Speaker 1: Who you put your trust in matters. Investors have put
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Speaker 1: Independent Advisor dot com. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best in economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and
Speaker 1: of course on the Bloomberg. We want to bring Lionel
Speaker 1: Lauren back with Bloomberg gad Fly in London to talk
Speaker 1: to us about Italian banking and the mystery of Montopost.
Speaker 1: Here's the chart quickly on Monte Apost and this is
Speaker 1: a thousand euros and then two hundred euros and then
Speaker 1: one hundred euros and we're down here at eighteen right now.
Speaker 1: I mean, it's been a total collapse of this bank, Leonel.
Speaker 1: What I'm frustrated about is I have not seen one
Speaker 1: iota of discussion about what it's going to cost the
Speaker 1: price of this transaction, whether it's the price of bond
Speaker 1: to equity, whether it's the yield taken on some form
Speaker 1: of bond or whether it's the actual dollar or euro
Speaker 1: figure that's going to be happened. Is there any price
Speaker 1: being discussed? That's a that's a good question. Um I Look,
Speaker 1: the difficulty here is that all all Italian banks have
Speaker 1: taken a big it. It's not just Montepasky the the
Speaker 1: change that you mentioned. There has been market cat destruction
Speaker 1: across the board. Um, we don't even know. Investors don't
Speaker 1: even know what's the balance sheet is worth, what these
Speaker 1: on flolans are worth. Even appetite for the equity at
Speaker 1: these incredibly cheat bats levels of zero point one times
Speaker 1: at times book has not attracted the investors. So right
Speaker 1: now we're twenty billion euros right, twenty billion euros could
Speaker 1: get you thirty Montpaskys. Um, it's it's completely unclear as
Speaker 1: to what you would spend the money on. So right
Speaker 1: now it's it's really complete lack of faith in in
Speaker 1: these balance sheets, in these valuations, and really the lack
Speaker 1: of mark to market going on here. For our global audience,
Speaker 1: particularly in London and particularly in New York and Washington,
Speaker 1: this is beyond odd. Are there outside institutions coming to
Speaker 1: bear upon an original Italian dialogue? And discourse. I'm skeptical.
Speaker 1: I really wish there was, but I feel like we
Speaker 1: we were here at the start of this year, we're
Speaker 1: here at the end of this year twenty billion euros. Again,
Speaker 1: you could do a lot, You could buy un credit
Speaker 1: with twenty billion, But I feel that this is not political,
Speaker 1: and that the whole discussion will be about whether you
Speaker 1: can avoid a bailon of investors, whether you can get
Speaker 1: a political solution to kick the can down the road.
Speaker 1: It will require the ECB, it will require Europe, it
Speaker 1: will require Germany agreeing something with Italy. My my concern
Speaker 1: is that we're still going to be talking about Italian
Speaker 1: banks and we still want to fix this solution well
Speaker 1: into next year. What would I have to do to
Speaker 1: get some degree of clarity on a bag of assets
Speaker 1: that I made buy from one of these institutions. How
Speaker 1: difficult would it be? It's it's difficult because there's so
Speaker 1: much that goes on. I mean, you do want to
Speaker 1: get some value right, and and and trying to work
Speaker 1: out how you can actually get that tiny bit of
Speaker 1: value left. That takes some security on getting those cash flow.
Speaker 1: They've got villas in Tuscany, they've got they've got all
Speaker 1: kinds of stuff on their books, They've got buildings around
Speaker 1: the corner from our bureau in Rome. How do how
Speaker 1: do we value this stuff? But but the issue is
Speaker 1: how do you retrieve the cash flows? Whereas the legal
Speaker 1: certainty some of these loans have been kicking around for
Speaker 1: ten years and unique political reform and legal from which
Speaker 1: you started to actually get the infrastructure behind getting the
Speaker 1: cash flows back for these vulture funds. There is appetite there. Absolutely,
Speaker 1: it's starting to change, but in terms of the discount
Speaker 1: that you would have to apply to get any concertancy
Speaker 1: on on getting the cash flows back, it's it still
Speaker 1: remains a big question. Leono, very valuable, Thank you so much.
Speaker 1: Look for Lionel Laura with Bloomberg gad flying no doubt
Speaker 1: on European banking. He was former chairman of Morgan Stanley Asia,
Speaker 1: from a chief economist at Morgan Stanley, now a Senior
Speaker 1: Fellow at the Jackson Institute of Global Affairs at the University,
Speaker 1: also a senior lecturer at the Yale School of Management.
Speaker 1: Stephen Roach joins us here in our studios in New York,
Speaker 1: recently returned from China. Great to have you here. And
Speaker 1: as someone who has traveled to China before, I know
Speaker 1: that the conversation plays itself out over and over and
Speaker 1: over again. People ask you while you're there for your
Speaker 1: sense of what US policy towards China is. And imagine
Speaker 1: there was some particular difficulty answering those questions this time
Speaker 1: while you were over there. If people were asking you
Speaker 1: what Donald Trump's policy towards China is, I want to
Speaker 1: ask you how many times you had to feel that question?
