1 00:00:10,039 --> 00:00:13,720 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Always 2 00:00:14,000 --> 00:00:17,560 Speaker 1: with Michael McKee daily we bring you insight from the 3 00:00:17,560 --> 00:00:22,760 Speaker 1: best in economics, finance, investment, and international relations. Find Bloomberg 4 00:00:22,840 --> 00:00:27,280 Speaker 1: Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course 5 00:00:27,760 --> 00:00:33,839 Speaker 1: on the Bloomberg. We are thrilled to have Jeffrey Dennis 6 00:00:33,840 --> 00:00:38,000 Speaker 1: with us UBS on the Emerging market Watch, but maybe 7 00:00:38,040 --> 00:00:42,400 Speaker 1: also on the collapsed multidecade market Watch, which always and 8 00:00:42,520 --> 00:00:47,720 Speaker 1: forever is Japan. The Emperor has requested an abdication. According 9 00:00:47,760 --> 00:00:51,720 Speaker 1: to NHK News, the Crown Prince is I believe fifty 10 00:00:51,840 --> 00:00:55,520 Speaker 1: six and has been waiting. There are some similarities to England, 11 00:00:55,560 --> 00:00:58,800 Speaker 1: but Japan is an island nation very different from the 12 00:00:58,920 --> 00:01:04,360 Speaker 1: United Kingdom. What difficult forecast of GDP and inflation today, 13 00:01:04,880 --> 00:01:07,639 Speaker 1: There's no doubt that the efforts that the Prime Minister 14 00:01:07,680 --> 00:01:11,000 Speaker 1: has put in place in Japan to really urban omics, 15 00:01:11,080 --> 00:01:13,880 Speaker 1: is called to really stimulate the economy, move growth higher 16 00:01:13,920 --> 00:01:16,560 Speaker 1: and of course also move inflation higher, have just already 17 00:01:16,560 --> 00:01:18,720 Speaker 1: worked out at this point in time, and the markets 18 00:01:18,720 --> 00:01:21,759 Speaker 1: have become very disappointed about that, and in particular there's 19 00:01:21,800 --> 00:01:24,160 Speaker 1: been a lot of miss signals from mixed signals. I'm 20 00:01:24,200 --> 00:01:27,240 Speaker 1: sorry from the central Bank about how much more policy 21 00:01:27,240 --> 00:01:29,440 Speaker 1: easing they're going to do. And what that's led to 22 00:01:29,560 --> 00:01:31,520 Speaker 1: is also a very strong yen until the last couple 23 00:01:31,560 --> 00:01:33,960 Speaker 1: of days, and that just makes the problem harder. So 24 00:01:34,120 --> 00:01:38,200 Speaker 1: the markets are assessing that the Japanese policy framework is 25 00:01:38,240 --> 00:01:41,600 Speaker 1: basically not working and um, and of course now you 26 00:01:41,680 --> 00:01:45,440 Speaker 1: have this major political event of the potential application of 27 00:01:45,440 --> 00:01:49,760 Speaker 1: the emperor. If Japan does well, the application of the 28 00:01:49,760 --> 00:01:52,440 Speaker 1: emperor would be have an interesting psychological impact on the 29 00:01:52,520 --> 00:01:55,680 Speaker 1: Japanese and it's probably, i'm guessing, almost too difficult to 30 00:01:55,760 --> 00:01:59,080 Speaker 1: quantify what it would mean for the economy. Probably a 31 00:01:59,160 --> 00:02:02,680 Speaker 1: short term boost. Does people spend in anticipation of a 32 00:02:02,680 --> 00:02:06,000 Speaker 1: new emperor, souvenirs and travel and tourism and that sort 33 00:02:06,000 --> 00:02:08,519 Speaker 1: of thing. But I'm wondering more about the stimulus plan 34 00:02:08,600 --> 00:02:11,760 Speaker 1: that Prime Minister Abby is talking about. If it's just 35 00:02:12,120 --> 00:02:16,160 Speaker 1: additional fiscal spending within the Japan's borders, I'm not sure 36 00:02:16,160 --> 00:02:17,919 Speaker 1: it has a big spill over effect into the rest 37 00:02:17,919 --> 00:02:20,040 Speaker 1: of the world. But there's also talk that what they 38 00:02:20,120 --> 00:02:22,840 Speaker 1: might be thinking about is some form of helicopter money, 39 00:02:23,040 --> 00:02:25,079 Speaker 1: which I would imagine would have a major spill over 40 00:02:25,120 --> 00:02:28,520 Speaker 1: effect into emerging markets. Yeah, and and and to be fair, 41 00:02:29,520 --> 00:02:32,560 Speaker 1: many argue that the helicopter money concept, if we're going 42 00:02:32,600 --> 00:02:34,520 Speaker 1: to end up with that in this low inflation, low 43 00:02:34,639 --> 00:02:37,880 Speaker 1: rate world, is going to be initiative, if by anybody, 44 00:02:37,600 --> 00:02:40,240 Speaker 1: by the Japanese, and there will be some sort of 45 00:02:40,240 --> 00:02:43,000 Speaker 1: a spill over. But in a way, that's where we 46 00:02:43,040 --> 00:02:47,600 Speaker 1: are now because we're having another one of these enormous 47 00:02:47,680 --> 00:02:52,920 Speaker 1: liquidity rallies post the UK referendum, which is is pulling 48 00:02:52,960 --> 00:02:55,960 Speaker 1: money into into the emerging markets. We've had a big rally. 49 00:02:56,000 --> 00:02:58,880 Speaker 1: In fact, we called our second half report which came 50 00:02:58,880 --> 00:03:01,680 Speaker 1: out a couple of days ago, liquidity versus growth. The 51 00:03:01,760 --> 00:03:04,800 Speaker 1: trend here is that the growth numbers in my world 52 00:03:04,800 --> 00:03:07,800 Speaker 1: and e M or if anything to tourrading again and 53 00:03:07,880 --> 00:03:11,280 Speaker 1: net net, the UK voters fallout will be somewhat negative 54 00:03:11,280 --> 00:03:14,639 Speaker 1: for European growth. At the same time, ratcheting down of 55 00:03:14,800 --> 00:03:17,400 Speaker 1: global bond deals in the US. In the UK, we 56 00:03:17,520 --> 00:03:19,800 Speaker 1: just heard about Jim and Buns having to pay the 57 00:03:19,840 --> 00:03:23,399 Speaker 1: government to hold their debt for ten years UM. That's 58 00:03:23,480 --> 00:03:27,560 Speaker 1: leading to money going towards carry currencies and carry markets 59 00:03:27,600 --> 00:03:31,840 Speaker 1: like Brazil, like Turkey, like South Africa. So it's a dichotomy. 60 00:03:31,880 --> 00:03:33,760 Speaker 1: The problem with all of this is eventually you've got 61 00:03:33,760 --> 00:03:36,680 Speaker 1: to have the growth coming through otherwise equity markets get 62 00:03:36,680 --> 00:03:39,640 Speaker 1: too high and the liquidity eventually, Where where is the 63 00:03:39,680 --> 00:03:41,680 Speaker 1: growth in the Pacific RIM? I mean, start with the 64 00:03:41,760 --> 00:03:44,280 Speaker 1: Japan shock today, which I believe is sub two percent 65 00:03:44,840 --> 00:03:50,160 Speaker 1: sub two percent nominal GDP, the the quiver that everybody 66 00:03:50,160 --> 00:03:52,680 Speaker 1: talks about, the arrows in the quiver that's out the window. 67 00:03:53,240 --> 00:03:57,200 Speaker 1: What's Pacific rim GDP looks like? Well, in Japan, let's 68 00:03:57,240 --> 00:04:01,120 Speaker 1: let's say, charitably growing between point five and one. The 69 00:04:01,200 --> 00:04:04,440 Speaker 1: so called former Asian Tigers or some of the career 70 00:04:04,480 --> 00:04:06,880 Speaker 1: Taiwan are growing between two two and a half percent, 71 00:04:07,720 --> 00:04:11,080 Speaker 1: very disappointing, all sorts of structural issues there, especially in Korea. 72 00:04:11,160 --> 00:04:15,720 Speaker 1: The so called Asian markets, Philippines, Indonesia are growing very strongly. 73 00:04:16,080 --> 00:04:18,480 Speaker 1: They are some of the better stories in the emerging markets. 74 00:04:18,480 --> 00:04:20,400 Speaker 1: And then of course you've got India which is growing 75 00:04:20,400 --> 00:04:23,000 Speaker 1: at seven percent, which people end up being disappointed about. 76 00:04:23,000 --> 00:04:25,320 Speaker 1: But India has got a very very low GDP perhead 77 00:04:25,320 --> 00:04:29,000 Speaker 1: still one half thousand dollars, two thousand dollars, that sort 78 00:04:29,000 --> 00:04:31,000 Speaker 1: of range. So they can continue to grow for a 79 00:04:31,040 --> 00:04:33,279 Speaker 1: long for a long period of time. So it's almost 80 00:04:33,360 --> 00:04:36,680 Speaker 1: like Korea and Taiwan are becoming more like developed economies, 81 00:04:36,920 --> 00:04:40,080 Speaker 1: and yet the other guys, India, Philippines and Aitian particular 82 00:04:40,240 --> 00:04:42,560 Speaker 1: are behaving like good olf fashioned emerging market. So it's 83 00:04:42,560 --> 00:04:45,719 Speaker 1: a very mixed picture. Do you see the possibility of 84 00:04:46,240 --> 00:04:49,400 Speaker 1: global recession ahead? We don't. We're not expecting a global 85 00:04:49,440 --> 00:04:52,000 Speaker 1: recession at all. We just think we're in this prolonged 86 00:04:52,600 --> 00:04:56,800 Speaker 1: slow growth environment. You know, global growth somewhere around the 87 00:04:56,880 --> 00:04:58,760 Speaker 1: two to two and a half percent range, depends how 88 00:04:58,800 --> 00:05:01,520 Speaker 1: you measure it. Of course, um emerging markets growing in 89 00:05:01,600 --> 00:05:04,200 Speaker 1: about four and we've been we've been slowing down for 90 00:05:04,200 --> 00:05:05,880 Speaker 1: a while. We've been in this low growth range for 91 00:05:05,920 --> 00:05:08,480 Speaker 1: a while. We doubt very much it rolls into recessions 92 00:05:08,480 --> 00:05:10,800 Speaker 1: simply because of all the liquidity that's being created. But 93 00:05:11,320 --> 00:05:14,320 Speaker 1: the point we make is that there are tomb well, 94 00:05:14,360 --> 00:05:16,279 Speaker 1: I guess three. If you can't China, there are three 95 00:05:16,320 --> 00:05:18,440 Speaker 1: major things holding the global economy back. One is the 96 00:05:18,440 --> 00:05:22,800 Speaker 1: slowdown in China, which has such traumatic impacts on