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 --> 00:00:22,800 Speaker 1: best in economics, finance, investment, and international relations. Find Bloomberg 4 00:00:22,840 --> 00:00:27,280 Speaker 1: Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course 5 00:00:27,760 --> 00:00:33,040 Speaker 1: on the Bloomberg The News of the morning. Morgan Stanley 6 00:00:33,520 --> 00:00:36,479 Speaker 1: with its earnings report and it's beat on thick and 7 00:00:36,479 --> 00:00:38,720 Speaker 1: of course this is a company that does rely more 8 00:00:38,800 --> 00:00:42,560 Speaker 1: on trading with their Morgan Stanley brokerage is Brad Hints 9 00:00:42,640 --> 00:00:46,280 Speaker 1: is with us from New York University, and of course 10 00:00:46,320 --> 00:00:50,480 Speaker 1: he's been a long time analyst of the banks at 11 00:00:50,800 --> 00:00:54,000 Speaker 1: Sanford Bernstein and before that was a CFO, so he 12 00:00:54,040 --> 00:00:57,440 Speaker 1: knows these numbers. Brad. The story at Morgan Stanley and 13 00:00:57,840 --> 00:01:00,680 Speaker 1: you're better at us than digging into all this stuff. 14 00:01:00,720 --> 00:01:03,400 Speaker 1: But the story of Morgan Stanley so far seems to 15 00:01:03,400 --> 00:01:05,600 Speaker 1: be pretty much the same as we've seen at the 16 00:01:05,720 --> 00:01:09,759 Speaker 1: other banks. They're making money on trading, particularly bonds. Uh 17 00:01:09,959 --> 00:01:12,120 Speaker 1: go figure, you know, the rest of the business is 18 00:01:12,160 --> 00:01:15,880 Speaker 1: coming in okay. Plus they're holding down costs. It seems 19 00:01:15,920 --> 00:01:19,240 Speaker 1: like everybody's holding down costs. But the thing that is 20 00:01:19,240 --> 00:01:23,280 Speaker 1: is helping everyone is that trading has returned over the 21 00:01:23,319 --> 00:01:28,120 Speaker 1: past couple of months. Brexit actually has been has been 22 00:01:28,120 --> 00:01:32,880 Speaker 1: good for for government bond trading UH and UH and 23 00:01:32,959 --> 00:01:36,240 Speaker 1: certainly for foreign exchange. Now, yeah, Morgan Stanley foreign exchange 24 00:01:36,280 --> 00:01:39,720 Speaker 1: is going to be less of a contributor than than 25 00:01:39,800 --> 00:01:42,760 Speaker 1: than the government bond trading. But remember Gorman has de 26 00:01:42,920 --> 00:01:46,440 Speaker 1: emphasized that the thick business, and we've seen Morgan Stanley 27 00:01:46,440 --> 00:01:48,800 Speaker 1: cut back and cut back, so it's very impressive that 28 00:01:48,840 --> 00:01:51,320 Speaker 1: they're getting this kind of performance. It means that he's 29 00:01:51,320 --> 00:01:54,520 Speaker 1: got a lean, mean fixed income business. And I think 30 00:01:54,560 --> 00:01:57,960 Speaker 1: that's actually fixed income. Yeah, I think that's I think 31 00:01:58,000 --> 00:02:00,240 Speaker 1: that's where all these banks want to go. And and 32 00:02:00,280 --> 00:02:03,880 Speaker 1: that's very good news. The challenge that that we have 33 00:02:04,040 --> 00:02:07,080 Speaker 1: going forward is, you know, low interest rates are certainly 34 00:02:07,120 --> 00:02:10,919 Speaker 1: not good for for for these these banks. UH. Slow 35 00:02:11,000 --> 00:02:15,440 Speaker 1: economy is certainly not good for for these banks. And 36 00:02:15,440 --> 00:02:17,800 Speaker 1: and and the fact that we're seeing a slowing investment 37 00:02:17,800 --> 00:02:22,120 Speaker 1: banking business. Yeah, this is a better quarter than last quarter, 38 00:02:22,400 --> 00:02:24,960 Speaker 1: but but again, the the investment banking cycle tends to 39 00:02:24,960 --> 00:02:27,280 Speaker 1: be tied to GDP. So if you're if you don't 40 00:02:27,280 --> 00:02:29,720 Speaker 1: have a booming economy, you're not going to get that. 41 00:02:29,840 --> 00:02:33,160 Speaker 1: So you know, the the outlook remains, let's keep the 42 00:02:33,200 --> 00:02:35,400 Speaker 1: cost down. And so you know you've hit on the theme. 43 00:02:35,680 --> 00:02:39,080 Speaker 1: Costs are well. I mean, just looking at their headline 44 00:02:39,120 --> 00:02:43,080 Speaker 1: here in second quarter non compensation expenses were down eight percent. 45 00:02:43,760 --> 00:02:46,960 Speaker 1: That's the universal among all of the banks these days 46 00:02:47,080 --> 00:02:49,320 Speaker 1: is with interest rates so low, you've got it, just 47 00:02:49,400 --> 00:02:52,520 Speaker 1: cut cut, cut, that's right, that's right. And remember the 48 00:02:52,560 --> 00:02:55,359 Speaker 1: banks are they're not quite there yet, but the money 49 00:02:55,400 --> 00:03:00,440 Speaker 1: that they were expending to build the regulatory infrastructure, they're 50 00:03:00,480 --> 00:03:02,200 Speaker 1: kind of getting at the end of that. They've met 51 00:03:02,240 --> 00:03:05,160 Speaker 1: the needs of the regulatory changes that were put in, 52 00:03:05,480 --> 00:03:08,320 Speaker 1: so now you can see them some of the expense 53 00:03:08,360 --> 00:03:11,720 Speaker 1: controls began to flow in because remember, at the same 54 00:03:11,720 --> 00:03:14,040 Speaker 1: time they were cutting back over the last eight years, 55 00:03:14,200 --> 00:03:17,040 Speaker 1: they also had to be building on the on the 56 00:03:17,080 --> 00:03:21,040 Speaker 1: regulatory side, on the compliance and compare and contrast Morgan 57 00:03:21,120 --> 00:03:25,600 Speaker 1: Stanley with Golden Sex. There are two venerable names. There's 58 00:03:25,639 --> 00:03:28,359 Speaker 1: a difference, though, there's a distinction tick by tick within 59 00:03:28,360 --> 00:03:30,840 Speaker 1: the cultures of the two. What's the difference We can 60 00:03:30,840 --> 00:03:33,640 Speaker 1: think of it more from the strategy point of view. 61 00:03:33,840 --> 00:03:36,960 Speaker 1: The culture at Morgan Stanley changed with the merger and 62 00:03:37,080 --> 00:03:40,320 Speaker 1: Dean witter uh So the old Morgan Stanley investment banking 63 00:03:40,360 --> 00:03:43,440 Speaker 1: culture is long long gone. What they do have is 64 00:03:43,480 --> 00:03:46,880 Speaker 1: they have the merger with with Dean Witterer. Add to 65 00:03:47,080 --> 00:03:51,160 Speaker 1: that the Smith Party. The wealth management business is nearing 66 00:03:51,280 --> 00:03:54,760 Speaker 1: Gorman's targets, right. He wants it to be that offset 67 00:03:54,800 --> 00:03:58,400 Speaker 1: to the institutional business, and that's really important. And he's 68 00:03:58,560 --> 00:04:01,400 Speaker 1: he's done that, he's chained, he's got he's got a 69 00:04:01,440 --> 00:04:03,920 Speaker 1: different animal then when the gossip of and a different 70 00:04:03,920 --> 00:04:07,280 Speaker 1: animal precisely as you just went through the heritage of 71 00:04:07,800 --> 00:04:10,720 Speaker 1: um Dean Winter and all the challenges that were made there, 72 00:04:10,840 --> 00:04:13,880 Speaker 1: Mr Gorman coming in and saving the day. Compare that 73 00:04:14,080 --> 00:04:19,840 Speaker 1: with Paine Webber and UBS. Totally different train work, right, Yeah, exactly. 74 00:04:20,680 --> 00:04:24,800 Speaker 1: The what you've seen with UBS was an underperforming wealth 75 00:04:24,880 --> 00:04:27,520 Speaker 1: management business that has been turned around. Right. So if 76 00:04:27,560 --> 00:04:30,440 Speaker 1: we if we think of the management team that was 77 00:04:30,520 --> 00:04:34,560 Speaker 1: there there that is there. Actually they've they've improved the performance. 78 00:04:34,960 --> 00:04:39,480 Speaker 1: They still have a scale issue, and there's the there's 79 00:04:39,520 --> 00:04:42,880 Speaker 1: the challenge they face, which is there are three big 80 00:04:42,920 --> 00:04:45,440 Speaker 1: wire houses and then there's a fourth. Yeah, in mind 81 00:04:45,520 --> 00:04:48,919 Speaker 1: to me, the scale the words scale which professor hints 82 00:04:49,000 --> 00:04:52,760 Speaker 1: teaches at n y U and he doesn't scale Tuesday. 