Speaker 1: But what do you find yourself saying when asked? Well,
Speaker 1: you know, I I talk about them some of the
Speaker 1: challenges that this new administration is going to face in
Speaker 1: delivering on its promises to get America growing again, deliver jobs,
Speaker 1: and make the country great again. And is it? Is
Speaker 1: it a challenge It's going to come in China's expense
Speaker 1: or ultimately in America's expense or the world's expense. And
Speaker 1: I guess the point that I make is that Trump
Speaker 1: inherits a difficult set of circumstances because the United States
Speaker 1: is a low savings economy that's going to be expanding
Speaker 1: its budget deficit under the Trump regine, and that budget
Speaker 1: deficit is going to push our low savings right, even
Speaker 1: lower create more problems with respect to our current account
Speaker 1: and multilateral trade and balances. Tom So that puts pressure
Speaker 1: more and more on China and the US to find
Speaker 1: a way out that doesn't create issues for the dollar
Speaker 1: or U S interest rate. David I thought that was
Speaker 1: a key sentence within Dr Roaches note was a bilateral
Speaker 1: fix in a multilateral world, which really captured some of
Speaker 1: those tensions when you you're over there, How is news
Speaker 1: about the transition being communicated? In other ways? What what
Speaker 1: is of interest to the press in China about about
Speaker 1: Donald Trump's China policy? In code as it is, what's
Speaker 1: being communicated? How has it been communicated? Well? I mean,
Speaker 1: and you know, the big shock was the phone call
Speaker 1: from Sighing, when President of Taiwan to Donald Trump, which
Speaker 1: really took the discussion US China into a realm that
Speaker 1: the Chinese work completely unprepared for. UH. They understand the
Speaker 1: broad constellation of forces, whether it's the South China Sea,
Speaker 1: the UH, some of the currency capital outflow related issues,
Speaker 1: but Taiwan was not a topic that was thought about
Speaker 1: ahead of time by the Chinese, and it's not quite
Speaker 1: clear that it was something that was thought about by
Speaker 1: the Trump administration either. But it is what it is,
Speaker 1: and this is, you know, touches on the key perceptions
Speaker 1: of territorial sovereignty for for China, and so I think
Speaker 1: the risk here is that the incoming Trump administration doesn't
Speaker 1: fully appreciate the waters that they are waiting into with
Speaker 1: respect to this issue. And I'm not sure the Chinese
Speaker 1: fully understand it either. How will they adapt to the
Speaker 1: general nous of the cabinet and of the senior administration
Speaker 1: of fish choices, the idea of the military within a
Speaker 1: Trump administration, Well, it's it's a great question, Tom. I
Speaker 1: mean that sort of changes the character by which the
Speaker 1: by which this new administration is going to address global issues.
Speaker 1: Is it going to be one of uh negotiating a
Speaker 1: a safer and saner worlds? Are going to be a
Speaker 1: more muscular The United States is going to demand uh
Speaker 1: that UM allies and adversaries alike, UH play according to
Speaker 1: its rules. Uh. These are these are tough strategic issues.
Speaker 1: One of the issues that that I found being addressed
Speaker 1: when I was there last week was, uh, what is
Speaker 1: the U. S Gonna do with respect to enforcing its
Speaker 1: treaties with h Japan? Korea, Taiwan, UH, and another Southeast
Speaker 1: Asian Assian economies. Is it gonna walk away? David, Girl,
Speaker 1: This is really important. This goes to what we talked
Speaker 1: about before, which is adjacencies and that we have such
Speaker 1: a simplistic bilateral dealmaking tone. Frankly, not just Mr Trump.
Speaker 1: I don't mean to criticize the President elect without the
Speaker 1: nuances of those adjacencies. How does to David's question, how
Speaker 1: does Singapore look at the new administration and the pivot
Speaker 1: to Asia? Well, the new administration is UH pivoting away
Speaker 1: from the pivot under the Obama doctrine that won the
Speaker 1: Secretary Clinton very much. UH supported that UMU. The US
Speaker 1: focus on Asia, especially through t PP was designed to
Speaker 1: put leverage on on on China and possibly contain what
Speaker 1: they worried to be a arise of China that was
Speaker 1: going well beyond something that UH, the United States was
Speaker 1: comfortable with strategically. UH and I think under if Clinton presidency,
Speaker 1: which will not occur, that that pressure that China containment
Speaker 1: strategy would have been an important feature of the next
Speaker 1: four years. That is taking a different form right now
Speaker 1: under under Trump, China containment appears to be shifting from
Speaker 1: the economic realm to more of a military strategy. And
Speaker 1: that's a worrisome UH development to think about. Stephen Roach,
Speaker 1: of course, with Morgan Stanley for years and now at
Speaker 1: Yale University. A beginning question is, David, and I ask
Speaker 1: you and quizz you on our central banks. Is the
Speaker 1: Phillips curve alive? And well, this odd relationship, this guestimate, this,
Speaker 1: if it was Newtonian nineteenth century, would be multiple plug
Speaker 1: in belief in a relationship of jobs, an inflation and
Speaker 1: a greater economy is a Phillips curve working? No, it's
Speaker 1: not working, but that doesn't prevent central banks from pretending
Speaker 1: that it will. I mean, why else did the Fed
Speaker 1: UH move um UH last week? There's a belief that,
Speaker 1: you know, inflation is moving back to their target, and
Speaker 1: so they want they want to align interest rates with
Speaker 1: a commitment to price stability. So using short term interest
Speaker 1: rates to address um UH inflation control is at the
Speaker 1: heart of what central banks UH have long done in
Speaker 1: this country and and probably around the world as well.
Speaker 1: Tom what did you make of of what Jennet Yellen Fitcher?
Speaker 1: Jennet Yellen said internews conference last week about the reader,
Speaker 1: which she and her colleagues has been thinking about the
Speaker 1: prospects for big fiscal policy, big fiscal spending. The fact
Speaker 1: that this decision was based at least in part on
Speaker 1: the sense that that might be coming down the line.
Speaker 1: How how active a role do you see the FED
Speaker 1: playing here if we are to see a big spending
Speaker 1: package like the ones that the President elect has proposed. Well,
Speaker 1: you know, David, the FETE has always said that, you know,
Speaker 1: they uh don't believe that monetary policy can do the
Speaker 1: job alone. I mean, I used to work at the
Speaker 1: fedback in the Jurassic era, and that was something that was, uh,
Speaker 1: you know, always in the template of anything you wrote
Speaker 1: in terms of official statements, you know, you know, way
Speaker 1: back then. Uh. And and and still is the case
Speaker 1: right now. And the and the Ft has argued in
Speaker 1: more recent times that the unconventional uh monetary ease and
Speaker 1: the swollen balance sheets reflect the fact that fiscal policy
Speaker 1: is not doing the heavy lifting. Well, guess what. Trump
Speaker 1: has promised to be much more proactive in terms of
Speaker 1: fiscal policy to so, uh does that mean that the
Speaker 1: FED has to accelerate? Uh, it's withdrawal from the current stance.
Speaker 1: And and I think that's what Janet Yellen was alluding to.
