaker 1: I don't remember more res already I do, but I 598 00:36:46,760 --> 00:36:49,319 Speaker 1: don't remember really Maurice the Rocket and all that, but 599 00:36:49,719 --> 00:36:54,759 Speaker 1: there was a point where they were priced to perfection. 600 00:36:55,280 --> 00:36:58,600 Speaker 1: Everybody agrees bonds are priced to perfection. Is your world 601 00:36:58,600 --> 00:37:02,600 Speaker 1: price to perfection? I don't believe the broad equity market 602 00:37:02,719 --> 00:37:05,600 Speaker 1: is okay. Um. So let's you know, if you go 603 00:37:05,640 --> 00:37:08,520 Speaker 1: back and look at what was happening back in nine 604 00:37:08,880 --> 00:37:11,880 Speaker 1: where you had the tech stocks price to perfection, um, 605 00:37:11,920 --> 00:37:14,080 Speaker 1: and they were you know, some of these stocks were 606 00:37:14,080 --> 00:37:16,800 Speaker 1: insanely valued right price to eyeballs, not priced earnings or 607 00:37:16,960 --> 00:37:20,640 Speaker 1: future earnings. UM. That's when you get kind of freaked 608 00:37:20,640 --> 00:37:23,160 Speaker 1: out and the whole market being dragged up. We don't 609 00:37:23,200 --> 00:37:26,680 Speaker 1: really have that across the spectrum. Um. Many stocks and 610 00:37:26,680 --> 00:37:28,839 Speaker 1: take financials are really beat up, trading in very low 611 00:37:28,840 --> 00:37:31,160 Speaker 1: price to put tangible books in the in the banking 612 00:37:31,160 --> 00:37:33,920 Speaker 1: area because of flat curves and things like that. Um. 613 00:37:34,000 --> 00:37:36,240 Speaker 1: So you've got chunks of the market in the value 614 00:37:36,280 --> 00:37:39,440 Speaker 1: area that that looked pretty attractive relative to some of 615 00:37:39,440 --> 00:37:42,640 Speaker 1: the growthier segments or some of the again stable areas. 616 00:37:42,840 --> 00:37:44,959 Speaker 1: Device left because thank you so much for sitting group. 617 00:37:54,320 --> 00:38:00,799 Speaker 1: It has been an exceptional week of smart conversation on economics, finance, investment, 618 00:38:00,880 --> 00:38:05,560 Speaker 1: in international relations. This job's day is always we feel 619 00:38:05,560 --> 00:38:08,960 Speaker 1: gifted and now joining us with a wonderful perspective from 620 00:38:09,040 --> 00:38:12,920 Speaker 1: Pimco Yakum Fell's um actual Fels. I don't even know 621 00:38:12,960 --> 00:38:16,840 Speaker 1: where to begin, other than I think I'm where the 622 00:38:16,920 --> 00:38:21,279 Speaker 1: Yakum Fell's research notes of four and five and eight 623 00:38:21,360 --> 00:38:25,759 Speaker 1: years ago told us where will be? Are we at 624 00:38:25,800 --> 00:38:29,520 Speaker 1: the beginning of the disintegration of core Europe? I don't 625 00:38:29,520 --> 00:38:32,520 Speaker 1: think so, Tom, This is not the beginning of disintegration 626 00:38:32,760 --> 00:38:35,279 Speaker 1: in in core Europe. I think Europe is going through 627 00:38:35,280 --> 00:38:39,560 Speaker 1: a difficult time, but I think policymakers have learned something 628 00:38:39,680 --> 00:38:43,560 Speaker 1: during the crisis, and I think there's now much less 629 00:38:43,600 --> 00:38:46,759 Speaker 1: appetite than there might have been a few years ago 630 00:38:47,040 --> 00:38:52,400 Speaker 1: for allowing this construct, this very difficult and complicated construct 631 00:38:52,440 --> 00:38:57,480 Speaker 1: of the Euro to disintegrate. So UM, I think they 632 00:38:57,480 --> 00:39:01,640 Speaker 1: will continue to model through and I think that's that's 633 00:39:01,640 --> 