everybody. Secondly, 97 00:05:22,960 --> 00:05:25,320 Speaker 1: is dealing with this high level of debt that you've 98 00:05:25,360 --> 00:05:28,440 Speaker 1: got still in the global economy righthand Rugoff. We're dead right, 99 00:05:28,520 --> 00:05:30,120 Speaker 1: you know, when you get a debt deflation like you 100 00:05:30,160 --> 00:05:31,479 Speaker 1: had in our way, to take a long time to 101 00:05:31,480 --> 00:05:34,120 Speaker 1: recover from that. And then thirdly and not given enough 102 00:05:34,320 --> 00:05:37,640 Speaker 1: airtime in our view, is the very very weak growth 103 00:05:37,640 --> 00:05:40,080 Speaker 1: in world trade, which is which is kind of has 104 00:05:40,400 --> 00:05:42,760 Speaker 1: feedback effects on everybody. Those are the things that are 105 00:05:42,760 --> 00:05:45,400 Speaker 1: slowing growth down. Jeffrey Dennis with us with UBS to 106 00:05:45,440 --> 00:05:49,080 Speaker 1: carry this forward, and it is about political economy or 107 00:05:49,200 --> 00:05:52,520 Speaker 1: economic politics. I would say right now jeff Dennis, that 108 00:05:52,880 --> 00:05:56,279 Speaker 1: we're being subsumed by democracy. People are going to the 109 00:05:56,320 --> 00:06:00,320 Speaker 1: booth and speaking. I think I've never known only a 110 00:06:00,360 --> 00:06:02,800 Speaker 1: time in my career where politics has been seen to 111 00:06:02,839 --> 00:06:05,520 Speaker 1: be so important for the markets. And frankly, I'm not 112 00:06:05,560 --> 00:06:07,440 Speaker 1: a political expert, so you kind of have to roll 113 00:06:07,480 --> 00:06:09,240 Speaker 1: with the punches. But I think to a certain extent 114 00:06:09,400 --> 00:06:11,440 Speaker 1: that's been the case since the global financial crisis in 115 00:06:11,480 --> 00:06:14,040 Speaker 1: two thousand and eight, when obviously people lost a lot 116 00:06:14,080 --> 00:06:15,680 Speaker 1: of money, and then of course you have the European 117 00:06:15,720 --> 00:06:17,760 Speaker 1: crisis which has been rolling on for a while, a 118 00:06:17,920 --> 00:06:20,960 Speaker 1: very high levels of unemployment, we growth in Europe, the 119 00:06:20,960 --> 00:06:24,200 Speaker 1: problems and countries like Greece, etcetera. And we watch elections 120 00:06:24,279 --> 00:06:27,039 Speaker 1: very closely in emerging markets. I mean, emerging markets don't 121 00:06:27,120 --> 00:06:30,680 Speaker 1: seem to have you know, disruptive changes of government anymore 122 00:06:30,680 --> 00:06:32,920 Speaker 1: like military coups, but we still have to watch, um 123 00:06:32,960 --> 00:06:35,160 Speaker 1: what happens in terms of governments. You know, you look 124 00:06:35,200 --> 00:06:38,160 Speaker 1: at Brazil where you're you're seeing the president having been 125 00:06:38,200 --> 00:06:40,880 Speaker 1: impeached and what does that mean for policy there? And 126 00:06:40,960 --> 00:06:44,159 Speaker 1: of course Mexico which has in a lot of reforms, Um, 127 00:06:44,279 --> 00:06:46,880 Speaker 1: the presidents very unpopular and they're watching the U S 128 00:06:46,880 --> 00:06:50,320 Speaker 1: election very closely. So yeah, politics, um, you know, pervades 129 00:06:50,400 --> 00:06:52,240 Speaker 1: everything more than I think I've seen in my thirty 130 00:06:52,320 --> 00:06:54,240 Speaker 1: year career. Well, let me rip up the script. It 131 00:06:54,279 --> 00:06:55,760 Speaker 1: wasn't where I was going to go. But if you 132 00:06:55,839 --> 00:06:58,839 Speaker 1: talked about politics, let me ask you this is, do 133 00:06:58,920 --> 00:07:02,480 Speaker 1: we see in any emerging markets the kind of populist 134 00:07:02,680 --> 00:07:07,799 Speaker 1: movement that we're seeing in so many developed markets these days? Actually, 135 00:07:07,800 --> 00:07:10,520 Speaker 1: as I'm rattling through my thought process here, I think 136 00:07:10,560 --> 00:07:13,600 Speaker 1: not in quite the same way. There's certainly been some 137 00:07:13,720 --> 00:07:16,480 Speaker 1: sort of a spill over in terms of what I 138 00:07:16,560 --> 00:07:20,600 Speaker 1: might call you know, warily quote unquote nationalism into parts 139 00:07:20,600 --> 00:07:25,120 Speaker 1: of Eastern europe um in terms of recent elections in 140 00:07:25,240 --> 00:07:28,640 Speaker 1: Hungary and also in Poland, although frankly there's economies still 141 00:07:28,640 --> 00:07:30,640 Speaker 1: on even very well in relative terms, and so we 142 00:07:30,640 --> 00:07:33,640 Speaker 1: shouldn't worry too much about it. But if you if 143 00:07:33,680 --> 00:07:36,239 Speaker 1: you look around the e M, it's hard to see 144 00:07:36,800 --> 00:07:39,720 Speaker 1: that degree of populism that you've seen in the Western world. 145 00:07:39,720 --> 00:07:41,160 Speaker 1: And I think that's as I say, I think that's 146 00:07:41,200 --> 00:07:43,280 Speaker 1: because when you have a fixed exchange of system that 147 00:07:43,320 --> 00:07:45,120 Speaker 1: doesn't work very well, such as the EU, you have 148 00:07:45,160 --> 00:07:47,360 Speaker 1: a lot of countries that are deficit, countries that are 149 00:07:47,480 --> 00:07:49,320 Speaker 1: that are forced to have very type policy. Let's go 150 00:07:49,360 --> 00:07:51,120 Speaker 1: the minute, the minute too minutes we got left in you. 151 00:07:51,240 --> 00:07:53,680 Speaker 1: Let's go here right now. As foreign exchange is metaphor 152 00:07:54,120 --> 00:07:57,000 Speaker 1: for our political economy, I mean very Ion Green's written 153 00:07:57,040 --> 00:08:00,520 Speaker 1: about this for years. If we assume the United States 154 00:08:00,520 --> 00:08:05,400 Speaker 1: has the exorbitant privilege, who does not, who loses their 155 00:08:05,440 --> 00:08:08,400 Speaker 1: currency might in the next five to ten years, um. 156 00:08:09,000 --> 00:08:11,560 Speaker 1: I I suspect I don't about who loses it. I 157 00:08:11,640 --> 00:08:15,240 Speaker 1: think that you'll still see, assuming the Euro survives, you 158 00:08:15,280 --> 00:08:18,520 Speaker 1: also see the Euro being being very important. I suspect 159 00:08:18,520 --> 00:08:22,600 Speaker 1: the Japanese yen could lose some some positioning. Um, I 160 00:08:22,600 --> 00:08:25,080 Speaker 1: I'd rather say, you know what, what could you see 161 00:08:25,120 --> 00:08:28,240 Speaker 1: gaining in in currency so to speak? And clearly the 162 00:08:28,320 --> 00:08:31,440 Speaker 1: Chinese R and B is is an example of that. 163 00:08:31,520 --> 00:08:34,800 Speaker 1: But you're so right because um the story I like 164 00:08:34,920 --> 00:08:38,000 Speaker 1: to tell is that the dollar trade weighted Index went 165 00:08:38,160 --> 00:08:42,040 Speaker 1: up from oh ten to the beginning of this year, 166 00:08:42,720 --> 00:08:44,840 Speaker 1: and that was a big problem for emerging market and 167 00:08:44,880 --> 00:08:46,760 Speaker 1: now it's going it's not exactly going the other way, 168 00:08:46,760 --> 00:08:50,199 Speaker 1: but the dollars pullback, it's weaker than it's been and 169 00:08:50,240 --> 00:08:54,240 Speaker 1: that's making some of our currencies which got crushed last year, 170 00:08:54,840 --> 00:08:59,319 Speaker 1: actually rallying pretty strongly. And that's allowing those the these 171 00:08:59,360 --> 00:09:02,760 Speaker 1: markets to dubeta. But you wouldn't say the South conrodo, 172 00:09:02,840 --> 00:09:05,520 Speaker 1: the Brazilian real for tolbody is going to become one 173 00:09:05,520 --> 00:09:07,040 Speaker 1: of the leading cards of the world. I'm not sure 174 00:09:06,960 --> 00:09:10,880 Speaker 1: that ten seconds overweight underweight emerging markets. Um, we're still 175 00:09:10,920 --> 00:09:14,040 Speaker 1: underway to MEGI markets. Jeffrey Dennis of UBS, thank you 176 00:09:25,040 --> 00:09:28,120 Speaker 1: in all my years at Bloomberg to see the headline 177 00:09:28,160 --> 00:09:32,000 Speaker 1: come across today that the Emperor of Japan is considering abdication. 178 00:09:32,120 --> 00:09:34,520 Speaker 1: He's in his eighties. He had a thought of prostate 179 00:09:34,600 --> 00:09:38,880 Speaker 1: cancer or a good fifteen fourteen years ago. Emperor Arkado 180 00:09:39,200 --> 00:09:42,960 Speaker 1: possibly will abdicate. It's being handled as all things to 181 00:09:42,960 --> 00:09:47,000 Speaker 1: do with the Japanese with grace. Carl Weinberg has gracefully 182 00:09:47,040 --> 00:09:51,240 Speaker 1: covered the Japanese political and economic experiment for decades and 183 00:09:51,320 --> 00:09:54,880 Speaker 1: joins us now. Carl. Robbie Feldman was on earlier with 184 00:09:54,920 --> 00:09:59,360 Speaker 1: Morgan Stanley and may clear the affection that the Japanese 185 00:09:59,400 --> 00:10:03,960 Speaker 1: people have for their emperor. What kind of economy will 186 00:10:04,000 --> 00:10:07,239 Speaker 1: they have going forward? I was shocked at the flatness 187 00:10:07,280 --> 00:10:10,880 Speaker 1: of the economy during the reign of the emperor. Yeah, 188 00:10:11,000 --> 00:10:14,160 Speaker 1: good morning, Tom. Well, you know, the emperor really doesn't 189 00:10:14,160 --> 00:10:17,360 Speaker 1: have a lot of input into economic policy and uh, 190 00:10:17,480 --> 00:10:20,120 Speaker 1: he's more of a symboloship figure and he's going to 191 00:10:20,240 --> 00:10:23,080 Speaker 1: be be missed. But what he's seen in his twenty 192 00:10:23,080 --> 00:10:26,520 Speaker 1: eight years of emperorship, I guess that's the right word 193 00:10:26,600 --> 00:10:30,679 Speaker 1: for it, and in his role has been a consistent 194 00:10:30,760 --> 00:10:33,120 Speaker 1: decline of the economy. You know, we look at the 195 00:10:33,160 --> 00:10:36,400 Speaker 1: industrial production numbers that were just out overnight and they're 196 00:10:36,440 --> 00:10:41,280 Speaker 1: actually lower than they were in that years ago when 197 00:10:41,280 --> 00:10:44,160 Speaker 1: the Emperor first came into power. So it's been a 198 00:10:44,200 --> 00:10:47,880 Speaker 1: time of net flatness for the economy and in the 199 00:10:47,920 --> 00:10:53,480 Speaker 1: recent decade or so of persistent decline, the numbers this morning, folks, 200 00:10:53,520 --> 00:10:54,960 Speaker 1: you know, when you're in the game here and you 201 00:10:55,080 --> 00:10:58,360 Speaker 1: see relative numbers streamed by as we do every moment 202 00:10:58,400 --> 00:11:01,760 Speaker 1: of every day, the only word I could come up with, Dr. 203 00:11:01,800 --> 00:11:07,200 Speaker 1: Weinberger was heartbreaking. The real GDP statistics sub one in 204 00:11:07,280 --> 00:11:12,360 Speaker 1: an overlay of inflation, which is virtually sub The animal 205 00:11:12,400 --> 00:11:15,120 Speaker 1: spirit is just not there, isn't. It's that it's not 206 00:11:15,200 --> 00:11:17,600 Speaker 1: a question of animal spirits. There aren't any animals there. 