WEBVTT - Surveillance: Change in China Strategy Is Worrisome, Roach Says 0:00:00.040 --> 0:00:02.640 Who you put your trust in matters. Investors have put 0:00:02.680 --> 0:00:07.040 their trust and independent registered investment advisors to the two 0:00:07.040 --> 0:00:10.680 and four trillion dollars. Why learn more at find your 0:00:10.760 --> 0:00:26.360 Independent Advisor dot com. Welcome to the Bloomberg Surveillance Podcast. 0:00:26.760 --> 0:00:30.480 I'm Tom Keene with David Gura. Daily we bring you 0:00:30.520 --> 0:00:35.560 insight from the best in economics, finance, investment, and international relations. 0:00:35.960 --> 0:00:40.559 Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and 0:00:40.640 --> 0:00:48.640 of course on the Bloomberg. We want to bring Lionel 0:00:48.720 --> 0:00:51.720 Lauren back with Bloomberg gad Fly in London to talk 0:00:51.760 --> 0:00:54.320 to us about Italian banking and the mystery of Montopost. 0:00:54.560 --> 0:00:57.920 Here's the chart quickly on Monte Apost and this is 0:00:57.960 --> 0:01:02.320 a thousand euros and then two hundred euros and then 0:01:02.400 --> 0:01:05.840 one hundred euros and we're down here at eighteen right now. 0:01:05.880 --> 0:01:09.080 I mean, it's been a total collapse of this bank, Leonel. 0:01:09.120 --> 0:01:12.559 What I'm frustrated about is I have not seen one 0:01:12.760 --> 0:01:17.040 iota of discussion about what it's going to cost the 0:01:17.080 --> 0:01:21.400 price of this transaction, whether it's the price of bond 0:01:21.520 --> 0:01:24.720 to equity, whether it's the yield taken on some form 0:01:24.760 --> 0:01:28.640 of bond or whether it's the actual dollar or euro 0:01:28.760 --> 0:01:31.480 figure that's going to be happened. Is there any price 0:01:31.720 --> 0:01:38.360 being discussed? That's a that's a good question. Um I Look, 0:01:38.840 --> 0:01:42.360 the difficulty here is that all all Italian banks have 0:01:42.440 --> 0:01:45.000 taken a big it. It's not just Montepasky the the 0:01:45.200 --> 0:01:48.280 change that you mentioned. There has been market cat destruction 0:01:48.880 --> 0:01:52.280 across the board. Um, we don't even know. Investors don't 0:01:52.320 --> 0:01:54.720 even know what's the balance sheet is worth, what these 0:01:54.720 --> 0:01:57.960 on flolans are worth. Even appetite for the equity at 0:01:58.000 --> 0:02:03.040 these incredibly cheat bats levels of zero point one times 0:02:03.600 --> 0:02:07.440 at times book has not attracted the investors. So right 0:02:07.480 --> 0:02:11.440 now we're twenty billion euros right, twenty billion euros could 0:02:11.480 --> 0:02:15.800 get you thirty Montpaskys. Um, it's it's completely unclear as 0:02:15.800 --> 0:02:17.840 to what you would spend the money on. So right 0:02:17.880 --> 0:02:21.600 now it's it's really complete lack of faith in in 0:02:21.639 --> 0:02:25.239 these balance sheets, in these valuations, and really the lack 0:02:25.240 --> 0:02:28.120 of mark to market going on here. For our global audience, 0:02:28.160 --> 0:02:31.560 particularly in London and particularly in New York and Washington, 0:02:32.040 --> 0:02:36.640 this is beyond odd. Are there outside institutions coming to 0:02:36.840 --> 0:02:44.919 bear upon an original Italian dialogue? And discourse. I'm skeptical. 0:02:45.000 --> 0:02:47.240 I really wish there was, but I feel like we 0:02:47.240 --> 0:02:49.160 we were here at the start of this year, we're 0:02:49.200 --> 0:02:53.160 here at the end of this year twenty billion euros. Again, 0:02:54.120 --> 0:02:56.239 you could do a lot, You could buy un credit 0:02:56.320 --> 0:02:59.359 with twenty billion, But I feel that this is not political, 0:02:59.560 --> 0:03:01.960 and that the whole discussion will be about whether you 0:03:02.000 --> 0:03:04.480 can avoid a bailon of investors, whether you can get 0:03:04.480 --> 0:03:06.520 a political solution to kick the can down the road. 0:03:06.960 --> 0:03:09.480 It will require the ECB, it will require Europe, it 0:03:09.520 --> 0:03:13.800 will require Germany agreeing something with Italy. My my concern 0:03:13.880 --> 0:03:15.400 is that we're still going