00:39:05,759 Speaker 1: really what's going on, muddling through UM and trying to 634 00:39:05,960 --> 00:39:11,440 Speaker 1: gradually make the Euro a more solid currency. Yeah, but 635 00:39:11,520 --> 00:39:14,640 Speaker 1: how do you do that without a fiscal authority? The 636 00:39:14,680 --> 00:39:18,680 Speaker 1: problem they've had all along, Yeah, exactly, Mike. So I 637 00:39:18,719 --> 00:39:21,719 Speaker 1: think the way it works is that Europe only progresses 638 00:39:21,960 --> 00:39:25,839 Speaker 1: through crisis We've seen that again and again. Right now, 639 00:39:25,880 --> 00:39:29,280 Speaker 1: it's a half built house. We have a monetary union, 640 00:39:30,120 --> 00:39:34,040 Speaker 1: we have maybe half of a banking union in Europe. 641 00:39:34,080 --> 00:39:38,120 Speaker 1: It's not complete yet because there's no joint deposit insurance 642 00:39:38,200 --> 00:39:42,120 Speaker 1: for example, UM and as as you noted, we don't 643 00:39:42,160 --> 00:39:46,400 Speaker 1: have a fiscal union yet. So it's a half built house. 644 00:39:46,640 --> 00:39:50,640 Speaker 1: And what usually happens is whenever you head into a crisis, 645 00:39:50,680 --> 00:39:54,160 Speaker 1: the next crisis in Europe, they are making more progress 646 00:39:54,920 --> 00:39:59,320 Speaker 1: towards that union. So I think you probably need another 647 00:39:59,680 --> 00:40:03,600 Speaker 1: cry is to make that next step towards the fiscal union. 648 00:40:04,120 --> 00:40:07,399 Speaker 1: Does that keep the world until they figure this out? 649 00:40:09,520 --> 00:40:12,440 Speaker 1: Is it weighing on global growth for a long time 650 00:40:12,480 --> 00:40:16,960 Speaker 1: to come? I think it's yes, it's weighing on global 651 00:40:17,040 --> 00:40:20,279 Speaker 1: growth in the sense that it is weighing down on 652 00:40:20,440 --> 00:40:25,319 Speaker 1: European growth. UM, it creates uncertainty, or it adds to 653 00:40:25,600 --> 00:40:30,680 Speaker 1: uncertainty about the economic outlook, and so there's always a 654 00:40:30,719 --> 00:40:34,359 Speaker 1: residual risk that something goes wrong in Europe, that we're 655 00:40:34,360 --> 00:40:37,439 Speaker 1: heading into the next crisis. And in that sense, yes, 656 00:40:37,560 --> 00:40:42,680 Speaker 1: it's it is weighing down on global growth. But unfortunately, UM, 657 00:40:42,760 --> 00:40:45,719 Speaker 1: that's not going to change anytime soon. Are we on 658 00:40:45,800 --> 00:40:49,000 Speaker 1: a house of cards? I say this, yeahkum fells because 659 00:40:49,000 --> 00:40:51,399 Speaker 1: the dowages to the eighteen thousand. It's been there many 660 00:40:51,440 --> 00:40:56,440 Speaker 1: times before, up hundred eighteen points of vix positively fells 661 00:40:56,560 --> 00:40:59,799 Speaker 1: like thirteen point seven five. I mean, I guess it's 662 00:40:59,800 --> 00:41:03,000 Speaker 1: all clear on the on the stock front, but the 663 00:41:03,080 --> 00:41:07,640 Speaker 1: other the here's bubbles From an economic standpoint, does yakham 664 00:41:07,719 --> 00:41:13,600 Speaker 1: Fell suggests are modern distortions have placed us into financial bubbles? 665 00:41:14,200 --> 00:41:17,280 Speaker 1: I don't think we're seeing a bubble in the stock market. 666 00:41:17,400 --> 00:41:20,040 Speaker 1: I think the stock market is I mean, valuations are 667 00:41:20,080 --> 00:41:25,440 Speaker 1: not cheap, Valuations are you know, above average, somewhat elevated. 