207 00:11:17,720 --> 00:11:19,679 Speaker 1: I mean, that's really a better way to think about it. 208 00:11:20,000 --> 00:11:22,839 Speaker 1: The two point six percent year over year decline, I'm 209 00:11:23,080 --> 00:11:26,080 Speaker 1: two point six percent month to month decline in GDP 210 00:11:26,360 --> 00:11:29,960 Speaker 1: and two point one percent year over year is a 211 00:11:30,000 --> 00:11:33,560 Speaker 1: really dramatic figure. But the longer term trend here, the 212 00:11:33,600 --> 00:11:36,520 Speaker 1: recent industrial production is lower now than it was twenty 213 00:11:36,559 --> 00:11:39,200 Speaker 1: eight years ago because there are fewer people in Japan 214 00:11:39,280 --> 00:11:41,680 Speaker 1: now than there were twenty eight years ago. And well, 215 00:11:41,720 --> 00:11:45,800 Speaker 1: potentially they could make more stuff using productivity enhancing technology, 216 00:11:45,840 --> 00:11:48,600 Speaker 1: and surely they have a lot of that. There's less 217 00:11:48,600 --> 00:11:50,960 Speaker 1: demand when there are fewer people in the economy. That 218 00:11:51,000 --> 00:11:53,240 Speaker 1: means they don't have to make as much, and they're 219 00:11:53,240 --> 00:11:56,559 Speaker 1: not exporting as much of the world's trade as they 220 00:11:56,600 --> 00:12:00,319 Speaker 1: did before. Competition has been stiff, so everything has been 221 00:12:00,320 --> 00:12:03,440 Speaker 1: going against them, and but the demographics has really been 222 00:12:03,640 --> 00:12:06,960 Speaker 1: the marginal driver of the economy downward. Well, speaking of 223 00:12:07,000 --> 00:12:11,280 Speaker 1: the economy, the Cabinet Office today cut its forecast for 224 00:12:11,400 --> 00:12:15,040 Speaker 1: economic growth. I was quite surprised by that. They slash 225 00:12:15,120 --> 00:12:18,040 Speaker 1: it in half to nine tenths of a percent, and 226 00:12:18,080 --> 00:12:20,040 Speaker 1: they admit that we're only going to get a third 227 00:12:20,120 --> 00:12:22,840 Speaker 1: of the inflation that we thought we were going to get. 228 00:12:23,360 --> 00:12:26,800 Speaker 1: In my short memory of dealing with people in Japan, 229 00:12:26,880 --> 00:12:29,439 Speaker 1: it is unusual for them to admit failure like this. 230 00:12:29,880 --> 00:12:32,920 Speaker 1: Oh yeah, Mike, this was a pretty gutsy move. The 231 00:12:32,960 --> 00:12:35,840 Speaker 1: Prime Minister and the Governor of the Bank of Japan 232 00:12:35,880 --> 00:12:37,840 Speaker 1: have been not just in the last few days, talking 233 00:12:37,840 --> 00:12:41,439 Speaker 1: about how albionomics is clearly working. That was Corrona's message 234 00:12:41,480 --> 00:12:44,440 Speaker 1: to the managers branch managers at the Bank of Japan 235 00:12:44,480 --> 00:12:48,200 Speaker 1: at their quarterly meeting last week. Um And now suddenly 236 00:12:48,240 --> 00:12:51,840 Speaker 1: the Cabinet Office comes out and speaks against the position 237 00:12:51,880 --> 00:12:54,280 Speaker 1: of the Prime Minister and the Central Bank governor and says, no, 238 00:12:54,400 --> 00:12:57,360 Speaker 1: it's not working. We need more fiscal stimulus, and we 239 00:12:57,400 --> 00:12:59,960 Speaker 1: need an emergency package that could be as big as 240 00:13:00,080 --> 00:13:02,559 Speaker 1: four percent of GDP based on the numbers that were 241 00:13:02,600 --> 00:13:04,760 Speaker 1: being thrown around it. Can they stand that that's a 242 00:13:04,840 --> 00:13:08,360 Speaker 1: huge number? Car? Can they withstand that? Well? This is 243 00:13:08,400 --> 00:13:12,600 Speaker 1: the back to basics l DP think tank apparatics at 244 00:13:12,640 --> 00:13:15,760 Speaker 1: work putting together a program. This is what the LDP 245 00:13:16,000 --> 00:13:19,560 Speaker 1: does when things get bad. They spend more with no 246 00:13:19,720 --> 00:13:23,800 Speaker 1: regard to the costs or penalties of financing it. And uh, 247 00:13:23,960 --> 00:13:26,320 Speaker 1: this is what they're probably going to try to do again. 248 00:13:26,360 --> 00:13:29,120 Speaker 1: Whether they can get away with it or not this time, well, 249 00:13:29,360 --> 00:13:32,000 Speaker 1: in the short term they probably can. The Bank of 250 00:13:32,080 --> 00:13:34,720 Speaker 1: Japan is still in a position where it can buy 251 00:13:34,840 --> 00:13:38,440 Speaker 1: pretty much all the bonds that that the government's printing, 252 00:13:38,720 --> 00:13:42,040 Speaker 1: but every time it increases its uptake of bonds, it 253 00:13:42,120 --> 00:13:45,000 Speaker 1: puts more pressure on the balance of payments, which will 254 00:13:45,040 --> 00:13:47,360 Speaker 1: turn back to a deficit. That current account is going 255 00:13:47,400 --> 00:13:51,280 Speaker 1: to be a deficit again because of the government's fiscal recklessness. 256 00:13:51,520 --> 00:13:53,560 Speaker 1: And it's only to drop in oil prices year over 257 00:13:53,559 --> 00:13:56,400 Speaker 1: a year. That's keeping that the current account deficit from 258 00:13:57,120 --> 00:14:00,160 Speaker 1: occurring again and getting water work, thank you. So it's 259 00:14:00,200 --> 00:14:02,080 Speaker 1: no doubt we will speak of this in the coming 260 00:14:02,360 --> 00:14:06,040 Speaker 1: days and weeks. Dr Weinberg with New York University and 261 00:14:06,120 --> 00:14:19,840 Speaker 1: High Frequency Economics as well. Michael Wilckep bringing our esteemed 262 00:14:20,000 --> 00:14:23,280 Speaker 1: guest Um out of Northwestern. I think he drank the 263 00:14:23,320 --> 00:14:26,720 Speaker 1: kool aid with Robert Gordon a few years ago. Well, 264 00:14:26,760 --> 00:14:28,680 Speaker 1: that's what you do, as long as it's not frozen 265 00:14:28,680 --> 00:14:32,480 Speaker 1: in Chicago. Williams. Strauss Uh, the research director for the 266 00:14:32,560 --> 00:14:35,280 Speaker 1: Chicago Fed here with me at the Rocky Mountain Economic 267 00:14:35,320 --> 00:14:39,120 Speaker 1: Submity in Afton, Wyoming, where it's Chicago like weather this morning. Bill, 268 00:14:39,200 --> 00:14:41,960 Speaker 1: it's it's pretty cool. Um. But Tom, I'll also point 269 00:14:42,000 --> 00:14:44,920 Speaker 1: out that I teach part time at the University of Chicago. Also, 270 00:14:45,040 --> 00:14:50,800 Speaker 1: you get it from both sides here. Tom, I'm when 271 00:14:50,800 --> 00:14:53,200 Speaker 1: I start by ripping up the script. I was going 272 00:14:53,240 --> 00:14:56,600 Speaker 1: to start by asking Bill about the manufacturing and we'll 273 00:14:56,600 --> 00:14:59,160 Speaker 1: get to that, but he had some interesting observations. We 274 00:14:59,160 --> 00:15:01,680 Speaker 1: were just talking with you're younger about gasoline prices and 275 00:15:01,720 --> 00:15:04,520 Speaker 1: how low they are, and that's something that you've been 276 00:15:04,560 --> 00:15:07,680 Speaker 1: tracking and Americans we know we have it good, but 277 00:15:07,760 --> 00:15:09,960 Speaker 1: we don't even realize how good we have it. Well, 278 00:15:10,000 --> 00:15:14,240 Speaker 1: I think we do realize about the selections and choices 279 00:15:14,280 --> 00:15:16,680 Speaker 1: that we're making. UM. One thing I do is I 280 00:15:16,760 --> 00:15:20,480 Speaker 1: look at the fuel and energy prices when you compare 281 00:15:20,560 --> 00:15:24,480 Speaker 1: that too, When you compare the amount of food and 282 00:15:24,560 --> 00:15:29,400 Speaker 1: energy prices, sorry, personal consumract expenditures on energy, which includes 283 00:15:29,800 --> 00:15:33,240 Speaker 1: filling up your vehicle, uh, paying your electric bill, paying 284 00:15:33,240 --> 00:15:36,400 Speaker 1: your heating bill, relative to all your other spend that 285 00:15:36,440 --> 00:15:39,880 Speaker 1: consumers do, it's less than four cents out of every dollar. Uh. 286 00:15:39,920 --> 00:15:42,280 Speaker 1: That is at a really an all time low that 287 00:15:42,360 --> 00:15:45,480 Speaker 1: we've seen it. And we were talking earlier that when 288 00:15:45,480 --> 00:15:48,240 Speaker 1: you look at the nineteen sixties, which some people view 289 00:15:48,240 --> 00:15:50,760 Speaker 1: as like kind of the golden age, when fuel was 290 00:15:50,800 --> 00:15:53,560 Speaker 1: just twenty five cents of gallon and then they you know, 291 00:15:53,680 --> 00:15:56,520 Speaker 1: wash your windows as well. You know, in fact, when 292 00:15:56,520 --> 00:15:59,120 Speaker 1: you go back to that period, uh, it was closer 293 00:15:59,160 --> 00:16:01,720 Speaker 1: to about seven sense out of every dollar. So we're 294 00:16:02,040 --> 00:16:05,080 Speaker 1: we're we're substantially below that. And I think that when 295 00:16:05,120 --> 00:16:07,520 Speaker 1: you look at what people are doing with regard to 296 00:16:07,640 --> 00:16:10,760 Speaker 1: their type of choices and making on vehicles, UH, they're 297 00:16:10,800 --> 00:16:14,520 Speaker 1: buying the uh you know, bigger products. The light trucks 298 00:16:14,560 --> 00:16:17,760 Speaker 1: are out selling passenger cars all the games last year 299 00:16:17,800 --> 00:16:22,200 Speaker 1: in sales passenger passenger cars were down about five and 300 00:16:22,200 --> 00:16:25,760 Speaker 1: a half percent. Light trucks were up by double digits. Well, 301 00:16:25,800 --> 00:16:28,960 Speaker 1: if that's all the case, then where's that extra money going. 