to be talking about Italian 0:03:15.440 --> 0:03:18.160 banks and we still want to fix this solution well 0:03:18.200 --> 0:03:23.080 into next year. What would I have to do to 0:03:23.200 --> 0:03:27.680 get some degree of clarity on a bag of assets 0:03:27.720 --> 0:03:30.079 that I made buy from one of these institutions. How 0:03:30.120 --> 0:03:34.000 difficult would it be? It's it's difficult because there's so 0:03:34.080 --> 0:03:35.960 much that goes on. I mean, you do want to 0:03:35.960 --> 0:03:39.160 get some value right, and and and trying to work 0:03:39.160 --> 0:03:41.280 out how you can actually get that tiny bit of 0:03:41.360 --> 0:03:46.040 value left. That takes some security on getting those cash flow. 0:03:46.040 --> 0:03:47.960 They've got villas in Tuscany, they've got they've got all 0:03:48.040 --> 0:03:49.880 kinds of stuff on their books, They've got buildings around 0:03:49.880 --> 0:03:52.200 the corner from our bureau in Rome. How do how 0:03:52.200 --> 0:03:54.400 do we value this stuff? But but the issue is 0:03:54.400 --> 0:03:56.320 how do you retrieve the cash flows? Whereas the legal 0:03:56.320 --> 0:03:59.280 certainty some of these loans have been kicking around for 0:03:59.360 --> 0:04:02.360 ten years and unique political reform and legal from which 0:04:02.360 --> 0:04:06.120 you started to actually get the infrastructure behind getting the 0:04:06.120 --> 0:04:09.640 cash flows back for these vulture funds. There is appetite there. Absolutely, 0:04:10.000 --> 0:04:13.680 it's starting to change, but in terms of the discount 0:04:13.720 --> 0:04:15.520 that you would have to apply to get any concertancy 0:04:15.600 --> 0:04:18.960 on on getting the cash flows back, it's it still 0:04:19.000 --> 0:04:22.000 remains a big question. Leono, very valuable, Thank you so much. 0:04:22.040 --> 0:04:24.719 Look for Lionel Laura with Bloomberg gad flying no doubt 0:04:24.800 --> 0:04:40.560 on European banking. He was former chairman of Morgan Stanley Asia, 0:04:40.600 --> 0:04:43.000 from a chief economist at Morgan Stanley, now a Senior 0:04:43.080 --> 0:04:45.760 Fellow at the Jackson Institute of Global Affairs at the University, 0:04:45.800 --> 0:04:48.240 also a senior lecturer at the Yale School of Management. 0:04:48.240 --> 0:04:50.680 Stephen Roach joins us here in our studios in New York, 0:04:50.720 --> 0:04:54.760 recently returned from China. Great to have you here. And 0:04:54.960 --> 0:04:56.839 as someone who has traveled to China before, I know 0:04:56.880 --> 0:04:59.599 that the conversation plays itself out over and over and 0:04:59.600 --> 0:05:02.000 over again. People ask you while you're there for your 0:05:02.040 --> 0:05:04.680 sense of what US policy towards China is. And imagine 0:05:04.680 --> 0:05:07.440 there was some particular difficulty answering those questions this time 0:05:07.440 --> 0:05:09.200 while you were over there. If people were asking you 0:05:09.480 --> 0:05:11.880 what Donald Trump's policy towards China is, I want to 0:05:11.880 --> 0:05:13.880 ask you how many times you had to feel that question? 0:05:13.960 --> 0:05:17.800 But what do you find yourself saying when asked? Well, 0:05:17.839 --> 0:05:22.920 you know, I I talk about them some of the 0:05:23.800 --> 0:05:27.200 challenges that this new administration is going to face in 0:05:28.200 --> 0:05:33.839 delivering on its promises to get America growing again, deliver jobs, 0:05:33.920 --> 0:05:36.919 and make the country great again. And is it? Is 0:05:36.960 --> 0:05:40.839 it a challenge It's going to come in China's expense 0:05:41.000 --> 0:05:44.360 or ultimately in America's expense or the world's expense. And 0:05:45.160 --> 0:05:48.920 I guess the point that I make is that Trump 0:05:48.960 --> 0:05:53.320 inherits a difficult set of circumstances because the United States 0:05:53.360 --> 0:05:56.000 is a low savings economy that's going to be expanding 0:05:56.000 --> 0:06:00.360 its budget deficit under the Trump regine, and that budget 0:06:00.360 --> 0:06:02.719 deficit is going to push our low savings right, even 0:06:02.760 --> 0:06:06.600 lower create more problems with respect