668 00:41:26,320 --> 00:41:28,799 Speaker 1: But we are in a new environment where we have 669 00:41:28,920 --> 00:41:32,160 Speaker 1: a much much lower neutral rate of interest, what we 670 00:41:32,200 --> 00:41:36,239 Speaker 1: call the new neutral here at PIMCO. And if you 671 00:41:36,320 --> 00:41:40,040 Speaker 1: think that this environment will prevail, that we will continue 672 00:41:40,040 --> 00:41:42,920 Speaker 1: to live in a low interest rate environment, then I 673 00:41:42,960 --> 00:41:46,840 Speaker 1: think that justifies higher stock valuations. I wouldn't call this 674 00:41:46,960 --> 00:41:50,480 Speaker 1: a bubble unless you believe that the bond market is 675 00:41:50,520 --> 00:41:53,000 Speaker 1: a bubble. But I don't think the bond market is 676 00:41:53,120 --> 00:41:55,759 Speaker 1: in a bubble. I think what we're seeing here is 677 00:41:55,800 --> 00:41:59,759 Speaker 1: that the equilibrium interest rate, what the fat calls are 678 00:42:00,040 --> 00:42:04,600 Speaker 1: star is very low. It's around zero, maybe even negative. 679 00:42:05,160 --> 00:42:08,800 Speaker 1: And if that is the case, then you know stocks 680 00:42:08,960 --> 00:42:12,480 Speaker 1: are not massively overvalued. So I wouldn't I wouldn't talk 681 00:42:12,480 --> 00:42:16,440 Speaker 1: about a bubble here. It's just a new environment, something 682 00:42:16,480 --> 00:42:19,000 Speaker 1: that we've called the new normal and the new neutral. 683 00:42:19,080 --> 00:42:23,760 Speaker 1: Does the accommodation provided by the FED, the European Central 684 00:42:23,760 --> 00:42:26,759 Speaker 1: Bank and the Bank in Japan at all? Does it 685 00:42:27,040 --> 00:42:30,560 Speaker 1: matter anymore? Is it doing anything anymore? Well, I I 686 00:42:30,640 --> 00:42:35,800 Speaker 1: still think that monetary policy is effective. There are clearly 687 00:42:35,840 --> 00:42:38,960 Speaker 1: diminishing returns to monetary easing, so in a way you 688 00:42:38,960 --> 00:42:41,839 Speaker 1: could argue they have to do ever more to get 689 00:42:41,840 --> 00:42:45,320 Speaker 1: the same small effect. But I would say we're still 690 00:42:45,520 --> 00:42:49,279 Speaker 1: in an environment where the returns to monetary policy, to 691 00:42:49,360 --> 00:42:54,560 Speaker 1: monetary easing are positive, even though they are diminishing. Um. 692 00:42:54,600 --> 00:42:57,640 Speaker 1: But it is a worry that we still have to 693 00:42:57,680 --> 00:43:01,759 Speaker 1: rely on monetary policy as almost the only game in town. 694 00:43:01,880 --> 00:43:04,799 Speaker 1: Would be much better if we've got some support, at 695 00:43:04,840 --> 00:43:07,960 Speaker 1: least some support, some more support from fiscal policy. I 696 00:43:07,960 --> 00:43:11,680 Speaker 1: believe Italian banks need support. You're you're truly an expert 697 00:43:11,719 --> 00:43:14,160 Speaker 1: and as I put you in a category with Charles 698 00:43:14,160 --> 00:43:16,799 Speaker 1: White Plots and Paul de Iguar and others that have 699 00:43:16,960 --> 00:43:20,879 Speaker 1: really thought about European dynamics, how would you what would 700 00:43:20,880 --> 00:43:25,440 Speaker 1: be the best practice for Chancellor Miracle in assisting Italy 701 00:43:26,040 --> 00:43:30,440 Speaker 1: after years of Italian I responsibility. I think what Italy 702 00:43:30,480 --> 00:43:33,640 Speaker 1: needs is a clean up of its banking system. I think, 703 00:43:34,080 --> 00:43:37,280 Speaker 1: you know, everybody realizes that in Europe. The only debate 704 00:43:37,320 --> 00:43:40,839 Speaker 1: now is how do you do that within the existing 705 00:43:41,280 --> 