302 00:16:29,000 --> 00:16:32,320 Speaker 1: We were expecting this big pop to the economy from 303 00:16:32,320 --> 00:16:35,359 Speaker 1: this gasoline price dividend. Well, I think we've all been, 304 00:16:35,360 --> 00:16:37,400 Speaker 1: you know, looking and see where that money is going. 305 00:16:37,520 --> 00:16:39,880 Speaker 1: And you look at the savings rate. The savings rate 306 00:16:39,920 --> 00:16:43,120 Speaker 1: has come back, so uh, we're you know, we're thinking 307 00:16:43,160 --> 00:16:46,000 Speaker 1: that uh perhaps uh quite a bit of it as 308 00:16:46,040 --> 00:16:50,240 Speaker 1: being used to rebalance their financial position, which kind of 309 00:16:50,320 --> 00:16:52,320 Speaker 1: hurts you in the near term by not getting that 310 00:16:52,400 --> 00:16:55,400 Speaker 1: pop on on spending, but probably if they're gonna putting 311 00:16:55,440 --> 00:16:59,120 Speaker 1: themselves in better financial position might bear some fruit later 312 00:16:59,160 --> 00:17:03,600 Speaker 1: down the road. Within the Chicago region, there's a pulse 313 00:17:04,359 --> 00:17:07,159 Speaker 1: we all were forced to read, you know, the Jungle 314 00:17:07,200 --> 00:17:12,040 Speaker 1: and all about industrial Chicago three generations ago. What's the 315 00:17:12,080 --> 00:17:16,800 Speaker 1: pulse right now of industrial mid America? William Stress? Yeah, 316 00:17:16,840 --> 00:17:19,720 Speaker 1: thanks Tom. I'm so Manufacturing is still one of the 317 00:17:19,760 --> 00:17:23,639 Speaker 1: dominant sectors for for the Midwest economy. Um, you know, 318 00:17:23,680 --> 00:17:26,199 Speaker 1: we have about twelve percent of the country's population in 319 00:17:26,200 --> 00:17:28,800 Speaker 1: the five states that make up the seventh Fedders or 320 00:17:28,840 --> 00:17:34,760 Speaker 1: of district, which includes Indiana, Illinois, Michigan, Wisconsin, and Iowa. UH. 321 00:17:35,040 --> 00:17:38,760 Speaker 1: Yet we produce about thirty percent of all all the 322 00:17:38,880 --> 00:17:41,600 Speaker 1: light vehicles that are out there, the lion's share of 323 00:17:41,600 --> 00:17:45,159 Speaker 1: heavy machinery when you think about cat deer, UH, CNH 324 00:17:45,280 --> 00:17:49,320 Speaker 1: manitoa crane UH, as as well as UH. You know, steel, 325 00:17:49,359 --> 00:17:51,199 Speaker 1: We produced about a third of the steel in the country. 326 00:17:51,280 --> 00:17:54,399 Speaker 1: So manufacturing is still a very vital part of the 327 00:17:54,400 --> 00:17:57,679 Speaker 1: Midwest economy. It came out of the Great Recession like 328 00:17:57,720 --> 00:18:00,119 Speaker 1: a like a rocket. It was clearly the strong this 329 00:18:00,240 --> 00:18:03,679 Speaker 1: recovering sector, but of course at the same time it 330 00:18:03,760 --> 00:18:08,400 Speaker 1: went down more than probably any other sector short of housing. UH. 331 00:18:08,680 --> 00:18:12,879 Speaker 1: For example, While the US economy lost about UH a 332 00:18:12,920 --> 00:18:15,400 Speaker 1: little bit more than four percent of its output during 333 00:18:15,480 --> 00:18:19,040 Speaker 1: the eighteen month period of the Great Recession, manufacturing followed 334 00:18:19,040 --> 00:18:23,240 Speaker 1: by about It's not unusual that manufacturing is more volatile, 335 00:18:23,800 --> 00:18:26,800 Speaker 1: more cyclical, but that was still all in all quite extreme. 336 00:18:27,359 --> 00:18:30,160 Speaker 1: But it came back with some real strength, and UH 337 00:18:30,600 --> 00:18:34,080 Speaker 1: had been doing very very well up until about a 338 00:18:34,160 --> 00:18:36,960 Speaker 1: year and a half two years ago, coinciding with the 339 00:18:37,000 --> 00:18:41,280 Speaker 1: COLLAPSEI energy prices UH. That hurt those industries that were 340 00:18:41,320 --> 00:18:45,840 Speaker 1: supplying uh, the energy sector. But in addition to that, uh, 341 00:18:45,880 --> 00:18:49,840 Speaker 1: the surging value of the US dollar really caused our 342 00:18:50,040 --> 00:18:53,560 Speaker 1: US made goods to be uncompetitively priced around the world. Well, 343 00:18:53,880 --> 00:18:57,320 Speaker 1: the question that follows from that is, yeah, we're still 344 00:18:57,320 --> 00:19:00,400 Speaker 1: making stuff in manufacturing is back, but we don't need 345 00:19:00,440 --> 00:19:03,440 Speaker 1: as many people to do that. And you've got a 346 00:19:03,480 --> 00:19:07,080 Speaker 1: political campaign that's playing out against that backdrop now always 347 00:19:07,119 --> 00:19:09,960 Speaker 1: the case in fact, uh Uh you know, Mica I 348 00:19:10,040 --> 00:19:12,160 Speaker 1: had a chance to testify in front of the US 349 00:19:12,240 --> 00:19:16,560 Speaker 1: in it back in two on this very issue where uh, 350 00:19:16,600 --> 00:19:19,040 Speaker 1: you know, Shared Brown from Ohio invited me to come 351 00:19:19,040 --> 00:19:22,960 Speaker 1: and testify at a subcommittee hearing. And you know, my 352 00:19:23,000 --> 00:19:25,680 Speaker 1: main my main point for being there is to basically 353 00:19:25,800 --> 00:19:28,480 Speaker 1: highlight the fact that, you know, when you're judging a 354 00:19:28,520 --> 00:19:32,080 Speaker 1: sector that has strong productivity not just for this year, 355 00:19:32,119 --> 00:19:36,160 Speaker 1: but for decades. Uh, it's a real mistake to look 356 00:19:36,160 --> 00:19:38,880 Speaker 1: at the number of people employed in that sector as 357 00:19:38,880 --> 00:19:42,440 Speaker 1: a way of of of judging its health. Uh. And 358 00:19:42,480 --> 00:19:46,560 Speaker 1: you know, manufacturing output employed about a third of of 359 00:19:46,720 --> 00:19:49,200 Speaker 1: US workforce back in the you know, post World War 360 00:19:49,200 --> 00:19:52,639 Speaker 1: two period. It's now below ten percent. And you and 361 00:19:52,720 --> 00:19:54,199 Speaker 1: you look at that and you say, you know what, 362 00:19:54,240 --> 00:19:56,920 Speaker 1: we're losing all these jobs. It's being taken by other countries. 363 00:19:57,280 --> 00:20:00,560 Speaker 1: Really not the case. What we're saying is that output 364 00:20:00,840 --> 00:20:04,840 Speaker 1: is up by six over that same period. The amount 365 00:20:04,840 --> 00:20:07,160 Speaker 1: of people we need to produce, the amount of goods 366 00:20:07,200 --> 00:20:10,480 Speaker 1: we make as just going down over time. Uh, that's 367 00:20:10,480 --> 00:20:13,960 Speaker 1: a good thing all in all. But unless, of course 368 00:20:14,200 --> 00:20:16,720 Speaker 1: you're we'll come back and touch on this point, because 369 00:20:16,720 --> 00:20:19,320 Speaker 1: it's the question then of what happens to the workers, 370 00:20:19,359 --> 00:20:22,400 Speaker 1: and that has become sort of the central political issue 371 00:20:22,400 --> 00:20:26,680 Speaker 1: of the two thousand and sixteen presidential campaign. Donald Trump says, uh, 372 00:20:26,960 --> 00:20:29,000 Speaker 1: tear up the trade deals and build a wall, and 373 00:20:29,040 --> 00:20:32,040 Speaker 1: that'll fix the problem. You argue, that's not going to 374 00:20:32,160 --> 00:20:35,080 Speaker 1: fix the problem. No, it's a number of counts, first 375 00:20:35,080 --> 00:20:37,879 Speaker 1: of one of which being that you know, fair trade, 376 00:20:37,920 --> 00:20:41,399 Speaker 1: free trade is beneficial for a country. But outside of that, 377 00:20:41,400 --> 00:20:43,919 Speaker 1: we're seeing this around the world. Uh. This is not 378 00:20:44,000 --> 00:20:47,200 Speaker 1: just the u S phenomena, where we're seeing fewer manufacturing 379 00:20:47,240 --> 00:20:50,080 Speaker 1: workers needed to produce the goods that we want. Being 380 00:20:50,080 --> 00:20:52,080 Speaker 1: from the FED, we we don't we don't give advice 381 00:20:52,160 --> 00:20:54,399 Speaker 1: to the fiscal side. But I was asked at the 382 00:20:54,480 --> 00:20:57,119 Speaker 1: very end of my testimony back in you know what 383 00:20:57,160 --> 00:21:00,160 Speaker 1: would I recommend? And I was just basically saying, if 384 00:21:00,000 --> 00:21:03,119 Speaker 1: if the opportunities for employment are not going to be 385 00:21:03,280 --> 00:21:05,520 Speaker 1: very strong in a particular sector, you need to be 386 00:21:05,560 --> 00:21:07,960 Speaker 1: thinking about and preparing people for the jobs that will 387 00:21:08,000 --> 00:21:10,160 Speaker 1: be needed to be done in the future. And as 388 00:21:10,160 --> 00:21:13,280 Speaker 1: we talk about our economy ever evolving into this knowledge 389 00:21:13,320 --> 00:21:16,320 Speaker 1: based economy, in my view, in order to be successful, 390 00:21:16,440 --> 00:21:18,919 Speaker 1: you need to have knowledge, which I think is one 391 00:21:18,920 --> 00:21:21,919 Speaker 1: of our greatest challenges when you look at the you know, 392 00:21:22,000 --> 00:21:24,800 Speaker 1: the education system that we have in this country not 393 00:21:24,920 --> 00:21:29,520 Speaker 1: meeting the needs of the of that employee, employee, potential employee. 