83 00:04:52,800 --> 00:04:55,880 Speaker 1: Every Tuesday they talk about scale. That's the challenge, that's 84 00:04:55,880 --> 00:04:58,240 Speaker 1: the hard thing to do well. The question that comes 85 00:04:58,240 --> 00:04:59,800 Speaker 1: to my mind, of course, is when you look at 86 00:04:59,800 --> 00:05:01,920 Speaker 1: all the these banks and Tom brought off brought up 87 00:05:02,160 --> 00:05:05,200 Speaker 1: EBS and credit Switez, not to just to pick on 88 00:05:05,279 --> 00:05:07,760 Speaker 1: the Swiss, but everybody, Barkley is doing this. Everybody wants 89 00:05:07,760 --> 00:05:10,560 Speaker 1: to be wealth managers these days. Is there enough revenue 90 00:05:10,600 --> 00:05:12,839 Speaker 1: for everybody to do that? If everybody is cilling into 91 00:05:12,880 --> 00:05:17,359 Speaker 1: the same business strategy, Well, you've you've hit on a 92 00:05:17,440 --> 00:05:19,960 Speaker 1: on a good good point on that one too, which 93 00:05:20,080 --> 00:05:22,520 Speaker 1: is you know the what are the wealth managers? What 94 00:05:22,560 --> 00:05:24,960 Speaker 1: are the wirehouses control? They control the one to three 95 00:05:25,000 --> 00:05:27,440 Speaker 1: million dollar accounts size in the United States. That's a 96 00:05:27,480 --> 00:05:32,120 Speaker 1: powerful sector, right. The scale which Tom mentioned, very important 97 00:05:32,200 --> 00:05:35,640 Speaker 1: because if you look at client assets under custody, the 98 00:05:35,680 --> 00:05:38,359 Speaker 1: client assets, and you look at pretax margins of the 99 00:05:38,360 --> 00:05:41,760 Speaker 1: wealth management beautifully correlated, just beautifully correlated, which says you 100 00:05:41,839 --> 00:05:45,240 Speaker 1: get bigger, you generate greater profitability. On the other hand, 101 00:05:45,320 --> 00:05:49,200 Speaker 1: the clients belong to the to the wealth managers themselves, 102 00:05:49,480 --> 00:05:52,359 Speaker 1: so you're running this this very difficult business of trying 103 00:05:52,400 --> 00:05:55,560 Speaker 1: to keep the best wealth managers together. It's so that 104 00:05:55,600 --> 00:05:58,000 Speaker 1: you keep the scale ups of the performance delivers. Mike 105 00:05:58,000 --> 00:06:00,480 Speaker 1: and I have been watching the pro with the official 106 00:06:00,880 --> 00:06:04,200 Speaker 1: Sanford Burnsting pen he stole on his last day at Bernstein, 107 00:06:04,839 --> 00:06:09,239 Speaker 1: watching professor un He's just going right through the press 108 00:06:09,279 --> 00:06:11,839 Speaker 1: release and is you and I both noted it was 109 00:06:11,839 --> 00:06:15,599 Speaker 1: the first thing I mentioned on air. Twenty two percent 110 00:06:15,839 --> 00:06:20,600 Speaker 1: margin on wealth management. You and I know, double digits unacceptable. 111 00:06:20,640 --> 00:06:23,159 Speaker 1: You want to get up to sixteen cents, eighteen cents, 112 00:06:23,560 --> 00:06:27,040 Speaker 1: twenty cents on the dollar. This has been Gorman's religion. 113 00:06:27,480 --> 00:06:31,919 Speaker 1: As Mike mentioned earlier, wealth management to the rescue. Can 114 00:06:31,960 --> 00:06:36,040 Speaker 1: everybody do twenty two cents in the dollar in asset management? Now? 115 00:06:36,160 --> 00:06:39,680 Speaker 1: The pretext it's a scale issue totally. And so if 116 00:06:39,720 --> 00:06:42,159 Speaker 1: you if you don't have the scale and wealth management 117 00:06:42,200 --> 00:06:45,240 Speaker 1: you you have a really real challenge in terms of 118 00:06:45,279 --> 00:06:49,440 Speaker 1: building the business. Your your observation about everyone wanting to 119 00:06:49,480 --> 00:06:52,039 Speaker 1: get into it. Yeah, it's a good business because the 120 00:06:52,240 --> 00:06:54,839 Speaker 1: because the money is very sticky. You have a broker, 121 00:06:55,200 --> 00:06:57,360 Speaker 1: your fees are coming out of your account all the time, 122 00:06:57,680 --> 00:06:59,960 Speaker 1: and so that's you know, that that's a very good 123 00:07:00,000 --> 00:07:02,920 Speaker 1: business for the for the banks to be in. And 124 00:07:03,000 --> 00:07:06,520 Speaker 1: you control a channel and that channel provides value when 125 00:07:06,560 --> 00:07:09,679 Speaker 1: you're selling products through that channel. So if you control 126 00:07:09,760 --> 00:07:12,680 Speaker 1: the channel, you can make money from both the makers 127 00:07:12,720 --> 00:07:15,640 Speaker 1: of the products and the end users of the products. 128 00:07:15,680 --> 00:07:18,600 Speaker 1: So you know, it's a it's a very good strategy. 129 00:07:18,680 --> 00:07:20,560 Speaker 1: The problem is if every bank wants to do with 130 00:07:20,680 --> 00:07:23,520 Speaker 1: the price of those wealth managers goes out right, and 131 00:07:23,600 --> 00:07:27,080 Speaker 1: you then begin the problem of wealth managers moving from 132 00:07:27,160 --> 00:07:30,280 Speaker 1: among the big four and then going off and becoming 133 00:07:30,280 --> 00:07:33,120 Speaker 1: our Mike, but Mike, I'm sorry that is endemic to 134 00:07:33,160 --> 00:07:37,120 Speaker 1: the entire business. You want to keep fifteen percent of 135 00:07:37,120 --> 00:07:41,520 Speaker 1: the warm bodies across all pay skills, well, not just banking, 136 00:07:41,560 --> 00:07:43,280 Speaker 1: any business. You know, you're always trying to keep the 137 00:07:43,560 --> 00:07:46,760 Speaker 1: top performers and you gotta pay up for that. I 138 00:07:46,800 --> 00:07:49,480 Speaker 1: want to go to another personnel issue within the banks. 139 00:07:49,520 --> 00:07:53,240 Speaker 1: You mentioned before the break Brad that the era of 140 00:07:53,360 --> 00:07:57,320 Speaker 1: hiring all kinds of compliance people and the added costs 141 00:07:57,400 --> 00:08:00,200 Speaker 1: are coming to an end in terms of um a 142 00:08:00,320 --> 00:08:05,520 Speaker 1: percentage contribution to be a net decline, a net h 143 00:08:06,120 --> 00:08:09,040 Speaker 1: takeaway from the bottom line. That's coming to an end 144 00:08:09,480 --> 00:08:12,160 Speaker 1: and we're looking at banks like Morgan Stanley making much 145 00:08:12,200 --> 00:08:16,120 Speaker 1: better than expected earnings. Are the complaints from the bank 146 00:08:16,200 --> 00:08:20,320 Speaker 1: management over now that the government is strangling their ability 147 00:08:20,360 --> 00:08:23,720 Speaker 1: to make profits? Well, I don't think it's a good if. 148 00:08:23,760 --> 00:08:26,440 Speaker 1: If you're if your master is the government, I think 149 00:08:26,480 --> 00:08:28,600 Speaker 1: you have to be very careful about what you say 150 00:08:28,640 --> 00:08:31,960 Speaker 1: to them. But the whole idea of Dodd Frank killing 151 00:08:31,960 --> 00:08:34,320 Speaker 1: off the banking industry or making it into a utility 152 00:08:34,400 --> 00:08:40,559 Speaker 1: doesn't seem to be actually happening. Remember, we're celebrating eight 153 00:08:40,760 --> 00:08:43,760 Speaker 1: and ten percent r o E s as a victory 154 00:08:43,880 --> 00:08:46,719 Speaker 1: that would not be viewed as a victory ten years ago. 155 00:08:46,760 --> 00:08:50,920 Speaker 1: Wouldn't know, But I mean, right now GE has got 156 00:08:50,920 --> 00:08:53,520 Speaker 1: a seven point three percent r OW. So you know, 157 00:08:53,640 --> 00:08:56,040 Speaker 1: if if you're doing as well as GE, it's not 158 00:08:56,240 --> 00:08:59,679 Speaker 1: terrible for shareholders. No, no, it's not thirty nine or 159 00:08:59,720 --> 00:09:03,760 Speaker 1: forty per said it. But you know, let's let's remember 160 00:09:03,760 --> 00:09:07,120 Speaker 1: we've got a group of of players out there who 161 00:09:07,480 --> 00:09:10,480 Speaker 1: don't have large balance sheets. The boutiques right, they've taken 162 00:09:10,520 --> 00:09:13,280 Speaker 1: market share from the from the big banks, So you know, 163 00:09:13,480 --> 00:09:17,200 Speaker 1: we're regulations has hurt the banks really in terms of 164 00:09:17,200 --> 00:09:19,440 Speaker 1: their performance. I think we should recognize that. On the 165 00:09:19,440 --> 00:09:23,560 Speaker 1: other hand, it's tremendously improved their financial strength. The you know, 166 00:09:23,640 --> 00:09:26,360 Speaker 1: the the credit worthiness of the banks