00:43:47,360 Speaker 1: legal framework, especially the bank resolution framework. So I think, um, 706 00:43:47,440 --> 00:43:50,000 Speaker 1: what needs to happen, and I think what will eventually 707 00:43:50,040 --> 00:43:53,279 Speaker 1: happen is that Italy will be allowed to clean up 708 00:43:53,320 --> 00:43:57,239 Speaker 1: its banks, to put money into the banks, to do 709 00:43:57,360 --> 00:44:01,239 Speaker 1: something like a we'll call it a top program for 710 00:44:01,320 --> 00:44:05,600 Speaker 1: the Italian banks UM that addresses the non performing loan 711 00:44:05,680 --> 00:44:09,400 Speaker 1: issues and that puts the banks on a more solid 712 00:44:09,719 --> 00:44:12,640 Speaker 1: capital base. I think this will eventually happen, but as 713 00:44:12,719 --> 00:44:15,800 Speaker 1: usual in Europe right there's a lot of debate around 714 00:44:16,360 --> 00:44:18,920 Speaker 1: how to do it, how to do it within the 715 00:44:18,960 --> 00:44:23,719 Speaker 1: existing legal framework? UM. And the big issue is will 716 00:44:23,800 --> 00:44:27,960 Speaker 1: we get a bail in of creditors in the Italian banks. 717 00:44:28,040 --> 00:44:30,080 Speaker 1: That's really the debate because as you know, there are 718 00:44:30,080 --> 00:44:33,680 Speaker 1: a lot of retail investors who bought subordinated debt, debt 719 00:44:33,840 --> 00:44:37,920 Speaker 1: of the Italian banks, Italian retail investors who were made 720 00:44:38,320 --> 00:44:41,000 Speaker 1: to believe that this is a safe investment. You mentioned 721 00:44:41,000 --> 00:44:43,440 Speaker 1: the savings glood. I would say some of that savings 722 00:44:43,480 --> 00:44:46,759 Speaker 1: glad is not individuals but as corporations, which is this 723 00:44:46,880 --> 00:44:52,160 Speaker 1: whole arch idea of creating investment. Let's start on the 724 00:44:52,160 --> 00:44:56,200 Speaker 1: supply side. Is this an age of oversupply? Yes, I 725 00:44:56,239 --> 00:45:00,319 Speaker 1: think we have over supply um of savings. As you 726 00:45:00,360 --> 00:45:04,719 Speaker 1: already mentioned, we have over supply of capacity, particularly in 727 00:45:04,760 --> 00:45:09,959 Speaker 1: the manufacturing sector, and most of that over capacities in China. Yeah, 728 00:45:09,960 --> 00:45:12,600 Speaker 1: but over supply in the sense that when you talk 729 00:45:12,640 --> 00:45:19,080 Speaker 1: about savings glut, it's fueled by individuals. Demographics plays a role. 730 00:45:19,160 --> 00:45:22,880 Speaker 1: People have to and want to save more for their retirement, 731 00:45:23,560 --> 00:45:27,200 Speaker 1: and corporates are holding cash on their balance sheet. Um, 732 00:45:27,239 --> 00:45:30,600 Speaker 1: they're not investing in the real economy. They're using some 733 00:45:30,680 --> 00:45:33,319 Speaker 1: of the cash to buy back their own stock. But 734 00:45:33,360 --> 00:45:37,040 Speaker 1: there's a very little investment um. But maybe Tom, maybe 735 00:45:37,320 --> 00:45:41,000 Speaker 1: this is because we move into an age into a 736 00:45:41,080 --> 00:45:45,800 Speaker 1: time where you require less capital. Our economy is becoming 737 00:45:45,840 --> 00:45:51,319 Speaker 1: more is becoming more services dominated. Also, new technologies mean 738 00:45:51,400 --> 00:45:55,280 Speaker 1: you need less capital. So there's just less neat for 739 00:45:55,280 --> 00:45:58,720 Speaker 1: for capex and for business investment. Could the service sector 740 00:45:58,840 --> 00:46:02,640 Speaker 1: generate jobs if that's the case, Oh, yes, the service 