Speaker 1: Brought you by Bank of America, Mary Lynch. Investing in
Speaker 1: local communities, economies and a sustainable future. That's the power
Speaker 1: of global connections. Mary Lynch, Pierce Fenner and Smith Incorporated
Speaker 1: member s I p C. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best in economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and
Speaker 1: of course on the Bloomberg. Let we begin this morning
Speaker 1: with Steve Eisman, familiar to anyone who's read or seeing
Speaker 1: The Big Short, of course, now he's a portfolio manager
Speaker 1: with new Burger Berman Group. He joins us here in
Speaker 1: our Bloomberg eleven three O Studios and New York right
Speaker 1: to see you here. Thanks for coming on the show.
Speaker 1: You focused on You've paid so much attention to the
Speaker 1: integrity of the strength of the financial sector in the US,
Speaker 1: and I want to just start there if I could,
Speaker 1: asking you about what you make of the rhetoric we've
Speaker 1: heard from this president, indeed from any Republicans about the
Speaker 1: future of financial reform and regulation in this country. How worried,
Speaker 1: are you about the the integrity of that apparatus going forward?
Speaker 1: You know, I'm really not that worried about it at
Speaker 1: this point. I mean, let's just throw some numbers around.
Speaker 1: You know, when pre cry Let's use City Group as
Speaker 1: an example, just to get some numbers. You know, pre crisis,
Speaker 1: City Group was levered thirty five to one. You know,
Speaker 1: five years before that, in two thousand and two, it
Speaker 1: had been levered twenty two to one. Today it's levered
Speaker 1: ten to one. You know, the last time City Group
Speaker 1: was levered ten to one, I probably wasn't alive. So,
Speaker 1: I mean, I can honestly say that what the FED
Speaker 1: has accomplished via the auspices of Dodd Frank and the
Speaker 1: Stress Test, which is how the FED regulates the banks,
Speaker 1: is that the United States banking system has never been
Speaker 1: the safe in anyone's lifetime. Now what I think is
Speaker 1: going to happen, and I think the odds of Dodd
Speaker 1: Frank being changed is extremely low because you need sixty votes.
Speaker 1: And I think Senator Elizabeth Warren will probably get on
Speaker 1: the Senate floor and say, you're gonna have to kill
Speaker 1: me if I've performing let anything happen here, now they
Speaker 1: may kill her, but that's what almost it's going to take.
Speaker 1: So let's put aside changing Dodd frank Um. The FED
Speaker 1: regulates the banks, and the person who has been the
Speaker 1: chief regulator is Governor Daniel to Rollo, and he's resigned.
Speaker 1: So President Trump will appoint someone to replace him, and
Speaker 1: that person will not be Daniel to Rollo. They'll have
Speaker 1: a very different orientation. And I think what's going to
Speaker 1: happen is UM via the stress test starting in two eighteen,
Speaker 1: because it's too late now, UM for the two thousand
Speaker 1: and seventeen stress tests. Uh, this test will be let's
Speaker 1: just say, graded on a different curve, and the vocal
Speaker 1: rule will be reinterpreted. Today it's interpreted extremely strictly, tomorrow
Speaker 1: will be interpreted less strictly. So I think the leverage
Speaker 1: will start to go up, and we're not going to
Speaker 1: go back anywhere to where we were so many maybe
Speaker 1: city group goes from ten times over the next several
Speaker 1: years to twelve, thirteen, fourteen times. That's more leverage and
Speaker 1: more risk in the system, but it's still significantly significantly
Speaker 1: lower than we've ever seen anyway, So it's not it's
Speaker 1: not a calamity, and the returns will start to go
Speaker 1: up because they'll be able to do more things on
Speaker 1: their balance sheet via or like I said, the reinterpretation
Speaker 1: of the vocal rule, and the profitability of the banks
Speaker 1: will go up considerably. When you look at the softness
Speaker 1: of the thickness of that cushion, that capital cushion, do
Speaker 1: you attribute it exclusively to the work of the FIT
Speaker 1: or do we have banks and and executives here on
Speaker 1: Wall Street who learned a lesson from from what happens
Speaker 1: this way? Um, the what the FEED is accomplished has
Speaker 1: been with the banks kicking and screaming. They have not
Speaker 1: done it willingly. They've been ordered to do it, and
Speaker 1: they haven't had a choice. When when when you look
Speaker 1: at the FED, when you look at these stress tests
Speaker 1: they've changed over the years. Are we closer to getting
Speaker 1: perhaps not a perfect stress test? And again we note
Speaker 1: the departure of Mr Tribula, But how good is the
Speaker 1: FED now at assessing the integrity of these banks? Yeah,
Speaker 1: no one ever actually gets to see what's in those tests.
Speaker 1: What's very hard to say. All you can just see
Speaker 1: is the net results. And you know, like I said,
Speaker 1: going from thirty five to one leverage. To tend to
Speaker 1: one leverage is like discussing the difference the distance from
Speaker 1: Mercury to Pluto. It's just it's so it's so different,
Speaker 1: you know, for people in my world, it's it's even
Speaker 1: hard to describe what that means. It's just so unbelievable.
Speaker 1: Steve I's been working with his cell phone. It's part
Speaker 1: of being the guests. You're allowed to come into the
Speaker 1: studio with cell phone blaring. He's making cell phone adjustments
Speaker 1: right now. Help me here is you get out your
Speaker 1: the bad phone to work here on it. And you know,
Speaker 1: I know you want to go back to banking as well.
Speaker 1: But that the speed of information, the speed of flow,
Speaker 1: everybody glued to their cell phones, everybody with information flow.
Speaker 1: Has that changed the game? I actually think it has not.
Speaker 1: Um you know, if you go back to you know
Speaker 1: where I made my name in two thousand and seven
Speaker 1: and two thousand and eight, there wasn't a lack of
Speaker 1: information flow. It's just how you interpret that flow. So
Speaker 1: you know, people have more access in information. That's true,
Speaker 1: But there are no naked facts in this world. You
Speaker 1: have to interpret them, and it's how you interpret them
Speaker 1: that really matters. How do you interpret President Trump. That's
Speaker 1: a dangerous question. That's why we're here Friday. We wouldn't
Speaker 1: ask this rtion on Wednesday, but Wednesday the doors over there.
Speaker 1: I mean, I look at it. Let's leave aside the
Speaker 1: social stuff, which is always dangerous to talk about, just
Speaker 1: from a pure economic perspective. Um. You know, I do
Speaker 1: think we need tax reform in this country. It's long overdue.
Speaker 1: Hopefully what they'll do will be good, but we don't
Speaker 1: know what. They haven't presented a plan, so there's nothing
Speaker 1: to criticize yet. UM. But you know, my hope is
Speaker 1: that with lower tax rates, you will see companies be
Speaker 1: more willing to invest in the United States. UM. I
Speaker 1: think that, you know, some of the criticisms that the
Speaker 1: President has gotten about trade are misplaced. And the reason
Speaker 1: why I say that is, you know, if you go
Speaker 1: back to NAFTA in the ninety nineties, NAFTA was sold
Speaker 1: to the American public as it's going to improve GDP
Speaker 1: and it's going to create millions of jobs. And now
Speaker 1: whether or not have to improve g d P not
Speaker 1: we could debate, but there's no question that we lost
Speaker 1: millions of jobs. And so I think the president's um
Speaker 1: critique of the whole way that free trade has been
Speaker 1: done in our country over the last thirty years. He
Speaker 1: has a very valid point, and you know, maybe hopefully
Speaker 1: they'll make changes that are helpful. When you hear him
Speaker 1: talk about making changes, about pursuing these bilateral deals and
Speaker 1: doing it rather quickly, is he demonstrating to you optimism
Speaker 1: or naiveness about the way that Washington works in the
Speaker 1: way the way that you can get a deal like that.
Speaker 1: That's just political rhetoric to me, What do you what
Speaker 1: do you think he's going to say? You know, we're
Speaker 1: gonna try and do this, but we might fail, so
Speaker 1: you know, he's got to position it so that things
Speaker 1: look hopeful. Is there opportunity for you in the ambiguity
Speaker 1: and when it comes to taxi form that we don't
Speaker 1: know what's going to happen as an as an investor,
Speaker 1: is somebody who's who's watching the market? Um? Is this
Speaker 1: a a? Is there any opportunity? Is just a wait
Speaker 1: and see to see what I mean? There's more than ambiguity.
Speaker 1: We don't know anything. No one's proposed, hasn't imposed anything yet,
Speaker 1: So it's more than ambiguity. I don't know anything. Is
Speaker 1: there too much money chasing distress debt you mentioned earlier
Speaker 1: on our television. It's not my area of expertise. I
Speaker 1: don't have to stress have an opinion. You mentioned subprime autos, right,
Speaker 1: I mean, is there is there? Is there just like
Speaker 1: in private equity and the rest of it. Is there
Speaker 1: just such a wall of money that you can't get
Speaker 1: advantage or is there so much dumb money chasing after
Speaker 1: opportunities in the Matthew securitized world that it creates a
Speaker 1: huge opportunity for you because they do dumb things. You know,
Speaker 1: it's a it's maybe it's an opportunity, but in a
Speaker 1: zero right world, it's it's an opportunity that you can't
Speaker 1: really take advantage of yet, because I mean, you know,
Speaker 1: when you take a step back, you know, how do
Speaker 1: you value any asset or or company. You know, in theory,
Speaker 1: it's a discounted cash flow And and and the question
Speaker 1: and the discount of cash flow is what discount rate
Speaker 1: do you use? And in the world of zero rates,
Speaker 1: discount rate is heres are gonna We're gonna continue with
Speaker 1: Steve Weisman and and this is the third or fourth
Speaker 1: time this morning he's mentioned the great distortion about the
Speaker 1: complete linkage of central bank to fixed income distortion that
Speaker 1: we'll see. Let's come back and talk about that and
Speaker 1: the path as we get out to where he wants
Speaker 1: to be, which I believe he said earlier was three
Speaker 1: or four rate increases out. We'll do that with Steve
Speaker 1: Eisman and new Burger Berman. Steve I just put out
Speaker 1: on Twitter, it's a log normal world after all, and
Speaker 1: there's something about being in the finance business where we're smart,
Speaker 1: well meaning people outside of finance start lecturing finance people
Speaker 1: on a log normal world, people get a little moved,
Speaker 1: which brings us to the president of the Minneapolis Fed.
Speaker 1: Right now, Neil cash Carry has ideas about how to
Speaker 1: fix the banks, and many in your world go maybe not.
Speaker 1: What's he getting wrong? Well, I mean cash Car seems
Speaker 1: to think that the banks are um still too levered
Speaker 1: and that they should have three times more capital than
Speaker 1: they currently have. Um. So, let me say, as politely
Speaker 1: as I can, I think that view is ridiculous. I mean,
Speaker 1: he's outswissing the Swiss. It's insane. I mean, let's let's
Speaker 1: do some math. City group today is leveraged ten to
Speaker 1: one and has in return equity of eight. So if
Speaker 1: you triple the capital, City group is going to have
Speaker 1: a return equity of two and a half. Bad things
Speaker 1: happen to banks when it is mathematically impossible for them
Speaker 1: to achieve uh their costs of capital. And let me
Speaker 1: elaborate on that for a second. That would mean there's
Speaker 1: only two eventualities that could happen here. Either spreads on
Speaker 1: new loans would have to explode so that the banks
Speaker 1: would be able to make their return on capital, which
Speaker 1: would not be good for anybody, or all banks would
Speaker 1: have to shrink because every single loan that you would
Speaker 1: make would destroy capital. You know, the point of a
Speaker 1: banking system when you think about leverage, leverage is like
Speaker 1: little bears porridge. It has to be just right. Too
Speaker 1: much leverage is bad, but too little leverage is bad too,
Speaker 1: because the banks recycle money, and if and if you
Speaker 1: have too little leverage, they're not performing their function of
Speaker 1: recycling money into the banking system. It betrays a complete
Speaker 1: misunderstanding of how banks work. I want to elaborate on
Speaker 1: this for a second. You know, I don't have any
Speaker 1: institutional obligations to anybody. I work at New Burger Berman.
Speaker 1: If I have the opinion that that the banks are
Speaker 1: under capitalized, I could say it. Nobody owes me anything.
Speaker 1: They could agree with me, they could disagree with me.
Speaker 1: There's been a process in place for six years of
Speaker 1: regulating banks and delivering them and last year Kushkari shows
Speaker 1: up and and the first thing out of his mouth
Speaker 1: is the process is broken and we need more capital.
Speaker 1: It's like, you know, wait a second, you're part of
Speaker 1: the new Minneapolis fed. You you just don't show up
Speaker 1: and try and blow up what people have been doing
Speaker 1: for the last six years. And you know, and I,
Speaker 1: like I said on the TV, you know, prior to
Speaker 1: the financial crisis, bank regulators did about his bad job
Speaker 1: as anybody's ever did done and history Planet Earth, um,
Speaker 1: you know, thankfully, you know, Governor Daniel Torula took over
Speaker 1: and he's done a fantastic job. And I take great umbrage.
Speaker 1: And somebody's showing up and announcing to the whole world
Speaker 1: that the guy to Rula who's interest a fantastic job,
Speaker 1: doesn't know what he's talking about, because it's insane. We
Speaker 1: were talking about the transparency lack through of in these
Speaker 1: stress tests, and let me just ask you the last
Speaker 1: minute we've got with you about the call that we've
Speaker 1: heard of the last week from Senator Tom Cotton and others.
Speaker 1: You know, a letter to the Treasury Secretary to look
Speaker 1: at the jurisdiction of the Financial Stability Oversight accounts that
Speaker 1: to reevaluate that and look more closely at too big,
Speaker 1: too big to failness and systemic importance. Do you see
Speaker 1: an erosion with the f stock as well? Is that
Speaker 1: is the Is the role of the f SO gonna change? No,
Speaker 1: I don't know that that letter is irrelevant. It's who cares.
Speaker 1: It's just I mean you mean anything. You know, that's
Speaker 1: some politicians. Mollot Off doesn't mean the thing. Steve Iceman,
Speaker 1: thank you so much. Thank your room, always valuable, some
Speaker 1: real insight there, and particularly thank you for your comments
Speaker 1: earlier on the sport of asset management. Mr Heisman clearly
Speaker 1: optimistic on the good times for active management once we
Speaker 1: get rate normalization. That was such a good band, David
Speaker 1: Gurrow right, and they were awesome. The band reunited Emerson
Speaker 1: like and Palmer like Noboddy. You know, it's they were
Speaker 1: just super bud. You've got a wonderful interview coming up.
Speaker 1: Our David Weston, Alex Steele, and John Farrell with Peter Navarro.
Speaker 1: Let's be clear here, he's got he's got bulletproof chops,
Speaker 1: tough university, as doctorate is from Harvard and economics. He's
Speaker 1: out of Irvine. His acclaim book Death by China, and
Speaker 1: he has been a lightening rod of support and criticism,
Speaker 1: uh for Trump economics. So this is a timely conversation,
Speaker 1: certainly with the leadership of China meeting with Mr Trump
Speaker 1: tomorrow and now to David Weston. Trump will be signing
Speaker 1: two executive orders on trade and joining us now on
Speaker 1: both Bloomberg Television and on radio to take us through
Speaker 1: these two orders as the Director of the National Trade
Speaker 1: Council in the White House, Dr Peter Navarro. Peter, welcome
Speaker 1: back to the program. Good to have you here, David,
Speaker 1: How are you today? Good? Thanks. So we've had some
Speaker 1: preview of these two orders. I'd like to talk about themselves. First.
Speaker 1: The one that's going to review country by country possible
Speaker 1: unfair trade practices. Is that based largely on the question
Speaker 1: of a trade deficit with those countries. That's correct, David.
Speaker 1: There's uh about sixteen countries with which we have significant
Speaker 1: trade deficits. And the bigger picture here is that the
Speaker 1: United States is the freest trader in the world. Let's
Speaker 1: be clear about that. On balance, we have the lowest tariffs,
Speaker 1: we have the lowest non tariff barriers, yet we have
Speaker 1: the largest trade deficit. And these deficits are causing the
Speaker 1: job loss, They're causing our factories to move off shore
Speaker 1: their reflection of that, and so uh. Historically, what's going
Speaker 1: to happen with this omnibus investigation into trade abuses is
Speaker 1: that the Secretary of Commerce Wilber Ross, with the U. S.
Speaker 1: Trade Representative are going to take a comprehensive look at
Speaker 1: all of the different ways uh that that trade deficit
Speaker 1: might be happening. UM in the trade space. We're gonna
Speaker 1: look at differential tariffs, non tariff barriers, things like forced
Speaker 1: technology transfer, all of these things, and in ninety days,
Speaker 1: UM wilber Ross is going to deliver a report to
Speaker 1: the desk of the President and the information in that
Speaker 1: report will basically be the foundation of which will guide
Speaker 1: our our future trade policy. The purpose of this investigation
Speaker 1: is basically to fulfill a promise to the American people
Speaker 1: that that the Canada Trump made, uh to basically look
Speaker 1: into these trade abuses, correct them, smart new deals in
Speaker 1: a way which will basically put our people back to
Speaker 1: work and bring our factories back on shore. So so, Peter,
Speaker 1: certainly trade deficits or something to take a look at.
Speaker 1: But as an economist, I'm sure you would agree that
Speaker 1: a trade deficit does not necessarily equate to unfair trade practices.
Speaker 1: There are lots of reasons you can have a trade deficits,
Speaker 1: so it's a possible at least some of these countries
Speaker 1: you'll take a look at and decide, you know what
Speaker 1: it's for other factors, it's not because of untare practices. Yeah,
Speaker 1: that's a great question, and you're act exactly right. I mean,
Speaker 1: take Canada for example, We run a trade deficit in
Speaker 1: goods with them of over ten billion dollars, but a
Speaker 1: lot of that is driven by oil energy, so no
Speaker 1: big deal air. On the other hand, we have other
Speaker 1: countries which are cheating us blind uh. We have also
Speaker 1: a systemic problem um with our taxes, our income tax
Speaker 1: system relative to the rest of the world, which runs
Speaker 1: on a vat, which creates a disadvantage for us for
Speaker 1: for our country. So these are all the things we
Speaker 1: need to look at. Trade deficits aren't bad per se,
Speaker 1: but when you run a large and persistent trade deficit
Speaker 1: for as long as we have, UH, it's basically a
Speaker 1: proxy for all of the job loss, the slow economic growth,
Speaker 1: the low wages that we've suffered over the last fifteen years.
Speaker 1: And President Trump is going to deliver on this promise
Speaker 1: to turn that right around. And this is a big
Speaker 1: first step and his historic No American president has ever
Speaker 1: looked at this problem UH and committed to solving it.
Speaker 1: This and the Secretary of Commerce is going to deliver
Speaker 1: an historic report in a ninety days. We're going to
Speaker 1: start moving and Peter, it raises the question about what
Speaker 1: the proper remedy is insofar as you find unfair practices.
Speaker 1: Is it to enforce the existing laws, including under w
Speaker 1: t O more effectively or is it new agreements? Is
Speaker 1: it possible, and this goes to the second order as
Speaker 1: I understand it, that goes to anti dumping and countervailing
Speaker 1: duty enforcement. Is it possible that we have the rules
Speaker 1: in place, we just haven't been enforcing them effectively. Well,
Speaker 1: that is the day. That's a great segue to the
Speaker 1: second order. And let me describe that for the for
Speaker 1: for your viewers. UM, there's there's two ways that we
Speaker 1: can enforce against cheating. UH. One is he called anti dumping,
Speaker 1: and that's basically to defend our manufacturers and workers against
Speaker 1: countries that dump products into our markets below cost. And
Speaker 1: then the other part of that is what's called countervailing duties,
Speaker 1: and that's when foreign governments unfairly subsidize their industries and
Speaker 1: we get products essentially at costs lower than they should be.
Speaker 1: So the Department of Commerce historically has been able to
Speaker 1: file these anti dumping und availing duty cases. We have
Speaker 1: almost four hundred of them active right now, covering forty countries.
Speaker 1: But the problem is that the duties we are supposed
Speaker 1: to collect, UM, we haven't always been collecting. Since two
Speaker 1: thousand one, we failed to collect two point eight billion
Speaker 1: dollars in these duties. And it's not just the revenues
Speaker 1: we lose when we fail to collect them, it's also
Speaker 1: the fact that our industries don't get the kind of
Speaker 1: relief that they were promised when they filed their cases.
Speaker 1: So Customs and Border Protection we're giving them the tools
Speaker 1: basically to turn that situation around. And this order besides
Speaker 1: being a great order on trade in the economy, is
Speaker 1: a beautiful example of interagency cooperation and a new Trump administration.
Speaker 1: Because Secretary Ross and Commerce Secretary Kelly at the Department
Speaker 1: of Homeland Security, and the Commissioner at Customs and Boarder
Speaker 1: Protection Kevin mcaleen, and they all work together on this,
Speaker 1: it's a great order. Well, Peter, nowhere is this more
Speaker 1: clear than what has already happened over the last few
Speaker 1: years in terms of China and the anti dumping tariffs
Speaker 1: on steel, which at some point a triple digit taxes
Speaker 1: and that did wind up benefiting the steel industry. Here
Speaker 1: are you looking at those kind of tariffs like triple
Speaker 1: digit uncertain products from certain countries and what about retaliation? Well,
Speaker 1: you managed to go off in in in a direction
Speaker 1: that has nothing to do with what we're talking about today.
Speaker 1: We're talking today about two orders, one which will look
Speaker 1: at trade abuses in a copy handsome way, and another
Speaker 1: which is directed at collecting customs duties. The principle here
Speaker 1: for the Trump administration is smart, tough trade negotiations. The
Speaker 1: information we're gonna get from the Omnibus investigation will inform
Speaker 1: that the second pillar of President Trump's trade policy is
Speaker 1: strict enforcement and compliance. And when you have cheaters basically
Speaker 1: sending products in here after we've already had duties assessed
Speaker 1: and they don't pay them, that's not the kind of
Speaker 1: behavior we're going to tolerate. So this is the let's
Speaker 1: not don't even go there. I mean, we're not talking
Speaker 1: about trade wars or tariffs or anything like that. That's
Speaker 1: that's your rhetoric. We're talking and tariff barriers. I mean
Speaker 1: you specifically mentioned you're looking at tariff and non tariff
Speaker 1: barriers and anti dumping, and that's exactly what we're talking about, exactly,
Speaker 1: and what we're gonna do with this report, if I may,
Speaker 1: what we're gonna do with this report is lay a
Speaker 1: strong foundation for measured, analytically based steps that we're going
Speaker 1: to take to fight what's happening with unfair trade practices
Speaker 1: in this world. Look, I go back to the beginning
Speaker 1: of what I said. We are the freest trader in
Speaker 1: the world. We have the lowest tariffs, we have the
Speaker 1: lowest non tariff barriers, and that's not fair of the
Speaker 1: American people. And and we're gonna look at the causes
Speaker 1: of these trade deficits. There's gonna be some causes that
Speaker 1: are unrelated to trade per se. But when it's trade
Speaker 1: and when there's unfair or non reciprocal behavior by any
Speaker 1: of our trading partners, I can assure you President Trump
Speaker 1: is going to take action. How significant paid effects distortions
Speaker 1: to the problems that you're talking about currently? Say again,
Speaker 1: how significant our FECs distortions to the problem that you're
Speaker 1: talking about currently? Okay, little code word there? The effects
Speaker 1: you're talking about the currency issue? Pay that you're familiar
Speaker 1: with foreign exchange and ECT go U. Yeah, Come on, um, Look,
Speaker 1: Secretary Ross is going to look carefully at many many factors.
Speaker 1: Currency misalignments are certainly one of them in an international environment.
Speaker 1: Will he will look at that, uh and come up
Speaker 1: with an assessment and see where we are. Is that
Speaker 1: something that we'll be brought up with a president? She next,
Speaker 1: sweet pizza? Uh. These orders are totally unrelated to the
Speaker 1: Chinese visit, and I have nothing to say about the
Speaker 1: Chinese visit. I'm here to talk about the two orders today,
Speaker 1: So let's let's talk about what's happening within the White House.
Speaker 1: Has been a lot of reporting about a division between
Speaker 1: the nationalists like your South Peter and the Bannons of
Speaker 1: this world, and a division between yourselth and sake Gary
Speaker 1: co in the film President of Goldman Sacks, what do
Speaker 1: you make of those reports at the moment? And it's
Speaker 1: that fracture within the White House or is that just
Speaker 1: a natural debate that's emerging. Well, two days ago we
Speaker 1: were sitting in a room altogether going over these executive
Speaker 1: orders and we agreed that these would move forward today.
Speaker 1: So that's that's pretty good. But you know, look, I'm here,
Speaker 1: and I know you want to sell soap here with
Speaker 1: selictions stories or whatever, but I'm here to talk about
Speaker 1: two historical events. Be omnibus investigation. His historical because no
Speaker 1: sitting president has ever looked at the issue of trade
Speaker 1: deficits and trade abuses in this way and promised to
Speaker 1: take action. The Customs and Border Protection Order is historic
Speaker 1: because here we have UH agencies working strongly together with
Speaker 1: the White House solving a problem with the stroke of
Speaker 1: a pen in in in in less than thirty days.
Speaker 1: When we're looking at this UH that's gone on for
Speaker 1: fifteen years. So I would say that's pretty good for
Speaker 1: the for President Trump and his team brought you by
Speaker 1: Bank of America. Mary Lynch. Dedicated to bringing our clients
Speaker 1: insights and solutions to meet the challenges of a transforming world.
Speaker 1: That's the power of global connections. Marylynch, Pierce Federan Smith
Speaker 1: Incorporated Member s I p C. Good morning everyone, David
Speaker 1: gurn Tom Keenan moments are Michael McKee in Florida, his
Speaker 1: Florida with William Dudley, David Gurrow. This is gonna be great.
Speaker 1: Bill Dudley is one of the most interesting practicing economists today.
Speaker 1: Eleven years of Goldman Sachs out of the New College
Speaker 1: of Florida are really interesting school. And then his PhD
Speaker 1: at Berkeley. Bill Dudley has done original economics full disclosure.
Speaker 1: He was in my book Flag on one Engine and
Speaker 1: it's phrasing there. Uh. David Gurra was from Patrick O'Brien
Speaker 1: on the budget deficit. There is not a moment to
Speaker 1: lose and it's ever more so today. Absolutely very eager
Speaker 1: to hear what he has to say to our our
Speaker 1: colleague Michael McKee, who has been traveling the world quite
Speaker 1: literally traveling the world talking to to central bankers and
Speaker 1: policy makers here over these last a few weeks. He's
Speaker 1: in Sarasota for the for the interview today. Just a
Speaker 1: host of interviews this week, Kathleen Hayes talking with Eric
Speaker 1: Rosen Green, Jim Bullard coming up on Blomberg Grady as
Speaker 1: well at ten o'clock Wall Time. And what's great about
Speaker 1: him versus other presidents governors is he was knee deep
Speaker 1: in the practicing grind of market economics, where he had
Speaker 1: to publish weekly with his team including jan Hanseius. Now
Speaker 1: there Ed mcelvy of course, Uh there for years at
Speaker 1: Goldman Sex. But he's one of the few people in
Speaker 1: the academic central bank world that actually did the market
Speaker 1: economics grind, which gives you great respect for being wrong
Speaker 1: because as you know, you're wrong often. David early and
Speaker 1: often will admit that for sure. Uh. Eager to hear
Speaker 1: what he has to say about the Fed's balance sheet,
Speaker 1: Michael McKee saying he's eager to talk more about that
Speaker 1: with Bill Dudley. It's something that Bill Deadley spoke about
Speaker 1: in broad strokes yesterday in his speech down in Florida.
Speaker 1: Mike mculbee following up on that and of course said
Speaker 1: just his outlook for for growth, outlook for rate increases,
Speaker 1: something of paramount interest to all of us as well.
Speaker 1: And of course the background and this of course coming
Speaker 1: off the Federals at phrase from RK. Kathleen Haser conversation
Speaker 1: with Jim Bullard later this morning of noisy g d P.
Speaker 1: And at the end of the day, with the mandate
Speaker 1: that we have of inflation, the mandate of jobs, there's
Speaker 1: also the quiet unspoken mandate of economic growth has no substitute.
Speaker 1: The backdrop against CBO report yesterday pretty grim on the
Speaker 1: future budget, and also the backdrop of challenging productivity numbers. UH.
Speaker 1: The other UH to day here is our Michael McKee. Well,
Speaker 1: good morning. We are at New College, a small liberal
Speaker 1: arts institution here in Sarasota that is the honors college
Speaker 1: for the Florida University System. It is also the alma
Speaker 1: mater of New York FED President Bill Dudley, and we
Speaker 1: thank you for having us at your alma mater this morning.
Speaker 1: We're glad to have you for joining us. The mood
Speaker 1: on Global Wall Street, the question on Global Wall Street
Speaker 1: has shifted recently from when is the FED going to move?
Speaker 1: To how far? How fast? So to put it in
Speaker 1: terms that have come up in the last week or so.
Speaker 1: Are you a two more this year kind of guy?
Speaker 1: Or maybe a three more this year kind of guy? Um?
Speaker 1: How many times do you see the Fed moving in
Speaker 1: two thousand seventeen? Oka, It really depends on the data.
Speaker 1: So trying to predict, you know, what, what's going to
Speaker 1: happen based on what I think today is not. I
Speaker 1: don't think that's very relevant. Look what happened in two
Speaker 1: thousand and sixteen. In the fall of two thousand and fifteen,
Speaker 1: the medium consensus was four hikes. In two thousands sixteen,
Speaker 1: we did one. Uh. Two thousand seventeen, going into the year,
Speaker 1: the medium with three. So far we've done one. So
Speaker 1: I think I think where where the where the FONC
Speaker 1: is is? I think in a reasonable place? Uh, you know,
Speaker 1: a couple more hikes this year seems reasonable. Uh. You know,
Speaker 1: if the comedy is a little bit stronger than we expect,
Speaker 1: we could go do a little bit more, and if
Speaker 1: it's weaker than we expect, we could do a little
Speaker 1: bit less. Well, what tells you it's time to raise rates?
Speaker 1: It took a long time and to build Dudley interview
Speaker 1: to convince Wall Street you were going to move in March,
Speaker 1: primarily because people were saying, well, nothing really changed in
Speaker 1: the economy between December and March. Well, the fact was
Speaker 1: nothing really changed. The economy is on the same trajectory,
Speaker 1: growing above trend, generating sturdy job gains, and we basically
Speaker 1: we had been trying to communicate to people if the
Speaker 1: econmy state on that trajectory, we're going to get gradually
Speaker 1: remove monetary policy accommodation. So the March move was consistent,
Speaker 1: I think with what we said previously because the communy
Speaker 1: was performing in line with what we were anticipating. What
Speaker 1: does that mean you would consider moving in May? Or
Speaker 1: do you want some time to see what happened with
Speaker 1: this rate increase, to see if there are changes in
Speaker 1: the economy, And of course there's no press conference, so
Speaker 1: mechanically it's a little more difficult. Well, I don't think
Speaker 1: that we're at the stage in the cycle where there's
Speaker 1: a great urgency to tightening monitor policy, because the economy
Speaker 1: is growing just a little bit above trend and inflation
Speaker 1: is still a little bit below our target. If you
Speaker 1: look at the underlying pace of inflation, if just for example,
Speaker 1: if you look at the core personal consumption expenditures deflators
Speaker 1: from running about one in three courters per cent. So
Speaker 1: that tells you that there's not this huge rush that
Speaker 1: we have to tighten monterary policy quickly. The e commedy
Speaker 1: is clearly not overheating. At the same time, policy is accommodative,
Speaker 1: and we're pretty close to full employment, so it makes
Speaker 1: sense to very gradually take back accommodation to get monterrey policy,
Speaker 1: you know, closer to neutral as we go through two
Speaker 1: thousand and seventeen. All right, well, where's neutrals? How high
Speaker 1: will you go? Well, I think the consensus about among
Speaker 1: many people is that the neutral federal funds rate, so
Speaker 1: adjusted for inflation, is somewhere between zero and one percent.
Speaker 1: So add our two percent inflation tiret, you're probably talking
Speaker 1: a neutral federal funds rate maybe somewhere in the two
Speaker 1: to three percent range. Uh So we're we're right now,
Speaker 1: we're you know, ninety one basis points or so on
Speaker 1: the federal funds rate. So we have maybe you know,
Speaker 1: a hundred and hundred fifty basis points of tightening ahead perhaps,
Speaker 1: but it all depends on the economy. If the comedy
Speaker 1: is stronger, that would suggest that we have a little
Speaker 1: more to do if the commedy is weaker than the
Speaker 1: probably not so much. Well what about the pace? How
Speaker 1: soon do you need to get that hundred basis? I
Speaker 1: don't think that soon. I mean, if you look at
Speaker 1: the last year, we've been growing above trend, generating very
Speaker 1: sturdy job gains, yet the unemployment rate hasn't really moved
Speaker 1: very much. So that tells you that there's actually something
Speaker 1: maybe a little bit more excess back in the labor market.
Speaker 1: Then then you would think just looking at the unempotant rate,
Speaker 1: the fact is as people who have been discouraged, workers
Speaker 1: are coming back into the labor force, So that allows
Speaker 1: you to generate pretty sturdy job games without putting a
Speaker 1: lot more pressure on the labor mark. Are you doing that?
Speaker 1: Is it the level of FED funds that is stimulating
Speaker 1: job growth? In other words, if you raise raids, so
Speaker 1: you're going to cut that off, well, I think you're
Speaker 1: gonna You're gonna you're perhaps gonna slow that down a
Speaker 1: little bit, and that's what that would be the goal.
Speaker 1: I don't think it's a question of you know, the
Speaker 1: spicket wide open or the spicket shut. I think the spicket,
Speaker 1: just turning the spicket down a little bit, so that
Speaker 1: comedy isn't is it less risk of overheating as we
Speaker 1: go forward in two thousand, seventeen, eighteen and beyond fiscal policy,
Speaker 1: did you adjust any of your forecast to account for
Speaker 1: something happening in two thousand seventeen or eighteen? Not explicitly,
Speaker 1: because I don't know what it is, how big it is,
Speaker 1: or when it's going to happen. I do think that
Speaker 1: it's true that the likelihood over the next couple of
Speaker 1: years is fiscal policy becomes more expansive. But until I
Speaker 1: can see a little bit more visibility in terms of
Speaker 1: what it is, when it isn't how big it is,
Speaker 1: I'm not going to corporate explicitly into my growth forecus
Speaker 1: now what I think the fact that I think fiscal
Speaker 1: policy is likely to turn somewhat stimulative over the next
Speaker 1: couple of years, that just means that affects my view
Speaker 1: of the risk to the outlook. So this creates a
Speaker 1: little bit more upside risks to the outlook than before. Well,
Speaker 1: consumer and corporate confidence very high since the election, But
Speaker 1: do you see evidence our corporate leaders tell you that
Speaker 1: they're acting on that confidence are they investing. I would
Speaker 1: say at this point there's been a huge increase in
Speaker 1: both consumer and business sentiment, but it's not translating at
Speaker 1: least yet into the hard data. So this is one
Speaker 1: reason why when we get the first quarter GDP numbers
Speaker 1: at the end of next month, uh, they're probably gonna
Speaker 1: be a little weaker than one might one might expect
Speaker 1: given the very large improvements that we've seen in consumer
Speaker 1: and business sentiment. So the jury is out is the
Speaker 1: rising off is going to translate to forward into a
Speaker 1: greater economic activity or not. We'll see business leaders say
Speaker 1: they have to see something concrete before they spend. Well,
Speaker 1: I think that, you know, they probably would like to
Speaker 1: see more clarity on what's for example, it's going to
Speaker 1: happen to the corporate tax regime. I imagine that's important
Speaker 1: to them. But I think that that generally the mood
Speaker 1: is pretty pretty pretty upbeat. Do you think that fiscal
Speaker 1: policy as being talked about can generate three percent or
Speaker 1: better growth on a sustained basis or we eight two
Speaker 1: percent to come? It all depends on what happens to
Speaker 1: productivity growth. If we can do things that push up
Speaker 1: productivity growth. We can also push up the sustainable growth
Speaker 1: rate of the economy. If you think about that sustainable
Speaker 1: growth rate of the economy, it's basically how fast is
Speaker 1: the labor force growing plus productivity. Labor force in the
Speaker 1: US is only growing about a half percent a year,
Speaker 1: so to get to three percent, we need to an
Speaker 1: half percent growth in productivity. Not impossible, we did it
Speaker 1: in the late nineteen nineties. But you'd have to say,
Speaker 1: these policies are going to have you know, have are
Speaker 1: gonna have to lift productivity in some some some some
Speaker 1: sort sort of way. What what kind of policy would
Speaker 1: do that? Well, I think there's no question that infrastructure
Speaker 1: spending over time would raise productivity growth. Better education for people,
Speaker 1: are more job training and others lift the capabilities of workers,
Speaker 1: would lift productivity over time. Uh, some types of regular
Speaker 1: deregulation might also help on the proactivity front. So there
Speaker 1: are things you can do to live proactivity. The question
Speaker 1: is how much will you get from those things. FEDS
Speaker 1: balance sheet just under four and a half trillion dollars
Speaker 1: back into prominence. Members of the Open Market Committee talking
Speaker 1: about it, big implications for investors when you start doing something.
Speaker 1: So the first question is when do you address it?
Speaker 1: How do you know that it is time to start
Speaker 1: doing something. Well, we've said publicly a number of times
Speaker 1: that we're not going to normalize begin to normalize the
Speaker 1: balance until the federal funds rate normalization process is well advanced.
Speaker 1: And the question is what is well advanced me? I
Speaker 1: think generally if you talk to people in the market,
Speaker 1: they think that that's going to start sometime with the
Speaker 1: federal fund rate between one and two percent. So not
Speaker 1: quite yet. When surprise A is me, is you know
Speaker 1: sometime later this year or sometime in two thousand and
Speaker 1: eighteen should be comedy perform in line with our expectations
Speaker 1: that we'll start to gradually let securities mature rather than
Speaker 1: reinvesting them. We've been very clear that the balance sheet
Speaker 1: is really not our primary tool of monetary policy. Short
Speaker 1: term interest rates are primary to monetary policy. So if
Speaker 1: we do something on the balance sheet, it's gonna be
Speaker 1: something that's gonna be very passive. It's just gonna be
Speaker 1: running in the in the background. So we we want
Speaker 1: to do this in a way that was just very
Speaker 1: very not a big deal for the You suggested yesterday
Speaker 1: tapering your reinvestments rather than just ending them. But given
Speaker 1: the taper tantrum we saw a couple of years ago,
Speaker 1: wouldn't the markets just take it as a sign that
Speaker 1: it's ending in adjust accordingly. Well, I'm not that worried
Speaker 1: that the markets are going to react to changes in
Speaker 1: our balance sheet in a in a violent way, because
Speaker 1: because it's already factored in. I mean, most people think
Speaker 1: that sometime late this year or sometime in two thousand eighteen,
Speaker 1: we're gonna gradually start to allow securities to match your
Speaker 1: and D gradually and the reinvestment process. So I think
Speaker 1: that's already an expectation. The taper tantrum in two thousand
Speaker 1: thirteen I think was violent as it was because people conflated, UH,
Speaker 1: the idea that we're going to reduce the pace of
Speaker 1: asset purchases with pulling forward the timing of monetary policy tightening. UH.
Speaker 1: In this case, I, from my personal opinion, if we
Speaker 1: start to normalize the balance sheet, that's a substitute for
Speaker 1: short term rate hikes because it would also work in
Speaker 1: the direction of actually tightening financial conditions. So if and
Speaker 1: when we decided to begin to normalize the balance sheet,
Speaker 1: we might actually decide at the same time to take
Speaker 1: a little pause in terms of raising short term interest rates?
Speaker 1: Do you stop reinvestments in mortgages only? Are also treasuries
Speaker 1: because if you look at currency in circulation and other
Speaker 1: fat obligations, your treasury holdings are just about equal to
Speaker 1: what you would need as an asset to hold against
Speaker 1: your liabilities. Well, that's for the Federal Upper Market Committee
Speaker 1: to decide, and we haven't made those decisions yet. UM,
Speaker 1: does it make sense to focus on mortgages or is
Speaker 1: there a problem with doing that because of you paid it? Look,
Speaker 1: I think my own personal view, I don't. I don't
Speaker 1: think it's there's a strong need to differentiate between mortgages
Speaker 1: and treasures, just speaking for myself. But it's up to
Speaker 1: the committee to decide. How do you envision conducting monetary
Speaker 1: policy in the future. Do you go back to a
Speaker 1: Fed funds rate? Uh? Do you continue with the current
Speaker 1: system of interest on access reserves and repose in the
Speaker 1: Fed funds rate? Trade somewhere in the middle of it? Um,
Speaker 1: and when do you make a decision on that? Well,
Speaker 1: we don't have to make that decision for quite quite
Speaker 1: some time. But I would just emphasize that the current
Speaker 1: system is working very well. Uh you know, there are
Speaker 1: some questions, what what what would the Fed be able
Speaker 1: to raise the Federal funds rate in a reliable and
Speaker 1: predictable manner with such a large balance sheet? Uh so
Speaker 1: we we we created the overnight reverse Repurchase Agreement to
Speaker 1: set a floor, and we have the ability to pay
Speaker 1: interest on access reserves as sort of the ceiling, and
Speaker 1: the Federal funds rate has traded right in the middle
Speaker 1: of that range. And when when we raise our target
Speaker 1: by twenty five basis points, the Federal funds rate rises
Speaker 1: by exactly twenty five basis points. So not from my
Speaker 1: own perspective, having run the open market desk in two
Speaker 1: thousand and seven, two thousand and eight when things were
Speaker 1: a lot more turbulent than they are now, this system
Speaker 1: works really well from my From my perspective. At the
Speaker 1: end of this year, you'll have a bit of a
Speaker 1: political problem in that the two leaders of the Federal
Speaker 1: Reserve their terms are going to be up, and we
Speaker 1: have to find out if they're going to be reappointed.
Speaker 1: If Donald Trump were to come to you and say,
Speaker 1: is Janet yelling? Is her policies? Are they my friend?
Speaker 1: In what I'm trying to do for the U. S economy?
Speaker 1: What would you say absolutely? I mean, the FED has
Speaker 1: a very clear mandate from Congress maximum sustainable employment in
Speaker 1: the context of price stability. How's the FED doing on
Speaker 1: that mandate. We're at a four point seven percent unemploying rate.
Speaker 1: Inflation is a little bit if you look at underlying
Speaker 1: inflation is a little bit below our two percent objective,
Speaker 1: but we're not really very far off. Those objectives were
Speaker 1: adjusting Monterrey policy, I think in a very careful, measured way.
Speaker 1: So I don't see any reason why, uh, people wouldn't
Speaker 1: look at chair yelling and say, she's doing a really
Speaker 1: great job. We're gonna go outside the box now. Uh.
Speaker 1: He is prolific within the industry. His writing has been prodigious,
Speaker 1: to say the least. And I find that with Dr
Speaker 1: Arian there are always the same questions, what's the FED
Speaker 1: gonna do? How many rates are they going to increase
Speaker 1: this year? We would like to wax philosophical and what
Speaker 1: Dr Larry in his world had claimed for, and that
Speaker 1: is game theory. Mohammed, good morning, and we do so
Speaker 1: in the backdrop of Anne Marie Slaughter's wonderful new book,
Speaker 1: which opens with Thomas Shelling with her sitting in a
Speaker 1: classroom with fooda jammy years ago with k In and
Speaker 1: I the Powered Interpretent Defendants. I want to go back
Speaker 1: to Cambridge in John Maynard smith Evolution in the theory
Speaker 1: of games. This administration knows nothing about game theory. What
Speaker 1: do they need to know about the theory of games?
Speaker 1: What is the Trump administration need to know about the
Speaker 1: game theory of chicken that you know so well? Yeah,
Speaker 1: I don't know if they know nothing about game theory,
Speaker 1: because they are exhibiting certain element of game theory in
Speaker 1: the approach they're taking with the rest of the world.
Speaker 1: You see this in particularly on trade, and they've come
Speaker 1: out and they've warned that they're willing to do things
Speaker 1: that may not be in the interest of the global
Speaker 1: economy and not in the interest of the US with
Speaker 1: a view to getting concessions. And I think you will
Speaker 1: see quite a few concessions coming their way. I think
Speaker 1: if you want to see typical game theory, look at
Speaker 1: what's happening in the UK and the European Union over
Speaker 1: break set. That is classic game theory right now. Within
Speaker 1: that game of chicken is shells, conflict and strategy, the
Speaker 1: artist strategy, Avonage. Just Avonage Dick said, what is your
Speaker 1: art of strategy for Prime Minister Meg? So? I think
Speaker 1: she is doing what I would do, which is she
Speaker 1: is saying this is what we can achieve. She is
Speaker 1: trying to define the benchmark for the negotiations and focusing
Speaker 1: in particular on securing free trade with Britain outside the EU.
Speaker 1: What's interesting is how quickly the EU came back and said,
Speaker 1: oh no, that's not how it's going to work. Um.
Speaker 1: So I think the EU also read the script. And
Speaker 1: the question is going to be do they end up
Speaker 1: in the prisoners dilemma where they cannot collaborate and they
Speaker 1: both works off, or do they find a way to
Speaker 1: iterate to something that makes them both better off? On
Speaker 1: that note, what what's the what's the outcome of that
Speaker 1: prisoner's dilemma? If we get it? We know of course
Speaker 1: that if there's no trade deal by the end of
Speaker 1: this two year period we go back to w t
Speaker 1: O rules. How do you see this playing out? So
Speaker 1: it's about David. It's about ultimately three things trade, money
Speaker 1: and people, and the UK wants to get agreement on
Speaker 1: trade first. Then minimize the money it will have to
Speaker 1: pay and then hope that it can get an agreement
Speaker 1: on people, which remember that's what really drove the Brexit vote,
Speaker 1: the migration issue. Um the EU says, no, we're not
Speaker 1: going to do this sequentially, We're going to do simultaneously, right,
Speaker 1: and that's a big difference. So a prisoner's dilemma where
Speaker 1: there is no collaboration between the two sides ends up
Speaker 1: by hurting both Britain and the EU through lower trade.
Speaker 1: That would be the major outcome, lower trade between the
Speaker 1: biggest trading area in the world, the EU and G
Speaker 1: seven economy, and that's not a good outcome for either side.
Speaker 1: Of course. He's the chief Economic Advice with Alians, a
Speaker 1: columnist for Bloomberg View. Mohammed, let me ask you about
Speaker 1: what you heard from Donald to us when he spoke
Speaker 1: on the heels of Theresa May's speech. He talked about unanimity,
Speaker 1: He talked about the twenty seven remaining memories speaking with
Speaker 1: one voice. As you travel through Europe, as you look
Speaker 1: at the political and economic landscape in Europe, how rooted
Speaker 1: in fact is what Mr tusks san It is rooted
Speaker 1: and hope more than than fact right now. And that
Speaker 1: is because the fundamental issue is the following, David. When
Speaker 1: you run sophisticated market economies at low growth for a
Speaker 1: long time, and when the benefits of that growth are
Speaker 1: perceived to go to a small segment of the population,
Speaker 1: things start to break. They break politically, institutionally, financially, and economically.
Speaker 1: And that is a situation for Europe right now. It
Speaker 1: has to be very careful because society is responding to
Speaker 1: the lack of inclusive growth. So it's very hard to
Speaker 1: get the sort of harmony as solidarity that EU politician
Speaker 1: would like to get at this point. And that's got
Speaker 1: to realize this To get back to John Maynard Smith.
Speaker 1: Not John Maynard Kayesville, this is something different. Dr Larian.
Speaker 1: Is Donald Trump or true hawk? I mean the classic
Speaker 1: discussion in academics is hawk dove within the game of chicken,
Speaker 1: the brinksmanship, of of of how we act. He loves
Speaker 1: to the president loves to pursue to posture. Is a hawk?
Speaker 1: Is he a true hawk? I think? First, um, we
Speaker 1: I don't. I certainly don't have enough data point to respond,
Speaker 1: But I would say the major issue is the balance
Speaker 1: between tactical and strategic to what extent is the administration
Speaker 1: pursuing hactical objectives, and how is is reconciling this with
Speaker 1: the strategical protected objective for the most powerful economy in
Speaker 1: the world. And that's going to be critical not just
Speaker 1: for the well being of the US and the global economy,
Speaker 1: but also for whether there asset prices can be validated
Speaker 1: given where they are well. Then I go to brinksmanship.
Speaker 1: Are you suggesting back the dullars fifty years ago? This
Speaker 1: goes back to all the tensions folks that Dr Shelling
Speaker 1: was acclaimed for. Is this a new Is it almost
Speaker 1: the neo brinksmanship? All these tensions that we've seen in
Speaker 1: the first eight days of this administration. It is maybe
Speaker 1: the rest of the world. I think the rest of
Speaker 1: the world now realizes that the US wants a better
Speaker 1: deal and that the US will not be the global
Speaker 1: police um at at at no cost to the rest
Speaker 1: of the world. And and the rest of the world
Speaker 1: is is seeing the U s flex its muscles in
Speaker 1: a way that it hasn't before. The problem, and this
Speaker 1: is really important, common David. The problem is that you
Speaker 1: cannot replace something with nothing. So you have to be
Speaker 1: clear as to what does the new world economic order
Speaker 1: look like? And that's a question market. When I travel
Speaker 1: outside the US, people are asking the same the sctions
Speaker 1: over and over again. What is it gonna what is
Speaker 1: it gonna be look like? Is it going to fragment economically,
Speaker 1: in trade, in payments or not? And David, it brings
Speaker 1: us up after what we saw on Anchor yesterday with
Speaker 1: Secretary Tillerson. I don't know, you know is Dr Larian says,
Speaker 1: what are we going to with Turkey? And to that question,
Speaker 1: what does the new economic outlook look like? You had
Speaker 1: President Shesh and Pink speaking in Davos trying to really
Speaker 1: craft a new economic outlook, and certainly that's going to
Speaker 1: come into crystalline focus next week when he meets with
Speaker 1: President Trump at Mara Lago in Florida. Let's come back
Speaker 1: with Dr a bit about that. I hope you joys.
Speaker 1: I just made a decision, folks. It with Dr Larry
Speaker 1: and we we wouldn't know what's the Fed, what's the
Speaker 1: Fed going to do? Etcetera, that we'd really talk about
Speaker 1: a lot of these theories behind the strategy and tactics
Speaker 1: of this changing world. I know, Mohammed, you were lending
Speaker 1: an ear to the interview that our colleague Michael McKee
Speaker 1: just did with Bill Dudley, the president of the New
Speaker 1: York Fan and I wonder what stood out to you.
Speaker 1: We were listening here for some commentary on unwinding that
Speaker 1: balance sheet. Yeah, that was a great interview by Mike McKee. UM,
Speaker 1: two things stood out to me, one very specific and
Speaker 1: one more general. The very specific, as you say, where
Speaker 1: the balance sheet remarks, particularly that this could be a
Speaker 1: late seventeen issue, and that they don't have strong feelings
Speaker 1: as to the sequencing of balance sheet normalization. I think
Speaker 1: that is the issue that the market would look most into,
Speaker 1: But there's more general aspect. Until Dudley's comments today, most
Speaker 1: of the Fed speak we heard this week was hinting
Speaker 1: that the FED was getting more confident about the economy,
Speaker 1: somewhat more assertive with markets, and was keeping an eye
Speaker 1: on asset prices. UM, Dudley didn't go back to that.
Speaker 1: Dudley was much more dovish than that. So it's interesting
Speaker 1: to see that that you didn't get as much consistency
Speaker 1: in signals as you've got ahead of the last fo
Speaker 1: MC meeting when the FED really change market expectations. We've
Speaker 1: had a conversation throughout the week about the relationship between
Speaker 1: the soft data and the hard data to Bias left
Speaker 1: Its earlier in the week saying he's looking at soft
Speaker 1: data as a firm indicator of of what's happening with
Speaker 1: the hard data. It's leading the hard data. How do
Speaker 1: you see. It's something that Bill Dudley talked about this
Speaker 1: morning with Michael McCain. Yeah, he and he said what
Speaker 1: everybody has noticed so far, which is that the much
Speaker 1: improved sentiment both for household and business indicators not yet
Speaker 1: reflected in heart data. UM, I don't know whether it's
Speaker 1: a firm leading indicator or whether it's a soft leading indicator.
Speaker 1: It certainly will have an impact on behaviors, but I
Speaker 1: wouldn't say it's a firm leading indicator. Mom, and let
Speaker 1: me change gears here, and we thank you always for
Speaker 1: your coverage, uh the soft data and the hard data.
Speaker 1: The asset management business is coming to a thunderous end
Speaker 1: of this quarter with restructurings at Fidelity, black Rock, etcetera,
Speaker 1: and on and on. You are truly one of the
Speaker 1: great experts on this year, work for years at PIMCO
Speaker 1: and of course your work for Harvard Management, they've just
Speaker 1: gone through their own active management restructuring. Can you tell
Speaker 1: a kid at your Cambridge to go into active management
Speaker 1: in two thousand seventeen, I would tell them, if you're
Speaker 1: going to active management, make sure it's in the less
Speaker 1: perfect asset classes. So don't go to active management on
Speaker 1: US stocks, going to active management on high yield on
Speaker 1: emerging markets, where a clear marketing perfections and where you
Speaker 1: can be more confident about adding value. UM. I think
Speaker 1: the whole passive versus active debate is going to get
Speaker 1: much more sophisticated and people are going to realize it
Speaker 1: depends on what asset class. But that is just one
Speaker 1: of the big themes that's going to define asset management
Speaker 1: for the next few years, and asset management is going
Speaker 1: to change. Steve Weisman was with this earlier today, of
Speaker 1: course the Great Investor, and he was acclaimed in the
Speaker 1: movie The Big Short as well. Dr Larry and Steve
Speaker 1: Weisman said, all of this debate is going to go away,
Speaker 1: and what active management needs is an end to the
Speaker 1: great distortion. They need to normalize fixed income in short
Speaker 1: term paper market that's not there now. When we finally
Speaker 1: normalize interest rates somewhere in our lifetime. Will that assist
Speaker 1: active managers? Yes? I mean think of you being on
Speaker 1: the field where the referee is also playing on the
Speaker 1: other side. It makes life very complicated. And when the
Speaker 1: referee is a central bank pursuing non commercial objectives using
Speaker 1: market instruments, then it makes active management even more complicated.
Speaker 1: And and and that's been the reality since the global financial crisis.
Speaker 1: And for me, it's not a big surprise that quite
Speaker 1: a few sophisticated hedge funds have decided to exit because
Speaker 1: it's a world. It's a world where you've got to
Speaker 1: predict non commercial decisions and that's really hard. Yeah, I
Speaker 1: strongly support that. Do you see, girl, how l Arion
Speaker 1: does that. He always brings in a New York Jets
Speaker 1: model into a discussion of asset management where the Jets
Speaker 1: lose because the referees on the other side. You see,
Speaker 1: there you go, he let go, But Tom, Tom, with
Speaker 1: all respect only you read this as a complaint about
Speaker 1: the pace. Let me let me finish here with with
Speaker 1: where we began. We have this meeting coming up next week.
Speaker 1: Presidentiation Ping is going to be in West Palm Beach
Speaker 1: with the President of the United States. We had a
Speaker 1: conversation with a Marie Slaughter about, among other things, grand
Speaker 1: strategy in the year two thousand and seventeen. What's it
Speaker 1: gonna look like when we see Chinese grand strategy mixed
Speaker 1: with whatever The diplomatic outlook is that President Trump is
Speaker 1: pioneering in Washington, d C. What do you expect to
Speaker 1: come out of that meeting? What's going to be central
Speaker 1: to the conversations about the global economy there at mar Lago?
Speaker 1: So I think it's it's first, it's important that they're
Speaker 1: looking to put the executive Orders on trade out before
Speaker 1: that meeting, because that's gonna define a little bit the
Speaker 1: US getting tougher on this notion of bilateral deficits and
Speaker 1: also on this notion of anti dumping UM penalties. I
Speaker 1: haven't been collected. I think what you're gonna see is
Speaker 1: going to be while they're more reconciliatory than anything else,
Speaker 1: I think what you're going to see is two of
Speaker 1: the two biggest trading partners coming together and signaling that
Speaker 1: is in the joint interest of getting things together. I
Speaker 1: don't think you're going to see fireworks with tell you
Speaker 1: the truth, this has been fabulous folks. It will be
Speaker 1: on our iTunes podcast. I can't say enough about really
Speaker 1: listening to Muhammad l Arian on the brinksmanship in the
Speaker 1: game of Chicken going on, and so much of our economics,
Speaker 1: whether it's Brexit, UH, United Kingdom, the EU, or is
Speaker 1: what we're observing out of Washington and for example China.
Speaker 1: Dr Larrian is always thank you so much. Thanks for
Speaker 1: listening to the Bloomberg Surveillance Podcast. Subscribe and listen to
Speaker 1: interview on iTunes, SoundCloud, or whichever podcast platform you prefer.
Speaker 1: I'm out on Twitter at Tom Keene. David Gura is
Speaker 1: at David Gura. Before the podcast, you can always catch
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