is better than 167 00:09:26,400 --> 00:09:30,720 Speaker 1: it's been in decades, so we should all you need 168 00:09:30,760 --> 00:09:34,199 Speaker 1: to calculate return on risk. Well, that's true. Yeah, it's 169 00:09:34,200 --> 00:09:37,120 Speaker 1: almost like a sharp ratio for the business. Lazard three 170 00:09:37,120 --> 00:09:42,840 Speaker 1: thousand employees, Morgan Stanley fifty four thousand employees, JP Morgan 171 00:09:43,280 --> 00:09:46,880 Speaker 1: two hundred forty thousand employees. And that goes to your 172 00:09:46,920 --> 00:09:49,880 Speaker 1: ideal scale. And yet you just said the boutiques are 173 00:09:49,920 --> 00:09:54,000 Speaker 1: taking market share with that intellectual brain power. How much 174 00:09:54,480 --> 00:09:58,200 Speaker 1: is there to cut at fifty four thousand Morgan Stanley 175 00:09:58,320 --> 00:10:01,959 Speaker 1: or two hundred and forty Morgan. Well, you're comparing two 176 00:10:01,960 --> 00:10:04,640 Speaker 1: different animals. I agree with that. There's three different three 177 00:10:04,679 --> 00:10:10,880 Speaker 1: different animals Lazard, ever Core, Green Hills, and then the 178 00:10:10,920 --> 00:10:13,160 Speaker 1: big banks. You know you've got you know what you 179 00:10:13,280 --> 00:10:18,160 Speaker 1: have is you have established investment bankers whose clients belong 180 00:10:18,320 --> 00:10:21,959 Speaker 1: to them, who can walk over to those boutiques and 181 00:10:22,120 --> 00:10:24,959 Speaker 1: jen and and bring money with them they don't use. 182 00:10:25,679 --> 00:10:27,600 Speaker 1: But one of the important things is if you run 183 00:10:27,600 --> 00:10:29,520 Speaker 1: a boutique, you have to be a Red Sox fan. 184 00:10:30,120 --> 00:10:33,240 Speaker 1: That's just all very important, very important. I had a 185 00:10:33,320 --> 00:10:35,840 Speaker 1: quick political question since we got the Republican Convention on 186 00:10:35,920 --> 00:10:38,800 Speaker 1: these days, the Republicans, like the Democrats, have now adopted 187 00:10:38,800 --> 00:10:42,280 Speaker 1: a platform plank and Donald Trump's endorsed saying that we 188 00:10:42,280 --> 00:10:47,600 Speaker 1: should bring back glass Stiegel. Uh, you know, Henry Morgan 189 00:10:47,679 --> 00:10:51,280 Speaker 1: and Harold Stanley take Morgan Stanley out of JP Morgan 190 00:10:51,320 --> 00:10:55,280 Speaker 1: Company because of glass Stiegel? Would that do anything to 191 00:10:55,320 --> 00:11:00,160 Speaker 1: bring Glass Steel? I mean investment separating investment banking from 192 00:11:00,160 --> 00:11:04,000 Speaker 1: retail banking any anymore? Is that an issue? Well, I 193 00:11:04,880 --> 00:11:08,280 Speaker 1: don't see that. I don't see that happening. But what 194 00:11:08,280 --> 00:11:10,360 Speaker 1: would it do? I mean, we're seeing it to an 195 00:11:10,360 --> 00:11:13,240 Speaker 1: extent in in the in the growth of the boutiques, right, 196 00:11:13,480 --> 00:11:16,960 Speaker 1: I mean, the the boutiques are and a part of 197 00:11:17,000 --> 00:11:19,320 Speaker 1: the capital markets business that are there's a sort of 198 00:11:19,360 --> 00:11:22,560 Speaker 1: outside the banking world. And and you know, if we 199 00:11:22,800 --> 00:11:25,880 Speaker 1: if we were to separate it, I guess what you 200 00:11:25,920 --> 00:11:27,640 Speaker 1: have to do is you have to look at the 201 00:11:27,400 --> 00:11:30,000 Speaker 1: at the capital markets businesses of the banks and what 202 00:11:30,080 --> 00:11:31,840 Speaker 1: kind of returns they would get. I'm not certain they 203 00:11:31,840 --> 00:11:33,920 Speaker 1: would get great returns at this point. And I think 204 00:11:33,920 --> 00:11:37,800 Speaker 1: a real question would be are they how do they 205 00:11:37,800 --> 00:11:40,640 Speaker 1: finance themselves. I mean they need the deposit basis at 206 00:11:40,640 --> 00:11:43,599 Speaker 1: this point to keep themselves. Generous of you, professor, to 207 00:11:43,679 --> 00:11:45,440 Speaker 1: be with us today, I hope we got at least 208 00:11:45,480 --> 00:11:58,440 Speaker 1: a C minus bred Hinds is with New York University, Michael. 209 00:11:58,480 --> 00:12:04,480 Speaker 1: If you go north above the Green Mountains, there's Canaan, No, 210 00:12:04,520 --> 00:12:09,280 Speaker 1: not Biblical, there's Canaan, and there's the Canaan Street, La, 211 00:12:10,320 --> 00:12:13,680 Speaker 1: there's Cardigan Mountains School. If you go down Back Bay 212 00:12:13,760 --> 00:12:18,319 Speaker 1: Road and down Fernwood Farns Road, there's a Republican going. 213 00:12:18,760 --> 00:12:22,600 Speaker 1: When will they talk about policy? Well, actually he's not 214 00:12:22,679 --> 00:12:25,440 Speaker 1: there right now, as I understand that Johnson, new former 215 00:12:25,520 --> 00:12:30,880 Speaker 1: senator from New Hampshire, has migrated west to Cleveland where 216 00:12:30,920 --> 00:12:34,640 Speaker 1: the Republican Party. It's not talking about policy, is what 217 00:12:34,679 --> 00:12:37,840 Speaker 1: they're talking about. It just about everything. But um, he 218 00:12:37,920 --> 00:12:43,640 Speaker 1: is attending the Republican National Convention in Cleveland, and uh, welcome, senator. 219 00:12:44,720 --> 00:12:47,640 Speaker 1: What what is happening there right now? We we've heard 220 00:12:47,640 --> 00:12:51,640 Speaker 1: lots of police for unity. We've heard the Republicans have 221 00:12:51,679 --> 00:12:55,199 Speaker 1: officially nominated Donald Trump, and yet you've got a big 222 00:12:55,240 --> 00:12:58,400 Speaker 1: story of political today saying there's a parallel convention going 223 00:12:58,440 --> 00:13:02,880 Speaker 1: on as people like you, all the Republican power brokers 224 00:13:03,280 --> 00:13:07,079 Speaker 1: from years past have been gathering in small and large groups, 225 00:13:07,080 --> 00:13:09,320 Speaker 1: trying to figure out how to move beyond all this 226 00:13:09,400 --> 00:13:13,640 Speaker 1: and put the party back together after November. Well, good morning. First, 227 00:13:13,920 --> 00:13:16,600 Speaker 1: I'm no power broker, uh, and I haven't been part 228 00:13:16,640 --> 00:13:20,320 Speaker 1: of any secret side meeting. Look. Uh, this is a 229 00:13:20,360 --> 00:13:24,840 Speaker 1: convention where Donald Trump will be nominated. Obviously, the party 230 00:13:24,920 --> 00:13:27,880 Speaker 1: wants to talk about the policy, and we can talk 231 00:13:27,920 --> 00:13:31,160 Speaker 1: more about that. I do think that's important. But also 232 00:13:31,720 --> 00:13:35,120 Speaker 1: Donald Trump wants to define himself as he wants the 233 00:13:35,200 --> 00:13:38,720 Speaker 1: voters to think about this election. And look, there has 234 00:13:38,760 --> 00:13:42,880 Speaker 1: been some some serious policy talk. Rudy Giuliani on national security, 235 00:13:43,040 --> 00:13:45,720 Speaker 1: Paul Ryan On on his vision for America. We're gonna 236 00:13:45,760 --> 00:13:48,680 Speaker 1: hear from Mike Pence tonight, you know, the vice presidential 237 00:13:48,679 --> 00:13:51,840 Speaker 1: pick who ran the Republican Study Committee, sort of a 238 00:13:51,920 --> 00:13:55,960 Speaker 1: serious conservative policy group within the House of Representatives. Uh. 239 00:13:55,960 --> 00:13:59,920 Speaker 1: He's governed in Indiana, UH for four years, helped bring 240 00:14:00,000 --> 00:14:02,600 Speaker 1: a state back. So I think there'll be plenty of 241 00:14:02,640 --> 00:14:06,280 Speaker 1: policy over the next two nights. It is important and 242 00:14:06,280 --> 00:14:09,640 Speaker 1: and look, there are a lot of distinct differences between 243 00:14:09,679 --> 00:14:13,280 Speaker 1: Donald Trump and Hillary Clinton. When it comes to expanding government, 244 00:14:13,320 --> 00:14:17,280 Speaker 1: or cutting taxes, or or making sure that America's kept safe. 245 00:14:17,280 --> 00:14:19,960 Speaker 1: And I do think those deserve to be discussed. Do 246 00:14:20,000 --> 00:14:22,600 Speaker 1: you think that we'll hear any policy talk from Donald 247 00:14:22,640 --> 00:14:25,200 Speaker 1: Trump who has given us lots of slogans but no 248 00:14:25,320 --> 00:14:30,360 Speaker 1: coherent platform or policy yet, you know, you gotta be candid. 