to our current account 0:06:07.120 --> 0:06:11.440 and multilateral trade and balances. Tom So that puts pressure 0:06:11.920 --> 0:06:15.880 more and more on China and the US to find 0:06:15.880 --> 0:06:18.479 a way out that doesn't create issues for the dollar 0:06:18.600 --> 0:06:20.400 or U S interest rate. David I thought that was 0:06:20.400 --> 0:06:23.479 a key sentence within Dr Roaches note was a bilateral 0:06:23.600 --> 0:06:27.039 fix in a multilateral world, which really captured some of 0:06:27.040 --> 0:06:30.760 those tensions when you you're over there, How is news 0:06:30.800 --> 0:06:33.359 about the transition being communicated? In other ways? What what 0:06:33.480 --> 0:06:37.280 is of interest to the press in China about about 0:06:37.400 --> 0:06:41.000 Donald Trump's China policy? In code as it is, what's 0:06:41.000 --> 0:06:43.920 being communicated? How has it been communicated? Well? I mean, 0:06:43.960 --> 0:06:47.360 and you know, the big shock was the phone call 0:06:47.560 --> 0:06:52.800 from Sighing, when President of Taiwan to Donald Trump, which 0:06:52.960 --> 0:06:59.080 really took the discussion US China into a realm that 0:06:59.200 --> 0:07:04.400 the Chinese work completely unprepared for. UH. They understand the 0:07:04.480 --> 0:07:08.440 broad constellation of forces, whether it's the South China Sea, 0:07:08.720 --> 0:07:13.160 the UH, some of the currency capital outflow related issues, 0:07:13.680 --> 0:07:19.559 but Taiwan was not a topic that was thought about 0:07:19.600 --> 0:07:22.600 ahead of time by the Chinese, and it's not quite 0:07:22.600 --> 0:07:24.960 clear that it was something that was thought about by 0:07:24.960 --> 0:07:27.880 the Trump administration either. But it is what it is, 0:07:28.080 --> 0:07:33.800 and this is, you know, touches on the key perceptions 0:07:34.000 --> 0:07:38.720 of territorial sovereignty for for China, and so I think 0:07:38.760 --> 0:07:45.040 the risk here is that the incoming Trump administration doesn't 0:07:45.120 --> 0:07:48.720 fully appreciate the waters that they are waiting into with 0:07:48.800 --> 0:07:50.960 respect to this issue. And I'm not sure the Chinese 0:07:51.320 --> 0:07:54.960 fully understand it either. How will they adapt to the 0:07:55.040 --> 0:07:59.560 general nous of the cabinet and of the senior administration 0:07:59.600 --> 0:08:03.680 of fish choices, the idea of the military within a 0:08:03.760 --> 0:08:08.640 Trump administration, Well, it's it's a great question, Tom. I 0:08:08.640 --> 0:08:12.000 mean that sort of changes the character by which the 0:08:12.480 --> 0:08:16.960 by which this new administration is going to address global issues. 0:08:17.080 --> 0:08:21.080 Is it going to be one of uh negotiating a 0:08:22.160 --> 0:08:24.280 a safer and saner worlds? Are going to be a 0:08:24.320 --> 0:08:28.800 more muscular The United States is going to demand uh 0:08:28.840 --> 0:08:33.800 that UM allies and adversaries alike, UH play according to 0:08:34.000 --> 0:08:39.800 its rules. Uh. These are these are tough strategic issues. 0:08:40.360 --> 0:08:44.199 One of the issues that that I found being addressed 0:08:44.480 --> 0:08:47.400 when I was there last week was, uh, what is 0:08:47.440 --> 0:08:50.840 the U. S Gonna do with respect to enforcing its 0:08:50.920 --> 0:08:58.520 treaties with h Japan? Korea, Taiwan, UH, and another Southeast 0:08:58.559 --> 0:09:03.920 Asian Assian economies. Is it gonna walk away? David, Girl, 0:09:04.000 --> 0:09:05.760 This is really important. This goes to what we talked 0:09:05.800 --> 0:09:09.280 about before, which is adjacencies and that we have such 0:09:09.280 --> 0:09:14.240 a simplistic bilateral dealmaking tone. Frankly, not just Mr Trump. 0:09:14.240 --> 0:09:17.319 I don't mean to criticize the President elect without the 0:09:17.440 --> 0:09:21.920 nuances of those adjacencies. How does to David's question, how 0:09:21.960 --> 0:09:27.120 does Singapore look at the new administration and the pivot 0:09:27.120 --> 0:09:33.880 to Asia? Well, the new administration is UH pivoting away 0:09:33.880 --> 0:09:39.280 from the pivot under the Obama doctrine that won the 0:09:39.679 --> 0:09:45.920 Secretary Clinton very much. UH supported that UMU. The US 0:09:46.640 --> 0:09:51.800 focus on Asia, especially through t PP was designed to 0:09:51.840 --> 0:09:56.440 put leverage on on on China and possibly contain what 0:09:56.480 --> 0:10:00.840 they worried to be a arise of China that was 0:10:01.280 --> 0:10:04.480 going well beyond something that UH, the United States was 0:10:04.520 --> 0:10:11.599 comfortable with strategically. UH and I think under if Clinton presidency, 0:10:11.679 --> 0:10:16.400 which will not occur, that that pressure that China containment 0:10:16.440 --> 0:10:20.320 strategy would have been an important feature of the next 0:10:20.400 --> 0:10:24.000 four years. That is taking a different form right now 0:10:24.200 --> 0:10:27.800 under under Trump, China containment appears to be shifting from 0:10:27.800 --> 0:10:31.160 the economic realm to more of a military strategy. And 0:10:31.200 --> 0:10:36.400 that's a worrisome UH development to think about. Stephen Roach, 0:10:36.480 --> 0:10:38.480 of course, with Morgan Stanley for years and now at 0:10:38.559 --> 0:10:42.760 Yale University. A beginning question is, David, and I ask 0:10:42.840 --> 0:10:45.560 you and quizz you on our central banks. Is the 0:10:45.679 --> 0:10:52.120 Phillips curve alive? And well, this odd relationship, this guestimate, this, 0:10:52.600 --> 0:10:55.920 if it was Newtonian nineteenth century, would be multiple plug 0:10:55.960 --> 0:11:00.800 in belief in a relationship of jobs, an inflation and 0:11:00.840 --> 0:11:06.719 a greater economy is a Phillips curve working? No, it's 0:11:06.760 --> 0:11:10.480 not working, but that doesn't prevent central banks from pretending 0:11:10.480 --> 0:11:12.240 that it will. I mean, why else did the Fed 0:11:12.720 --> 0:11:17.440 UH move um UH last week? There's a belief that, 0:11:17.480 --> 0:11:21.160 you know, inflation is moving back to their target, and 0:11:21.240 --> 0:11:25.040 so they want they want to align interest rates with 0:11:25.120 --> 0:11:30.520 a commitment to price stability. So using short term interest 0:11:30.600 --> 0:11:35.040 rates to address um UH inflation control is at the 0:11:35.080 --> 0:11:39.040 heart of what central banks UH have long done in 0:11:39.200 --> 0:11:41.800 this country and and probably around the world as well. 0:11:41.840 --> 0:11:44.600 Tom what did you make of of what Jennet Yellen Fitcher? 0:11:44.679 --> 0:11:48.480 Jennet Yellen said internews conference last week about the reader, 0:11:48.480 --> 0:11:50.120 which she and her colleagues has been thinking about the 0:11:50.120 --> 0:11:53.520 prospects for big fiscal policy, big fiscal spending. The fact 0:11:53.559 --> 0:11:55.600 that this decision was based at least in part on 0:11:55.640 --> 0:11:58.160 the sense that that might be coming down the line. 0:11:58.320 --> 0:12:00.200 How how active a role do you see the FED 0:12:00.240 --> 0:12:02.319 playing here if we are to see a big spending 0:12:02.320 --> 0:12:05.880 package like the ones that the President elect has proposed. Well, 0:12:05.960 --> 0:12:09.400 you know, David, the FETE has always said that, you know, 0:12:09.679 --> 0:12:14.400 they uh don't believe that monetary policy can do the 0:12:15.440 --> 0:12:17.480 job alone. I mean, I used to work at the 0:12:17.520 --> 0:12:22.239 fedback in the Jurassic era, and that was something that was, uh, 0:12:22.480 --> 0:12:25.640 you know, always in the template of anything you wrote 0:12:25.679 --> 0:12:28.240 in terms of official statements, you know, you know, way 0:12:28.280 --> 0:12:31.280 back then. Uh. And and and still is the case 0:12:31.920 --> 0:12:34.920 right now. And the and the Ft has argued in 0:12:35.040 --> 0:12:42.600 more recent times that the unconventional uh monetary ease and 0:12:42.679 --> 0:12:45.880 the swollen balance sheets reflect the fact that fiscal policy 0:12:46.840 --> 0:12:49.760 is not doing the heavy lifting. Well, guess what. Trump 0:12:49.760 --> 0:12:53.000 has promised to be much more proactive in terms of 0:12:53.000 --> 0:12:56.760 fiscal policy to so, uh does that mean that the 0:12:56.760 --> 0:13:03.840 FED has to accelerate? Uh, it's withdrawal from the current stance. 0:13:03.920 --> 0:13:07.080 And and I think that's what Janet Yellen was alluding to. 0:13:07.200 --> 0:13:10.240 If in fact that the fiscal authorities are going to 0:13:10.320 --> 0:13:13.880 play a more active role as the President actors promised, 0:13:13.920 --> 0:13:16.920 and you know that suggests a different approach for central 0:13:16.960 --> 0:13:19.000 banks in the US. Well, we're speaking with John Taylor 0:13:19.320 --> 0:13:23.320 last week and he was the next chair Perhaps we 0:13:23.320 --> 0:13:25.760 could get him to say so, but he was very 0:13:25.800 --> 0:13:27.640 optimistic that we would see reform to the way the 0:13:27.720 --> 0:13:30.040 FED is structured and the way that the FED interacts 0:13:30.080 --> 0:13:31.640 with with the Congress, going for what he thinks the 0:13:31.640 --> 0:13:34.120 appetite is there for for that to happen. Do you 0:13:34.160 --> 0:13:36.440 foresee that happening as well? A change here in that 0:13:36.559 --> 0:13:41.360 in that relationship. Principally, I would be surprised if if 0:13:41.400 --> 0:13:45.120 there would be legislation passed to sort of codify a 0:13:45.240 --> 0:13:51.120 rules based framework that Professor Taylor has long advocated. On 0:13:51.160 --> 0:13:56.880 the other hand, if he is appointed the next chairman 0:13:57.520 --> 0:13:59.920 of the Federal Reserve, you better believe that's where the 0:14:00.040 --> 0:14:02.360 that is headed. So I think it's going to be 0:14:02.440 --> 0:14:08.439 more personality driven rather than um driven by a new 0:14:08.480 --> 0:14:12.840 piece of legislation that reformulates the mandate. How do you feel, then, 0:14:13.040 --> 0:14:17.920 personality driven about let's even assume not the chairman, not 0:14:18.040 --> 0:14:22.680 the vice chairman, but the governors in the President's with 0:14:22.800 --> 0:14:26.720 the president's having a heritage of business, not being fancy 0:14:26.760 --> 0:14:30.440 pants macro economists like Stephen Roach. We all agreed there's 0:14:30.440 --> 0:14:32.520 got to be a couple. Kevin Warsh comes to mind 0:14:33.000 --> 0:14:36.760 of people outside the normal economic boom. But a lot 0:14:36.840 --> 0:14:39.680 of people supporting the president elect would say down with 0:14:39.720 --> 0:14:43.080 a macro economist, wouldn't they. Well, they I think they 0:14:43.120 --> 0:14:48.680 say down with experts, down with facts, down with truth. Okay, 0:14:48.680 --> 0:14:50.680 I'll go there. So I mean, you know, you've got 0:14:50.680 --> 0:14:55.200 to be careful, uh, in this um type of mindset 0:14:55.240 --> 0:14:57.000 that you know, when we go into where you can 0:14:57.040 --> 0:14:59.800 sort of say whatever you want and defend it as 0:15:00.000 --> 0:15:04.400 the new post truth reality. But but you know, I 0:15:04.760 --> 0:15:08.720 think that um, you know, getting back to the FED, 0:15:09.320 --> 0:15:12.840 the FED historically from you know, the years that I 0:15:12.920 --> 0:15:17.880 work there under uh, people like Arthur Burns remember him, 0:15:17.960 --> 0:15:23.360 Tom too, Uh, Paul Vulker to Alan Greenspan and Janet Yelling. 0:15:23.760 --> 0:15:28.880 The chairman has played a disproportionate role in shaping Monty. 0:15:28.880 --> 0:15:31.360 You'd like to see less of that and FED decision making. 0:15:31.400 --> 0:15:34.120 I certainly think that this is a committee that should 0:15:34.800 --> 0:15:37.760 be ruled by a democracy. Very quickly here you mentioned 0:15:37.760 --> 0:15:40.800 Sherman Burns. Folks, he used to do it unmeasured. Should 0:15:40.840 --> 0:15:42.600 we have a FED that has occuraged to do more 0:15:42.640 --> 0:15:45.720 than twenty five basis points if they're gonna act act 0:15:45.760 --> 0:15:49.040 with a little more power into the system, or should 0:15:49.200 --> 0:15:54.119 they stay green spanning and measured. Large measures are designed, 0:15:54.280 --> 0:15:59.240 I think to surprise markets. Greenspan wanted to uh sort 0:15:59.280 --> 0:16:04.120 of out of the markets, and that it depends on 0:16:04.200 --> 0:16:06.840 you know where where we're how how far the markets 0:16:06.880 --> 0:16:10.080 go uh in taking us to unpleasant places, and if 0:16:10.440 --> 0:16:13.360 the markets are turned out to be a problem, which 0:16:13.400 --> 0:16:17.320 is clearly a risk in terms of some of the 0:16:17.360 --> 0:16:20.400 dislocations that we're seeing now in markets, and then will 0:16:20.480 --> 0:16:24.880 require larger actions. David, can you imagine young Roach sitting 0:16:24.960 --> 0:16:29.640 at the FED with a pipe and never smoked a pipe, Tom, 0:16:29.680 --> 0:16:33.080 but certainly had you know, a great experience in dealing 0:16:33.080 --> 0:16:37.640 with characters like Arthur Burns character that goes back to 0:16:37.680 --> 0:16:42.960 the personalization about his chairman. Burns battled with the Nixon 0:16:43.880 --> 0:16:59.640 White House. Steven Roach always enjoyed David Gurr and Tom Keene. 0:17:00.000 --> 0:17:03.240 The Penguins beat the Rangers last night, which I think 0:17:03.280 --> 0:17:05.159 is the only reason. Stephen as here. Did you go 0:17:05.200 --> 0:17:08.119 to the hockey game last night? You did not go 0:17:08.160 --> 0:17:10.560 to the hockey game. I did not. I'm waiting. I'm 0:17:10.600 --> 0:17:13.240 saving my energy for the Giants game on Thursday. That 0:17:13.280 --> 0:17:16.920 will be very exciting. Absolutely, Stephen A with us, uh 0:17:17.200 --> 0:17:20.400 with with Federated, tell us give us an update Unfederated. 0:17:20.400 --> 0:17:24.040 A long time ago, Federated owned the money market short 0:17:24.119 --> 0:17:26.560 term paper business. Do you still own it? I mean, 0:17:26.680 --> 0:17:29.800 even with all that's changed, we don't think we ever 0:17:29.840 --> 0:17:31.800 owned it, but we have a decent share of it. 0:17:31.880 --> 0:17:33.560 You know, we're still one of the top ranked money 0:17:33.560 --> 0:17:39.000 market players. Uh in the United States. We're becoming a 0:17:39.040 --> 0:17:42.600 pretty big equity player, which is where I where. Um. Yes, yeah, 0:17:42.880 --> 0:17:45.720 I know you're focused on the equity view and we're 0:17:45.760 --> 0:17:49.240 just beginning or two thousand seventeen views. Are you surprised 0:17:49.240 --> 0:17:54.639 by the double digit wonderment of two thousand and sixteen? Uh? 0:17:54.680 --> 0:17:57.159 I am a little bit surprised. Tom. We We've been 0:17:57.240 --> 0:18:01.520 cautious all year up until the day after the try. Yeah. 0:18:01.520 --> 0:18:04.400 Things changed, effects change, and we shifted at that point 0:18:04.440 --> 0:18:07.320 to a more at least neutral stance from an underweight 0:18:07.320 --> 0:18:10.080 stance on equities. But yeah, it's been a tough year. 0:18:10.080 --> 0:18:13.359 I mean we've been through really an eighteen month bear 0:18:13.520 --> 0:18:15.919 mini bear market, really going all the way back to 0:18:16.000 --> 0:18:20.400 May fifteen, and we've now we think we've now exited 0:18:20.440 --> 0:18:22.960 that one of these It's interesting, David, is to have 0:18:23.080 --> 0:18:26.560 someone of such grizzled experience as Mr Arth, who was 0:18:26.680 --> 0:18:30.000 enjoyed being wrong before, so talking about it is not painful. 0:18:30.359 --> 0:18:32.120 It's like, you know, you're a little underweight this year, 0:18:32.119 --> 0:18:34.720 and that's what happens when you when you look at 0:18:34.600 --> 0:18:42.240 a sort of what changed scars me too. Uh, let's 0:18:42.280 --> 0:18:44.040 go to the election, that's or what changed after that? 0:18:44.080 --> 0:18:47.080 We saw this impulse here to get into things that 0:18:47.160 --> 0:18:49.280 might be in line with it with an introduction spending plan. 0:18:49.359 --> 0:18:52.400 We sew people going to financials. How in that rush 0:18:52.480 --> 0:18:54.720 were you? And and now a few months after that, 0:18:54.720 --> 0:18:57.840 a few weeks after that, at least, how much sense 0:18:57.880 --> 0:18:59.760 did that make? How much of that was just exuberance? 0:19:00.840 --> 0:19:02.560 There's a little bit of exuberance in there. I wrote 0:19:02.560 --> 0:19:05.919 a piece last weekend called wall of hope. You know, 0:19:06.000 --> 0:19:09.119 usually markets climb walls of worry, and right now this 0:19:09.200 --> 0:19:14.919 market is climbing a wall of hope. We're awesome, and 0:19:14.960 --> 0:19:18.000 it's it's unusual because you know, if you think about 0:19:18.000 --> 0:19:20.680 it against the context of a long period now where 0:19:20.720 --> 0:19:25.840 we've been told we can't grow, productivities declining, we just 0:19:26.119 --> 0:19:30.320 keep carving up the pie. Uh and business is really 0:19:30.400 --> 0:19:34.639 under attack. Really, I think we're seeing something different now. 0:19:34.880 --> 0:19:36.480 There's something in the air. You can see it in 0:19:36.480 --> 0:19:39.639 the confidence indicators, you can see it in the stock market. 0:19:40.160 --> 0:19:43.960 You've got a businessman running the bully pulpit, if you will. 0:19:44.720 --> 0:19:49.720 And I think his proposals are somewhat misunderstood. Actually, in fact, 0:19:49.760 --> 0:19:53.479 people keep talking about fiscal package as if it is 0:19:54.800 --> 0:19:56.960 and I have every political anilist in the country in 0:19:57.040 --> 0:20:00.360 my offices over the course of the year. Obviously um 0:20:00.400 --> 0:20:03.000 and you know Hillary Trump didn't matter. We're gonna get 0:20:03.000 --> 0:20:05.479 a big fiscal stimulus. I think we're in this world 0:20:05.520 --> 0:20:08.840 where we think, since the private sector can grow, the 0:20:08.880 --> 0:20:10.960 only to make it grow is the government either fed 0:20:11.280 --> 0:20:14.320 or the government spends money it doesn't have and somehow 0:20:14.520 --> 0:20:17.399 hires people and gets them to work. And that is 0:20:17.440 --> 0:20:21.720 precisely not what Trump is thinking about. He doesn't articulate it. Well, 0:20:21.760 --> 0:20:25.440 he's a businessman. He's an entrepreneur. But what I would 0:20:25.440 --> 0:20:32.040 like to use the term restructuring economic restructuring to define 0:20:32.200 --> 0:20:36.399 the Trump program. And if you think about that, deregulation, 0:20:36.560 --> 0:20:38.960 getting out of the way of making business is more efficient, 0:20:39.000 --> 0:20:43.359 cutting their costs, cutting their tax burdens, making the tax 0:20:43.400 --> 0:20:47.840 code simpler, infrastructure spending from the perspective of making the 0:20:47.880 --> 0:20:52.760 economy more efficient, to raise productivity. All of those things 0:20:53.440 --> 0:20:57.760 can improve economic growth, maybe bump inflation a little. But importantly, 0:20:57.880 --> 0:21:00.480 I think, and this is the real up here with 0:21:00.520 --> 0:21:04.959 the Trump plan. Uh the but the bond bears, and 0:21:05.000 --> 0:21:06.880 you know they've been out in force in the last 0:21:06.880 --> 0:21:11.359 twenty four hours even right the bond bears would say, look, 0:21:11.600 --> 0:21:17.680 this is full stop inflationary when you apply fiscal stimulus 0:21:17.760 --> 0:21:21.240 to an economy that's at full employment. But if you're 0:21:21.280 --> 0:21:25.359 providing structural reform to an economy and full employment, maybe 0:21:25.400 --> 0:21:28.879 you can increase the growth rate and not have inflation 0:21:28.960 --> 0:21:31.640 go through the roof, not have the ten year bond 0:21:31.640 --> 0:21:35.359 you'll go to five. And in that context, you're in 0:21:35.440 --> 0:21:39.080 another leg of the equity bull market, and for now 0:21:39.480 --> 0:21:42.960 I think that's what we're in. Obviously, things don't go 0:21:43.080 --> 0:21:46.520 straight up, We're due for a pullback, some accident, something, 0:21:46.880 --> 0:21:51.080 but our view is that this wall of hope is 0:21:51.080 --> 0:21:53.400 going to keep us going for most of the next year. 0:21:53.520 --> 0:21:55.399 How much of this is attributable to the plans that 0:21:55.440 --> 0:21:57.840 you were talking about their the infrastructure plans versus something 0:21:58.200 --> 0:22:02.720 more ineffable, just a new sense of optimism, the fact 0:22:02.760 --> 0:22:04.320 that we're going to see a change in Washington, the 0:22:04.359 --> 0:22:06.919 fact that we're going to see at Republicans controlling at 0:22:06.920 --> 0:22:10.080 the legislative branch and the executive branch. Less based on 0:22:10.119 --> 0:22:13.359 the granular nature of these plans. So I don't have 0:22:13.359 --> 0:22:15.399 the granular nature plans that, but but more just on 0:22:15.440 --> 0:22:18.680 a feeling. Well, one of the things I've learned from 0:22:18.720 --> 0:22:22.400 the various scars on my back, David, is that I'm 0:22:22.440 --> 0:22:25.080 not a lot smarter than everybody else. So part of 0:22:25.080 --> 0:22:27.080 me thinks, oh, I have an insight here that no 0:22:27.119 --> 0:22:29.800 one else has figured out, because I hear when talking 0:22:29.840 --> 0:22:33.720 about this fiscal spending, and particularly the infrastructure in the 0:22:33.760 --> 0:22:35.399 roll focus, how big it's going to be, how many 0:22:35.440 --> 0:22:38.440 dollars it's gonna get spent. How quickly are I think 0:22:38.480 --> 0:22:41.960 the markets and businesses actually smell out what I smell 0:22:42.000 --> 0:22:45.800 out that this is something more than just that. And um, 0:22:45.840 --> 0:22:47.800 I think that's part of what's going on. And look 0:22:47.840 --> 0:22:50.719 what's moving. I mean, you know the stocks that are 0:22:50.760 --> 0:22:54.200 really in the heart the cross hairs of these reforms, 0:22:54.240 --> 0:22:59.440 like the bank spooks. You've got deregulation, you've got lower taxes. Uh, 0:22:59.520 --> 0:23:02.400 you know, you've got nominal GDP growth picking up. These 0:23:02.400 --> 0:23:05.840 are all things that helped the banks. Uh. You know, 0:23:05.920 --> 0:23:09.240 the sector the right sectors are moving in this sort 0:23:09.240 --> 0:23:12.760 of different view of the world. So I think actually 0:23:12.800 --> 0:23:17.120 people are sniffing this out. We are evaluations. I mean 0:23:17.160 --> 0:23:21.800 just on a trailing p basis. I mean, I mean 0:23:22.160 --> 0:23:24.040 not that you and I want to recite Graham Dot 0:23:24.040 --> 0:23:27.560 and Coddle, not the coronozoo Graham dot and or Coddle 0:23:27.720 --> 0:23:31.479 is but where are valuations right now? Graham dot I 0:23:31.520 --> 0:23:34.960 think that might have been a bill or something. Uh. Well, 0:23:35.560 --> 0:23:39.960 on a trailing basis, valuations look very extended. And you 0:23:40.000 --> 0:23:43.400 could say, in a way, this entire move post Trump 0:23:43.520 --> 0:23:46.480 has been a value a reevaluation of equities. I don't 0:23:46.480 --> 0:23:50.120 think that's the case. I think we think markets are 0:23:50.119 --> 0:23:54.119 being valued about eighteen times where they believe earnings are 0:23:54.160 --> 0:23:56.840 gonna be in twelve to eighteen months to me, I 0:23:56.840 --> 0:24:00.359 mean interrupt. This is critical because you said eighteen months. Yeah, 0:24:00.400 --> 0:24:03.040 I agree, it's not a I mean the media does 0:24:03.080 --> 0:24:05.879 a one year view. I agree. The Trump is um 0:24:06.200 --> 0:24:09.920 has moved us out exactly in a wall of hope environment. 0:24:10.000 --> 0:24:12.879 People are willing to look eighteen months out in a 0:24:13.200 --> 0:24:16.840 things are going nowhere environment. Everyone wants to know. Tell 0:24:16.880 --> 0:24:19.320 me what the trailing earnings are. I can't convey enough, 0:24:19.320 --> 0:24:21.639 folks how important this is. This is called theta on 0:24:21.720 --> 0:24:25.240 the X axis, which is a time continuum of the 0:24:25.320 --> 0:24:29.160 belief from confidence, and all of a sudden everybody reaches out. 0:24:29.359 --> 0:24:34.280 The middle syllable of economy is con confidence. It could 0:24:34.320 --> 0:24:40.680 be that's where the cynic for Brooklyn Commy doesn't go 0:24:40.680 --> 0:24:44.640 anywhere without confidence. So yeah, eighteen times one forty, which 0:24:44.680 --> 0:24:47.480 is where we think we easily get to by sometime 0:24:47.520 --> 0:24:50.199 in two thousands. Are we going back to a cell side? 0:24:50.480 --> 0:24:53.040 The security analysts that come on the show all good people, 0:24:53.440 --> 0:24:56.800 where they're ordered by their research directors to start, well, 0:24:56.840 --> 0:24:58.960 can you give me a two thousand and eighteen view 0:24:59.720 --> 0:25:03.040