Speaker 1: If in fact that the fiscal authorities are going to
Speaker 1: play a more active role as the President actors promised,
Speaker 1: and you know that suggests a different approach for central
Speaker 1: banks in the US. Well, we're speaking with John Taylor
Speaker 1: last week and he was the next chair Perhaps we
Speaker 1: could get him to say so, but he was very
Speaker 1: optimistic that we would see reform to the way the
Speaker 1: FED is structured and the way that the FED interacts
Speaker 1: with with the Congress, going for what he thinks the
Speaker 1: appetite is there for for that to happen. Do you
Speaker 1: foresee that happening as well? A change here in that
Speaker 1: in that relationship. Principally, I would be surprised if if
Speaker 1: there would be legislation passed to sort of codify a
Speaker 1: rules based framework that Professor Taylor has long advocated. On
Speaker 1: the other hand, if he is appointed the next chairman
Speaker 1: of the Federal Reserve, you better believe that's where the
Speaker 1: that is headed. So I think it's going to be
Speaker 1: more personality driven rather than um driven by a new
Speaker 1: piece of legislation that reformulates the mandate. How do you feel, then,
Speaker 1: personality driven about let's even assume not the chairman, not
Speaker 1: the vice chairman, but the governors in the President's with
Speaker 1: the president's having a heritage of business, not being fancy
Speaker 1: pants macro economists like Stephen Roach. We all agreed there's
Speaker 1: got to be a couple. Kevin Warsh comes to mind
Speaker 1: of people outside the normal economic boom. But a lot
Speaker 1: of people supporting the president elect would say down with
Speaker 1: a macro economist, wouldn't they. Well, they I think they
Speaker 1: say down with experts, down with facts, down with truth. Okay,
Speaker 1: I'll go there. So I mean, you know, you've got
Speaker 1: to be careful, uh, in this um type of mindset
Speaker 1: that you know, when we go into where you can
Speaker 1: sort of say whatever you want and defend it as
Speaker 1: the new post truth reality. But but you know, I
Speaker 1: think that um, you know, getting back to the FED,
Speaker 1: the FED historically from you know, the years that I
Speaker 1: work there under uh, people like Arthur Burns remember him,
Speaker 1: Tom too, Uh, Paul Vulker to Alan Greenspan and Janet Yelling.
Speaker 1: The chairman has played a disproportionate role in shaping Monty.
Speaker 1: You'd like to see less of that and FED decision making.
Speaker 1: I certainly think that this is a committee that should
Speaker 1: be ruled by a democracy. Very quickly here you mentioned
Speaker 1: Sherman Burns. Folks, he used to do it unmeasured. Should
Speaker 1: we have a FED that has occuraged to do more
Speaker 1: than twenty five basis points if they're gonna act act
Speaker 1: with a little more power into the system, or should
Speaker 1: they stay green spanning and measured. Large measures are designed,
Speaker 1: I think to surprise markets. Greenspan wanted to uh sort
Speaker 1: of out of the markets, and that it depends on
Speaker 1: you know where where we're how how far the markets
Speaker 1: go uh in taking us to unpleasant places, and if
Speaker 1: the markets are turned out to be a problem, which
Speaker 1: is clearly a risk in terms of some of the
Speaker 1: dislocations that we're seeing now in markets, and then will
Speaker 1: require larger actions. David, can you imagine young Roach sitting
Speaker 1: at the FED with a pipe and never smoked a pipe, Tom,
Speaker 1: but certainly had you know, a great experience in dealing
Speaker 1: with characters like Arthur Burns character that goes back to
Speaker 1: the personalization about his chairman. Burns battled with the Nixon
Speaker 1: White House. Steven Roach always enjoyed David Gurr and Tom Keene.
Speaker 1: The Penguins beat the Rangers last night, which I think
Speaker 1: is the only reason. Stephen as here. Did you go
Speaker 1: to the hockey game last night? You did not go
Speaker 1: to the hockey game. I did not. I'm waiting. I'm
Speaker 1: saving my energy for the Giants game on Thursday. That
Speaker 1: will be very exciting. Absolutely, Stephen A with us, uh
Speaker 1: with with Federated, tell us give us an update Unfederated.
Speaker 1: A long time ago, Federated owned the money market short
Speaker 1: term paper business. Do you still own it? I mean,
Speaker 1: even with all that's changed, we don't think we ever
Speaker 1: owned it, but we have a decent share of it.
Speaker 1: You know, we're still one of the top ranked money
Speaker 1: market players. Uh in the United States. We're becoming a
Speaker 1: pretty big equity player, which is where I where. Um. Yes, yeah,
Speaker 1: I know you're focused on the equity view and we're
Speaker 1: just beginning or two thousand seventeen views. Are you surprised
Speaker 1: by the double digit wonderment of two thousand and sixteen? Uh?
Speaker 1: I am a little bit surprised. Tom. We We've been
Speaker 1: cautious all year up until the day after the try. Yeah.
Speaker 1: Things changed, effects change, and we shifted at that point
Speaker 1: to a more at least neutral stance from an underweight
Speaker 1: stance on equities. But yeah, it's been a tough year.
Speaker 1: I mean we've been through really an eighteen month bear
Speaker 1: mini bear market, really going all the way back to
Speaker 1: May fifteen, and we've now we think we've now exited
Speaker 1: that one of these It's interesting, David, is to have
Speaker 1: someone of such grizzled experience as Mr Arth, who was
Speaker 1: enjoyed being wrong before, so talking about it is not painful.
Speaker 1: It's like, you know, you're a little underweight this year,
Speaker 1: and that's what happens when you when you look at
Speaker 1: a sort of what changed scars me too. Uh, let's
Speaker 1: go to the election, that's or what changed after that?
Speaker 1: We saw this impulse here to get into things that
Speaker 1: might be in line with it with an introduction spending plan.
Speaker 1: We sew people going to financials. How in that rush
Speaker 1: were you? And and now a few months after that,
Speaker 1: a few weeks after that, at least, how much sense
Speaker 1: did that make? How much of that was just exuberance?