394 00:21:29,640 --> 00:21:32,600 Speaker 1: And and in particular when you look at the share 395 00:21:32,640 --> 00:21:36,240 Speaker 1: of those of those workers who do only possess no 396 00:21:36,359 --> 00:21:38,880 Speaker 1: more than a high school degree they've either dropped out 397 00:21:39,200 --> 00:21:41,320 Speaker 1: or the highest education they've had as a highest degree, 398 00:21:41,560 --> 00:21:44,639 Speaker 1: it's about a third of our workforce. With those jobs 399 00:21:44,680 --> 00:21:49,119 Speaker 1: being ever increasingly not outsourced away, but technology driven away 400 00:21:49,640 --> 00:21:52,760 Speaker 1: as as we're seeing UH continued improvements in terms of 401 00:21:52,800 --> 00:21:57,280 Speaker 1: the way we deliver services well. Education US traditionally is 402 00:21:57,320 --> 00:22:01,920 Speaker 1: a local responsibility. We have candidates running on a national platform. 403 00:22:02,320 --> 00:22:05,359 Speaker 1: Do we need to maybe rethink how the United States 404 00:22:05,440 --> 00:22:08,000 Speaker 1: does education and I'm not talking about whether it should 405 00:22:08,000 --> 00:22:11,080 Speaker 1: be at the local school boarder in Washington, but just 406 00:22:11,160 --> 00:22:13,960 Speaker 1: the whole idea of elementary school, middle school, high school, 407 00:22:14,160 --> 00:22:16,120 Speaker 1: and then if you can afford it, you go to college. 408 00:22:16,320 --> 00:22:18,880 Speaker 1: Does that model work anymore? Again, not to get into 409 00:22:18,880 --> 00:22:22,120 Speaker 1: fiscal issues, which I'm hesitant to do, I do think 410 00:22:22,119 --> 00:22:25,080 Speaker 1: there's some role to be played by the national authorities 411 00:22:25,080 --> 00:22:27,760 Speaker 1: with regard to giving incentives. You know what, I remember 412 00:22:27,800 --> 00:22:30,840 Speaker 1: when I went to school, I did get subsidized student 413 00:22:30,880 --> 00:22:33,200 Speaker 1: loans that were back in the early eighties, we had 414 00:22:33,240 --> 00:22:36,439 Speaker 1: interest rates that were very very high, double digit and 415 00:22:37,119 --> 00:22:41,040 Speaker 1: close to UH. And yet I got you know, much 416 00:22:41,119 --> 00:22:45,080 Speaker 1: produced loans that were locked in at at a lower rate. 417 00:22:45,320 --> 00:22:48,679 Speaker 1: So there was some assistance that was offered up there 418 00:22:48,680 --> 00:22:51,679 Speaker 1: by the federal government. That being said, you know, it 419 00:22:51,720 --> 00:22:56,439 Speaker 1: allowed me to achieve a degree and subsequently now working 420 00:22:56,440 --> 00:22:59,080 Speaker 1: for thirty five years. UH. It probably what would be 421 00:22:59,160 --> 00:23:02,000 Speaker 1: viewed as a much high income because of that education. 422 00:23:02,520 --> 00:23:06,480 Speaker 1: UH and given out progressive tax system, I've paid back, hopefully, 423 00:23:06,480 --> 00:23:09,840 Speaker 1: I've paid back much more UH than those subsidized loans 424 00:23:09,840 --> 00:23:11,520 Speaker 1: that were afforded to me. And I think again that's 425 00:23:11,520 --> 00:23:14,000 Speaker 1: one of the investments that we have to think about, 426 00:23:14,080 --> 00:23:15,399 Speaker 1: and I think we need to look at it as 427 00:23:15,440 --> 00:23:18,240 Speaker 1: an investment, same as we would be encouraging other types 428 00:23:18,240 --> 00:23:23,080 Speaker 1: of investment. The heritage of Chicago economics, William Stress, is 429 00:23:23,119 --> 00:23:26,399 Speaker 1: just the facts. Whether it's Frank Knight, are you wonder 430 00:23:26,440 --> 00:23:30,159 Speaker 1: for through Stigler to Milton Friedman, it is an observation 431 00:23:30,359 --> 00:23:33,199 Speaker 1: of facts. I think of Gary Becker, the laureate is 432 00:23:33,440 --> 00:23:36,760 Speaker 1: is being front and center this under social condition. Your 433 00:23:36,880 --> 00:23:42,440 Speaker 1: Chicago has been torn asunder by a chronic violence. You're 434 00:23:42,480 --> 00:23:46,719 Speaker 1: an economist, You're one of the elite of Chicago. What 435 00:23:47,000 --> 00:23:51,240 Speaker 1: is your prescription for a troubled city that all of 436 00:23:51,320 --> 00:23:54,280 Speaker 1: us in this nation are riveted by well, and so 437 00:23:54,400 --> 00:23:57,320 Speaker 1: Chicago's got a number of problems. You highlight the violence issue, 438 00:23:57,400 --> 00:24:01,400 Speaker 1: and that certainly is an outsized problem relative to other 439 00:24:01,480 --> 00:24:04,720 Speaker 1: large cities. Um So, I mean I would be you know, 440 00:24:04,840 --> 00:24:08,080 Speaker 1: using best practices. Look at why New York, for example, 441 00:24:08,200 --> 00:24:11,040 Speaker 1: has you know a much lower murder thank you that's 442 00:24:11,040 --> 00:24:13,760 Speaker 1: going on, and to go and think about doing some 443 00:24:13,840 --> 00:24:16,439 Speaker 1: of the program approaches that have that have worked more 444 00:24:16,480 --> 00:24:20,359 Speaker 1: successfully in New York. We're not even getting into the 445 00:24:20,359 --> 00:24:23,200 Speaker 1: whole fiscal issue of Chicago, which is probably the worst 446 00:24:23,440 --> 00:24:27,240 Speaker 1: fiscal responsible city that we've had in the country, matched 447 00:24:27,320 --> 00:24:29,240 Speaker 1: up with the with the state of Illinois, which is 448 00:24:29,240 --> 00:24:32,200 Speaker 1: also the most troubling on a fiscal front. You know, Mike, 449 00:24:32,560 --> 00:24:34,920 Speaker 1: the work of Peter Nikias and others that the Chicago 450 00:24:34,960 --> 00:24:38,160 Speaker 1: Tribune have been just extraordinary on this, and I think 451 00:24:38,200 --> 00:24:41,040 Speaker 1: Bill Strauss's answered there is just brilliant about there's got 452 00:24:41,040 --> 00:24:44,920 Speaker 1: to be some serious questions about where are the best 453 00:24:44,960 --> 00:24:48,880 Speaker 1: practices given what we observe in too many of our cities, 454 00:24:49,240 --> 00:24:52,720 Speaker 1: arguably led tragically by Chicago. Well, we've just got about 455 00:24:52,720 --> 00:24:54,960 Speaker 1: thirty seconds left, Bill, but you make a good point. 456 00:24:55,440 --> 00:25:00,000 Speaker 1: We don't always when we design social programs, make them 457 00:25:00,000 --> 00:25:02,920 Speaker 1: act based. We don't look at best practices. And that's 458 00:25:02,920 --> 00:25:06,040 Speaker 1: a problem that we have an economics uh you know, 459 00:25:06,240 --> 00:25:10,560 Speaker 1: quite frequently where you're you're given opportunities to offer up 460 00:25:10,600 --> 00:25:13,159 Speaker 1: something and and the first instance, it's like the minimum 461 00:25:13,200 --> 00:25:15,720 Speaker 1: wage concept, right, you want to help people out who 462 00:25:15,760 --> 00:25:18,359 Speaker 1: have low wages, Let's just raise up the minimum wage 463 00:25:18,520 --> 00:25:22,879 Speaker 1: without saying thinking about the second order or tertiary consequences 464 00:25:22,920 --> 00:25:25,560 Speaker 1: of what that will imply, which is an essence if 465 00:25:25,560 --> 00:25:29,359 Speaker 1: you're asking employee employers to pay more for somebody than 466 00:25:29,400 --> 00:25:32,480 Speaker 1: they actually contribute towards the job, they will not be 467 00:25:32,880 --> 00:25:35,080 Speaker 1: off to, just just to close off to. Since where 468 00:25:35,240 --> 00:25:37,080 Speaker 1: Tom seems to be a fan of Chicago, you know, 469 00:25:37,200 --> 00:25:40,479 Speaker 1: I'll quote Milton Friedman who said that the ultimate minimum 470 00:25:40,480 --> 00:25:43,240 Speaker 1: wage that we have is zero, because that's the wage 471 00:25:43,240 --> 00:25:45,520 Speaker 1: that somebody will learn who doesn't get a job because 472 00:25:45,520 --> 00:25:48,720 Speaker 1: the wages said over their their talent to be offered 473 00:25:48,720 --> 00:25:51,760 Speaker 1: to the employer. Bill Charlis, thanks for joining us here 474 00:25:51,840 --> 00:25:56,160 Speaker 1: from the Rocky Mountain Economic Summit, Senior economists that the 475 00:25:56,160 --> 00:26:10,560 Speaker 1: Federal Reserve Bank of Chicago. This is Bluebergen surveillance back 476 00:26:10,720 --> 00:26:13,720 Speaker 1: McKee and Wyoming. I'm in New York. I think Jamie 477 00:26:13,800 --> 00:26:16,600 Speaker 1: Diamonds in New York. Let's have a discussion. Michael Mayo here, 478 00:26:16,680 --> 00:26:19,879 Speaker 1: let's see l s a Michael, wonderful day. Have you 479 00:26:20,000 --> 00:26:23,720 Speaker 1: here for a good amount of time? And I guess 480 00:26:23,720 --> 00:26:26,320 Speaker 1: we want to start with JP Morgan earnings tomorrow, but 481 00:26:26,440 --> 00:26:29,560 Speaker 1: we need to go viral. Is Mr diamonded yesterday with 482 00:26:29,600 --> 00:26:32,240 Speaker 1: an essay