249 00:14:31,040 --> 00:14:33,920 Speaker 1: Getting into the details of policy is not a Donald 250 00:14:33,960 --> 00:14:37,160 Speaker 1: Trump strength. But but I think where he can be 251 00:14:37,280 --> 00:14:42,920 Speaker 1: strong isn't putting forward those leaders that he will put 252 00:14:43,040 --> 00:14:47,520 Speaker 1: in a position of defining policy, executing policy, and helping 253 00:14:48,520 --> 00:14:51,840 Speaker 1: UH as chief executive to lead the country. And and look, 254 00:14:51,920 --> 00:14:54,280 Speaker 1: someone like a Rudy Giuliani is a good example of that. 255 00:14:54,400 --> 00:14:56,920 Speaker 1: Someone like Paul Ryan or Mike Pence a good example 256 00:14:57,040 --> 00:15:00,720 Speaker 1: of that. Uh Ted Cruz is gonna gonna speak and 257 00:15:00,840 --> 00:15:04,320 Speaker 1: obviously he's got a strong, uh conservative vision that speaks 258 00:15:04,320 --> 00:15:07,720 Speaker 1: to a very important base of the Republican Party. So, 259 00:15:08,200 --> 00:15:11,560 Speaker 1: you know, as commander in chief, I don't think anyone 260 00:15:11,640 --> 00:15:15,480 Speaker 1: would mistake uh Donald Trump for some sort of an 261 00:15:15,920 --> 00:15:20,320 Speaker 1: intellectual you know, conservative art laugher on taxes or anything 262 00:15:20,360 --> 00:15:23,760 Speaker 1: like that. But the strength of leaders that I've known 263 00:15:24,200 --> 00:15:27,680 Speaker 1: comes from their ability to recruit UH great people to 264 00:15:27,760 --> 00:15:30,760 Speaker 1: help them get the job done. From what I understand, 265 00:15:30,800 --> 00:15:32,960 Speaker 1: he didn't even agree with his vice presidential running mate 266 00:15:32,960 --> 00:15:36,080 Speaker 1: and a lot of conservative positions. But I'm curious, Uh, 267 00:15:36,280 --> 00:15:38,280 Speaker 1: have you met him, have you had a chance to 268 00:15:38,440 --> 00:15:40,840 Speaker 1: talk with him? A lot of reports are that he 269 00:15:40,920 --> 00:15:44,040 Speaker 1: isn't particularly interested in policy and doesn't study up on it. 270 00:15:44,440 --> 00:15:47,760 Speaker 1: I can't speak to that, and unless you have had 271 00:15:47,760 --> 00:15:51,160 Speaker 1: a conversation with him that it's probably not a fair characterization. 272 00:15:51,600 --> 00:15:55,920 Speaker 1: I've met him, but only very briefly. So um, okay, 273 00:15:56,000 --> 00:15:59,920 Speaker 1: I've seen him on the campaign trail. He's uh, he's captivating, 274 00:16:00,000 --> 00:16:02,680 Speaker 1: he's unique. He wasn't my candidate. I'm a case here 275 00:16:02,720 --> 00:16:04,720 Speaker 1: as a case of delegate. Uh. You know, we were 276 00:16:04,720 --> 00:16:07,200 Speaker 1: in a great campaign. Very proud of the governor and 277 00:16:07,280 --> 00:16:09,520 Speaker 1: John Casey because he is a different kind of person. 278 00:16:09,560 --> 00:16:12,280 Speaker 1: You know, he's a conservative, he's got taxed these balanced budgets, 279 00:16:12,320 --> 00:16:15,480 Speaker 1: but uh, he's the kind of leader that's I've been 280 00:16:15,480 --> 00:16:18,080 Speaker 1: able to solve problems and bring people together, and that 281 00:16:18,120 --> 00:16:21,400 Speaker 1: more than anything else moving out of the convention is 282 00:16:21,440 --> 00:16:23,600 Speaker 1: I think what Donald Trump needs to do. If you 283 00:16:23,640 --> 00:16:26,720 Speaker 1: want to win the presidency, you need to win independence 284 00:16:26,840 --> 00:16:30,880 Speaker 1: across America. The independence is the undecided voters. Senator, I 285 00:16:30,920 --> 00:16:33,200 Speaker 1: say this with great respect. Somebody just out on Twitter 286 00:16:33,320 --> 00:16:36,000 Speaker 1: said they were amazed how I had tried to avoid 287 00:16:36,040 --> 00:16:38,200 Speaker 1: the snark. I'm going to try to avoid the snark 288 00:16:38,360 --> 00:16:44,160 Speaker 1: with you. Your father and your grandfather came here. I 289 00:16:44,200 --> 00:16:47,840 Speaker 1: guess they walked around or over the wall. Your father 290 00:16:47,960 --> 00:16:51,480 Speaker 1: is an honorary advisor to the US as your Bijani 291 00:16:51,640 --> 00:16:56,360 Speaker 1: Chamber of Commerce. You've got a heritage here, three generations deep. 292 00:16:56,840 --> 00:16:59,680 Speaker 1: Would your father is a young guy in New Hampshire. 293 00:17:00,240 --> 00:17:02,720 Speaker 1: Out of them, I t with all he was doing 294 00:17:02,760 --> 00:17:06,080 Speaker 1: and engineering and toughs, would he have supported the modern 295 00:17:06,160 --> 00:17:09,720 Speaker 1: Republican Party. Well, if you if you're saying Donald Trump 296 00:17:10,240 --> 00:17:13,159 Speaker 1: is the modern Republican Party, then the answer is probably not, 297 00:17:13,280 --> 00:17:15,560 Speaker 1: because I don't think you know, I didn't support Donald 298 00:17:15,560 --> 00:17:17,920 Speaker 1: Trump in the primary. My father didn't support Donald Trump 299 00:17:17,920 --> 00:17:21,440 Speaker 1: in the primary. But look, I think the modern Republican 300 00:17:21,520 --> 00:17:24,800 Speaker 1: Party is also people like Paul Ryant, John Soon, Bob 301 00:17:24,920 --> 00:17:28,040 Speaker 1: Cork or John Kasik. These are people who are great 302 00:17:28,080 --> 00:17:31,600 Speaker 1: friends of mine. I think they're terrific leaders. So I 303 00:17:31,720 --> 00:17:34,640 Speaker 1: think you're making a mistake if you if you throw 304 00:17:34,720 --> 00:17:38,560 Speaker 1: out one issue or one person and try to use 305 00:17:38,680 --> 00:17:43,040 Speaker 1: that specific to characterize the entire party to be a broad, 306 00:17:43,080 --> 00:17:46,119 Speaker 1: inclusive party if we're gonna win. My note Greg Velier's 307 00:17:46,200 --> 00:17:48,760 Speaker 1: note this morning, where Villier at the bottom of the note, 308 00:17:49,080 --> 00:17:53,760 Speaker 1: it's already talking about do you think Sonna's name should 309 00:17:53,800 --> 00:17:58,160 Speaker 1: be on that list? Like why not? Everybody else's name 310 00:17:58,200 --> 00:18:02,840 Speaker 1: will be really that? Look, yeah, there are people people 311 00:18:03,040 --> 00:18:07,960 Speaker 1: always are looking Democrats and Republicans looking for years in 312 00:18:08,040 --> 00:18:10,600 Speaker 1: the future. Don't take for a moment the people whose 313 00:18:10,720 --> 00:18:14,960 Speaker 1: names are on Hillary's vice presidential lists aren't thinking, well, 314 00:18:15,040 --> 00:18:18,119 Speaker 1: this will be good for me in depending on what 315 00:18:18,280 --> 00:18:21,680 Speaker 1: happens in the presidential election. Look, that's the way politics works, 316 00:18:21,720 --> 00:18:24,800 Speaker 1: and it's it's nothing vicious or underhanded, whether you're Democrat 317 00:18:24,920 --> 00:18:27,600 Speaker 1: or a Republican. To look towards the future. And and 318 00:18:27,840 --> 00:18:30,520 Speaker 1: you know, there are some people who who always are 319 00:18:30,600 --> 00:18:33,119 Speaker 1: looking for their next job. Frankly, those people make me 320 00:18:33,119 --> 00:18:35,800 Speaker 1: a little nervous. I want people who come to lead, 321 00:18:35,960 --> 00:18:38,120 Speaker 1: solve a problem, and when they get the job done, 322 00:18:38,200 --> 00:18:40,160 Speaker 1: they go home. One of the things I love about 323 00:18:40,240 --> 00:18:42,760 Speaker 1: John Kasy he went to Congress, he said he was 324 00:18:42,800 --> 00:18:45,200 Speaker 1: going to balance the budget. He helped leave the effort 325 00:18:45,240 --> 00:18:48,320 Speaker 1: to balance the budget, retired, he left Congress and went 326 00:18:48,359 --> 00:18:51,720 Speaker 1: to the private sector. That to me is what public 327 00:18:51,840 --> 00:18:55,400 Speaker 1: service really should be. Johnson and former Senator from New Hampshire, 328 00:18:55,440 --> 00:18:58,040 Speaker 1: thank you for joining us today from Cleveland, and hopefully 329 00:18:58,760 --> 00:19:00,520 