Speaker 1: There's a little bit of exuberance in there. I wrote
Speaker 1: a piece last weekend called wall of hope. You know,
Speaker 1: usually markets climb walls of worry, and right now this
Speaker 1: market is climbing a wall of hope. We're awesome, and
Speaker 1: it's it's unusual because you know, if you think about
Speaker 1: it against the context of a long period now where
Speaker 1: we've been told we can't grow, productivities declining, we just
Speaker 1: keep carving up the pie. Uh and business is really
Speaker 1: under attack. Really, I think we're seeing something different now.
Speaker 1: There's something in the air. You can see it in
Speaker 1: the confidence indicators, you can see it in the stock market.
Speaker 1: You've got a businessman running the bully pulpit, if you will.
Speaker 1: And I think his proposals are somewhat misunderstood. Actually, in fact,
Speaker 1: people keep talking about fiscal package as if it is
Speaker 1: and I have every political anilist in the country in
Speaker 1: my offices over the course of the year. Obviously um
Speaker 1: and you know Hillary Trump didn't matter. We're gonna get
Speaker 1: a big fiscal stimulus. I think we're in this world
Speaker 1: where we think, since the private sector can grow, the
Speaker 1: only to make it grow is the government either fed
Speaker 1: or the government spends money it doesn't have and somehow
Speaker 1: hires people and gets them to work. And that is
Speaker 1: precisely not what Trump is thinking about. He doesn't articulate it. Well,
Speaker 1: he's a businessman. He's an entrepreneur. But what I would
Speaker 1: like to use the term restructuring economic restructuring to define
Speaker 1: the Trump program. And if you think about that, deregulation,
Speaker 1: getting out of the way of making business is more efficient,
Speaker 1: cutting their costs, cutting their tax burdens, making the tax
Speaker 1: code simpler, infrastructure spending from the perspective of making the
Speaker 1: economy more efficient, to raise productivity. All of those things
Speaker 1: can improve economic growth, maybe bump inflation a little. But importantly,
Speaker 1: I think, and this is the real up here with
Speaker 1: the Trump plan. Uh the but the bond bears, and
Speaker 1: you know they've been out in force in the last
Speaker 1: twenty four hours even right the bond bears would say, look,
Speaker 1: this is full stop inflationary when you apply fiscal stimulus
Speaker 1: to an economy that's at full employment. But if you're
Speaker 1: providing structural reform to an economy and full employment, maybe
Speaker 1: you can increase the growth rate and not have inflation
Speaker 1: go through the roof, not have the ten year bond
Speaker 1: you'll go to five. And in that context, you're in
Speaker 1: another leg of the equity bull market, and for now
Speaker 1: I think that's what we're in. Obviously, things don't go
Speaker 1: straight up, We're due for a pullback, some accident, something,
Speaker 1: but our view is that this wall of hope is
Speaker 1: going to keep us going for most of the next year.
Speaker 1: How much of this is attributable to the plans that
Speaker 1: you were talking about their the infrastructure plans versus something
Speaker 1: more ineffable, just a new sense of optimism, the fact
Speaker 1: that we're going to see a change in Washington, the
Speaker 1: fact that we're going to see at Republicans controlling at
Speaker 1: the legislative branch and the executive branch. Less based on
Speaker 1: the granular nature of these plans. So I don't have
Speaker 1: the granular nature plans that, but but more just on
Speaker 1: a feeling. Well, one of the things I've learned from
Speaker 1: the various scars on my back, David, is that I'm
Speaker 1: not a lot smarter than everybody else. So part of
Speaker 1: me thinks, oh, I have an insight here that no
Speaker 1: one else has figured out, because I hear when talking
Speaker 1: about this fiscal spending, and particularly the infrastructure in the
Speaker 1: roll focus, how big it's going to be, how many
Speaker 1: dollars it's gonna get spent. How quickly are I think
Speaker 1: the markets and businesses actually smell out what I smell
Speaker 1: out that this is something more than just that. And um,
Speaker 1: I think that's part of what's going on. And look
Speaker 1: what's moving. I mean, you know the stocks that are
Speaker 1: really in the heart the cross hairs of these reforms,
Speaker 1: like the bank spooks. You've got deregulation, you've got lower taxes. Uh,
Speaker 1: you know, you've got nominal GDP growth picking up. These
Speaker 1: are all things that helped the banks. Uh. You know,
Speaker 1: the sector the right sectors are moving in this sort
Speaker 1: of different view of the world. So I think actually
Speaker 1: people are sniffing this out. We are evaluations. I mean
Speaker 1: just on a trailing p basis. I mean, I mean
Speaker 1: not that you and I want to recite Graham Dot
Speaker 1: and Coddle, not the coronozoo Graham dot and or Coddle
Speaker 1: is but where are valuations right now? Graham dot I
Speaker 1: think that might have been a bill or something. Uh. Well,
Speaker 1: on a trailing basis, valuations look very extended. And you
Speaker 1: could say, in a way, this entire move post Trump
Speaker 1: has been a value a reevaluation of equities. I don't
Speaker 1: think that's the case. I think we think markets are
Speaker 1: being valued about eighteen times where they believe earnings are
Speaker 1: gonna be in twelve to eighteen months to me, I
Speaker 1: mean interrupt. This is critical because you said eighteen months. Yeah,
Speaker 1: I agree, it's not a I mean the media does
Speaker 1: a one year view. I agree. The Trump is um
Speaker 1: has moved us out exactly in a wall of hope environment.
Speaker 1: People are willing to look eighteen months out in a
Speaker 1: things are going nowhere environment. Everyone wants to know. Tell
Speaker 1: me what the trailing earnings are. I can't convey enough,
Speaker 1: folks how important this is. This is called theta on
Speaker 1: the X axis, which is a time continuum of the
Speaker 1: belief from confidence, and all of a sudden everybody reaches out.
Speaker 1: The middle syllable of economy is con confidence. It could
Speaker 1: be that's where the cynic for Brooklyn Commy doesn't go
Speaker 1: anywhere without confidence. So yeah, eighteen times one forty, which
Speaker 1: is where we think we easily get to by sometime
Speaker 1: in two thousands. Are we going back to a cell side?