741 00:46:02,640 --> 00:46:05,359 Speaker 1: sector is generating a lot of jobs, and we saw 742 00:46:05,440 --> 00:46:08,920 Speaker 1: this in this job report again, that's really where the 743 00:46:09,000 --> 00:46:12,399 Speaker 1: jobs are created. The problem is that many of these 744 00:46:12,480 --> 00:46:16,600 Speaker 1: jobs are low productivity and low wage jobs. So what 745 00:46:16,680 --> 00:46:19,399 Speaker 1: we're seeing in the economy in the US but also 746 00:46:19,440 --> 00:46:24,520 Speaker 1: in other economies, is that technology and globalization has led 747 00:46:24,600 --> 00:46:29,600 Speaker 1: to job destruction of high productivity jobs, particularly in the 748 00:46:29,640 --> 00:46:34,120 Speaker 1: manufacturing sector. And many of those workers who get displaced 749 00:46:34,160 --> 00:46:38,279 Speaker 1: in the manufacturing sector eventually end up in the service sector, 750 00:46:38,320 --> 00:46:42,640 Speaker 1: where they earn lower average wages and where productivity is lower. 751 00:46:42,640 --> 00:46:45,960 Speaker 1: And maybe that's one of the explanations for why productivity 752 00:46:46,000 --> 00:46:48,879 Speaker 1: growth has slowed so much in the US. Well, there's 753 00:46:49,200 --> 00:46:52,960 Speaker 1: a question as to whether it's a it's a tax 754 00:46:53,040 --> 00:46:56,879 Speaker 1: policy issue, and Congress can change that. I wonder if 755 00:46:56,920 --> 00:47:01,080 Speaker 1: it's to what extent it's an uncertainty isshoe, it's a 756 00:47:01,480 --> 00:47:03,560 Speaker 1: people in the c suite don't know what's going on, 757 00:47:03,640 --> 00:47:07,760 Speaker 1: and there's always been something over the last couple of years, 758 00:47:07,880 --> 00:47:11,120 Speaker 1: and just better for them and their quarterly earnings to 759 00:47:11,160 --> 00:47:14,759 Speaker 1: focus on cutting costs rather than making investments that who 760 00:47:14,800 --> 00:47:16,640 Speaker 1: knows how it's gonna turned out. Yeah, right, I mean 761 00:47:16,920 --> 00:47:22,319 Speaker 1: uncertainty does play a role. There's political uncertainty, there's uncertainty 762 00:47:22,400 --> 00:47:25,400 Speaker 1: over the slowdown in China and what it means for 763 00:47:25,440 --> 00:47:28,600 Speaker 1: the global economy and so on. So that's clearly also 764 00:47:28,640 --> 00:47:32,320 Speaker 1: a contributing factor. But again, I think the bigger trend 765 00:47:32,480 --> 00:47:36,040 Speaker 1: is that there is just less neat for capital for 766 00:47:36,160 --> 00:47:41,040 Speaker 1: business investment um in our modern economies, and this adds 767 00:47:41,080 --> 00:47:44,719 Speaker 1: to the global savings glut. There's there's less demand for 768 00:47:44,800 --> 00:47:49,160 Speaker 1: the savings that get generated for business investment, and I 769 00:47:49,160 --> 00:47:52,440 Speaker 1: think that's the main reason why the equilibrium interest rate, 770 00:47:52,480 --> 00:47:55,120 Speaker 1: the neutral interest rate, is so low. It may even 771 00:47:55,120 --> 00:47:58,440 Speaker 1: be negative. Wow, I don't believe, Mike, I've ever heard that. 772 00:47:58,560 --> 00:48:02,440 Speaker 1: We we We've heard from some Fed officials who think 773 00:48:02,440 --> 00:48:05,439 Speaker 1: it could be that low, and certainly um the Fed 774 00:48:05,600 --> 00:48:09,239 Speaker 1: staff has argued it could be that low, which would 775 00:48:09,280 --> 00:48:12,760 Speaker 1: imply that what we're going to see is real rates 776 00:48:12,920 --> 00:48:15,600 Speaker 1: very low for a