Speaker 1: you'll get a little cooler well there. I know it's 330 00:19:00,560 --> 00:19:02,800 Speaker 1: been hot and sticky there as it has been here 331 00:19:03,119 --> 00:19:13,199 Speaker 1: in New York. It's never that way in New Hampshire. Mike, 332 00:19:13,280 --> 00:19:15,159 Speaker 1: I want you to bring in David Stockton because I 333 00:19:15,240 --> 00:19:17,879 Speaker 1: think you're a lot more familiar with this. But within 334 00:19:18,200 --> 00:19:24,800 Speaker 1: his prodigious history is this phrase the forecasting capability, which 335 00:19:24,880 --> 00:19:26,679 Speaker 1: is the heart of what we do every day. I mean, 336 00:19:26,760 --> 00:19:30,159 Speaker 1: it's the blood going through the circulatory system, isn't it. Well, 337 00:19:30,280 --> 00:19:33,200 Speaker 1: that's the question that has been raised by a number 338 00:19:33,240 --> 00:19:35,280 Speaker 1: of people this week. When you look at what's going 339 00:19:35,359 --> 00:19:37,520 Speaker 1: on in the economy, and when you look at what's 340 00:19:37,560 --> 00:19:40,080 Speaker 1: going on in the market, so they don't seem to square, 341 00:19:40,680 --> 00:19:43,920 Speaker 1: you wonder about the forecasting capability One of the models work, 342 00:19:43,960 --> 00:19:45,720 Speaker 1: and what do you do if you're not sure? Dave 343 00:19:45,760 --> 00:19:48,480 Speaker 1: Stockton used to help run the computer models at the 344 00:19:48,560 --> 00:19:53,480 Speaker 1: Federal Reserve as director of UH Statistics and as Research 345 00:19:53,520 --> 00:19:56,639 Speaker 1: and Statistics is the official term at the Board of 346 00:19:56,640 --> 00:19:58,520 Speaker 1: Governors of the Federal Reserve System. He's not with the 347 00:19:58,560 --> 00:20:02,480 Speaker 1: Peterson Institute the FED. Anybody who follows the FED knows 348 00:20:02,520 --> 00:20:05,160 Speaker 1: they have a sophisticated model of the economy called FURBUS 349 00:20:05,240 --> 00:20:07,480 Speaker 1: for Federal Reserve Board in the United States, and yet 350 00:20:07,760 --> 00:20:10,240 Speaker 1: there's a lot of people question whether it's giving you 351 00:20:10,880 --> 00:20:13,560 Speaker 1: the kind of data that enable you to make good 352 00:20:13,680 --> 00:20:17,520 Speaker 1: forecasts of what policy should be these days. Well, any 353 00:20:17,600 --> 00:20:20,000 Speaker 1: forecast at this point in economics is would be some 354 00:20:20,160 --> 00:20:23,400 Speaker 1: combination of science and art, and there's a lot more 355 00:20:23,600 --> 00:20:26,680 Speaker 1: art than science I think at this point. I think 356 00:20:26,880 --> 00:20:31,840 Speaker 1: the FEDS models obviously provide some guidance about empirical regularities 357 00:20:31,960 --> 00:20:35,440 Speaker 1: that one sees and the data, but our ability to 358 00:20:35,520 --> 00:20:38,160 Speaker 1: predict is pretty limited. And you can take a look 359 00:20:38,200 --> 00:20:40,959 Speaker 1: at the FED publishes in the back of their Summary 360 00:20:41,000 --> 00:20:44,440 Speaker 1: of Economic Projections some competence intervals around these forecasts, and 361 00:20:44,520 --> 00:20:47,840 Speaker 1: they're pretty darn wide. And I think that's a reflection 362 00:20:47,920 --> 00:20:50,600 Speaker 1: of the fact that we're still pretty limited in our 363 00:20:50,640 --> 00:20:54,000 Speaker 1: ability to predict events, especially ones that we haven't seen before. 364 00:20:54,640 --> 00:20:57,639 Speaker 1: If that's the case, does that justify then sort of 365 00:20:57,880 --> 00:21:01,560 Speaker 1: the FEDS reluctance to do anything, and they operating sort 366 00:21:01,600 --> 00:21:06,440 Speaker 1: of on the old principle of first do no harm. Well, 367 00:21:06,440 --> 00:21:10,320 Speaker 1: I think that's certainly one reason why the Fed would 368 00:21:10,359 --> 00:21:14,200 Speaker 1: be reluctant to act aggressively at any point, and why 369 00:21:14,280 --> 00:21:17,160 Speaker 1: they probably have been as cautious as they've been about 370 00:21:17,240 --> 00:21:20,840 Speaker 1: this process of normalization, as they're just uncertain about what 371 00:21:21,040 --> 00:21:23,000 Speaker 1: the economy is going to do, but also how the 372 00:21:23,080 --> 00:21:26,000 Speaker 1: economy will respond to their actions. And I think in 373 00:21:26,160 --> 00:21:29,040 Speaker 1: that kind of an environment, you move slowly tests see 374 00:21:29,080 --> 00:21:32,600 Speaker 1: what the consequences are of your actions, and then probe further. 375 00:21:33,800 --> 00:21:36,560 Speaker 1: You know, once you gain a little bit more confidence. Well, 376 00:21:36,600 --> 00:21:40,320 Speaker 1: I I look, David, where we are. And of course 377 00:21:40,440 --> 00:21:44,240 Speaker 1: the Bullard research piece we talked about that earlier with 378 00:21:44,359 --> 00:21:48,520 Speaker 1: Chris low Folks on regime change. Part of this is 379 00:21:48,920 --> 00:21:52,639 Speaker 1: the belief of the plug in numbers within the theory 380 00:21:52,720 --> 00:21:56,680 Speaker 1: and models that are good. Governor presidents and chair have. 381 00:21:57,520 --> 00:21:59,920 Speaker 1: Are we working in a new regime even if Jim 382 00:22:00,080 --> 00:22:03,639 Speaker 1: Jim Bullard's talking about going to a new regime is 383 00:22:03,720 --> 00:22:06,680 Speaker 1: the fact is we're operating our central banks in a 384 00:22:06,800 --> 00:22:09,480 Speaker 1: new regime because things are so distorted. So I think 385 00:22:09,640 --> 00:22:13,760 Speaker 1: that would probably be uh an exaggeration. I think, you know, 386 00:22:14,119 --> 00:22:18,000 Speaker 1: constantly the economies change over time. Certainly we've been in 387 00:22:18,240 --> 00:22:21,439 Speaker 1: an extraordinary period where interest rates have been penned at 388 00:22:21,560 --> 00:22:24,760 Speaker 1: zero in central banks have been employing a variety of 389 00:22:24,880 --> 00:22:29,399 Speaker 1: unconventional measures to stimulate economies. We still kind of understand that, 390 00:22:30,160 --> 00:22:34,000 Speaker 1: you know, long term interest rates affect borrowing and spending, 391 00:22:34,160 --> 00:22:37,440 Speaker 1: that the same thing goes with increases in household wealth 392 00:22:37,560 --> 00:22:39,879 Speaker 1: or improvements in the housing sector. So there are some 393 00:22:40,240 --> 00:22:43,680 Speaker 1: it isn't all just pure guesswork here, and we're not 394 00:22:43,800 --> 00:22:47,440 Speaker 1: completely ignorant, But I think the point that Jim Bullard's 395 00:22:47,520 --> 00:22:49,960 Speaker 1: making is that sometimes there are some big events that 396 00:22:50,320 --> 00:22:53,800 Speaker 1: come along, and maybe we've shifted from a moderate growth 397 00:22:54,600 --> 00:22:57,480 Speaker 1: regime to a very low growth regime, and maybe we 398 00:22:57,480 --> 00:22:59,879 Speaker 1: should just expect that to persist. I don't think the 399 00:23:00,000 --> 00:23:02,960 Speaker 1: evidence yet morern't that, but it's clear we've been in 400 00:23:03,000 --> 00:23:05,879 Speaker 1: a long period where there's been a secular decline in 401 00:23:06,160 --> 00:23:11,280 Speaker 1: interest rates and considerable disappointment in the productive potential growth 402 00:23:12,040 --> 00:23:15,040 Speaker 1: of the US economy and the other advanced foreign economy. 403 00:23:15,160 --> 00:23:18,879 Speaker 1: So I think certainly one should entertain the possibility that 404 00:23:19,160 --> 00:23:22,119 Speaker 1: will be in this period for a considerable period, be 405 00:23:22,200 --> 00:23:25,080 Speaker 1: in this low growth equilibrium for a considerable period of time. 406 00:23:25,480 --> 00:23:27,920 Speaker 1: I'm not quite sure. I'd expect to be here and 407 00:23:27,960 --> 00:23:29,800 Speaker 1: then all of these uns shift to a high growth 408 00:23:30,520 --> 00:23:32,840 Speaker 1: regime at some point in the future, and I certainly 409 00:23:32,840 --> 00:23:35,679 Speaker 1: wouldn't know how to predict when that would would occur. Um. 410 00:23:36,200 --> 00:23:39,760 Speaker 1: I think what will more likely see is gradual repair 411 00:23:40,040 --> 00:23:42,800 Speaker 1: of some of the damage that's been done in recent years, 412 00:23:42,880 --> 00:23:45,760 Speaker 1: and a gradual improvement and growth going forward and in 413 00:23:45,800 --> 00:23:49,560 Speaker 1: a graduate return. And one thinks about technological progress to 414 00:23:49,720 --> 00:23:52,640 Speaker 1: sort of more historical averages from the very slow pace 415 00:23:52,720 --> 00:23:54,960 Speaker 1: that we've had since the start of the Great Recession. 