Speaker 1: The security analysts that come on the show all good people,
Speaker 1: where they're ordered by their research directors to start, well,
Speaker 1: can you give me a two thousand and eighteen view
Speaker 1: in you know, February of two thousand seventeen. That's you
Speaker 1: and I remember this. Yeah. The thing is about the
Speaker 1: cell side is they are hesitant to put out numbers
Speaker 1: that they don't have facts to support the great in
Speaker 1: the New world, Like really, they've got the Attorney General
Speaker 1: chasing after whatever. So, but are we going back with
Speaker 1: Donald Trump? Are we going back to what you and
Speaker 1: I remember our five year view on international business machines?
Speaker 1: I think it is. It is changing now. It's very
Speaker 1: horizon is changing. Wall of Hope? Do you have any
Speaker 1: idea what we're talking about? David? You know, I follow,
Speaker 1: I could follow here climbing that wall of hope with you,
Speaker 1: Stephen Federated Investors. Of course, I'm doing equity investments. They're
Speaker 1: forcing us to continue with Mr Author so much fun,
Speaker 1: Like really, I mean seriously, folks trying to figure out
Speaker 1: the time continuum and the changes of Mr Mr Oths
Speaker 1: phrase the wall of Hope. I love that with audacity.
Speaker 1: We will use that. Did you get that? David? Which
Speaker 1: David got it? I haven't started by Christmas shopping yet.
Speaker 1: Help Who you put your trust in matters? Investors have
Speaker 1: put their trust in independent registered investment advisors to the
Speaker 1: two and of four trillion dollars. Why they see their
Speaker 1: roles to serve, not sell. That's why Charles Schwab is
Speaker 1: committed to the success over seven thousand independent financial advisors
Speaker 1: who passionately dedicate themselves to helping people achieve their financial goals.
Speaker 1: Learn more and find your independent advisor dot com. Alan Krueger,
Speaker 1: Princeton economist, teacher of public policy at Princeton, has written
Speaker 1: a piece with his colleague there at the university, Alan Blinder,
Speaker 1: from a vice chair at the Fed Reserve, looking at
Speaker 1: Donald Trump's in structure mistake. As they put it, We've
Speaker 1: been talking about the infrastructure plan this morning, so much
Speaker 1: as we know about it. And before we get into that, Alan,
Speaker 1: I want to ask you. I mean, I think right
Speaker 1: after the election, I was asking every guest without fail
Speaker 1: here for a definition of trump ponomics. Uh, let's reprise
Speaker 1: that here on December the twenty three, wenty closer to
Speaker 1: having a sort of standardized definition of what trump ponomics is.
Speaker 1: No good. We see that Ellen Krueger has continued to
Speaker 1: not take the surveillance radio course for emphasis. Give us
Speaker 1: a sense of maybe saut who knows uh? Donald Trump said,
Speaker 1: uh thought wages were too high. The next day he
Speaker 1: said he was misheard UH many todays for ten dollar
Speaker 1: federal minimum wage, and apparently he plans to nominate someone
Speaker 1: for labor secretary was opposed to the minimum wage altogether.
Speaker 1: So I think it's very hard to divide exactly where
Speaker 1: he stands on economic policy, and it's a moving partment.
Speaker 1: Walk us through here what we know of the infrastructure
Speaker 1: proposal we expect to be on the table here when
Speaker 1: he takes office. You point out in your piece that
Speaker 1: Peter Navarro and wilber Ross has outlined in some detail
Speaker 1: what that's going to look like. Give us a sense
Speaker 1: of a shape. Well, that's one area where the campaign
Speaker 1: actually was specific, um, one of the few areas, and
Speaker 1: what they proposed I think could be a component of
Speaker 1: a robust infrastructure plan, but just a component of it.
Speaker 1: So I think the problem is that the plan is
Speaker 1: really lacking, as opposed to UH being a mistake to
Speaker 1: have an infrastructure plan, or even for this to be
Speaker 1: a component of the infrastructure plan. What Peter Navarro and
Speaker 1: wilber Ross proposed in their ten page white paper is
Speaker 1: to have the federal government provide a very large tax
Speaker 1: credit tax credit to encourage private investors to invest in infrastructure.
Speaker 1: UM there are some projects, probably a small number, where
Speaker 1: that makes some sense to have h private sector participation
Speaker 1: in the design and construction of the infrastructure. U subsidies
Speaker 1: drives us as awfully generous. But more importantly, there are
Speaker 1: many other projects where there's no revenustry, so there's no
Speaker 1: incentive for private investors to make an investment in public
Speaker 1: infrastructure projects like schools or hospitals, roads that don't have
Speaker 1: Told Allen, the hallmark of your work is granular with concept,
Speaker 1: and in the back of your important essay with Professor Blinder,
Speaker 1: you bring up something that I'm going to suggest worked
Speaker 1: like a charm, which was Build America Bonds. Educator audience
Speaker 1: on the success the proven success of Build America bonds.
Speaker 1: Both America Bonds were one of secrets of the Recovery Act.
Speaker 1: The Recovery Act provided for a new type of municipal bond,
Speaker 1: one where the federal government encouraged subsidized UH municipal government
Speaker 1: state government to do infrastructure projects by giving them a
Speaker 1: thirty direct subsidies to cover their interest costs. So instead
Speaker 1: of taxing them bonds which worked through wealthy investors who
Speaker 1: get interest tax free, these work by providing a direct
Speaker 1: subsidy to the state and local governments to pay their
Speaker 1: interest costs. These were taxable bonds, so they were appealing
Speaker 1: to investors from abroad, they were appealing to nonprofits depending funds,
Speaker 1: to any investors who don't have tax liabilities in the US.
Speaker 1: They were available for just two years, tom and in
Speaker 1: that period almost two billion dollars to Build America bonds
Speaker 1: were issued. And remember two thousand that at the time
Speaker 1: when the bond markets were frozen. So there's new innovation
Speaker 1: enabled infrastructure to go forward up at a time when
Speaker 1: financing was extremely challenged. The state local governments say, by
Speaker 1: my calculations, over thirteen billion dollars because of the subsidy
Speaker 1: and the lower interest rate that they were paying. Why
Speaker 1: were they paying a lower interest rates? They paid a
Speaker 1: lower interest rate because there were many more buyers and
Speaker 1: these bonds than municipal bombs. Because foreign investors and tension
Speaker 1: funds and and and UH nonprofits endowment funds, UH all
Speaker 1: desired these bonds. And I'm looking back on that Recovery Act.