very long time. And yet we're 777 00:48:15,600 --> 00:48:21,200 Speaker 1: not We're not getting a monetary associate response, uh impulse 778 00:48:21,280 --> 00:48:24,640 Speaker 1: to that. Yeah, that's right. I mean interest rates are 779 00:48:24,719 --> 00:48:28,279 Speaker 1: much lower than the historical norm, but they have been 780 00:48:28,360 --> 00:48:30,880 Speaker 1: low for a long time and we haven't really seen 781 00:48:30,960 --> 00:48:34,640 Speaker 1: an overheating economy, So that tells you that the natural 782 00:48:34,680 --> 00:48:37,680 Speaker 1: interest rate is low. This also means that the current 783 00:48:37,719 --> 00:48:42,680 Speaker 1: policy stances maybe less expansionary than many people think. And 784 00:48:42,719 --> 00:48:45,200 Speaker 1: I think that also puts limits on the extent of 785 00:48:45,239 --> 00:48:48,520 Speaker 1: which the FED will be able to raise interest rates. Well, okay, 786 00:48:48,640 --> 00:48:51,160 Speaker 1: And and within this, it's lovely to do on a 787 00:48:51,200 --> 00:48:54,640 Speaker 1: Friday to sharpen the mind for the weekend. Within this, 788 00:48:54,840 --> 00:48:58,400 Speaker 1: the dynamic is price change in currency. Let's start with 789 00:48:58,480 --> 00:49:01,319 Speaker 1: price change. If you drive down to a zero or 790 00:49:01,360 --> 00:49:06,480 Speaker 1: a negative terminal value, by definition, you bring in disinflation 791 00:49:06,520 --> 00:49:10,640 Speaker 1: and deflation to equiliberate back to a positive return. Right, 792 00:49:10,840 --> 00:49:14,680 Speaker 1: So you're just assuming disinflation forever. Well, I think that's 793 00:49:14,719 --> 00:49:18,160 Speaker 1: clearly been the trend over the past ten years or so, 794 00:49:18,480 --> 00:49:21,360 Speaker 1: and I don't think the trend is over yet, but eventually, 795 00:49:21,440 --> 00:49:24,719 Speaker 1: I think when we get bolder policy responses that I'm 796 00:49:24,719 --> 00:49:28,799 Speaker 1: not talking monetary policy now, I'm talking fiscal policy. If 797 00:49:28,840 --> 00:49:32,440 Speaker 1: we get bolder fiscal policy responses, You've mentioned tax cuts 798 00:49:32,440 --> 00:49:36,759 Speaker 1: early on, I would add higher government spending. I think 799 00:49:36,800 --> 00:49:40,640 Speaker 1: that's when you could start to see some inflation coming in, 800 00:49:40,920 --> 00:49:43,680 Speaker 1: it pushes back against those trends, right, and then if you, 801 00:49:43,719 --> 00:49:46,640 Speaker 1: if you, if you then throw in another emerging trend, 802 00:49:46,719 --> 00:49:50,440 Speaker 1: which is the trend towards more protectionism, and you know, 803 00:49:50,560 --> 00:49:55,400 Speaker 1: the trend towards more redistribution, which is the response to 804 00:49:55,920 --> 00:49:59,200 Speaker 1: the discontent we see in the in the political area. 805 00:49:59,280 --> 00:50:01,319 Speaker 1: Then I think you could actually end up in a 806 00:50:01,400 --> 00:50:05,879 Speaker 1: situation where inflation starts to surprise on the upside. And 807 00:50:05,960 --> 00:50:08,399 Speaker 1: as we discussed on this program last week, I think 808 00:50:08,440 --> 00:50:10,960 Speaker 1: the longer term outlook for the global economy is actually 809 00:50:11,000 --> 00:50:15,959 Speaker 1: for stag inflation rather than the current stag nation and disinflation. 