416 00:23:55,080 --> 00:23:58,680 Speaker 1: Would you endorse Jim Bullard's idea that you shouldn't even 417 00:23:58,720 --> 00:24:00,840 Speaker 1: bother to contribute to the dot plot now because you 418 00:24:00,880 --> 00:24:03,520 Speaker 1: can't give forward guidance. Well, I mean, I recognized that 419 00:24:03,640 --> 00:24:06,399 Speaker 1: that the dot plot is obviously a pretty uh fraught 420 00:24:06,520 --> 00:24:11,879 Speaker 1: device for communicating policy expectations. But I actually think I 421 00:24:11,960 --> 00:24:14,600 Speaker 1: wouldn't abandon the dot plot at this point. I think 422 00:24:14,640 --> 00:24:18,320 Speaker 1: it is important for the FED to communicate as part 423 00:24:18,400 --> 00:24:23,000 Speaker 1: of its forecast process what underlying policy, what policy underlies 424 00:24:23,240 --> 00:24:25,879 Speaker 1: the forecast that they're presenting to the public. Simply to 425 00:24:25,960 --> 00:24:30,640 Speaker 1: present forecasts of GDP growth and unemployment, and to say 426 00:24:30,720 --> 00:24:33,640 Speaker 1: nothing about the policy that you think might produce those 427 00:24:33,760 --> 00:24:37,520 Speaker 1: things is a very partial, partial exercise. I I think 428 00:24:37,560 --> 00:24:40,679 Speaker 1: the fact could probably improve the presentation of these forecasts 429 00:24:40,720 --> 00:24:44,600 Speaker 1: by perhaps having each participant provide a linked set of 430 00:24:44,680 --> 00:24:49,600 Speaker 1: forecasts of their own views about inflation, unemployment, GDP, growth 431 00:24:49,720 --> 00:24:52,359 Speaker 1: in interest rate, so that market participants in the public 432 00:24:52,440 --> 00:24:54,159 Speaker 1: and sort of see how they're thinking things are going 433 00:24:54,240 --> 00:24:59,560 Speaker 1: to evolve over time. DA critic of the Fed, David 434 00:24:59,680 --> 00:25:03,600 Speaker 1: st into the Peterson Institute, a strong, strong supporter of 435 00:25:03,640 --> 00:25:06,680 Speaker 1: the FED, with his heritage there, among other things, a 436 00:25:06,720 --> 00:25:11,120 Speaker 1: division of research and statistics, And I love this. Instructor 437 00:25:11,200 --> 00:25:14,560 Speaker 1: and lecturer at Yale and a trinity, did you ever 438 00:25:14,720 --> 00:25:18,919 Speaker 1: instructor lecture on the phrase ultra accommodative? Have we ever 439 00:25:19,040 --> 00:25:22,000 Speaker 1: been as ultra accommodative as we are now? When I 440 00:25:22,200 --> 00:25:26,000 Speaker 1: was at Yale in the late nineteen seventies, it was 441 00:25:26,280 --> 00:25:30,280 Speaker 1: ultra tighten policy, not ultra loose policy. So my career 442 00:25:30,359 --> 00:25:33,840 Speaker 1: was sort of book ended by a period of extreme 443 00:25:34,080 --> 00:25:39,080 Speaker 1: austerity and monetary policy to a period of extreme accommodativeness. 444 00:25:39,280 --> 00:25:42,520 Speaker 1: So I think this is more recent language beyond my 445 00:25:43,320 --> 00:25:46,280 Speaker 1: my teaching days, But clearly we are at a period 446 00:25:46,720 --> 00:25:49,480 Speaker 1: our policy has obviously been pushing as hard as it 447 00:25:49,600 --> 00:25:52,560 Speaker 1: can to try to move the economy and move the 448 00:25:52,640 --> 00:25:55,440 Speaker 1: FED back to its dual mandates of price stability and 449 00:25:55,880 --> 00:26:01,240 Speaker 1: maximum employment. How a comminative are we We've had different 450 00:26:01,280 --> 00:26:04,800 Speaker 1: people on the show this week already suggesting that the 451 00:26:04,920 --> 00:26:09,200 Speaker 1: FED is maybe not quite as accommodative as they would 452 00:26:09,240 --> 00:26:12,520 Speaker 1: like to be. So I think the FED probably has 453 00:26:12,680 --> 00:26:15,639 Speaker 1: things just about right currently. If you look at what's 454 00:26:16,000 --> 00:26:20,840 Speaker 1: been going on, we've seen unemployment rate down below five percent, 455 00:26:21,119 --> 00:26:26,680 Speaker 1: somewhere in the neighborhood of the full employment. I don't 456 00:26:26,720 --> 00:26:29,040 Speaker 1: think they're yet quite Frankly, I think there's still some 457 00:26:29,160 --> 00:26:32,000 Speaker 1: slack in the labor market. And we've seen the inflation rate, 458 00:26:32,080 --> 00:26:34,879 Speaker 1: which core inflation would have been running around one of 459 00:26:34,960 --> 00:26:37,840 Speaker 1: the quarters now moving back up to one and three quarters, 460 00:26:37,920 --> 00:26:40,560 Speaker 1: maybe a little bit above. So they're making progress towards 461 00:26:40,720 --> 00:26:44,240 Speaker 1: their dual mandate and not probably suggests they've had policy 462 00:26:44,320 --> 00:26:46,440 Speaker 1: set just about right. I think the more important question 463 00:26:46,600 --> 00:26:50,119 Speaker 1: is going forward. You know, how much how fast is 464 00:26:50,160 --> 00:26:53,199 Speaker 1: this process of normalization need to proceed, And I think 465 00:26:53,240 --> 00:26:55,560 Speaker 1: it's going to be a pretty slow process. So you're 466 00:26:55,600 --> 00:26:58,440 Speaker 1: not in the camp that suggests that we're seeing bubbles 467 00:26:58,520 --> 00:27:01,800 Speaker 1: developed or distortion in the markets that need to be 468 00:27:01,920 --> 00:27:04,680 Speaker 1: cured by a rate increase or two. I don't think 469 00:27:04,720 --> 00:27:07,399 Speaker 1: we're there yet, no, um. I in fact think that 470 00:27:08,160 --> 00:27:11,439 Speaker 1: that's probably not the case. It's possible that equities are 471 00:27:11,560 --> 00:27:13,920 Speaker 1: are getting a little richly value, but it doesn't feel 472 00:27:14,000 --> 00:27:17,160 Speaker 1: like a bubble in the sense that people buying those 473 00:27:17,400 --> 00:27:20,280 Speaker 1: assets and expectations that their price can only go up 474 00:27:20,320 --> 00:27:23,000 Speaker 1: at this point. Uh. And I think the bigger issue 475 00:27:23,119 --> 00:27:26,720 Speaker 1: is in fact to get inflation back to two, the 476 00:27:26,800 --> 00:27:30,120 Speaker 1: fed's target, and to make sure that they're made progress 477 00:27:30,200 --> 00:27:33,520 Speaker 1: on the full employment prospects. And while we've certainly got 478 00:27:33,680 --> 00:27:36,400 Speaker 1: much closer on both those objectives, were still not there. 479 00:27:36,680 --> 00:27:38,920 Speaker 1: So I think the FED can proceed slowly. I do 480 00:27:39,040 --> 00:27:41,520 Speaker 1: think the process of normalization is going to proceed. That 481 00:27:41,640 --> 00:27:45,160 Speaker 1: markets right now have an expectation of FED on hold 482 00:27:45,320 --> 00:27:48,360 Speaker 1: too long, and that is going to be disappointed ultimately 483 00:27:48,840 --> 00:27:51,040 Speaker 1: by by some tight thing as we move through the 484 00:27:51,080 --> 00:27:57,360 Speaker 1: aear doctor Stockton, from your area of forecasting capability? Can 485 00:27:57,400 --> 00:28:02,639 Speaker 1: you forecast the outcomes of helicopter money? However, I'll let 486 00:28:02,720 --> 00:28:05,960 Speaker 1: you define it and then do we know what will 487 00:28:06,119 --> 00:28:10,520 Speaker 1: happen when. So I mean, if one thinks of helicopter 488 00:28:10,680 --> 00:28:14,320 Speaker 1: money is being fiscal policy that is financed with debt 489 00:28:14,800 --> 00:28:17,440 Speaker 1: that is purchased by the central bank, so there could 490 00:28:17,440 --> 00:28:20,600 Speaker 1: be no possible effect on interest rate increases, I think 491 00:28:20,680 --> 00:28:23,960 Speaker 1: that is obviously going to be stimulative, and I think 492 00:28:24,080 --> 00:28:27,280 Speaker 1: we would be able to estimate those effects with sort 493 00:28:27,320 --> 00:28:31,840 Speaker 1: of conventional models. I think it raises more complicated questions 494 00:28:31,920 --> 00:28:36,080 Speaker 1: about the relationship of an independent central bank to the 495 00:28:36,240 --> 00:28:39,240 Speaker 1: government and to the fiscal authorities. I certainly would not 496 00:28:39,400 --> 00:28:44,040 Speaker 1: have central banks themselves making decisions about helicopter money. I 497 00:28:44,120 --> 00:28:46,440 Speaker 1: would have that definitely be in the realm of the 498 00:28:47,160 --> 00:28:50,000 Speaker 1: of the elected government, in the in the fiscal authorities. 