Speaker 1: What are some some lessons learned here that this new
Speaker 1: administration could change or do things differently going forward here
Speaker 1: in terms of what what what didn't work about that
Speaker 1: Recovery Act that could that could be different this time around. Well,
Speaker 1: you know, when you're talking about an eight billion dollar act,
Speaker 1: and I think there were many many different components for
Speaker 1: the cup REACT that was a very different time. Unemployment
Speaker 1: rate was on its way up ten percent at that time,
Speaker 1: probably higher without the Recovery Act. UM. But just as
Speaker 1: far as infrastructure is concerned, UM, I think one has
Speaker 1: to recognize that infratrustre infrastructure spending does go out slowly.
Speaker 1: It takes a while to get the projects spot the ground.
Speaker 1: One aspect of infrastructure that does go out quickly, however,
Speaker 1: is maintenanced, and we have an enormous need in this
Speaker 1: country for maintaining our roads and our bridges and our highways,
Speaker 1: for fixing UH structurally damaged bridges for example. UM maintenance
Speaker 1: also has a very high economic return, and it's particularly
Speaker 1: difficult to see how having a private equity investment is
Speaker 1: going to help prepare existing roads where it's already very
Speaker 1: difficult to collect more revenue in terms of tolls from
Speaker 1: those roads. So UM, I think I would emphasize if, if,
Speaker 1: if the administration is interested in investing in infrastructure to
Speaker 1: generate a high return and to um generate more economic activity,
Speaker 1: and to focus on me Alan Krueger with US of
Speaker 1: Princeton University. Always there are eight ways to go, David,
Speaker 1: can I rip up the script Alan Krueger among minimum
Speaker 1: wage with card, among your teaching, among your public service,
Speaker 1: your discussion with Professor Blinder, and infrastructure. You wrote a
Speaker 1: little book that I read every word of It was
Speaker 1: a jewel on terror. I found it exceptionally illuminating. Back then,
Speaker 1: it was new, it was different, and yet terror has endured.
Speaker 1: As you look at Berlin, as you look at the
Speaker 1: assassination and Anchora. What have you learned since you wrote
Speaker 1: that beautiful monograph about terror? Oh, thanks for asking me
Speaker 1: about it. Tom actually sitting right in front of me.
Speaker 1: I'm about to revise the book because it's now almost
Speaker 1: ten years old and it needs it. It needs to
Speaker 1: be revised. That's wonderful. What's new? Well, I think what
Speaker 1: we've seen since I wrote What Makes a Terrorist is
Speaker 1: a very large expansion of lone wolf terrorism. People are
Speaker 1: acting on their own, may be inspired by some of
Speaker 1: the terrorist organizations, but not guided by them, not trained
Speaker 1: by them, not deployed by them. And I think that's
Speaker 1: a very different type of terrorism. They tend to be
Speaker 1: people who have run into problems in their lives who
Speaker 1: are carrying out these acts, whereas the nine eleven type terrorists,
Speaker 1: the terrorists who are sent by the terrorist organizations, are
Speaker 1: much more disciplined. They're much more dangerous in the types
Speaker 1: of act that they can carry act out. All of
Speaker 1: the loan terrorists are also dangerous, of course. Uh, And
Speaker 1: it's more of an existential threat and when it comes
Speaker 1: from a terrorist organization as opposed to these loan wolts,
Speaker 1: you know. I imagine wrapped into all of that is
Speaker 1: the role of the media and social media and the
Speaker 1: way that a lone wolf now can be radicalized with
Speaker 1: more ease than in the past. Absolutely. Uh, there's the
Speaker 1: way information spreads on the internet. Also, I don't think
Speaker 1: we've learned that the media should stay cool after these
Speaker 1: terrorist attacks and wait for the facts to come in. Invariably,
Speaker 1: the initial reporting is wrong, Even the best initial reporting
Speaker 1: tends to be wrong, and that just rates his fear
Speaker 1: in the public and blows the fear beyond beyond the
Speaker 1: risk that we're actually facing the line here between radicalism
Speaker 1: and terrorism and your economics is that still a huge
Speaker 1: motivating factor here? Just economic disparity, economic dissatisfaction. I think
Speaker 1: economic disparity has actually very little to do with it. UM.
Speaker 1: The terrorist organization seemed to be driven by geopolitical concerns,
Speaker 1: by occupations and conflicts and being on often the wrong
Speaker 1: side of history and using the only means they have. UM.
Speaker 1: The terrorists themselves are not people who are desperately poor
Speaker 1: even alone. Wolves tend to be people who look like
Speaker 1: the populations that they're coming from. UM, and certainly go
Speaker 1: back to nine eleven, it was people who were well educated,
Speaker 1: from from very wealthy families, from the countries that they
Speaker 1: came from. UM. So I think we tend to look
Speaker 1: at events through a lens of economics and tend to
Speaker 1: attribute too much to economic motivations. How about through the
Speaker 1: lens of public policy and how we respond to this,
Speaker 1: how we prevented from happening. How much better are we
Speaker 1: at it now than we were when you first wrote
Speaker 1: the book? Well, I think we're about to take a
Speaker 1: giant leak to being worse at it. I mean, I
Speaker 1: think provoking UH religious groups UM and criticizing entire religious
Speaker 1: groups is not a way UH to prevent radicalization. UM.
Speaker 1: You know, I admire what George Bush did in many
Speaker 1: respects by going to a mosque and saying that our
Speaker 1: enemy are these terrorist groups. I think we need to
Speaker 1: focus on terrorist organizations and try to degrade their capabilities. Um,
Speaker 1: and need to take security precautions against the lone wolves.