in the New York Times And I picked 483 00:26:32,280 --> 00:26:36,080 Speaker 1: it up and you know, I'm as jaded as you are. Yeah, yeah, okay, great, 484 00:26:36,359 --> 00:26:41,159 Speaker 1: And it was actually cogent about the primal scream of 485 00:26:41,160 --> 00:26:43,720 Speaker 1: a part of banking we never talked about, which is 486 00:26:43,760 --> 00:26:47,000 Speaker 1: these banks have thousands of people, and a lot of 487 00:26:47,080 --> 00:26:51,440 Speaker 1: them in commercial banking, traditional banking are barely getting by 488 00:26:51,480 --> 00:26:55,520 Speaker 1: two hundred and thirty seven thousand, four twenty employees, and 489 00:26:55,680 --> 00:26:59,600 Speaker 1: Mr Diamond has a lot of tellers and staff barely 490 00:26:59,640 --> 00:27:03,679 Speaker 1: getting by. Right. Yeah, most of the banking industry is 491 00:27:04,040 --> 00:27:06,880 Speaker 1: main street as opposed to wall streets. That guys out 492 00:27:06,880 --> 00:27:09,359 Speaker 1: in the Hampton's decide whether to take the Ferraria for 493 00:27:09,560 --> 00:27:13,520 Speaker 1: spin exactly. And that's why Jamie Diamond's op ed yesterday 494 00:27:13,560 --> 00:27:15,840 Speaker 1: got so much of attention. He said he's raising the 495 00:27:15,880 --> 00:27:19,639 Speaker 1: minimum wage for employees at JP Morgan by one. He 496 00:27:19,720 --> 00:27:23,280 Speaker 1: wants to make sure that the lower level of JP Morgan, 497 00:27:23,640 --> 00:27:26,440 Speaker 1: you know, they're gonna help try to fix that income equality, 498 00:27:26,840 --> 00:27:29,400 Speaker 1: at least the JP Morgan itself. When when we look 499 00:27:29,400 --> 00:27:33,440 Speaker 1: at this and I think that they executive at Davos 500 00:27:33,480 --> 00:27:37,679 Speaker 1: who announced on surveillance that he was boosting pay. Is 501 00:27:37,720 --> 00:27:39,880 Speaker 1: it because he wants to do it and feel good? 502 00:27:40,000 --> 00:27:44,080 Speaker 1: I doubt it. What's the back story here? Is it? Retention? Well, 503 00:27:44,080 --> 00:27:47,160 Speaker 1: the backstory here, Look, we call JP Morgan the Lebron 504 00:27:47,320 --> 00:27:51,440 Speaker 1: James of banking, because like Lebron James, JP Morgan is 505 00:27:51,480 --> 00:27:54,760 Speaker 1: good at both offense and defense, and this op ed 506 00:27:54,880 --> 00:27:57,359 Speaker 1: by Jamie diamond is a little bit of both. On 507 00:27:57,400 --> 00:28:00,760 Speaker 1: the defensive side, this is where the world's going. Anyway, 508 00:28:00,800 --> 00:28:04,080 Speaker 1: he needs to increase the minimum wage. Oh. By the way, banking, 509 00:28:04,200 --> 00:28:08,439 Speaker 1: especially at JP Morgan, is becoming more technology driven. You 510 00:28:08,520 --> 00:28:11,600 Speaker 1: have more advanced a t m S and mobile banking 511 00:28:11,640 --> 00:28:14,440 Speaker 1: and phone banking and internet banking, which means you have 512 00:28:14,480 --> 00:28:17,120 Speaker 1: a mix shift and the tellers that remain will be 513 00:28:17,200 --> 00:28:19,720 Speaker 1: expected to do more. So some of this defense. And 514 00:28:19,760 --> 00:28:22,119 Speaker 1: by the way, he got a shout out by Shared Brown, 515 00:28:22,520 --> 00:28:26,639 Speaker 1: you know staunch Off, an anti bank UH congressman, who 516 00:28:26,680 --> 00:28:29,159 Speaker 1: said this was really good that Jamie Diamonds said this. 517 00:28:29,160 --> 00:28:32,359 Speaker 1: This is also though an offensive move because it shows 518 00:28:32,359 --> 00:28:35,720 Speaker 1: that JP Morgan can pay their employees more. When banking 519 00:28:35,760 --> 00:28:38,680 Speaker 1: has done right, it's a great business for the lenders, 520 00:28:38,720 --> 00:28:42,120 Speaker 1: the borrowers and the employees. And JP Morgan's showing that. 521 00:28:42,440 --> 00:28:45,080 Speaker 1: And you know what, I'm not sure every community bank 522 00:28:45,160 --> 00:28:48,840 Speaker 1: out there can match the increase in the wage hikes 523 00:28:48,840 --> 00:28:51,600 Speaker 1: at at JP Morgan. So Jake Morrigan, this is an 524 00:28:51,600 --> 00:28:54,760 Speaker 1: example of economies of scale. Let's bringing Michael McKee. He's 525 00:28:54,800 --> 00:28:58,480 Speaker 1: in left why owning tomorrow he'll be in right, Idaho? 526 00:28:58,680 --> 00:29:02,360 Speaker 1: Is that right, Mike? That is correct. You're you're getting 527 00:29:02,400 --> 00:29:05,200 Speaker 1: your geography correct. I haven't seen a JP Morgan branch 528 00:29:05,240 --> 00:29:07,960 Speaker 1: out here, but I'm sure they're around there, around somewhere. 529 00:29:08,000 --> 00:29:11,480 Speaker 1: But you were talking about the technology they employ, the 530 00:29:11,520 --> 00:29:13,560 Speaker 1: advanced A T M S, And the thing that came 531 00:29:13,600 --> 00:29:17,040 Speaker 1: to my mind, Michael, is they're giving raises to employees 532 00:29:17,160 --> 00:29:18,960 Speaker 1: that they are just going to be getting rid of 533 00:29:19,320 --> 00:29:22,440 Speaker 1: over the next couple of years as they embrace automation 534 00:29:22,480 --> 00:29:25,280 Speaker 1: more and more and maybe as they cut back on 535 00:29:25,960 --> 00:29:29,440 Speaker 1: bank branches. Yeah, this is where the world's going, So 536 00:29:29,560 --> 00:29:32,520 Speaker 1: at least with those who remain, you're going to need 537 00:29:32,560 --> 00:29:34,520 Speaker 1: to know more about the technology. You're going to be 538 00:29:34,560 --> 00:29:37,600 Speaker 1: more of a type of consultant when you walk in 539 00:29:37,680 --> 00:29:40,920 Speaker 1: the branch. This isn't your father's banking. This is the 540 00:29:41,040 --> 00:29:44,600 Speaker 1: new age of banking. And so if you're going to 541 00:29:45,280 --> 00:29:47,320 Speaker 1: you have to go here anyway. Want to get a 542 00:29:47,320 --> 00:29:49,760 Speaker 1: first mover advantage, So to some degree in the banking industry, 543 00:29:49,840 --> 00:29:52,360 Speaker 1: Jamie Diamond help JP Morgan get a first mover advantage, 544 00:29:52,400 --> 00:29:54,760 Speaker 1: but without being too cynical, Tom, you and I are 545 00:29:54,800 --> 00:29:58,080 Speaker 1: both very jaded over the years. You know, banks do 546 00:29:58,200 --> 00:30:01,240 Speaker 1: a lot of good, So this op EDS sounded a 547 00:30:01,240 --> 00:30:04,000 Speaker 1: little bit like the JP Morgan CEO letter, like it's 548 00:30:04,040 --> 00:30:06,160 Speaker 1: great that you know they got it in there, But 549 00:30:06,320 --> 00:30:08,320 Speaker 1: on the other hand, they do a lot of good, 550 00:30:08,320 --> 00:30:09,760 Speaker 1: they may as well try to get credit for it. 551 00:30:09,920 --> 00:30:12,720 Speaker 1: What are we going to see in the earnings report tomorrow? 552 00:30:12,760 --> 00:30:16,080 Speaker 1: I get a real watershed emotion from guys like you 553 00:30:16,240 --> 00:30:19,520 Speaker 1: that they've been through the proverbial hell and they're moving 554 00:30:19,560 --> 00:30:24,120 Speaker 1: on to a better time. X quarters out is tomorrow 555 00:30:24,240 --> 00:30:27,800 Speaker 1: the beginning of a transitional set of announcements by two 556 00:30:27,800 --> 00:30:31,440 Speaker 1: big to fail banks. Well, tomorrow reflects the first earnings 557 00:30:31,480 --> 00:30:35,320 Speaker 1: released by a major bank since Brexit. And Brexit you know, 558 00:30:35,360 --> 00:30:39,040 Speaker 1: we summarize the potential issues as the four seas. One 559 00:30:39,160 --> 00:30:41,920 Speaker 1: is costs, the cost of doing business can go higher 560 00:30:42,200 --> 00:30:45,160 Speaker 1: in Europe. We'll want to ask Jamie Diamond about that. Remember, 561 00:30:45,320 --> 00:30:48,120 Speaker 1: Jamie Diamond, City might move four thousand jobs out of 562 00:30:48,160 --> 00:30:50,280 Speaker 1: line in the u K. Elsewhere in Europe. What's the 563 00:30:50,320 --> 00:30:52,880 Speaker 1: update on that. The second would be the currency move. 564 00:30:52,920 --> 00:30:55,640 Speaker 1: Look at that move in the pound. Did JP Morgan 565 00:30:55,720 --> 00:30:57,880 Speaker 1: get hurt? Did another large bank get hurt? If they did, 566 00:30:58,200 --> 00:31:00,680 Speaker 1: they're going to get beaten up by investors that didn't. 567 00:31:00,680 --> 00:31:04,680 Speaker 1: This show's additional resiliency. The third sea would be capital markets, 568 00:31:04,720 --> 00:31:07,920 Speaker 1: a little risk golf environment. But are the US banks 569 00:31:07,960 --> 00:31:10,720 Speaker 1: such as JP Morgan gaining share? And the fourth sea 570 00:31:10,720 --> 00:31:13,520 Speaker 1: would be central banks, and that's the lower for longer 571 00:31:13,560 --> 00:31:17,160 Speaker 1: interest rates and that's probably the factor that hurts bank 572 00:31:17,200 --> 00:31:20,920 Speaker 1: earnings more than any other. Well, the next question then, 573 00:31:21,040 --> 00:31:25,440 Speaker 1: is is it mostly absorbed at this point? Well, there's 574 00:31:25,480 --> 00:31:28,000 Speaker 1: two ways to answer that. One is is it mostly 575 00:31:28,040 --> 00:31:32,600 Speaker 1: absorbed in the earnings? And we think absolutely not. We 576 00:31:32,640 --> 00:31:35,920 Speaker 1: think that large bank earnings estimates are at risk by 577 00:31:36,000 --> 00:31:38,720 Speaker 1: ten to fifteen percent over the next couple of years. 