499 00:28:50,840 --> 00:28:53,080 Speaker 1: Do you think that's something that would work. I mean, 500 00:28:53,160 --> 00:28:56,760 Speaker 1: in theory, it does, but we've seen that a lot 501 00:28:56,840 --> 00:28:59,920 Speaker 1: of theory doesn't always translate to practice. So I think 502 00:29:00,120 --> 00:29:04,040 Speaker 1: in really dire circumstances and ones that were not currently 503 00:29:04,120 --> 00:29:06,880 Speaker 1: in for example, if we were to hit some sort 504 00:29:06,920 --> 00:29:09,840 Speaker 1: of significant global recession in the next couple of years, 505 00:29:09,960 --> 00:29:13,400 Speaker 1: when the interest rates were still pinned at zero, you know, 506 00:29:13,520 --> 00:29:16,840 Speaker 1: I think, just as we experimented with unconventional policies, I 507 00:29:16,960 --> 00:29:22,400 Speaker 1: think something like a money financed the fiscal stimulus could 508 00:29:22,440 --> 00:29:25,400 Speaker 1: be considered. But it's it's got dangerous. It's got dangerous, 509 00:29:25,440 --> 00:29:28,480 Speaker 1: not only in terms of unintended effects that might have 510 00:29:28,640 --> 00:29:32,160 Speaker 1: unintended consequences, as well as I think political effects of 511 00:29:32,320 --> 00:29:37,440 Speaker 1: giving policymakers in Congress or in the White House a 512 00:29:37,520 --> 00:29:39,800 Speaker 1: sense that, gee, this is really great, we can actually 513 00:29:40,000 --> 00:29:42,040 Speaker 1: you know, this is just print money and spend it. 514 00:29:42,440 --> 00:29:44,840 Speaker 1: So I would be reluctant to move in that direction 515 00:29:45,040 --> 00:29:50,840 Speaker 1: outside of a truly more dire situation. David Stunton, thank 516 00:29:50,880 --> 00:30:00,600 Speaker 1: you so much, really appreciate it. With the Peterson's too, Mike, 517 00:30:00,680 --> 00:30:04,080 Speaker 1: you mentioned gold, I had someone called me up, Matt 518 00:30:04,120 --> 00:30:07,520 Speaker 1: from New Jersey and said, look at gold. So I'm 519 00:30:07,560 --> 00:30:11,360 Speaker 1: looking at gold, and on a daily chart, it is 520 00:30:11,480 --> 00:30:18,240 Speaker 1: sitting precisely on the support that I use, precisely, precisely precisely, 521 00:30:18,880 --> 00:30:21,080 Speaker 1: and I would suggest and this is just one view 522 00:30:21,240 --> 00:30:24,880 Speaker 1: of one setup. It's neither long or short. It is soup, 523 00:30:25,160 --> 00:30:28,920 Speaker 1: as I call it. It's indeterminate. I can't tell which 524 00:30:28,960 --> 00:30:32,720 Speaker 1: way it's going either. Can I tell which way the 525 00:30:32,800 --> 00:30:36,240 Speaker 1: dollars going? Axel Mark spends a lot of time thinking 526 00:30:36,280 --> 00:30:39,960 Speaker 1: about this with more investments ACTEL. A lot of people 527 00:30:40,240 --> 00:30:43,840 Speaker 1: are sort of mixed about dollar. They're ambivalent, but I 528 00:30:43,880 --> 00:30:48,600 Speaker 1: would call the tendency two stronger dollar. Can you make 529 00:30:49,080 --> 00:30:53,240 Speaker 1: any here or there of it given the immense distortions 530 00:30:53,320 --> 00:30:57,400 Speaker 1: within our financial system, I think, I mean, when one 531 00:30:57,480 --> 00:30:59,800 Speaker 1: has to dissect it a little bit, emerging markets are 532 00:31:00,040 --> 00:31:02,239 Speaker 1: kind of easy in the sense that emerging markets are 533 00:31:02,280 --> 00:31:05,560 Speaker 1: mostly gauges of liquidity. UM. The Japanese are trying to 534 00:31:05,680 --> 00:31:08,360 Speaker 1: make it easy to us, but the two majority they're 535 00:31:08,400 --> 00:31:10,520 Speaker 1: gonna do a helicopter money and the end it's going 536 00:31:10,560 --> 00:31:12,360 Speaker 1: to go down the drain. UM. That the one that 537 00:31:12,520 --> 00:31:14,600 Speaker 1: that's kind of the difficult one to crack is the 538 00:31:14,720 --> 00:31:17,360 Speaker 1: euro because the urine never does what you wanted to do. 539 00:31:17,840 --> 00:31:19,600 Speaker 1: Um do AGGI always wants it to go down. We 540 00:31:19,640 --> 00:31:21,440 Speaker 1: always say everything is great in the U S. Everything 541 00:31:21,520 --> 00:31:23,720 Speaker 1: is horrible in Europe, and the sure now that you're 542 00:31:23,800 --> 00:31:26,400 Speaker 1: around one ten, But it's just some difficult to weaken 543 00:31:26,480 --> 00:31:28,920 Speaker 1: the euro um and so it depends a little bit 544 00:31:29,000 --> 00:31:31,440 Speaker 1: on on on where you're looking. But the thing is, 545 00:31:31,480 --> 00:31:33,360 Speaker 1: we've been told for years the dollar is going to 546 00:31:33,400 --> 00:31:36,360 Speaker 1: go through the roof, and ever since we started raising 547 00:31:36,480 --> 00:31:38,880 Speaker 1: rates that dollar hasn't been able to reach new heighst 548 00:31:39,400 --> 00:31:41,120 Speaker 1: What do you think the dollar does from here? Because 549 00:31:41,160 --> 00:31:44,320 Speaker 1: we're at the dollar index over ninety seven. That was 550 00:31:44,880 --> 00:31:48,600 Speaker 1: sort of the February level when we were all worried 551 00:31:48,600 --> 00:31:50,320 Speaker 1: about how high the dollar was going to go, then 552 00:31:50,360 --> 00:31:52,440 Speaker 1: it came back down. Does it continue to rise now 553 00:31:52,920 --> 00:31:55,480 Speaker 1: or does it hold where it is? Well, my view 554 00:31:55,600 --> 00:31:57,440 Speaker 1: is that we are near the top of the interest 555 00:31:57,520 --> 00:31:59,840 Speaker 1: circle in the US and we're near the bottom of 556 00:31:59,880 --> 00:32:03,000 Speaker 1: the cycling Europe. And that obviously sounds counterintuitive since we're 557 00:32:03,040 --> 00:32:05,440 Speaker 1: talking about yet another rate hike, but it's just done 558 00:32:05,520 --> 00:32:08,280 Speaker 1: difficult to get real rates up in the US and 559 00:32:08,480 --> 00:32:10,360 Speaker 1: in Europe. How on earth are you going to lower 560 00:32:10,480 --> 00:32:12,800 Speaker 1: rates further from where they are. You're already destroying all 561 00:32:12,840 --> 00:32:14,960 Speaker 1: the markets and causing tons of the stortions. And so 562 00:32:15,120 --> 00:32:17,920 Speaker 1: obviously we have drugg Beta Tomorrow, he's going to try 563 00:32:17,960 --> 00:32:20,200 Speaker 1: to job on the you're lower and talk about this 564 00:32:20,360 --> 00:32:23,760 Speaker 1: amazing interest rate differential. I just don't see that interest 565 00:32:23,880 --> 00:32:27,000 Speaker 1: rate differential. Um If if we were to have high 566 00:32:27,120 --> 00:32:29,600 Speaker 1: real interest rates in the U s as economy would falter. 567 00:32:29,920 --> 00:32:31,640 Speaker 1: And so the feed is going to do what it's 568 00:32:32,000 --> 00:32:34,280 Speaker 1: best that it's going to stay behind the curve. And 569 00:32:34,480 --> 00:32:36,400 Speaker 1: yet we have this perception that they that we are 570 00:32:36,440 --> 00:32:38,480 Speaker 1: so far ahead in the US, and because of that, 571 00:32:38,640 --> 00:32:41,080 Speaker 1: we've priced a lot of good news into the dollar. 