Speaker 1: But that's not the biggest threat that we faced. That's
Speaker 1: not an existential threat I think to the US. On
Speaker 1: the other hand, the terrorist group being able uh to
Speaker 1: use weapons of mass destruction, that is a threat to
Speaker 1: the US. Yeah. I look, Allan. And to bring it
Speaker 1: back to I guess where we are right now. There's
Speaker 1: a construction of a cabinet. I've got to ask a
Speaker 1: difficult question. Lawrence Cudlow has been a terrific market economist
Speaker 1: with a steam track record at bear Stearns. Mr Eisenboys
Speaker 1: down at the Atlanta Fed documented it's a number of
Speaker 1: years ago. And of course the rap that will be
Speaker 1: put out by critics of President elect Trump is that
Speaker 1: he's not a fancy pants PhD economist like Allen Krueger. Uh,
Speaker 1: with great candor and respect for your work. And frankly,
Speaker 1: Mr Cardlos, Larry Cardlos, do you think it's a requirement
Speaker 1: to be an academic and a PhD to be the
Speaker 1: chairman of the President's Council of Economic Advisors. It's not
Speaker 1: a requirement, Tom, And at the very beginning of the council,
Speaker 1: in fact, there was a lawyer who was the chairman.
Speaker 1: Beginning with President Eisenhower. He asked Arthur Burns to review
Speaker 1: the Council Economic Advisors, and it was Arthur Burns's view
Speaker 1: that the council should be run by UH research economists
Speaker 1: economics who are familiar with the literature. UH doesn't have
Speaker 1: to be an academic, of course, and hasn't always been
Speaker 1: an academic. UM. So I don't think there's a requirement
Speaker 1: that it is UH fancy pants PhD as you put it.
Speaker 1: But I think it is helpful for the person to
Speaker 1: be knowledgeable of certainly of the economy, but also of
Speaker 1: what the uhsearch has found about the economy. Let me
Speaker 1: interject your David as you jump in and suggested by
Speaker 1: fancy pants PhD, Mr Gurt, I understand that Alan Krueger
Speaker 1: works more than fifty one work week, where the stereotype
Speaker 1: of his work at Princeton is about eighteen a week.
Speaker 1: You know, you sort of Wanders on Thursday to teach,
Speaker 1: you know, undergraduate very quickly here, Allan, when when you
Speaker 1: look at that role of c e A chair, how
Speaker 1: much of it is is baked in other ways? How
Speaker 1: much determinism do you have when you inherit that role
Speaker 1: to shape at what that council does? Well? Certainly at
Speaker 1: the beginning of the administration you do. Um, it's a
Speaker 1: great job, and I should say I think very highly
Speaker 1: Uh Larry Cutlo as television persona. I've always enjoyed interacting
Speaker 1: with him. You've never called me persona. Continue, Allen, I'm
Speaker 1: still holding out and hope for you that there's a
Speaker 1: job for you. You know, there's a bow tie. There's
Speaker 1: a bow tie restriction. Uh. At the beginning of administration,
Speaker 1: when procedures are getting set, I think that's the time
Speaker 1: when individuals in any of these top level jobs going
Speaker 1: to have the greatest influence. Um, the council is a
Speaker 1: terrific job. Being chairman of the CEA is a terrific
Speaker 1: job because you're basically heading a think tank right next
Speaker 1: to the president. You have an outstanding, hard working staff.
Speaker 1: They come for a year. Again, this is the way
Speaker 1: that Arthur Burne set it up for President Eisenhower. Um,
Speaker 1: the staff usually doesn't care too much about uh stepping
Speaker 1: on people's toes because they're gonna go back to their
Speaker 1: previous jobs. And UM, you get to weigh in basically
Speaker 1: on any economic policy that you want to the second
Speaker 1: Arthur Burns reference of the of the show there, I
Speaker 1: know it's too much. Alan Krueger, with great respect, thank
Speaker 1: you so much, and congratulations early for any and all
Speaker 1: of whatever persuasion Trump's infrastructure mistake. Blinder and Krueger in
Speaker 1: the Wall Street Journal, and we look forward to the
Speaker 1: new new edition of What Makes a Terrorist? When that
Speaker 1: when the Ling book, I remember when he brought it out,
Speaker 1: and to be blunt, David, it was so brutal that
Speaker 1: a lot of people couldn't read it. You know, it
Speaker 1: was just so shockingly direct about what his research showed
Speaker 1: in the mindset of those that commit terra. Let me
Speaker 1: get your attention, Americans. Imports would be more expensive, exports
Speaker 1: would be cheaper, which I guess means the President elect
Speaker 1: wants to buy a BMW or Mercedes or something like that.
Speaker 1: Sebastian Galley has done terrific work on this. Deutsche Bank.
Speaker 1: Let's talk about something I don't know about, and I
Speaker 1: guess as most of our listeners don't know about. Sebastian,
Speaker 1: Good morning. The Better Way Reform package in a border
Speaker 1: to its proposal discuss it's a it's an interesting and
Speaker 1: UH and because the groundbreaking proposal made by the incoming
Speaker 1: administration UH to tax imports essentially an equivalent of putting
Speaker 1: on a duty. That means if you would be shopping
Speaker 1: in Walmart, it would be significantly more expensive under the
Speaker 1: new plan. On the other hand, there's really no penalty
Speaker 1: for for exports for net net and theory it should
Speaker 1: be a positive for the U S economy. Unfortunately, it
Speaker 1: also probably means a bit of inflation coming through some
Speaker 1: more appeal for UH the U S because it looks
Speaker 1: essentially better in terms of balance sheet. It's to some
Speaker 1: extent a good reform um and the outcome would be
Speaker 1: a stronger dollar and more inflation coming into the US.
