Speaker 1: Yea. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Lee. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. So
Speaker 1: let's start with emerging markets. First it was Turkey, then Argentina,
Speaker 1: now Brazil. The some pain emerging in Am and e
Speaker 1: M central bankers are asking the Fed for help. Indonesia's
Speaker 1: new central bank chief joined his counterpart in India in
Speaker 1: calling on the Federal Reserve to be more mindful of
Speaker 1: the global repercussions of policy. Technik jointed me to discusses.
Speaker 1: David Balin, I'm really pleased to say who joins us
Speaker 1: here in New York City Private Bank Global head of Investments.
Speaker 1: Good morning, David, Good morning, Thank you for having me.
Speaker 1: Another central bank Kaike, this one coming from Turkey and
Speaker 1: e M is constantly responding now to precious coming from
Speaker 1: our swhere. Talk to me about the pain that e
Speaker 1: M could be about sick out through Well, let's talk
Speaker 1: about you know what's really happening in the sense that
Speaker 1: you've got um the US actually sort of sucking up
Speaker 1: capital because you had a huge, you know, tax um
Speaker 1: overhaul in the United States which has created both fiscal stimulus,
Speaker 1: has created a larger deficit at the same time that
Speaker 1: the FED is actually uh selling securities back to the market,
Speaker 1: you know, and raising rates. So this is sort of
Speaker 1: one two three punch for emerging market currency. So that's
Speaker 1: the what's what's taking place now. The emerging markets have
Speaker 1: different stories. If we take a look at Asian emerging markets,
Speaker 1: their currencies have done better. If you take a look
Speaker 1: at Latin America and Turkey, they've done worse. And in
Speaker 1: those circumstances. It really is the fact that they've got
Speaker 1: their own economic issues and growth issues that are taking place.
Speaker 1: So you know, there's a lot going on. They're not
Speaker 1: going to get much help from the FED. The FED
Speaker 1: is going to continue along its policy exactly as it
Speaker 1: intends to over the course of the next eighteen months.
Speaker 1: So they're gonna have to make an independent decision about
Speaker 1: what their reach should be and that and they're still
Speaker 1: going to be under currency pressure. In my mind in
Speaker 1: even sexture twelve months. This is what I was going
Speaker 1: to ask you about, just looking at what J. Powell
Speaker 1: has said very recently in the last month. This was
Speaker 1: a month ago, almost to the day. This was J
Speaker 1: p the Chairman of the Federal Reserve. Monetary stimulus by
Speaker 1: the FED and other advanced economy central bankers played a
Speaker 1: relatively limited role in the search of capital flows to
Speaker 1: emerging markets. There is good reason to think that the
Speaker 1: normalization of monetary policies and advanced economies should continue to
Speaker 1: prove manageable for e ms. What do you think of
Speaker 1: that statement from the Chairman of the Federal Reserve UM
Speaker 1: It's very It's supposed to be a calming statement in
Speaker 1: indicating that everything will happen gradually. And you know, in
Speaker 1: his defense, if you take a look at the speed
Speaker 1: with which the feed is moving, given the unemployment rate
Speaker 1: in the United States and different debates about inflation, you
Speaker 1: could argue that the Fed is moving very deliberately and
Speaker 1: relatively slowly. However, if you were to look at that
Speaker 1: from the emerging markets perspective, you would sit there and say,
Speaker 1: my goodness, you can imagine that there could be two
Speaker 1: four sixth rate hikes from here, and that that's gonna
Speaker 1: have a materially negative impact on on on emerging market currency.
Speaker 1: So again, I think what he's seeing is we're going
Speaker 1: to do this um and he's not really holding their
Speaker 1: view to any quarter whatsoever. So if you're just churning
Speaker 1: in more pain than emerging markets in Brazil in the
Speaker 1: last couple of days, we've seen it in Argentina, we've
Speaker 1: seen it in Turkey. Turkey hiked interest rates in an
Speaker 1: emergency meeting just a couple of weeks ago. They've hiked
Speaker 1: interest rates again at the scheduled meeting today, taking rates
Speaker 1: up to seventeen point seven five. A rally in the
Speaker 1: Turkish lira, taking dollar lira back through four fifty four
Speaker 1: forty six forty one is how we're trading in the
Speaker 1: here and now, Tom Keane, lots going on in the
Speaker 1: m It's extraordinary new. So I did not expect this
Speaker 1: today for a Thursday the economics. The economist didn't expect
Speaker 1: another hike from Turkey today either. And you know, I'm
Speaker 1: working out right now. I'll function and I'll eventually get
Speaker 1: it done and get it out on Twitter, Bloomberg Radio,
Speaker 1: you'll see it first. But you take that one week
Speaker 1: repo Turkey rate, it's like their Fed Funds target rate.
Speaker 1: Whatever seventeen and three quarters percent less twelve percent inflation.
Speaker 1: I think, John, the math is, that's a five percent
Speaker 1: real interest rate, David Balan is compared to real rates
Speaker 1: as they look west to Europe or frankly as they
Speaker 1: look self more troubled economies. I mean, that is an
Speaker 1: unsustainable real rate for any economy general. That's right, um.
Speaker 1: And certainly if you take a look at it compared
Speaker 1: to to the you know, the developed world, where you
Speaker 1: have you know, zero arguably negative rates in terms of
Speaker 1: what you're earning. Certainly across across Europe, that's exactly right. Um.
Speaker 1: You know, Turkey is is its own case, and I
Speaker 1: think we know by focusing on it, you actually we
Speaker 1: have to look at the emerging markets as a whole
Speaker 1: and and there I think the picture is quite different. Um.
Speaker 1: You know, they didn't get the benefits of Kwei and
Speaker 1: they're they're gonna have a little bit of pain as
Speaker 1: QUI comes off. And so it's gonna be at the
Speaker 1: end of the day for an investor to look at
Speaker 1: the actual economy and to look at the value of
Speaker 1: those stocks, and to look at the growth rate of
Speaker 1: earnings in those companies and their ability obviously to handle
Speaker 1: their their own foreign currency risk, and and and and
Speaker 1: in general, I have to say that that in contrast,
Speaker 1: you know, we think that you know, three quarters of
Speaker 1: the emerging market economies are actually going to be a
Speaker 1: decent place to put money um over the course of
Speaker 1: the next couple of years. So I do agree that
Speaker 1: these are flashpoints. But on the other hand, as an investor,
Speaker 1: I don't look upon them as bell weathers. Let's get
Speaker 1: to the three quotas. What are the three quartes? So
Speaker 1: the quota that you don't want to be in, well,
Speaker 1: I mean certainly Turkey would be a good example of that,
Speaker 1: and and and and in my mind Russia as well,
Speaker 1: which is very very um you know, never diversified, never
Speaker 1: diversified away from from oil. But if you were to
Speaker 1: look at you know, basically all across all across Asia,
Speaker 1: if you were to look at at Latin America as
Speaker 1: a whole, uh, if you were to look at the
Speaker 1: sort of multinational companies operating there, if you were to
Speaker 1: look at everything when it comes to mining, whether it
Speaker 1: comes to actual agricultural values companies, these companies are in
Speaker 1: some way cases very very inexpensive and healthy. Remember that
Speaker 1: they've had a chance to repair their balance sheets as well.
Speaker 1: It's not as if only U S companies are only
Speaker 1: European companies are only easier companies have benefited. So we
Speaker 1: when we look at individual baskets of companies and their
Speaker 1: ability to sort of get major shares of market, we
Speaker 1: think that they're quite quite uh dupily approached. There is
Speaker 1: this hope that in latam and let's take Brazil as
Speaker 1: one example, there will be this liberalization, they will move
Speaker 1: towards free markets and there will be great investable opportunities.
Speaker 1: What we've seen in the last month with a country
Speaker 1: like Petro Bass is ultimately, when crude prices went up,
Speaker 1: when petrol prices, gas prices went up, the truckers went
Speaker 1: on strike and the government lent on Petro Bass to
Speaker 1: get rid of the CEO. The CEO goes just like that.
Speaker 1: That's how quickly things move and stops, and all of
Speaker 1: a sudden we have to rethink Brazil. It's Brazil kind
Speaker 1: to be that bastion of free markets and capitalism with
Speaker 1: available investable opportunities. The last month, the lesson is maybe not,
Speaker 1: maybe not, but but I think that you know, that's
Speaker 1: not how you can invest looking at the last month.
Speaker 1: And you also have to remember that they're in a
Speaker 1: cycle now where they have the same type of political issue.
Speaker 1: They can choose the middle of the road candidate, far left,
Speaker 1: far right. All of it's still alive right now. Polls
Speaker 1: are very fluid, the candidates themselves are not, you know,
Speaker 1: especially dynamic, and so you know, you can't make it.
Speaker 1: The judgment. Our view on Brazil in terms of where
Speaker 1: it is and its economic recovery is that very very early,
Speaker 1: you know, and that for us is very very attractive.