572 00:32:41,120 --> 00:32:44,240 Speaker 1: And that's I think why historically, UM, the dollar rises 573 00:32:44,280 --> 00:32:47,320 Speaker 1: an anticipation of rate hikes, but when they actually come, UM, 574 00:32:47,360 --> 00:32:49,880 Speaker 1: the data isn't clear at all. And that's why ever 575 00:32:50,000 --> 00:32:52,160 Speaker 1: since I in versus the G ten anyway, the dollar 576 00:32:52,200 --> 00:32:54,520 Speaker 1: reached its peak, I believe, and and so I think 577 00:32:54,560 --> 00:32:56,360 Speaker 1: it's gonna be very very difficult for the dollar to 578 00:32:56,520 --> 00:32:58,960 Speaker 1: to really rally from here. Well, if it doesn't rally 579 00:32:59,040 --> 00:33:01,240 Speaker 1: from here, then the fat doesn't have anything to worry about. 580 00:33:01,280 --> 00:33:03,360 Speaker 1: They can raise rates right, Well, they have plenty to 581 00:33:03,400 --> 00:33:05,200 Speaker 1: worry about. I mean, that's what they do. They worry 582 00:33:05,200 --> 00:33:07,480 Speaker 1: about everything anything because they don't have a clear picture. Now, 583 00:33:07,600 --> 00:33:09,280 Speaker 1: do keep in mind, moving from the dollar, you a 584 00:33:09,360 --> 00:33:12,520 Speaker 1: little bit um oil prices, you have a year flatish UM. 585 00:33:12,600 --> 00:33:16,080 Speaker 1: That means this excuse of disinflationary forces is kind of 586 00:33:16,200 --> 00:33:18,760 Speaker 1: gone um. And that means inflation numbers are going to 587 00:33:18,800 --> 00:33:20,600 Speaker 1: take a little bit higher. And so the FET is 588 00:33:20,640 --> 00:33:23,000 Speaker 1: going to have more more reasons to to say, oh 589 00:33:23,080 --> 00:33:25,600 Speaker 1: we gotta raise rates, and and sure enough, once they 590 00:33:25,720 --> 00:33:28,120 Speaker 1: do it, um, what's going to happen is um, the 591 00:33:28,240 --> 00:33:30,400 Speaker 1: market is going to have a fit again and and 592 00:33:30,440 --> 00:33:32,480 Speaker 1: they're going to paddle away from it. And the reason 593 00:33:32,560 --> 00:33:34,440 Speaker 1: why every time the fit has to step back is 594 00:33:34,480 --> 00:33:38,000 Speaker 1: becout what central banks ultimately do they compress with premia 595 00:33:38,320 --> 00:33:41,760 Speaker 1: That means that risk asses including equities move higher. And 596 00:33:41,800 --> 00:33:43,880 Speaker 1: then when they take a step back, well, utility comes 597 00:33:43,960 --> 00:33:46,560 Speaker 1: back and answerprises come down, and and so a fit 598 00:33:46,680 --> 00:33:48,800 Speaker 1: that doesn't really have a clear concept of what wants 599 00:33:48,840 --> 00:33:51,720 Speaker 1: to do is just gonna be whacked by its tail 600 00:33:51,760 --> 00:33:53,720 Speaker 1: by the market and it's going to take a step back. 601 00:33:53,760 --> 00:33:56,880 Speaker 1: So as the markets are fine right now, Jen Bala 602 00:33:56,960 --> 00:33:59,239 Speaker 1: is going to say, hey, well like rates and let 603 00:33:59,400 --> 00:34:01,560 Speaker 1: it come close to it and they have to backpedal 604 00:34:01,680 --> 00:34:05,000 Speaker 1: yet again. Well, in a weird sort of way, is 605 00:34:05,000 --> 00:34:08,480 Speaker 1: there anything wrong with that? In the sense that if 606 00:34:08,520 --> 00:34:11,239 Speaker 1: you don't see a bubble developing in the markets and 607 00:34:12,080 --> 00:34:16,120 Speaker 1: the economy could use some stimulus without generating inflation, even 608 00:34:16,160 --> 00:34:17,880 Speaker 1: if it's it's like the old question, it's like the 609 00:34:17,960 --> 00:34:20,439 Speaker 1: question I put to an economist yesterday, Is it okay 610 00:34:20,480 --> 00:34:23,319 Speaker 1: to be right for the wrong reasons? Well, of course 611 00:34:23,400 --> 00:34:25,560 Speaker 1: you don't see anything when you're blindfolded. I mean the 612 00:34:25,920 --> 00:34:29,600 Speaker 1: the what the central bank sets the price of the 613 00:34:29,719 --> 00:34:32,080 Speaker 1: risk cre asset. If the central bank doesn't know what 614 00:34:32,200 --> 00:34:34,640 Speaker 1: it's doing, the market doesn't know what it's doing. And 615 00:34:34,800 --> 00:34:37,560 Speaker 1: the FED ought not to reteal you, but give a 616 00:34:37,840 --> 00:34:40,040 Speaker 1: give a path where it's going to be, and it's 617 00:34:40,080 --> 00:34:44,840 Speaker 1: not playing that game. Instead, it's saying, well, if everything behaves, 618 00:34:45,120 --> 00:34:46,880 Speaker 1: we get away with raising rates because we want to 619 00:34:46,880 --> 00:34:49,640 Speaker 1: get away from zero. That is not leadership and that's 620 00:34:49,680 --> 00:34:51,640 Speaker 1: what the market leads. If you want to price assets, 621 00:34:51,680 --> 00:34:53,360 Speaker 1: you need to have a benchmark, and the FED is 622 00:34:53,400 --> 00:34:57,320 Speaker 1: not providing advantage. Excel with great respect you by perspectives, 623 00:34:57,480 --> 00:35:02,080 Speaker 1: have given to your shareholders what you've described and what 624 00:35:02,400 --> 00:35:05,759 Speaker 1: they want, which is hard currency and the worries of 625 00:35:05,840 --> 00:35:08,600 Speaker 1: the system. And some would say maybe a more Austrian 626 00:35:08,760 --> 00:35:12,040 Speaker 1: feel fine. What I what I want to know is 627 00:35:12,120 --> 00:35:17,480 Speaker 1: can you do the same daily analysis now that you 628 00:35:17,640 --> 00:35:21,360 Speaker 1: could when you were killing it week dollar a number 629 00:35:21,440 --> 00:35:24,560 Speaker 1: of years ago, or is that just as one example, 630 00:35:24,600 --> 00:35:29,080 Speaker 1: the rate market so distorted that you can't do the 631 00:35:29,200 --> 00:35:32,239 Speaker 1: same theory you've always worked with. You know that the 632 00:35:32,320 --> 00:35:35,120 Speaker 1: world has certainly changed and and so one of the 633 00:35:35,239 --> 00:35:38,240 Speaker 1: things that we set throughout the crisis is that because 634 00:35:38,680 --> 00:35:42,440 Speaker 1: as surprises don't like fundamentals. Instead they reflect what the 635 00:35:42,520 --> 00:35:44,839 Speaker 1: next move of policymakers might be. And one thing we've 636 00:35:44,840 --> 00:35:46,799 Speaker 1: been had said at some point is that, well, then 637 00:35:47,080 --> 00:35:49,960 Speaker 1: one good thing about policymakers is that they're predictable and 638 00:35:50,120 --> 00:35:52,640 Speaker 1: and and so that that has changed things and and 639 00:35:52,840 --> 00:35:54,600 Speaker 1: and yes, and then by the way, what a lot 640 00:35:54,680 --> 00:35:56,960 Speaker 1: of the things we do these days you refer to 641 00:35:57,000 --> 00:35:58,880 Speaker 1: a hot corencry strategy. We do a lot in the 642 00:35:58,960 --> 00:36:01,759 Speaker 1: short long short space. And the key emphasis here is 643 00:36:02,280 --> 00:36:05,719 Speaker 1: what we we look at at changing risk sentiment, how 644 00:36:05,840 --> 00:36:08,680 Speaker 1: fee is developing in different markets, and we think that's 645 00:36:08,760 --> 00:36:11,040 Speaker 1: really where where there's a lot of value that one 646 00:36:11,440 --> 00:36:13,880 Speaker 1: create these days. But to the kind of the traditional 647 00:36:13,920 --> 00:36:17,160 Speaker 1: Austin analysis, yes we do it, and it's the place 648 00:36:17,239 --> 00:36:19,759 Speaker 1: it works as Japan, right, I mean Japan, we've been right, 649 00:36:20,040 --> 00:36:23,320 Speaker 1: um we we we work along the yan for a 650 00:36:23,360 --> 00:36:25,800 Speaker 1: while and we dropped the beginning of the month because 651 00:36:25,840 --> 00:36:27,600 Speaker 1: with the two thirds majority it goes the other directions. 652 00:36:27,719 --> 00:36:29,600 Speaker 1: With Japan, it still works, but it doesn't work everywhere. 653 00:36:29,680 --> 00:36:33,200 Speaker 1: That's right from our investments. Thank you for joining Thank 654 00:36:33,239 --> 00:36:37,880 Speaker 1: you this morning. Thanks for listening to the Bloomberg Surveillance Podcast. 655 00:36:38,280 --> 00:36:43,320 Speaker 1: Subscribe and listen to interviews on iTunes, SoundCloud, or whichever 656 00:36:43,520 --> 00:36:47,360 Speaker 1: podcast platform you prefer. I'm on Twitter at Tom Keane, 657 00:36:47,840 --> 00:36:51,799 Speaker 1: Michael McKee is at Economy Before the podcast. You can 658 00:36:51,840 --> 00:36:55,080 Speaker 1: always catch us worldwide on Bloomberg Radio