Speaker 1: It it's a radical plan. UH, it's an interesting plan
Speaker 1: and UH it's it's very sizable in terms of its
Speaker 1: implication for mistic the mix of industries within the United States,
Speaker 1: and maybe some restoring of activity in the US. What's
Speaker 1: your sense of of whether or not this is going
Speaker 1: to be come policy. I mentioned are we speaking with
Speaker 1: and Morris of City yesterday about the oil market, and
Speaker 1: he brought this up in that context as well, that
Speaker 1: a border tax adjustment could result in a boon here
Speaker 1: for US producers. What sectors do you see this affecting
Speaker 1: the most, well, anybody who's exporting, and including the the
Speaker 1: oil sector. But the export sector in the United States
Speaker 1: is relatively weak, so pretty much anybody who starts to
Speaker 1: develop these kind of activity and it will probably take
Speaker 1: a few quarters for that to happen well well benefit
Speaker 1: from this. There are basically low added value type of
Speaker 1: producers sign I T sectors and the likes which would
Speaker 1: benefit very strongly because their margins are very poor. On
Speaker 1: the other side, there there are those who import a lot,
Speaker 1: and that's actually right now. They the majority um and
Speaker 1: they would suffer and they would have to take a
Speaker 1: hit on their earnings. You, of course, are are deeply
Speaker 1: involved with for ex strategy. And let's let's talk a
Speaker 1: little bit about China. We kicked off the show talking
Speaker 1: to Stephen Roach about the Chinese economy, and I wonder
Speaker 1: if you're you're forecasting here a s Groundhog Day in
Speaker 1: the new year. Just in January and February of this year,
Speaker 1: there was so much trouble with China's reserves and we
Speaker 1: saw so much movement in the Chinese currency. What's your
Speaker 1: your sense of where we're headed here in the new year, Well,
Speaker 1: what is what we've seen is the Chinese essentially been
Speaker 1: puts and more and more capital controls domestically UH to
Speaker 1: to stand the risk of outshows, including UM many marchers
Speaker 1: in acquisitions which we're going from China, particularly going into
Speaker 1: into Europe to acquire technology so that they could renovate
Speaker 1: the basically the industries within China. UH that has been cut,
Speaker 1: which tells you that there's a lot of pain. That
Speaker 1: means in terms of potential outflows, they're they're still there,
Speaker 1: but they simply are not realized. What will happen in
Speaker 1: the beginning of the year is as pointed off by
Speaker 1: our colleagues in Asia, is that the retail investors will
Speaker 1: be allowed to export such fifty sum per person and
Speaker 1: that typically means us some upper pressure on the dollar
Speaker 1: versus that remimbi. So there might be UH some some
Speaker 1: weakening of the remimbia in the beginning of the year.
Speaker 1: It might also be used as a signal to all
Speaker 1: the to the incoming administration, but that's not very clear.
Speaker 1: It's a bit playing with fire. If it's a very
Speaker 1: large evaluation. If it's a medium one, that it's more debatable.
Speaker 1: And so you know that when the big guys are
Speaker 1: playing in playing poker it so it can be a
Speaker 1: difficult game. Are there indications when you when you look
Speaker 1: at the currents, when you look at the Chinese currency,
Speaker 1: are you confident here that the Chinese government is letting
Speaker 1: it is willing to let it float. Well, they can't
Speaker 1: let it float. They are not not fast enough because
Speaker 1: they would effectively be a form of extreme tightening of
Speaker 1: monetary conditions within China. So what it's trying to do
Speaker 1: is achieve a reasonable pace of of the evaluation. Its
Speaker 1: currency is a cyclically overvalue it even though in long
Speaker 1: term and say it's actually quite cheap, they do have
Speaker 1: significant problems and as a fat Titans is driving a
Speaker 1: lot of demand for the dollar, plus the issue that
Speaker 1: they have in China um and and so the outcome
Speaker 1: is they're they're doing their best to to have a
Speaker 1: moderate evaluation, but that comes into the face of an
Speaker 1: incoming administration, which has decided to something ex actly for
Speaker 1: now to concern sun China. So it might be difficult
Speaker 1: from where you said, what does the ability to quote
Speaker 1: unquote make money or maybe make alpha and e M
Speaker 1: currencies right now? Is that a context bard and hazards
Speaker 1: or is there a real opportunity and the travails of
Speaker 1: emerging markets given President Trump, well, I mean particularly I
Speaker 1: feel if we're going to get trade wars in that,
Speaker 1: which seems somewhat likely on the emerging markets are particularly vulnerable.
Speaker 1: Then then again, some of them are are doing a
Speaker 1: little bit better. Higher old prices are helping some oil producers,
Speaker 1: and some of our colleagues are putting out to the
Speaker 1: Russian ruble is maybe being not so unappealing as it
Speaker 1: used to be. So there are some marginal opportunity within
Speaker 1: emerging markets, but the ways of risk coming from the
Speaker 1: fact that the FED is tightening, that there is significant
Speaker 1: risk and it's propagating in different ways through emerging markets
Speaker 1: is not over and so you could get further shock
Speaker 1: going through emerging markets, whether it's Mexico, whether um, it's
Speaker 1: it's other part of the emerging market spectrum, which which
Speaker 1: will still be coming in in the in the next
Speaker 1: a few quarters. Difficult to time them, but there are
Speaker 1: some pockets which maybe are of value, and Russian roubles
Speaker 1: have been identified by our colleagues. You mentioned Mexico and
Speaker 1: it was a currency we were following so closely during
Speaker 1: the presidential campaign. What is the legacy of that band
Speaker 1: when you look at here the Mexican currency versus the
Speaker 1: dollarance or what the future of that area is, what
Speaker 1: do you see? Well, first, I have to apologize because
Speaker 1: a few years ago it was so bullish on the
Speaker 1: Mexican baso reforms and all the likes, and it has
Speaker 1: been essentially a disaster. The occurrency has been devaluing and
Speaker 1: at a steady pace, and it's extremely linked to expectations
Speaker 1: of offset tightening. It's been used as a proxy given
Speaker 1: it's a it's high correlation and uh and it also
Speaker 1: means that even though the risk have faded recently in
Speaker 1: the Mexican bay so that they still can can come
Speaker 1: back in in the next few quarters. So unfortunately, whatever
Speaker 1: the fundamentals on Mexican Mexico are, they they are driven
Speaker 1: by the FETE into a secondary extent of the potential
Speaker 1: for some confrontation with a Trump adsinistration, which thankfully set
Speaker 1: a diminition. Thanks for listening to the Bloomberg Surveillance podcast.
Speaker 1: Subscribe and listen to interviews on iTunes, SoundCloud, or whichever
Speaker 1: podcast platform you prefer. I'm out on Twitter at Tom Keene.
Speaker 1: David Gura is at David Gura. Before the podcast, you
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