Speaker 1: So you have to be willing to tolerate volatility in
Speaker 1: order to make these investments, and and of course you
Speaker 1: have to get paid for it at the end. You
Speaker 1: can't show me a city private bank global head of
Speaker 1: investments also lagnus with us with OURBC capital markets, and
Speaker 1: she is a student of foreign exchange and the concept
Speaker 1: elsa excuse me, it's Berry, Ike and Green, Ricardo Houseman
Speaker 1: and Ugio Paniza. Original sin in the Great Fear and
Speaker 1: the original sin of Argentina, Brazil in Turkey is you're
Speaker 1: not going to be able to go out to the
Speaker 1: debt markets because you're so troubled. How close are we
Speaker 1: to where these emerging market economies can't function in the
Speaker 1: global debt market. Well, Turkey's problem in particular is UM.
Speaker 1: It's overseas borrowing, particularly borrowing in US dollars by the
Speaker 1: corporate sector. And I think, you know, the central bank
Speaker 1: is doing what it can to bring the situation under control,
Speaker 1: having come under a lot of political pressure earlier on
Speaker 1: in the year to keep rapes low UM. I think
Speaker 1: the political leadership in Turkey has admitted and acknowledged that's
Speaker 1: really not working UM. And so today's decision by the
Speaker 1: central banker larger than expected hike UM is really throwing
Speaker 1: everything they have at the problem to try and spend
Speaker 1: the weakness in Can the tools of our textbooks and
Speaker 1: the tools of previous moments and even crisis can they
Speaker 1: work today? Or is the world of em changed? You know,
Speaker 1: A lot will depend on broader risk appetite. And what
Speaker 1: we've seen so far is global markets less willing to
Speaker 1: forgive policy mistakes. We've seen that in Argentina, see that
Speaker 1: in Turkey. UM. But this is not an em led
Speaker 1: route where the good get punished along with the bad.
Speaker 1: UM and Argentina went down this route of hiking rates
Speaker 1: substantially and somewhat stemmed there out there, Turkey is trying
Speaker 1: the same. Can it work? That's your question, Um, you know,
Speaker 1: remains to be seen. I think the problem all of
Speaker 1: these central banks are going to face is that the
Speaker 1: FED is going to be hiking rates US you are
Speaker 1: going higher, um, and that's going to put more and
Speaker 1: more pressure over the longer term. Also, just to get
Speaker 1: to the central bank response from the Federal Reserve, we're
Speaker 1: seeing a plea for help from India the central bank
Speaker 1: governor in an o heed in the Financial Times over
Speaker 1: the last week. The indones In central bank doing the
Speaker 1: same thing. This is Federal Reserve Chairman J Powell about
Speaker 1: a month ago. He's basically saying there is good reason
Speaker 1: to think that the normalization of monetary policies and advanced
Speaker 1: economies should continue to prove manageable for EMS. Is this
Speaker 1: a Federal Reserve that's increasingly less sensitive to what is
Speaker 1: happening abroad. I don't think they've ever I think they've
Speaker 1: always been sensive, let me pay my words carefully, but
Speaker 1: they've never made it their their key focus. And I
Speaker 1: think that's fair enough. You know, Channen pal has enough.
Speaker 1: One has played worrying about managing the U s economy
Speaker 1: and achieving his targets there without also worrying about the
Speaker 1: rest of the world unless it feeds through to the
Speaker 1: outlook for the US. So we saw that a couple
Speaker 1: of years ago, when you know, capital was going out
Speaker 1: of China and people were very worried about the pressure
Speaker 1: on the remombies the central bank. The FED did step
Speaker 1: back and it didn't high rates um and that was
Speaker 1: seen as quite a rational thing to do. But if
Speaker 1: this is Turkey, Argentino, countries, like Tom said, which you know,
Speaker 1: have committed the original sin, I don't think it's really
Speaker 1: the federal reserve place to sort it out for them.
Speaker 1: So I think you make a really good point, especially
Speaker 1: when these are the same countries that we're complaining about
Speaker 1: relative currency strength about five, seven, eight years ago, and
Speaker 1: now they're complaining about completely the opposite. So just in
Speaker 1: terms of em right now, over the last few months,
Speaker 1: we've heard people say, well, these are all idiosynchronic, very
Speaker 1: unique stories. Local to Turkey, another one too local to Argentina.
Speaker 1: We've got another one local to Brazil, local to India,
Speaker 1: local to Indonesia. We're starting to see it be more
Speaker 1: than just a couple of cracks, aren't we. I think
Speaker 1: we're seeing a couple of things. One is that currencies
Speaker 1: are doing what they're supposed to do, which is act
Speaker 1: as a shock absorber. You know, we've seen that in
Speaker 1: the case of Brazil, We've seen in the case of Mexico,
Speaker 1: India another good example. Turkey face is a different problem,
Speaker 1: just because so much of the borrowing has been done
Speaker 1: in foreign currency UM. And the second thing is that,
Speaker 1: more broadly speaking, we're getting into an environment where em
Speaker 1: carry trades on a wil adjusted basis no longer necessarily
Speaker 1: makes sense. You know, there's a lot of places now
Speaker 1: with in g turn um that you can get a
Speaker 1: decent amount of carry with a lot less volatility. And
Speaker 1: I think more broadly speaking, investors are taking another look
Speaker 1: at great term carry trades and thinking, actually, in relative terms,
Speaker 1: it doesn't look as bad. So what do you do
Speaker 1: opportunistically given the interesting mili we're in right now. I
Speaker 1: think they're still good trades out there. We've been trading
Speaker 1: very tactically for some time now, you know, and so
Speaker 1: we'll have our longer term fundamental views. You know, we've
Speaker 1: been calling your a dollar as you know, UM to
Speaker 1: end the year round one eighteen UM. Now that's pretty
Speaker 1: much where we are. But of course two months ago
Speaker 1: that looked like a much more barrish euro dollar call. UM.
Speaker 1: But within that I think you can find oportunistically trades
Speaker 1: that go the other way. So, for example, this week
Speaker 1: we're long. You're a cat that's working very nicely. UM.
Speaker 1: I think there's a good opportunity next week to look
Speaker 1: for some Sterling strength, potentially around the June twelve vote. Obviously,
Speaker 1: Sterling has been very hard hit in the last half
Speaker 1: hour or so, so we'll see how that picks out. UM.
Speaker 1: You know, there are good opportunities out there. You just
Speaker 1: have to be more tactical. What is your strategic dollar call?
Speaker 1: Forget about making money, you know, very trying to make
Speaker 1: money to get to St. Petersburg for Italy versus the US,
Speaker 1: but forgetting forgetting about that. Also, what's the strategic call
Speaker 1: on dollar? I think it's got to be very careful
Speaker 1: about jumping onto the bearish dollar bandwagon. And I know
Speaker 1: we've discussed this together a number of times before, UM,
Speaker 1: and I still stick to that view. I'm not saying
Speaker 1: that dollar is going to go up across the board
Speaker 1: against every single ot of currency. UM. But there are
Speaker 1: places where I think the dollar can strengthen materially dollar
Speaker 1: yen for example, UM. And there are other places where
Speaker 1: I think it pays to be a lot more cautious,
Speaker 1: UM about getting too bearish on the dollar. You know,
Speaker 1: euro dollar. I just don't see one thirty anytime soon.
Speaker 1: So I think your broader dollar call has to be
Speaker 1: looks for the opportunity and don't get carried away with
Speaker 1: the dollar barousness. I think, can we go into the
Speaker 1: capital of foreign exchange, Tom, You and I were going
Speaker 1: to see ALSA in London because cables rolling over again. UM.
Speaker 1: Sterling at one thirty three eighty four, down about two
Speaker 1: tents of one on the session Alsa Brexit politics. We
Speaker 1: don't spend a lot of time talking about it on
Speaker 1: this program for very good reason. It's been going nowhere
Speaker 1: for a long time. But Sterling is starting to look
Speaker 1: painful over the last couple of months. Just give me
Speaker 1: your thoughts. An interesting picture, you know. Obviously some live
Speaker 1: developments at the moment, speculation over David Davis and whether
Speaker 1: he was threatening to resign. UM. I do think the
Speaker 1: verte next week will be really critical, very interesting to
Speaker 1: see how the Commons will react to the Lord's amendments.
Speaker 1: You know, more than anything, I think this is one
Speaker 1: where you've absolutely got to be tactical. Um, but there
Speaker 1: could be an opportunity to look for a bit of
Speaker 1: Sterling recovery next week. Now, Selena's going to catch up
Speaker 1: with you. RBC Global Head of Effects Strategy. We don't
Speaker 1: do Brexit very much, Tom and I would say I'm
Speaker 1: happy about that because not much as being achieved between
Speaker 1: the United Kingdom and the rest of Europe. Yeah, I'll
Speaker 1: agree with the rest of Europe. But even the the
Speaker 1: day to day battles of the Conservative Party the Tories
Speaker 1: in England with each other. I'm sorry it does get
Speaker 1: lost in translation. I mean I read about it, folks.
Speaker 1: I'm trying, you know, seriously, Simon Kennedy and Flavian the
Speaker 1: rest of them are doing a great job over there
Speaker 1: trying to explain it to me. But I just I mean,
Speaker 1: David Davies is running the Brexit debate basically he is
Speaker 1: upset with the Prime Minister. He is strong leave Europe right,
Speaker 1: he wants to leave, and Mr Johnson wants to leave.
Speaker 1: What is Prime Minister may want is she's just got
Speaker 1: to try and please as many people as she possibly can,
Speaker 1: and clearly she can't do that. So I just think
Speaker 1: for most investors worldwide outside of the UK, they wake
Speaker 1: up in the morning and they're just like, tell me
Speaker 1: when I should care. And when Alista says we get
Speaker 1: into a crucial point, I feel like we've been saying
Speaker 1: the last eighteen months, we get into it. I remember
Speaker 1: that I remember the day after Brexit. We knew a
Speaker 1: ten pm the night of Brexit that it would pass,
Speaker 1: which was a shock, and I remember being with you
Speaker 1: and our London team in watching, watching, and then then
Speaker 1: you went to a Mayfair five star dinner. I went
Speaker 1: to the McDonald's at Liverpool Station and I remember this clearly,
Speaker 1: and you know, I remember the shock of the streets,
Speaker 1: whether at the McDonald's at Liverpool's. Can we tell the
Speaker 1: real story? Can we tell the real story? Were freighting
Speaker 1: as straight? You went to go to the bow tie
Speaker 1: store where was it turn Blanassa that you wanted a
Speaker 1: special boat time and then someone spotted you and said,
Speaker 1: comforts come to our Brexit party and you went for
Speaker 1: cigars and whiskey, And I went to work and did
Speaker 1: eighteen as straight. So let's at a Mayfair restaurant. That
Speaker 1: was you and I on the Brexit tour. You were
Speaker 1: in a restaurant with cigars and I was on I'll
Speaker 1: make it up too. We'll go to the mcdonals. I
Speaker 1: can't wait, I can't wait. I can't wait to actually
Speaker 1: see you that I'm gonna I'm gonna run through the
Speaker 1: rice sections please quickly, just to get one up to
Speaker 1: spade this Thursday morning, John Farrell, This is really perfect
Speaker 1: with a less forty eight hours of debate about G
Speaker 1: seven and coming into Professor Keane no relations for Stephen
Speaker 1: k e n. Stephen Keene will be with us with
Speaker 1: Kingston University the President of the United States four minutes ago.
Speaker 1: Isn't it ironic? Already? Get that? That was at channeling
Speaker 1: alanis the tweet? Isn't it ironic? Question Mark getting ready
Speaker 1: to go to the G seven in Canada to fight
Speaker 1: for our country on trade. Parent the sees we have
Speaker 1: the worst trade deals ever made close parentheses. Then off
Speaker 1: the Singapore to meet with North Korea and the nuclear problem.
Speaker 1: But back home we still have the thirteen angry Democrats
Speaker 1: pushing the which hunt. So I guess this first tweet
Speaker 1: is an all encompassing tweet. It is a good time
Speaker 1: maybe to speak on our fractured Western capitalism with Steve Keane,
Speaker 1: who has been a student of labor and of course
Speaker 1: harketing back to the work of Mr Marks of a
Speaker 1: hundred years ago, Professor Keene, the state of labor here
Speaker 1: and the professor of the level of economic growth that
Speaker 1: we're seeing is a backdrop to G seven. Which G
Speaker 1: seven country is doing best right now? That's a tough question, Tom.
Speaker 1: I think in some ways it probably is the States
Speaker 1: and Lange because Trump's uh, you know, bull in a
Speaker 1: China Shop project awaken on my policy is meant as
Speaker 1: a huge government stimulus on it's way into the economy
Speaker 1: bouts where the tax cuts and increased levels of spending.
Speaker 1: So in that sense, I think that that's top topping
Speaker 1: on top of the momentum that QE gave the economy,
Speaker 1: very expensive momentum, I might add, but it still gave
Speaker 1: it to it for the last ten years, and I
Speaker 1: think we're approaching probably a level where you're likely to
Speaker 1: finally start seeing wage rises coming through. But as I
Speaker 1: said earlier on surveillance with you it's likely to spike,
Speaker 1: it won't be a gradual rise. But what's fascinating, Stephen,
Speaker 1: this goes to the heart of your study in your
Speaker 1: decades of work. Is the wage increases going in any
Speaker 1: way to all most sum of labor or is it
Speaker 1: really defined to a gilded age narrow pie of people.
Speaker 1: It's a guilt it. We're in a guilded age, definitely,
Speaker 1: and that the real sign of a guilded age is
Speaker 1: the level of leverage the global economy has. And one
Speaker 1: side effect of that leverage. This is something which has
Speaker 1: only come out of my mathematical modeling of Minski's financial
Speaker 1: instability hypothesis, is that increase in leverage is actually paid
Speaker 1: for by the workers, even if they're doing no borrowing whatsoever.
Speaker 1: And what actually happened, effectively is an income distribution effect,
Speaker 1: where the capital hast end up with a roughly the
Speaker 1: rate of profit that leads them to reach an average
Speaker 1: level of investment, and the increasing share going to bankers
Speaker 1: comes at the expensive workers getting a lower share, and
Speaker 1: at the moment, in some ways, I think probably the
Speaker 1: worker's share of income in America and possibly globally is
Speaker 1: the lowest has been in the history of capitalism. So, Professor,
Speaker 1: big question, can the president tackle the issue off the
Speaker 1: worker's share of overall income and support global markets at
Speaker 1: the same time. And what I mean by that is,
Speaker 1: can you simultaneously have risk assets performing global markets stock markets,
Speaker 1: and at the same time have more capital go to labor. Well,
Speaker 1: not that you're hardly talking about sacrificing a lot. I
Speaker 1: mean labor's labor share used to be. You used to
Speaker 1: talk in terms of a sort of seventy thirty labor
Speaker 1: share of income, with thirty including both industrial and financial capital.
Speaker 1: Now is something in the order of sixty two. I
Speaker 1: think something about that means something above sixty five. So
Speaker 1: to get back to the previous levels is hardly going
Speaker 1: to be taking a lot off the of the industrial
Speaker 1: and financial capital. But I don't think it will even
Speaker 1: get that far. I think what's more like that to
Speaker 1: happen is once there is a set of wage rises
Speaker 1: coming through the federal reserve, will that will respond in
Speaker 1: typical neoclassical Pavlovian fashion put up interest rates, believing they're
Speaker 1: balancing the flows of the economy and completely ignoring the
Speaker 1: stock of debt private debt that's out there, and you'll
Speaker 1: see the private sector to go back into d leveraging again,
Speaker 1: and we'll go from a short, sharp inflationary boom too
Speaker 1: higher interest rates, followed by another slump as the private
Speaker 1: sector starts to cut its debt levels once more. Professor,
Speaker 1: tell me why the Federals hiking interest rates is the
Speaker 1: wrong idea? Then why why should they stop? Well, they
Speaker 1: they believe that interest rates can control the global national economy.
Speaker 1: And about twenty years ago I argued to Australia's equivalent
Speaker 1: Inquiry into the financial sector of the Wallace Committee that
Speaker 1: you simply couldn't control that when you had massive levels
Speaker 1: of debt, because it simply was too blunt and instrument.
Speaker 1: It would always come in too late and too heavy.
Speaker 1: And the same thing applies here. There is a center
Speaker 1: of the Reserve bank. All all central banks have three
Speaker 1: numbers in their heads. Two percent is their desired rate
Speaker 1: of inflation, three is the desired rate of economic growth,
Speaker 1: and four percent is where they think their interest rate
Speaker 1: should be. And that is a world in which there's
Speaker 1: no role whatsoever for private debt. So they'll they'll get
Speaker 1: the two or three four right, and I'll blow up
Speaker 1: the global economy. Stick keen. In the time that we've
Speaker 1: got with you today, I want to step back and
Speaker 1: look at some of your work and this goes back
Speaker 1: to Marxist theory and modern capitalism, which is a study
Speaker 1: of profitability. And I say this in homage to you
Speaker 1: and all sort of megden to say of the London
Speaker 1: School of economics, is our profitability today equality profitability or
Speaker 1: is it an engineered profitability? Good question, Tom, and either
Speaker 1: go over the engineered side of things. Because you're talking
Speaker 1: earlier in the show about level of share buy backs
Speaker 1: that are occurring. That is a sign of a the
Speaker 1: management of industrial capitalism that that doesn't think it has
Speaker 1: any better ideas than to hand them any back to
Speaker 1: the shareholders rather than actually investing it and innovating. So,
Speaker 1: if you want to find a really vibrant stage of
Speaker 1: American capitalism, it was the forties to the sixties where
Speaker 1: there was dramatic levels of investment and nobody would even
Speaker 1: think of handing money back to shareholders, excepted dividends from
Speaker 1: successful in your product launchers. Um that that said, we
Speaker 1: still have the outstanding characters that the billionaires like Musk
Speaker 1: and Bozis and so on, who are using their incredible
Speaker 1: fortunes for various quite off the off the scale innovative investments.
Speaker 1: But as a whole, I think it can say it's
Speaker 1: a pretty moribund and engineered level of capital. Let's reve
Speaker 1: up the scripture. Secretary Ross over with Becky Quick on
Speaker 1: CNBC right now, UM saying that there will be an
Speaker 1: enforcement team installed ZTE. This is a controversial tech story
Speaker 1: in China. Mr Ross, as a U S and ZT
Speaker 1: have reached an agreement that in itself is headline making.
Speaker 1: Steve Keene, what is your take on the new China commerce?
Speaker 1: I guess is how I would put it. Their ability
Speaker 1: to do business is that business is usual for China?
Speaker 1: Or are they gonna take a new road that President
Speaker 1: Trump and others will have to adapt to. They won't.
Speaker 1: They certainly won't take the road the Trump wants them
Speaker 1: to follow. Um. If there's not a long enough memory
Speaker 1: in China political circles to say we're getting even for
Speaker 1: the opium Wars and not about the let to America
Speaker 1: dictate them anything after that identity for two centuries ago. Um,
Speaker 1: So I think what the new model in China is
Speaker 1: that they've gone past the stage where they can rely
Speaker 1: upon credit for the private sector as a driver of
Speaker 1: economic growth. That's what they've relied upon since two thousand
Speaker 1: and ten. What they're now doing, I think is the
Speaker 1: Silk Road and all the major infrastructure projects as the
Speaker 1: driver of growth because the last thing they can afford
Speaker 1: us to have rising unemployment amongst the industrial working class
Speaker 1: in China, because Chinese are much better revolution than Americans are. Well,
Speaker 1: let's see that there, Steve King thinking so much. Greatly appreciated,
Speaker 1: and folks, whatever your beliefs and politics, I would suggest
Speaker 1: a careful study of Mr Keen, Professor Keene would be
Speaker 1: uh important because we saw Turkish leira coming in earlier.
Speaker 1: Brazil announces extra foreign exchange intervention for the second time
Speaker 1: in three days. That's an official headline again, Brazilia raises
Speaker 1: f X intervention again these are swap transactions. Is Brazilian
Speaker 1: real gets out to a three ninety one? Uh? Certainly
Speaker 1: getting near that four level gets your attention and the
Speaker 1: major headline there is the activity two times in three
Speaker 1: days on Brazilian at real right now, um, Brazil, if
Speaker 1: my eyes don't fail me three point nine zero on
Speaker 1: Brazilian real. He may not look at Brazilian real. He
Speaker 1: may not look at Turkish lera, but his luck does
Speaker 1: look at down twenty five futures up sixty five in
Speaker 1: the dough. Right now joining us, Douglas Cast of Sea
Speaker 1: Breeze Partners. Doug, you have been what I would call
Speaker 1: a supple short, which is you know when to protect yourself.
Speaker 1: How have you done with a cautious view given the
Speaker 1: quality of this bull market, which seems to be tech
Speaker 1: tech tech. Um, I have basically of the view that
Speaker 1: the market is stretched. We're at the top end of
Speaker 1: where I see the trading range for two thousand eighteen.
Speaker 1: I'm staying long, but I'm using trailing stops to short
Speaker 1: the market and basically for the purpose of immunizing my
Speaker 1: portfolio should the price momentum abruptly change, which I suspect
Speaker 1: could happen at any time. So um, you know we
Speaker 1: we are in this extraordinary market which is distorted by
Speaker 1: machines and al goes and other price momentum based strategies
Speaker 1: and products, and they result in these exaggerated short term
Speaker 1: moves and is in to market landscape in which buyers
Speaker 1: live higher and sellers live lower. Um. So it's a
Speaker 1: great environment for opportunistic and impassioned trading. I would say, Tom,
Speaker 1: not so great for the buy and whole crowd. How
Speaker 1: narrow is this market? I mean Mr Kramer dusk Star
Speaker 1: came up with saying, is it an all saying, all
Speaker 1: the time market. Well, we're in a complicated market. You know,
Speaker 1: the investment mosaic is always complicated. It's not simple to
Speaker 1: explain or simple to respond to. UM. If you consider
Speaker 1: Tom as Jonathan on the wire too, No, John's not
Speaker 1: here today, okay, okay, Hey, Then with all the great
Speaker 1: news on the earnings front, the SMP is only up
Speaker 1: about three percent year to day. So we're seeing a
Speaker 1: contraction and valuations after last year's or at a large
Speaker 1: three multiple point rise in the SMP. So the complexion
Speaker 1: of the market seems to be changing. So this year
Speaker 1: main Main Street is beating Wall Street. Last year, uh,
Speaker 1: Wall Street, the Main Street and UM. The action in
Speaker 1: the last couple of a couple of days is particularly odd.
Speaker 1: The market seems to have no sector memory from day
Speaker 1: to day. Earlier in the week, tech spurted than retail
Speaker 1: was on fire. Both were subdued yesterday and financials took
Speaker 1: over on the up side. So it strikes me that
Speaker 1: the buying and swift rotation in the last couple of
Speaker 1: days is kind of panicky and a possible event by
Speaker 1: managers to catch up. Let's bring in Pim Fox in
Speaker 1: Florida with the gas. They're about a stand in home
Speaker 1: run away from each other. And how about those Yankees.
Speaker 1: The real question of the day is whether the Yankees
Speaker 1: Pim will be going to the White House after they
Speaker 1: win the World Series. I'm just gonna let that question
Speaker 1: float somewhere over. How about the Cubs, Tom Off grand
Speaker 1: slam by Hayward? Are you kidding me? It was? It
Speaker 1: was you always want the Cubs to participate? Mr Fox Well, Doug,
Speaker 1: you know that's where I was going with the with
Speaker 1: the change in the rotation in where box are are
Speaker 1: being traded. And I'm wondering if you could just step
Speaker 1: back and give us your thoughts about passive versus active
Speaker 1: management right now and this widespread use of e T
Speaker 1: s and do you have any idea what happens if
Speaker 1: there's a big down draft in the market and people
Speaker 1: don't realize what they actually own in their E T
Speaker 1: F s. I'll be very direct, there is an underlying
Speaker 1: assumption by retail investors that the ets themselves will behave
Speaker 1: in a much more stable condition than their components, and
Speaker 1: I suspect just the opposite will will happen. And we
Speaker 1: saw this a couple of summers ago, I think it
Speaker 1: was two thousand sixteen, where they were imbalanced as an
Speaker 1: E T S VISAVI the components of the E T F.
Speaker 1: So um, we're we're in a in a very precarious
Speaker 1: time in which markets are distorted by these machines and
Speaker 1: al goes uh, and by by quant strategies like volatility, trending,
Speaker 1: and risk parity, but also importantly by leveraged and unleveraged
Speaker 1: passive ets that you mentioned. I mean this is this
Speaker 1: is a great, a great, great backdrop if you're an
Speaker 1: unemotional trader and an opportunistic trader who has no fear. Well,
Speaker 1: that's why I wanted to go next, is that the
Speaker 1: speed of market reaction can really catch people unawares, and
Speaker 1: there's an opportunity to take advantage when people react. Are
Speaker 1: you surprised by the speed of market reaction to I mean,
Speaker 1: you've written about this, yes, Yes, the discounting is extraordinarily efficient.
Speaker 1: It happens within minutes or hours um, and I think
Speaker 1: some measure it's um um. I think it's like if
Speaker 1: I can do an analog. It's like it's like accepting
Speaker 1: Trump's rhetoric before he makes a substance of policy decision.
Speaker 1: Market participants are beginning to understand that these um exaggerated
Speaker 1: short term moves are providing short term opportunities. But then
Speaker 1: you know, we have a we have an unusual backdrop.
Speaker 1: We have Deutsche Bank, Will you have an Italian dead crisis?
Speaker 1: We have a number of potential In a prior segment,
Speaker 1: three or four segments ago, maybe an hour and a
Speaker 1: half ago, Tom, you guys were talking. You were talking
Speaker 1: to a woman about the potential funding stress of US
Speaker 1: dollar dis Yeah, it was a great segments. Equities Dog Cass,
Speaker 1: the series partners, that we don't talk to him about
Speaker 1: the equity markets. Possibly we will talk to Doug Cass
Speaker 1: about the dreaded New York Yankees. Thanks for listening to
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on
Speaker 1: Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm
Speaker 1: on Twitter at Tom Keene Before the podcast, you can
Speaker 1: always catch us worldwide I'm Bloomberg Radio