810 00:50:16,320 --> 00:50:19,040 Speaker 1: Does all of this talk benefit the exorbitant privilege of 811 00:50:19,040 --> 00:50:21,800 Speaker 1: the dollar. I think the dollar is still the best 812 00:50:21,920 --> 00:50:24,879 Speaker 1: of a bad bunch. So I think the risk here 813 00:50:25,000 --> 00:50:27,919 Speaker 1: is rather that the dollar strengthens too much, rather than 814 00:50:28,239 --> 00:50:31,719 Speaker 1: that it weakens. And you know, usually when times get 815 00:50:31,800 --> 00:50:34,399 Speaker 1: bad in the global economy, when they get really bad, 816 00:50:34,560 --> 00:50:38,200 Speaker 1: then the dollar strengthens. So I think the risk here 817 00:50:38,280 --> 00:50:41,480 Speaker 1: is rather that we see a stronger than a week 818 00:50:41,560 --> 00:50:44,240 Speaker 1: or dollar. How strong though we we saw a big 819 00:50:44,280 --> 00:50:47,040 Speaker 1: move up in two thousand fourteen, Then it's essentially treated 820 00:50:47,080 --> 00:50:50,359 Speaker 1: sideways within a with a band for the last year 821 00:50:50,480 --> 00:50:52,640 Speaker 1: or so. The kind of the bottom line question is 822 00:50:52,680 --> 00:50:54,680 Speaker 1: how worried does the FED get, how much of an 823 00:50:54,680 --> 00:50:56,719 Speaker 1: impact does it have on the US economy. Well, I 824 00:50:56,719 --> 00:50:58,680 Speaker 1: think the lesson of last year, when when the dollar 825 00:50:58,719 --> 00:51:01,759 Speaker 1: strengthened so much was at too strong a dollar is 826 00:51:01,800 --> 00:51:04,120 Speaker 1: a bad thing for the global economy and also for 827 00:51:04,200 --> 00:51:06,640 Speaker 1: the U S. It titans financial conditions in the US, 828 00:51:06,880 --> 00:51:09,200 Speaker 1: and it was bad news for all the dollar debtors 829 00:51:09,239 --> 00:51:12,719 Speaker 1: in emerging markets. Plus it led to a reaction from 830 00:51:12,800 --> 00:51:15,840 Speaker 1: the Chinese, who did not want to appreciate alongside the 831 00:51:15,840 --> 00:51:18,239 Speaker 1: dollar anymore. So I think we are now in a 832 00:51:18,360 --> 00:51:22,000 Speaker 1: broad trading range for the dollar. In a broad sideways 833 00:51:22,040 --> 00:51:25,440 Speaker 1: trading range, there's a natural tendency for the dollar to appreciate, 834 00:51:25,880 --> 00:51:28,520 Speaker 1: but I think central banks, including the FED, will stem 835 00:51:28,560 --> 00:51:31,239 Speaker 1: against that. This is another reason for the FED to 836 00:51:31,320 --> 00:51:34,960 Speaker 1: be very, very cautious in raising interest rates, because if 837 00:51:35,000 --> 00:51:38,160 Speaker 1: they get too aggressive, the dollar goes through the roof, 838 00:51:38,400 --> 00:51:41,880 Speaker 1: then you get another Chinese reaction in terms of appreciation, 839 00:51:42,040 --> 00:51:45,279 Speaker 1: and I think that that's something that is is a 840 00:51:45,280 --> 00:51:48,360 Speaker 1: big worry for the FED. After what happened last August 841 00:51:48,440 --> 00:51:52,680 Speaker 1: and earlier this year with an operative phraser through the roof. Yeah, 842 00:51:52,880 --> 00:51:55,600 Speaker 1: fels thank you so much for allowing us to finish 843 00:51:55,640 --> 00:52:00,719 Speaker 1: strong on this most interesting dame. Mr fels Is with PIMCO. 844 00:52:02,560 --> 00:52:06,640 Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and 845 00:52:06,719 --> 00:52:12,120 Speaker 1: listen to interviews on iTunes, SoundCloud, or whichever podcast platform 846 00:52:12,200 --> 00:52:16,319 Speaker 1: you prefer. I'm on Twitter at Tom Keane, Michael McKee 847 00:52:16,360 --> 00:52:19,960 Speaker 1: is at Economy Before the podcast. You can always catch 848 00:52:20,040 --> 00:52:22,600 Speaker 1: us worldwide. I'm Bloomberg Radio