578 00:31:39,240 --> 00:31:43,360 Speaker 1: Many investors and banks were expecting several rate hikes by 579 00:31:43,400 --> 00:31:46,720 Speaker 1: the INTERN next year, and now the the Fed fund 580 00:31:46,760 --> 00:31:49,920 Speaker 1: futures markets expects anything but that maybe one hike by 581 00:31:49,920 --> 00:31:52,760 Speaker 1: the INN next year. So you know, collectively the investment 582 00:31:52,760 --> 00:31:56,040 Speaker 1: world needs to ratchet down expectations for rate hikes and 583 00:31:56,080 --> 00:31:58,760 Speaker 1: with lower for longer rates, that hurts bank earnings. The 584 00:31:58,800 --> 00:32:02,040 Speaker 1: second part the answer, though, is is it reflected in 585 00:32:02,080 --> 00:32:05,400 Speaker 1: the bank stocks themselves. So here you have this stock 586 00:32:05,440 --> 00:32:08,440 Speaker 1: market hitting these these high levels, but banks are still 587 00:32:08,480 --> 00:32:11,920 Speaker 1: at levels from two decades ago, and so banks have 588 00:32:12,520 --> 00:32:15,640 Speaker 1: you know, very nice yields. The divin yields on like 589 00:32:15,720 --> 00:32:19,400 Speaker 1: JP Morgan, Wells Fargo are very favorable. So typically when 590 00:32:19,440 --> 00:32:21,920 Speaker 1: you're chasing for yield in this environment, you're really paying 591 00:32:22,000 --> 00:32:23,840 Speaker 1: up a lot, but not for the banks to put 592 00:32:23,840 --> 00:32:26,240 Speaker 1: this in. And let's run through this in worl of 593 00:32:26,280 --> 00:32:29,280 Speaker 1: Mike mayel Beck with us on the Bloomberg screen. JP 594 00:32:29,440 --> 00:32:33,880 Speaker 1: Morgan is a rich twelve multiple. That's half of most 595 00:32:33,880 --> 00:32:37,760 Speaker 1: consumer discretionaries that don't have the market share. JP Morgan 596 00:32:37,920 --> 00:32:42,240 Speaker 1: is is your area of screaming by. We think this 597 00:32:42,360 --> 00:32:44,560 Speaker 1: is a by as you know, we were negative for 598 00:32:44,600 --> 00:32:47,200 Speaker 1: a couple of decades and now we recommend bank stocks. 599 00:32:47,520 --> 00:32:50,360 Speaker 1: We think that there are Herning's headwinds. So if you're 600 00:32:50,360 --> 00:32:53,040 Speaker 1: looking to you know, we don't make these trading calls. 601 00:32:53,080 --> 00:32:54,840 Speaker 1: You're not going to use the word screaming because it's 602 00:32:54,880 --> 00:32:59,040 Speaker 1: not four. I know you're a c f A. Also 603 00:32:59,120 --> 00:33:01,960 Speaker 1: it's screaming. It's screaming. But our investment horizon now are 604 00:33:02,240 --> 00:33:04,840 Speaker 1: under a reasonable investments and have one to three years 605 00:33:04,840 --> 00:33:07,480 Speaker 1: this is as attractive as they've been in a long time. 606 00:33:07,760 --> 00:33:11,600 Speaker 1: You have earnings headwinds and that has not been fully incorporated, 607 00:33:11,640 --> 00:33:14,760 Speaker 1: but you have the best balance sheet resiliency you've had 608 00:33:14,760 --> 00:33:18,120 Speaker 1: in the banking industry in decades. Twelve seconds. Can they 609 00:33:18,200 --> 00:33:21,720 Speaker 1: do a double digit five year dividend growth? The massaw 610 00:33:21,760 --> 00:33:24,160 Speaker 1: screwed up now because they're starting from zero, But can 611 00:33:24,240 --> 00:33:27,560 Speaker 1: you model them out for a double digit dividend growth 612 00:33:28,080 --> 00:33:31,920 Speaker 1: for JP Morgan in the banks? You know. The way 613 00:33:31,960 --> 00:33:34,560 Speaker 1: I'd answer that question is if you look at dividends 614 00:33:34,640 --> 00:33:38,040 Speaker 1: with buy backs, it's all away to the capital. It's there. 615 00:33:38,200 --> 00:33:39,840 Speaker 1: So the answers yes, if you include the body, so 616 00:33:39,880 --> 00:33:41,880 Speaker 1: then you get there if you conclude share box. Mike, 617 00:33:41,920 --> 00:33:45,920 Speaker 1: I hadn't brought this chart up with so much America, Europe, Europe, Europe, 618 00:33:45,960 --> 00:33:50,400 Speaker 1: Italian banks and all that I had forgotten the diamond 619 00:33:50,480 --> 00:33:55,240 Speaker 1: Corbett disparity of JP Morgan's stock performance back to the 620 00:33:55,280 --> 00:33:58,480 Speaker 1: beginning of the crisis August of oh seven in the 621 00:33:58,600 --> 00:34:02,880 Speaker 1: dead Cat Bounce, a non ascent of City Group. Let's 622 00:34:02,920 --> 00:34:07,880 Speaker 1: talk about Michael Corbett in a team international. But you 623 00:34:07,920 --> 00:34:11,960 Speaker 1: have published many times before, what are you waiting for 624 00:34:12,160 --> 00:34:15,640 Speaker 1: on Mexico. Tell me about what City Group does with 625 00:34:15,800 --> 00:34:19,120 Speaker 1: distressed businesses. Well, City Groups gone a long way to 626 00:34:19,719 --> 00:34:22,880 Speaker 1: disposing of many of the legacy assets left over from 627 00:34:22,920 --> 00:34:25,800 Speaker 1: the crisis. They've exited, you know, more than a dozen 628 00:34:25,880 --> 00:34:29,279 Speaker 1: consumer markets outside the United States. But we don't think 629 00:34:29,320 --> 00:34:32,960 Speaker 1: City Groups gone far enough. City Group reports earnings on Friday, 630 00:34:33,000 --> 00:34:35,920 Speaker 1: and I think you'll still see single digit r's when 631 00:34:35,920 --> 00:34:38,960 Speaker 1: other banks such as JP Morgan Wells Fargo have double 632 00:34:39,000 --> 00:34:42,600 Speaker 1: digit return on equity. One idea that we have that 633 00:34:42,640 --> 00:34:44,960 Speaker 1: could take City Group further, and we think they should 634 00:34:44,960 --> 00:34:48,399 Speaker 1: do it, is exit Mexico. For most of their over 635 00:34:48,920 --> 00:34:51,480 Speaker 1: two hundred years in existence, they did not have a 636 00:34:51,560 --> 00:34:57,000 Speaker 1: major banking franchise in Mexico. They bought Batamex early last decade. 637 00:34:57,320 --> 00:35:00,400 Speaker 1: And so while we have this talk about Brexit, we 638 00:35:00,520 --> 00:35:03,160 Speaker 1: come up with our new term of mexit, and that 639 00:35:03,320 --> 00:35:06,640 Speaker 1: mexit refers to City Groups should exit Mexico, sell off 640 00:35:06,680 --> 00:35:09,600 Speaker 1: that bank. Simplify that much more. If I do a 641 00:35:09,640 --> 00:35:12,640 Speaker 1: reten for one reverse stock split on Amazon, I think 642 00:35:12,680 --> 00:35:15,759 Speaker 1: I get a seven thousand dollars per share something like that. 643 00:35:16,040 --> 00:35:19,040 Speaker 1: I still look at City Group is four dollars thirty 644 00:35:19,040 --> 00:35:23,000 Speaker 1: two cents pre the reverse split. Why can't they get 645 00:35:23,040 --> 00:35:26,520 Speaker 1: this stock going one difference versus before the crisis, as 646 00:35:26,560 --> 00:35:29,279 Speaker 1: they did issue a lot more stock, but even on 647 00:35:29,320 --> 00:35:32,279 Speaker 1: a stock for stock basis, the stock is still less 648 00:35:32,280 --> 00:35:35,480 Speaker 1: than half of where it was in the past. And 649 00:35:35,680 --> 00:35:38,360 Speaker 1: the bottom line is they need to improve their return 650 00:35:38,400 --> 00:35:40,880 Speaker 1: on equity. That's you know, as you know from cf 651 00:35:40,880 --> 00:35:43,720 Speaker 1: A tom uh you know how much earnings you generate 652 00:35:43,760 --> 00:35:46,960 Speaker 1: for every dollar of equity in the business. And part 653 00:35:47,000 --> 00:35:49,919 Speaker 1: of that is simply discarding still some of the low 654 00:35:49,960 --> 00:35:53,080 Speaker 1: performing businesses such as Mexico. We've said that. And the 655 00:35:53,120 --> 00:35:57,719 Speaker 1: stock the prices you know, around of book value, and 656 00:35:57,719 --> 00:35:59,880 Speaker 1: when you're trading at such a low price like that, 657 00:36:00,000 --> 00:36:03,600 Speaker 1: at management needs to take more aggressive action. Whatever they 658 00:36:03,600 --> 00:36:05,680 Speaker 1: need to do, they need to do it. It's been 659 00:36:05,680 --> 00:36:07,640 Speaker 1: long enough of a wait. I mean, the stock prices 660 00:36:08,040 --> 00:36:09,520 Speaker 1: at the same level where it was a couple of 661 00:36:09,560 --> 00:36:13,359 Speaker 1: decades ago. You've seen all the turmoil they've had now 662 00:36:13,360 --> 00:36:16,440 Speaker 1: the new CEO, he made some of the right steps 663 00:36:16,440 --> 00:36:18,480 Speaker 1: when he took over a few years ago, but we 664 00:36:18,560 --> 00:36:22,040 Speaker 1: see that waning sum. So they need to re energize 665 00:36:22,080 --> 00:36:24,560 Speaker 1: their restructuring program that they started a few years ago. 666 00:36:24,960 --> 00:36:29,719 Speaker 1: Anybody else as radical surgery, as city still does at 667 00:36:29,719 --> 00:36:32,280 Speaker 1: this point. Well, in general, that's a good question because 668 00:36:32,320 --> 00:36:34,640 Speaker 1: the banking industry in the United States still has the 669 00:36:34,640 --> 00:36:37,680 Speaker 1: worst revenue growth that it's had, you know, in eighty years. 670 00:36:38,000 --> 00:36:41,000 Speaker 1: This decade, revenues at US banks have been the worst 671 00:36:41,000 --> 00:36:44,160 Speaker 1: they've been in eighty years. So therefore, if you can't 672 00:36:44,200 --> 00:36:46,719 Speaker 1: get the results on the top line with revenues, the 673 00:36:46,760 --> 00:36:48,759 Speaker 1: only way to get it on the bottom line is 674 00:36:48,800 --> 00:36:52,960 Speaker 1: through expenses and restructuring. So Bank of America, which we 675 00:36:53,000 --> 00:36:55,000 Speaker 1: started to recommend a few months ago for the first 676 00:36:55,080 --> 00:36:58,200 Speaker 1: time in a while because the resiliency the balance sheet, 677 00:36:58,480 --> 00:37:02,480 Speaker 1: still lacks a sufficient plan B and so Bank America 678 00:37:02,560 --> 00:37:06,440 Speaker 1: during their earnings presentations they would highlight when interest rates increase, 679 00:37:06,680 --> 00:37:08,760 Speaker 1: look how much better will do? Well? Guess what interest 680 00:37:08,840 --> 00:37:11,960 Speaker 1: rates haven't increased. Well, still a similar spot where we 681 00:37:11,960 --> 00:37:14,000 Speaker 1: were a couple of years ago. What is your plan B, 682 00:37:14,000 --> 00:37:16,640 Speaker 1: Bank America? How are you going to become more efficient? 683 00:37:17,000 --> 00:37:19,520 Speaker 1: You can't just shine your shoes, you know, go to 684 00:37:19,560 --> 00:37:22,759 Speaker 1: work and wait for rates to rise anymore. So they 685 00:37:22,800 --> 00:37:25,080 Speaker 1: need more surgery at Bank America too. I want to 686 00:37:25,680 --> 00:37:27,360 Speaker 1: switch gears a little bit here and bring up a 687 00:37:27,400 --> 00:37:30,000 Speaker 1: subject that came up here at the Rocky Mountain Tsnomic 688 00:37:30,080 --> 00:37:34,160 Speaker 1: summon out in Wyoming. A couple of bankers and BC 689 00:37:34,360 --> 00:37:37,640 Speaker 1: people here saying the money is out there, you can 690 00:37:37,680 --> 00:37:41,799 Speaker 1: get money. Banks are willing to lend, but the customers 691 00:37:41,800 --> 00:37:45,839 Speaker 1: are not people. Even though interest rates are extraordinarily low. 692 00:37:46,400 --> 00:37:48,600 Speaker 1: The problem for banks isn't just the fact that they 693 00:37:48,640 --> 00:37:51,480 Speaker 1: don't have a big margin, but they're not moving enough product. 694 00:37:51,520 --> 00:37:54,400 Speaker 1: At this point, well at this time of the presidential election, 695 00:37:54,760 --> 00:37:57,960 Speaker 1: it's a fair question to ask has the regulatory reaction 696 00:37:58,200 --> 00:38:01,719 Speaker 1: gone too far? And as supportive as I was of 697 00:38:01,760 --> 00:38:05,560 Speaker 1: the the regulators before the crisis and since the crisis, 698 00:38:05,640 --> 00:38:08,920 Speaker 1: I think the pendulum now has swung too far. This 699 00:38:09,000 --> 00:38:13,120 Speaker 1: economic expansion, loans have only grown one third the pace 700 00:38:13,280 --> 00:38:17,120 Speaker 1: of a typical economic expansion, and partly that's due to 701 00:38:17,320 --> 00:38:21,239 Speaker 1: the de risking and de leveraging required by bank regulators 702 00:38:21,400 --> 00:38:25,800 Speaker 1: that encourages banks to lend less to the most risky borrowers. 703 00:38:25,880 --> 00:38:29,080 Speaker 1: The downside just too bad when you make a loan 704 00:38:29,120 --> 00:38:31,120 Speaker 1: to you know, a sub prime loan, or somebody can't 705 00:38:31,120 --> 00:38:33,440 Speaker 1: really afford it. On the other hand, it's not just supply, 706 00:38:33,760 --> 00:38:38,000 Speaker 1: it's also demand, and the demand from borrowers is not 707 00:38:38,080 --> 00:38:40,560 Speaker 1: as much their flush and cash also, so is it 708 00:38:40,640 --> 00:38:42,800 Speaker 1: the chicken the egg is the bank's not warning, the 709 00:38:42,880 --> 00:38:45,160 Speaker 1: lander is the demands A little bit of both way, 710 00:38:45,280 --> 00:38:47,759 Speaker 1: maybe from your remit, but I'm gonna ask you anyways. 711 00:38:47,800 --> 00:38:50,200 Speaker 1: I get this constantly. Where's the M and A? What 712 00:38:50,280 --> 00:38:53,560 Speaker 1: are these guys waiting for? Andrew Jackson talked about it. 713 00:38:53,600 --> 00:38:56,880 Speaker 1: I know you were recovering banks when uh Jackson was 714 00:38:56,960 --> 00:39:00,200 Speaker 1: fighting the good fight in New Orleans? Where is the man? 715 00:39:00,840 --> 00:39:03,560 Speaker 1: We think the bank industry is still very right for 716 00:39:03,640 --> 00:39:06,560 Speaker 1: more mergers. Now clearly the bank the largest banks are 717 00:39:06,560 --> 00:39:10,319 Speaker 1: too large, they're prohibited from BIOT. But for the rest 718 00:39:10,400 --> 00:39:14,399 Speaker 1: of those, such as America America, UH, this could be 719 00:39:14,560 --> 00:39:17,640 Speaker 1: an epic event based on how this plays out. They 720 00:39:17,680 --> 00:39:20,640 Speaker 1: report their earnings Tuesday. They give the results of a 721 00:39:20,680 --> 00:39:24,000 Speaker 1: consultant who's going to show them how to grow revenues 722 00:39:24,000 --> 00:39:26,600 Speaker 1: and control expenses better, even though the CEO has been 723 00:39:26,640 --> 00:39:29,480 Speaker 1: there for you know, quite some time. So why do 724 00:39:29,480 --> 00:39:31,279 Speaker 1: you need a consultant to tell you how to do that? 725 00:39:31,320 --> 00:39:33,920 Speaker 1: So America is one bank that should at least consider, 726 00:39:34,080 --> 00:39:36,360 Speaker 1: you know, as part of their plan being should we 727 00:39:36,440 --> 00:39:39,279 Speaker 1: sell to another bank that's a lot more efficient with 728 00:39:40,280 --> 00:39:42,160 Speaker 1: but that that's one example. But there's many banks. But 729 00:39:42,320 --> 00:39:43,720 Speaker 1: I get that, But I want to rip up the script. 730 00:39:43,800 --> 00:39:46,680 Speaker 1: This is really important. They're trading in a seventeen multiple, 731 00:39:46,920 --> 00:39:50,480 Speaker 1: they're trading at over double City Group. They're trading at 732 00:39:50,480 --> 00:39:53,920 Speaker 1: a very nice premium to Mr. Diamonds franchise. I get it. 733 00:39:54,000 --> 00:39:56,399 Speaker 1: That's a takeout premium because smart guys like you were 734 00:39:56,440 --> 00:39:59,560 Speaker 1: saying they're gonna take out. What's their response? What what 735 00:40:00,000 --> 00:40:03,080 Speaker 1: are they waiting for? Well, we will find out Tuesday. 736 00:40:03,160 --> 00:40:04,920 Speaker 1: This is a lot of eyes in the banking industry 737 00:40:04,920 --> 00:40:08,520 Speaker 1: are certainly looking at America there saying we can optimize 738 00:40:08,520 --> 00:40:10,960 Speaker 1: our franchise on our own. They haven't done it for 739 00:40:11,000 --> 00:40:13,520 Speaker 1: the last decade, so why now can they change it? 740 00:40:13,640 --> 00:40:16,120 Speaker 1: So we'll see if they get some magic beans from 741 00:40:16,160 --> 00:40:19,480 Speaker 1: the Boston Consulting Group. Mike, Yeah, the Boston Consulting Group, Mike, 742 00:40:19,480 --> 00:40:22,839 Speaker 1: America ten year track record, negative one percent per year. 743 00:40:23,160 --> 00:40:27,480 Speaker 1: They're optimizing. Mike, jump in here, please. Um, you're talking 744 00:40:27,520 --> 00:40:31,960 Speaker 1: about City getting rid of its Mexico operations as as 745 00:40:32,360 --> 00:40:35,279 Speaker 1: one strategic move. Is there anybody in the US that 746 00:40:35,360 --> 00:40:41,279 Speaker 1: needs to expand at this point overseas or um? Is 747 00:40:41,320 --> 00:40:44,840 Speaker 1: everybody optimized right now, Well, I think you can go 748 00:40:44,960 --> 00:40:47,960 Speaker 1: both ways. My if I was king of the banking industry, 749 00:40:48,000 --> 00:40:50,760 Speaker 1: let's say the banking industry does exactly what Mike NEOs 750 00:40:50,840 --> 00:40:54,280 Speaker 1: says to do, I would have the most deficient banks. 751 00:40:54,560 --> 00:40:58,280 Speaker 1: I'd like that by the least deficient banks, the successful banks, 752 00:40:58,280 --> 00:41:01,320 Speaker 1: by the ones that have failed for the last decade, 753 00:41:01,360 --> 00:41:04,080 Speaker 1: not failed in terms of not being existence, but failed 754 00:41:04,200 --> 00:41:07,439 Speaker 1: to generate good returns, you know, pay their employees well, 755 00:41:07,480 --> 00:41:10,120 Speaker 1: like Jape Morgan's, you know, doing more of a head. 756 00:41:10,520 --> 00:41:12,880 Speaker 1: And so you know, banks such as US Bancorp is 757 00:41:12,920 --> 00:41:15,279 Speaker 1: one of the most efficient banks around. I asked him, 758 00:41:15,480 --> 00:41:18,319 Speaker 1: why not buy somebody you're optimized, why not go out 759 00:41:18,320 --> 00:41:20,480 Speaker 1: and optim by somebody else? And I think they're starting 760 00:41:20,480 --> 00:41:22,640 Speaker 1: to go in that direction. So Tom, they answered your question, 761 00:41:22,680 --> 00:41:24,759 Speaker 1: is I think next year we could see you, you know, 762 00:41:24,760 --> 00:41:27,000 Speaker 1: a bit more M and A among banks. Michael Mayo 763 00:41:27,120 --> 00:41:29,000 Speaker 1: c l s A. We'll call upon him here in 764 00:41:29,040 --> 00:41:31,000 Speaker 1: the coming days and weeks. As he gets this is 765 00:41:31,040 --> 00:41:33,400 Speaker 1: like showtime for you, isn't it. Do you sleep like 766 00:41:33,480 --> 00:41:36,279 Speaker 1: in the next three weeks to next ten days rather 767 00:41:36,680 --> 00:41:38,960 Speaker 1: four times a year, it's four times a year. It's 768 00:41:40,000 --> 00:41:42,000 Speaker 1: it's it's game day. I mean, what you wake up 769 00:41:42,000 --> 00:41:44,440 Speaker 1: earlierre on It's Super Bowl. He's like, he's like cutting 770 00:41:44,520 --> 00:41:48,440 Speaker 1: chiseled and ready for it. Thanks for listening to the 771 00:41:48,440 --> 00:41:54,520 Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud, 772 00:41:54,840 --> 00:41:58,799 Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at 773 00:41:58,840 --> 00:42:03,640 Speaker 1: Tom Keane, Michael McKee is at Economy Before the podcast. 774 00:42:03,719 --> 00:42:07,200 Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio