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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane jay Ley.

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Speaker 1: We bring you insight from the best in economics, finance,

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Speaker 1: investment and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. We

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Speaker 1: have a wonderful guest to begin across the nation in worldwide.

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Speaker 1: He's Adam Posen, Yes, running the Peterson Institute, but far

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Speaker 1: more one of our leading economists, including a very visible

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Speaker 1: effort at the American Economic Association meetings over the weekend. Adam,

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Speaker 1: I thought much more than normal these headline These meetings

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Speaker 1: made headlines. What was the lead thought that you got

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Speaker 1: out of the discussions of posing, yelling Bernanke and others. Uh.

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Speaker 1: The main thought, of course, centered around Ben Bernanke's annual

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Speaker 1: presidential address. Uh. Not that he gives it every year,

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Speaker 1: but this year he was president, and it was a

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Speaker 1: major plea, an argument more than plea, that monetary policy

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Speaker 1: can offset the next recession successfully, that there is room

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Speaker 1: to go negative on interest rates, that quee done properly

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Speaker 1: on a large scale can make a big difference. And frankly,

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Speaker 1: there was a pushback on that for me to a

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Speaker 1: limited degree, from Janet Yelling his successor, from Larry Summers

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Speaker 1: Um and I think this was a really important discussion

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Speaker 1: to have. There's a huge amount of convergence on the

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Speaker 1: idea of public investment UH in this low inflation, low

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Speaker 1: interest rate environment, and there is a desire to have

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Speaker 1: a constructive front, so I think I think there was

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Speaker 1: a lot going on there. Also for the profession, was

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Speaker 1: a lot going on about changes in the profession where

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Speaker 1: Ben Bernanky Janet Yelling have been really leading some efforts

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Speaker 1: about diversity and sexism less racism, but that's not as

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Speaker 1: big a deal for the rest of the world. And

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Speaker 1: every econ one on one book, including Abel Bernancy. There's

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Speaker 1: chapter twenty seven which is naval gazing, which is what

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Speaker 1: economists like to do. Alan Blinder of Princeton does that

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Speaker 1: this morning with an essay in the Wall Street Journal.

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Speaker 1: Really talking about this two percent target, which is a

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Speaker 1: huge debate. I spoke to Charles Evans of Chicago, a

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Speaker 1: Federaries serve President Chicago about to at length. I think

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Speaker 1: it was six seven weeks ago. Is is well defined

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Speaker 1: for our audience the two percent debate very simply the

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Speaker 1: idea is that if you go directly for zero percent

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Speaker 1: inflation target, you're probably going to mess things up because

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Speaker 1: there's creeping price changes and it tends to be deflationary

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Speaker 1: in real terms if which sounds contradictory, but anyway, the

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Speaker 1: effect is deflationary if you set for too lower target.

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Speaker 1: So all the central banks converged on a two percent

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Speaker 1: target in the late nineties early two thousand's, and Ben

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Speaker 1: bernanke Rick Michigan, a number of people myself included, all

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Speaker 1: contributed to that. The argument right now is completely excuse

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Speaker 1: me that the inflation expectations are, if anything, being dragged

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Speaker 1: to the downside towards zero. You look at bond markets

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Speaker 1: in Europe and Japan until lesser degree US, they're pricing

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Speaker 1: and no inflation and no interest rate hikes out many

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Speaker 1: many years. And so the question is if you get

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Speaker 1: to a recession, you don't have much room to cut rates,

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Speaker 1: and and we're maybe driving down inflation in bad ways

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Speaker 1: and expectations in bad ways by not achieving our inflation target.

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Speaker 1: So the debate is is it better to raise the

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Speaker 1: inflation target. If you raise the inflation target, can you

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Speaker 1: get there? How do you get there? I don't want

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Speaker 1: to interrupt. To me, that's the heart of the matter

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Speaker 1: is the execution. Okay, anybody can set a target, or

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Speaker 1: a strategy or a theme, etcetera. But the heart of

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Speaker 1: it to me at imposing is then you have to

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Speaker 1: affect a pro Is there any proof that a central

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Speaker 1: bank can reflate short of pretty money? I'll you know

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Speaker 1: the deutsch Land of a long time ago. At the moment,

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Speaker 1: the evidence isn't great. Um So I my main pitch

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Speaker 1: in these sessions at a A was Unfortunately, if you

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Speaker 1: look at Japan, the Bank of Japan over the last

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Speaker 1: five years roughly has done pretty much everything that Bernankey

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Speaker 1: or Krugman or I or many people ask them to

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Speaker 1: do for their own reasons and including setting inflation target,

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Speaker 1: including doing aggressive que and the amount of difference it's

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Speaker 1: made in terms of inflation outcomes has been minimal. On

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Speaker 1: the other hand, I would hate to run the experiment.

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Speaker 1: If they hadn't done that, what would have happened in Japan?

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Speaker 1: They would have been in deflation, possibly accelerating inflation with

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Speaker 1: more harm. And I mean, I can't jump in. I

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Speaker 1: just want to bring the conversation to the story of

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Speaker 1: the moment and talk about the federal reserves, involvement in

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Speaker 1: asset prices and its role shapey financial conditions. What we've

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Speaker 1: seen over the last week quite clearly is renewed sans

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Speaker 1: renewed tensions in the Middle East, and yet a financial

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Speaker 1: market is set of financial markets that don't show real

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Speaker 1: signs of stress. There is a belief, because we've been

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Speaker 1: conditioned over the last couple of years, that if we

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Speaker 1: get into any difficulty, the FETE will be there to

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Speaker 1: ball a sound. I just wonder from your conversations over

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Speaker 1: the last week how much discomfort there is with that

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Speaker 1: at the moment, and how uncomfortable should central banks be

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Speaker 1: with this situation? Well, I think I think John, the

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Speaker 1: the issue is sorry that the central banks recognized that

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Speaker 1: a they shouldn't be making judgments on geopolitical matters. They

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Speaker 1: have no way to do that. But be that, going

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Speaker 1: back to nine eleven and before, the impact on macroeconomic

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Speaker 1: outcomes of even oil disruptions, of even major security threats

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Speaker 1: do not tend to be lasting. Again, that doesn't mean

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Speaker 1: they're not important, but it means that in terms of

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Speaker 1: the course of the things central banks are supposed to

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Speaker 1: talk about, which include inflation, unemployment, financial stability. These national

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Speaker 1: security threats, even very big ones, do not tend to

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Speaker 1: matter that much, and I and so they should not

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Speaker 1: be reacting to this. And I think for once markets

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Speaker 1: are pricing that correctly that they should not expect much

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Speaker 1: to come out of this. Long term product of investment

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Speaker 1: is going to be disrupted. Waste of human lives, waste

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Speaker 1: of money, waste of opportunities is going to occur, But

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Speaker 1: in terms of trading relative values not not really an issue.

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Speaker 1: One last quick point, as was stressing one of the

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Speaker 1: session with a lot of central bank officials Sunday morning

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Speaker 1: at a E A phil plane from the e c B,

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Speaker 1: the deput Government Bank in Japan all pointed out that

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Speaker 1: they've had low rates for a very long time and

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Speaker 1: no asset bubbles in recent years, and so I think

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Speaker 1: people are overly concerned about that. And do you think

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Speaker 1: that's the case though, when you look at the fixed

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Speaker 1: income market and see at one point last year that

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Speaker 1: we had seventeen trillion dollars of negative yielding assets, largely

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Speaker 1: because of central bank involvements in financial markets, I find

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Speaker 1: it difficult to get my hands around the idea that

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Speaker 1: the ECB can sit there comfortably and say that they

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Speaker 1: have not no role and asset prices and asset distication

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Speaker 1: to the point that we might even have a bumble. Yeah,

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Speaker 1: I realized that that's a very common point of view.

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Speaker 1: But I think the world divides john into the people

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Speaker 1: who think we have low rates because central banks took action,

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Speaker 1: versus versus we take action because we have low rates.

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Speaker 1: And I think there are very fundamental causes of these

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Speaker 1: low rates. And it's demographics, it's technology, it's low growth prospects.

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Speaker 1: It's been added to by the Trump administration creating huge

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Speaker 1: amounts of uncertainty about the trade regime and now security.

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Speaker 1: These all drive down real factors. There's no investment demand

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Speaker 1: and the central banks are merely reacting to that. People

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Speaker 1: would like to say it's the central banks causing it,

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Speaker 1: and the central banks don't always admit that they're not

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Speaker 1: causing it because they don't want to seem powerless. But

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Speaker 1: in my view, it's the other way around. Okay, this

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Speaker 1: is really important. It will be a huge topic with

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Speaker 1: Sherman Greenspan this morning. What is causing the dearth of

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Speaker 1: business investment? Yeah, and that that's the question, and I

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Speaker 1: tend to be I am reluctantly. But in recent years,

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Speaker 1: and you and I have talked about this time come

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Speaker 1: around to sort of a Robert Gordon point of view,

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Speaker 1: which is that there's been some kind of fundamental technology.

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Speaker 1: That's where Greenspan is too. Alan Greenspan has come around

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Speaker 1: the Northwestern Yeah, because when you look at the to me,

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Speaker 1: the big arguments are first that almost all the rich countries,

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Speaker 1: including Japan, Western Europe, US all slowed down in productivity

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Speaker 1: growth that roughly the same time, and it was before

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Speaker 1: the crisis, and that that to me suggested some kind

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Speaker 1: of global fundamental It's been phenomenal, Adam Post, and thank

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Speaker 1: you so much for joining us from American Economic Association meetings.

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Speaker 1: He is with the Peterson Institute. It is not a

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Speaker 1: surprise to those that no international relations that, without question,

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Speaker 1: the most trend essay that we have seen some Stephen A. Cook,

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Speaker 1: he is with a Council on Foreign Relations. His book

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Speaker 1: False Dawn is absolutely definitive and at times heart wrenching

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Speaker 1: on his experience of the Middle East. And we are

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Speaker 1: thrilled they could join us. He could join us this

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Speaker 1: morning in our Washington studios. Stephen Cook you stopped this

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Speaker 1: debate distracted by John Bolton yesterday afternoon with your publication

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Speaker 1: in Foreign Policy. You minced no words, we should leave

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Speaker 1: and leave. Now. What has been in a response to

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Speaker 1: your essay yesterday, Well, it's actually been rather surprising. There's

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Speaker 1: been a lot of support for the essay. I've heard

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Speaker 1: from members of Congress, former members of Congress, former ambassadors,

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Speaker 1: my dissertation supervisor, UH, and a variety of others. It's

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Speaker 1: been a former marine to former Marines who served in

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Speaker 1: the Rock. They've said, look, after now almost seventeen years,

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Speaker 1: you're calling a spade a spade that there's not much

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Speaker 1: for the United States to do in Iraq, and to

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Speaker 1: take out Costam Suleimani over over Iraq, a place where

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Speaker 1: Americans are vulnerable for no discernible reason, seems to be

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Speaker 1: a policy that is unnecessarily reckless. You're the pro I'm

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Speaker 1: the amateur. The night that night to two am in

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Speaker 1: the morning, I stood in the Bloomberg Television Studios in

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Speaker 1: New York and open the National Geographic Atlas, looked at

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Speaker 1: the map and said, you've got to be kidding me.

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Speaker 1: That was in two thousand three. You just visited Iraq,

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Speaker 1: which we agree is totally changed from oh three oh five,

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Speaker 1: and on and on and on. What did you observe

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Speaker 1: there that says to you leave and leave now? The

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Speaker 1: bottom line for me and Iraq was that Iraq really

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Speaker 1: isn't a state. Uh that map no longer exists. There

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Speaker 1: is a territory that we call Iraq, and there are

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Speaker 1: discernible borders. But as the classic definition, the state of

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Speaker 1: the state that controls the monopoly of violence that can

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Speaker 1: enforce property rights doesn't exist. You have a number of

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Speaker 1: different a number of myriad of armed groups fighting over

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Speaker 1: national resources and impoverishing what would otherwise be a wealthy country.

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Speaker 1: It is simply a river into the Persian Gulf. On

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Speaker 1: the right side is Iranian oil fields. On the left

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Speaker 1: side Iraq's treasure. What keeps Iran from just not moving

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Speaker 1: west over the river to pick up all those oil fields?

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Speaker 1: It really doesn't have to Iran. As every any Iraqi

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Speaker 1: you will tell you that Iran is the most influential

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Speaker 1: farm presence in the country. The protests that broke out

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Speaker 1: in Iraq in October were in part about Iranian dominance.

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Speaker 1: Our killing of customs. Solimana has really changed the terms

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Speaker 1: of the debate, those protesters as still want or Iran out,

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Speaker 1: but now the Iraqi parliament also wants the United States out. Stephen,

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Speaker 1: is that the president's objective to get out of the

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Speaker 1: Middle lag so many people full of walls and now

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Speaker 1: the scratching their heads after last week because it still

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Speaker 1: is objective. Well, your question speaks to the strategic and

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Speaker 1: coherence of the administration at this point. The President says

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Speaker 1: he wants to reduce America's footprint in the Middle East,

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Speaker 1: yet he takes actions that threatened to draw the United

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Speaker 1: States further into the region. Stephen, if the United States retrenches,

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Speaker 1: where does it leave the coalition of the fight against

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Speaker 1: ISIS in the region? Well, it's a very good question,

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Speaker 1: and I think that the United States can continue to

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Speaker 1: fight terrorism without having as large and as vulnerable a

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Speaker 1: footprint as it does in a place like a rock

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Speaker 1: where we're really not welcome, and that where we're so

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Speaker 1: hamstrung and so impotent that there's not much that we

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Speaker 1: can do at the moment. As you know, over the

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Speaker 1: last several decades, General Sulemani was at the epicentral and

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Speaker 1: effort to build out a sheer sphere of influence. So

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Speaker 1: imagine there are some allies, some allies of the United

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Speaker 1: States that did want them in the Middle East to

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Speaker 1: help them push back against that. Stephen, your thoughts on

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Speaker 1: that situation, Well, I think that it's undoubtedly the case

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Speaker 1: that the Saudias, the Maratis, the Israelis are particularly interested

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Speaker 1: in ensuring that the United States remains in the Middle

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Speaker 1: East to counter Iran. I don't think that anybody is

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Speaker 1: arguing that the United States should just withdraw from the

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Speaker 1: Middle East. Iraq is a zombie state. Iraq is not

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Speaker 1: a place where the United States can do much good

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Speaker 1: at this point. But we have lots of presents, and

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Speaker 1: there's a smart way to be in the Middle East,

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Speaker 1: and being in a rock and killing customs Sulimani over

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Speaker 1: Iraq doesn't seem to be a good thing. Steve, When

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Speaker 1: we've heard very little from Israel in the last couple

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Speaker 1: of days, why, well, the Israelis are obviously quite concerned

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Speaker 1: about blowback on them. Uh. It's well known that his

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Speaker 1: Balah and Iranian proxy Lebanese terrorist group has hundreds of

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Speaker 1: thousands of rockets that can be rained down on Israel. Now,

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Speaker 1: Israel has made a lot of progress in developing defenses

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Speaker 1: against this. But the sheer number of rockets in the

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Speaker 1: possession of his law is deeply worrying to the Israelis UH,

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Speaker 1: and they do not want to be implicated in this.

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Speaker 1: They don't want to be the focal point of Iran's retaliation.

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Speaker 1: Isn't it quite original? State? And that we have all

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Speaker 1: of these various different, contradicting interests in the region, and

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Speaker 1: yet we struggle to identify one nation in the Middle

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Speaker 1: East at the moment that was happy with that strike

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Speaker 1: Thursday night and to Friday original list. That that is

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Speaker 1: I think a very very good point. Uh. We are

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Speaker 1: at a point in the Middle East where it's very

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Speaker 1: very hard for American policymakers to define exactly what's important

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Speaker 1: to us, and this leads to a series of contradictory policies.

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Speaker 1: President Trump has been unpredictable, but this is also a

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Speaker 1: problem with the Obama administration identifying what's important, developing a strategy,

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Speaker 1: matching up national resources to that strategy, and pursuing those interests.

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Speaker 1: It's been a problem for some time all of your

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Speaker 1: nationwide we wellcommuter Bloomberg surveillance. John Farrow in New York

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Speaker 1: Time Time keenan Washington and the Stephen A. Cook of

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Speaker 1: the Council on Foreign Relations, And again you've seen my

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Speaker 1: rave review for his False Dawn, which is decidedly not dated. Protest,

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Speaker 1: democracy and violence, Stephen A. Cook, how do you respond

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Speaker 1: to every pro I've ever talked to that said, Look,

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Speaker 1: Iran is the one real economy, real nation, real culture,

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Speaker 1: real middle class of the Middle East. Have we just

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Speaker 1: frittered it away with the agony since nineteen seventy nine?

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Speaker 1: Have we handed away forever Persia? Well, it's I think

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Speaker 1: it's a very very tough issue. There has been a

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Speaker 1: lot of effort on the part of people in Washington

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Speaker 1: to think of ways and how to improve relations with Iran,

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Speaker 1: but Iran has to want to do that as well.

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Speaker 1: We had the Joint Comprehensive Plan of Action, but then

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Speaker 1: once that was signed General cut some solar money went

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Speaker 1: out to consolidate and extend Iran's influence around the region.

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Speaker 1: That made it very difficult for actually people both on

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Speaker 1: both sides of both sides of the debate to defend

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Speaker 1: uh a warming of relations between the two countries. So

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Speaker 1: let me ask you this question. And I asked to

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Speaker 1: have the atmstra VENs in general Kimmitt as well. We've

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Speaker 1: got a lot of people listening with family in the

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Speaker 1: military exposed in a new and different way in the

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Speaker 1: last three or four days. How do you respond when

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Speaker 1: you see troop movements and troop announcements Bloomberg with the

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Speaker 1: Marines moving from the Mediterranean into the Persian Gulf. How

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Speaker 1: do you, as a academic respond to these military movements. Well,

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Speaker 1: one of the things that that concerns me is that

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Speaker 1: we are moving forces back into the Middle East. But

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Speaker 1: it's entirely unclear to anybody why we are doing it.

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Speaker 1: If there is an interest, if there is a strategy

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Speaker 1: that is at play here, then we need to know

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Speaker 1: about it. Otherwise, these guys are being sent to the

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Speaker 1: Middle East for no discernible Folks want to rip up

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Speaker 1: the scripture. This is so keen. Thank you for your

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Speaker 1: notes on our coverage from Friday, Stephen Cook. It's just simple.

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Speaker 1: The military prose and the academic prose say the same thing.

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Speaker 1: What's the strategy? How do we find an American strategy

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Speaker 1: for the Middle East? Well, this is I think this

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Speaker 1: is a problem that any I think any president at

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Speaker 1: this point is going and I'm not going to pin

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Speaker 1: this on the President Trump. That's right. We the Cold

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Speaker 1: War ended thirty years ago and the world is changing.

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Speaker 1: And I think that it's very very hard after now

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Speaker 1: being in the region in this very significant way for

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Speaker 1: almost two decades, it's very hard to discern what it

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Speaker 1: is important to the United States. Is it building democratic societies?

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Speaker 1: Is it fighting terrorism? Is it oil? Is it Israel?

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Speaker 1: No one has a real clear answer to this, and

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Speaker 1: it's I think it's up to us people, academics, military strategists,

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Speaker 1: and others to debate this. Do we decide what it is?

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Speaker 1: With a great sacrifice, So all in America off of

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Speaker 1: September eleven, of two thousand one, and to steal a

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Speaker 1: line from Freed Zicaria, what does the post nine eleven

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Speaker 1: world look like to you? It looks like a mess? Uh.

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Speaker 1: There is no real Uh. It seems it's a very

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Speaker 1: long time ago in nine eleven where we had this

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Speaker 1: purpose and we've lost it. We've gotten wrapped around the

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Speaker 1: axle on politics in the Middle East, on things that

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Speaker 1: aren't as important to us. It's now time to sit

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Speaker 1: back and consider exactly what's important to the United States

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Speaker 1: in this part of the world. Thank you so much

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Speaker 1: for coming and Stephen and Cook folks, and the counts

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Speaker 1: on foreign relations. I will put out on Twitter and

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Speaker 1: LinkedIn today his important essay and foreign policy places. Saide

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Speaker 1: that Jena Mountain Adams is with us Blimbag Intelligence chief

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Speaker 1: Equity strategists, your thoughts on obvious the East Cold Gina.

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Speaker 1: Then we'll get to the call at Bloomberg more volatility,

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Speaker 1: closer to trend levels, higher equity markets through the year. Though,

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Speaker 1: what do you come down on that? Uh? You know,

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Speaker 1: if I can, I can sympathize with the idea that

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Speaker 1: equity markets continue their advance that they've been in for

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Speaker 1: more than a decade. Now, you know, I don't I

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Speaker 1: don't know about the higher vall call. I think that

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Speaker 1: you'd have to have a pretty significant change in market

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Speaker 1: structure in order to get higher prices with higher volatility.

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Speaker 1: That certainly was the case in the very very late

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Speaker 1: market extension of into two thousand. You know, if that's

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Speaker 1: your call that we're going to go into some kind

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Speaker 1: of melt up phase, then you will see volatility rise

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Speaker 1: as prices rise. I think it's real. I really struggled

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Speaker 1: to make the case that we're in a melt up,

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Speaker 1: I think instead, you know, investors are somewhat hesitant. It's

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Speaker 1: really a story of liquidity driving prices, and that to

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Speaker 1: me means volatility stays low as prices advanced. That would

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Speaker 1: be my only issue, um is I think you do

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Speaker 1: needed to see a big change in the way that

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Speaker 1: markets behave and see a massive shift and sentiment as well,

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Speaker 1: really driving some kind of melt up phase in order

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Speaker 1: to have praises rates with volatility. So let's talk about

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Speaker 1: something important, because you've touched on it. I remember in January,

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Speaker 1: I think it was there was a feeling that maybe

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Speaker 1: this was it, this was the melt up, that final

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Speaker 1: stages of a ball market where things start to rip

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Speaker 1: and everyone starts to participate. Two years later, here we

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Speaker 1: are still talking about the same dynamic, potentially the characteristics

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Speaker 1: of a late cycle, end of cycle melt up in

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Speaker 1: a ball market. What are they and why is it

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Speaker 1: so different to what we see in the last compliments.

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Speaker 1: So if there are really just several pillars that characterize

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Speaker 1: a melt up, in our mind, you have to have

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Speaker 1: rising prices on rising volatility on deteriorating fundamentals. That means

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Speaker 1: a decelerating earning scrowth outlook on just a massive explosion

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Speaker 1: and optimism reflected in the sentiment surveys. That we've been

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Speaker 1: missing a lot of those characteristics at various points in

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Speaker 1: this cycle. But the one that really has we've struggled

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Speaker 1: to sort of find is that massive optimistic sentiment. I

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Speaker 1: think in fits and starts, you do develop periods in

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Speaker 1: which investors are a little bit more enthusiastic. Late seventeen

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Speaker 1: was one of those periods. We did see a major

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Speaker 1: market peak occur in early eighteen, but it proved not

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Speaker 1: to be the secular bull market peak because you didn't

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Speaker 1: have enough long term build and optimism I would suggest

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Speaker 1: to really support a massive melt up peak developing. I

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Speaker 1: think we're in a similar state now. We probably are

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Speaker 1: a little excessively optimistic. You see it in the strategists

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Speaker 1: all caving on their on their forecast, right. You know,

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Speaker 1: I used to be one of these strategists, and thank

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Speaker 1: god I don't have to do this forecasting anymore, because

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Speaker 1: it is really, really, you know, it's tricky when the

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Speaker 1: market is inflating on sentiment and sentiment and alone, it's

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Speaker 1: really difficult to predict how far it's going to go,

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Speaker 1: but we haven't seen a massive improvement and fundamentals to

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Speaker 1: really drive those market outcomes right now, so we are

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Speaker 1: probably slightly over optimistic in the short run. That said,

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Speaker 1: most of the flows over the course of the last

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Speaker 1: several years have gone to the bond market, not into

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Speaker 1: the equity market. You did see some equity influence at

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Speaker 1: the end of last year, but not nearly as much

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Speaker 1: as you would normally see when stocks are peaking and

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Speaker 1: sentiment is overly enthusiastic. Gena and the zeitgeis this morning,

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Speaker 1: is any given company switching from share buy back to

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Speaker 1: dividends increased dividends? Walk us through that. In this case,

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Speaker 1: it was an essay on Apple computer and they really

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Speaker 1: need to get their act together and just switch from

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Speaker 1: share buy back, massive two dividend growth more sprightly. What's

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Speaker 1: the soil? What there? What's the distinction between share buy

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Speaker 1: back and dividends? I think it's signal more than anything.

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Speaker 1: I think that traditionally, the signal of a switch from

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Speaker 1: sort of a short term boost to share prices via

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Speaker 1: share buy back to a longer term commitment to dividend

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Speaker 1: is a signal of a slowing longer term growth outlook

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Speaker 1: to most investors, and so the results is, if you

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Speaker 1: are committing to a long term higher dividend, pay higher

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Speaker 1: dividend growth over over an extended period, the investor thinks fantastic.

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Speaker 1: It is a certainty of income. However, it also maybe

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Speaker 1: suggests you don't have a whole lot to do with

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Speaker 1: your cash, you don't have a whole lot of investment prospects.

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Speaker 1: Maybe your long term growth rate is going to slow

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Speaker 1: going forward. I mean you traditionally see the you know,

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Speaker 1: slow growing stables, more defensive places, the bigger dividend players

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Speaker 1: in the equity market. Gina Martin Adams with us as

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Speaker 1: we're in the doubt twenty nine thousand. Watch I'm kidding, Gina.

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Speaker 1: Manufacturing has been a tough spot on the I M.

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Speaker 1: I should point out on that particular reading in that sector,

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Speaker 1: not terrific services holding up. That's the story worldwide, particularly

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Speaker 1: in Europe, and I wonder if that continues. One of

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Speaker 1: the great themes of that has been Neil dudd Is

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Speaker 1: excellence a renaissance. Mcrowis really been quite good of pushing

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Speaker 1: against the certitude of the gloom crew. Uh. Neil Donna

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Speaker 1: let us reframe right now, you're called twelve months forward

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Speaker 1: on g d P. What is that statistic? Well, I

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Speaker 1: mean if you look at your Bloomberg News consensus, Uh,

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Speaker 1: they have GDP running basically below two personal a year,

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Speaker 1: and um, you know, I wouldn't be surprised if we

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Speaker 1: print something, um, you know, close to two and a half.

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Speaker 1: I think the composition of growth is improving. I mean,

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Speaker 1: you know, you look at I mean, investment spending will

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Speaker 1: probably be a little bit better, and inventory investment certainly

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Speaker 1: will be a little bit better. The trade deficits somewhat narrower.

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Speaker 1: We've seen the dollar come off the boil of that's

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Speaker 1: going to support exports and and help narrow the trade gaps.

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Speaker 1: So um, you know, it's not an economy that's off

431
00:24:52,600 --> 00:24:55,880
Speaker 1: to the races. But you know, it's always about This

432
00:24:56,000 --> 00:24:58,639
Speaker 1: job is all about what is the market pricing in

433
00:24:58,920 --> 00:25:00,600
Speaker 1: and what do you think the like the outcome is

434
00:25:00,600 --> 00:25:02,600
Speaker 1: going to be, and then pick your battles with the

435
00:25:02,640 --> 00:25:05,960
Speaker 1: consensus wisely, and I think the consensus a little bit

436
00:25:05,960 --> 00:25:09,199
Speaker 1: too cautious on growth, for which is one of the

437
00:25:09,200 --> 00:25:11,880
Speaker 1: reasons why I think this upward march in equity prices

438
00:25:11,880 --> 00:25:15,040
Speaker 1: in the US will probably continue. You have been a

439
00:25:15,680 --> 00:25:18,840
Speaker 1: well you've been you know, you've been wonderfully resilient about

440
00:25:18,960 --> 00:25:23,640
Speaker 1: this versus the gloom crew. And you've just explained, well,

441
00:25:23,840 --> 00:25:28,040
Speaker 1: but you explain how we get there. How do you

442
00:25:28,359 --> 00:25:31,600
Speaker 1: look at the resiliency of the American consumer? Is that

443
00:25:31,680 --> 00:25:35,359
Speaker 1: a foundation for your optimism or is it almost a

444
00:25:35,480 --> 00:25:40,639
Speaker 1: one off to your optimism? Well, I mean, certainly, consumer

445
00:25:40,840 --> 00:25:43,760
Speaker 1: balance sheets, household balance sheets are in a much better

446
00:25:43,800 --> 00:25:47,720
Speaker 1: place then they've been in years. Um. You know, look

447
00:25:47,760 --> 00:25:52,080
Speaker 1: at the household savings race. It's actually been rising even

448
00:25:52,119 --> 00:25:56,800
Speaker 1: as consumer spendings have been doing reasonably well. We've seen, um,

449
00:25:56,840 --> 00:26:02,400
Speaker 1: in addition of financial obligations ratios at rock bottom levels.

450
00:26:02,440 --> 00:26:05,280
Speaker 1: So the household balance sheets very strong. The upside risk,

451
00:26:05,280 --> 00:26:07,240
Speaker 1: of course, is that you know, we've seen this recovery

452
00:26:07,240 --> 00:26:10,440
Speaker 1: and equity prices. People feel better about their situation, they

453
00:26:10,480 --> 00:26:13,439
Speaker 1: begin to draw down some of that precautionary savings, and

454
00:26:13,480 --> 00:26:17,000
Speaker 1: the consumer actually does even better than what it's been doing.

455
00:26:17,119 --> 00:26:20,399
Speaker 1: So um, yeah, I mean, I think the consumer is

456
00:26:20,440 --> 00:26:23,000
Speaker 1: basically running in place. The risks are to the upside

457
00:26:23,400 --> 00:26:26,640
Speaker 1: um um, and we know that. I mean that's also

458
00:26:26,720 --> 00:26:28,600
Speaker 1: reflective in the housing market's sort of been the one

459
00:26:28,600 --> 00:26:31,480
Speaker 1: thing that no one's been talking about. But I mean, hey, look,

460
00:26:31,560 --> 00:26:33,840
Speaker 1: I mean new home sales are up what ten to

461
00:26:33,880 --> 00:26:37,440
Speaker 1: fift over the last twelve months. Those are signed contracts

462
00:26:37,440 --> 00:26:42,199
Speaker 1: and new houses those that leads construction activity. So I

463
00:26:42,240 --> 00:26:44,680
Speaker 1: think construction activity is also likely to be a tail

464
00:26:44,680 --> 00:26:49,439
Speaker 1: went for growth in. So you know, UM wasn't a

465
00:26:49,440 --> 00:26:52,959
Speaker 1: great year for the economy and it was mostly about consumers.

466
00:26:53,359 --> 00:26:56,880
Speaker 1: I do think we'll have a better better balance uh

467
00:26:56,920 --> 00:26:58,720
Speaker 1: in the in in the year ahead. No, you know

468
00:26:58,760 --> 00:27:00,440
Speaker 1: how this works. There's always a diates of in somewhere

469
00:27:00,480 --> 00:27:02,800
Speaker 1: to confirm your prize for anyone looking at the economy

470
00:27:02,920 --> 00:27:04,680
Speaker 1: right now. And if you barish on the economy, you

471
00:27:04,760 --> 00:27:07,600
Speaker 1: might be focused on manufacturing. So two questions from me.

472
00:27:08,119 --> 00:27:10,960
Speaker 1: The best read to get on manufacturing right now. You've

473
00:27:10,960 --> 00:27:13,280
Speaker 1: done some terrific work on pointing out the difference between

474
00:27:13,359 --> 00:27:14,639
Speaker 1: say the I S M and the p M I

475
00:27:14,920 --> 00:27:16,639
Speaker 1: and my follow up question to that, Neil, would be

476
00:27:16,880 --> 00:27:19,280
Speaker 1: the importance even if you do get a read of

477
00:27:19,359 --> 00:27:22,199
Speaker 1: weakness in manufacturing, the importance to the overall economy and

478
00:27:22,200 --> 00:27:24,119
Speaker 1: how that's diminished over the last ten years. Just your

479
00:27:24,119 --> 00:27:28,280
Speaker 1: point on those two things, Well, I mean, So, I

480
00:27:28,280 --> 00:27:30,879
Speaker 1: mean there's an issue between the two major surveys of

481
00:27:30,920 --> 00:27:33,639
Speaker 1: one of sample size and construction. Right. So the market

482
00:27:33,720 --> 00:27:38,000
Speaker 1: pm I actually overweights the forward looking indicators like new orders,

483
00:27:38,400 --> 00:27:42,399
Speaker 1: while while the I s M equally lates them. All um,

484
00:27:42,640 --> 00:27:48,080
Speaker 1: um and so um we've seen, we've seen UM. In addition,

485
00:27:48,480 --> 00:27:50,560
Speaker 1: it's a sample size right, market p M I has

486
00:27:50,600 --> 00:27:54,000
Speaker 1: eight hundreds, I s MUS three hundred. Some have made

487
00:27:54,040 --> 00:27:56,359
Speaker 1: the point that, you know, the market p M I

488
00:27:56,520 --> 00:27:59,399
Speaker 1: is less sensitive to what's going on in the global economy.

489
00:27:59,440 --> 00:28:02,320
Speaker 1: The I s M it's more sensitive to what's happening globally.

490
00:28:02,800 --> 00:28:05,840
Speaker 1: Uh So that's something else to think about. Um. But

491
00:28:05,960 --> 00:28:09,240
Speaker 1: you know, when I look at manufacturing UM, it comes

492
00:28:09,280 --> 00:28:13,480
Speaker 1: back to the inventory cycle John. Um. If you look

493
00:28:13,520 --> 00:28:15,440
Speaker 1: at even the I s M, you still have more

494
00:28:15,440 --> 00:28:17,280
Speaker 1: of the server respot and is telling you that their

495
00:28:17,320 --> 00:28:21,040
Speaker 1: inventory levels are too low then too high. That's very

496
00:28:21,119 --> 00:28:23,399
Speaker 1: unusual with the I s M sitting this far below

497
00:28:23,440 --> 00:28:26,719
Speaker 1: dist Okay, So my sense is that you get an

498
00:28:26,720 --> 00:28:30,120
Speaker 1: inventory tail in and that's going to necessitate further games

499
00:28:30,119 --> 00:28:33,440
Speaker 1: and manufacturing production. So I would be surprised to see

500
00:28:33,480 --> 00:28:36,480
Speaker 1: the I s M UM still sitting where it where

501
00:28:36,480 --> 00:28:38,880
Speaker 1: it is, you know, this time and let's say three

502
00:28:38,880 --> 00:28:41,200
Speaker 1: to four months. So again it's about it's not about

503
00:28:41,200 --> 00:28:43,239
Speaker 1: where the data point is right now, because that's all

504
00:28:43,280 --> 00:28:45,720
Speaker 1: the bears are talking about. It's about why is it

505
00:28:45,760 --> 00:28:48,120
Speaker 1: gonna stay here in three months? And that's a much

506
00:28:48,120 --> 00:28:50,360
Speaker 1: harder call to make. I think it's not likely to

507
00:28:50,360 --> 00:28:52,480
Speaker 1: stay there. It's likely to go higher. No, you expect

508
00:28:52,480 --> 00:28:54,360
Speaker 1: that inventory bill to be front loaded this year. How

509
00:28:54,360 --> 00:28:55,760
Speaker 1: do you think that's going to fly out through the

510
00:28:55,840 --> 00:28:59,280
Speaker 1: course of Well, it means that. I mean it's not

511
00:28:59,320 --> 00:29:02,080
Speaker 1: just the US also, I mean look at Europe. I mean,

512
00:29:02,160 --> 00:29:04,720
Speaker 1: if you look at the pace of contraction and insventries

513
00:29:04,720 --> 00:29:06,959
Speaker 1: and in Germany for example, and we haven't seen anything

514
00:29:07,000 --> 00:29:10,160
Speaker 1: like that since the sovereign debt crisis. So in other words,

515
00:29:10,160 --> 00:29:12,800
Speaker 1: it wouldn't take much in the way of global growth

516
00:29:12,840 --> 00:29:16,800
Speaker 1: and you know, European growth stabilization to the prompt games

517
00:29:16,800 --> 00:29:19,680
Speaker 1: and production activity in those economies. I think you have

518
00:29:19,720 --> 00:29:23,720
Speaker 1: a bit of a synchronized inventory cycle um in the

519
00:29:23,760 --> 00:29:28,200
Speaker 1: Western world over the first six months. Neil, do we

520
00:29:28,240 --> 00:29:31,320
Speaker 1: need to get used to subpar growth? I mean, there

521
00:29:31,400 --> 00:29:34,040
Speaker 1: was a time it was morning in America three percent

522
00:29:34,120 --> 00:29:36,760
Speaker 1: plus on we go the president has hit a real

523
00:29:36,840 --> 00:29:40,479
Speaker 1: residence with the American people in search of this. Do

524
00:29:40,560 --> 00:29:44,480
Speaker 1: you is a card carrying optimists give up on three

525
00:29:44,520 --> 00:29:49,080
Speaker 1: plus growth? So I think the only way you get

526
00:29:49,080 --> 00:29:52,719
Speaker 1: to three plus growth, Tom, in any sort of sustained way,

527
00:29:52,840 --> 00:29:56,120
Speaker 1: is if you see a inflection and productivity, I mean

528
00:29:56,120 --> 00:30:00,360
Speaker 1: productivity growth. Historically as a process, it does and turn

529
00:30:00,440 --> 00:30:03,520
Speaker 1: on a dime. What you can say is that on

530
00:30:03,560 --> 00:30:05,520
Speaker 1: the plus side, you know, if you look at the

531
00:30:05,640 --> 00:30:09,560
Speaker 1: last let's say five years, productivity has been growing a

532
00:30:09,600 --> 00:30:12,200
Speaker 1: little over one percent at an annual rate. Now that's

533
00:30:12,320 --> 00:30:15,160
Speaker 1: very low, but if you look at the five years

534
00:30:15,160 --> 00:30:17,680
Speaker 1: before that, it was basically half a percent. So we've

535
00:30:17,680 --> 00:30:20,920
Speaker 1: sort of been slowly growing productivity. UM. I would say

536
00:30:20,960 --> 00:30:23,680
Speaker 1: the one positive that I've seen lately is that, you know,

537
00:30:23,760 --> 00:30:26,200
Speaker 1: even though we've had a weak investment year UM in

538
00:30:26,240 --> 00:30:29,040
Speaker 1: the last year, UM, I do think capital deepening is

539
00:30:29,080 --> 00:30:31,720
Speaker 1: growing at a more normal, normal rate than it had been,

540
00:30:31,760 --> 00:30:34,600
Speaker 1: and so you know, maybe there's a chance for productivity

541
00:30:34,600 --> 00:30:38,120
Speaker 1: to grow something looking at closer to normal this year,

542
00:30:38,120 --> 00:30:39,840
Speaker 1: I mean maybe one and a half percent. But again

543
00:30:39,880 --> 00:30:43,960
Speaker 1: it's it's a it's a process. But you know what

544
00:30:44,200 --> 00:30:46,080
Speaker 1: I mean, do we need the question is do we

545
00:30:46,120 --> 00:30:48,000
Speaker 1: need three and at three percent growth, I mean I

546
00:30:48,040 --> 00:30:50,560
Speaker 1: think you know, look we're talking about we're gonna have.

547
00:30:50,800 --> 00:30:55,280
Speaker 1: We've had, you know, improving a median household income, declines

548
00:30:55,320 --> 00:30:59,960
Speaker 1: in UH, in measures of poverty, low unemployment, and that's

549
00:31:00,040 --> 00:31:04,000
Speaker 1: all happened, you know, with growth running slightly above two.

550
00:31:04,160 --> 00:31:07,240
Speaker 1: So um, you know, I mean to me, I think

551
00:31:07,280 --> 00:31:10,360
Speaker 1: two and a half it's pretty good. I mean, this

552
00:31:10,440 --> 00:31:14,680
Speaker 1: is so important. We have capital deepening with with your optimism,

553
00:31:14,720 --> 00:31:17,760
Speaker 1: does labor get a better share of what's out there?

554
00:31:17,840 --> 00:31:23,440
Speaker 1: Or is that just from a bygoing time? I mean, certainly,

555
00:31:23,480 --> 00:31:25,320
Speaker 1: I mean that's what the FET is trying to engineer,

556
00:31:25,520 --> 00:31:29,280
Speaker 1: right and totally totally meading and uh and we have

557
00:31:29,360 --> 00:31:31,160
Speaker 1: when we and we have seen I mean, certainly we

558
00:31:31,240 --> 00:31:34,200
Speaker 1: have seen some increase in labor share of income. And

559
00:31:34,480 --> 00:31:36,280
Speaker 1: one of the interesting things I think we're seeing right

560
00:31:36,280 --> 00:31:38,719
Speaker 1: now though in the labor market is it's sort of

561
00:31:38,720 --> 00:31:42,600
Speaker 1: this um, you know, not necessarily falling labor share, but

562
00:31:42,680 --> 00:31:46,760
Speaker 1: shifting of where the labor income is going. Because we're seeing, um,

563
00:31:46,800 --> 00:31:48,960
Speaker 1: you know, folks at the low end see much faster

564
00:31:49,040 --> 00:31:51,400
Speaker 1: wage growth, but interestingly enough, folks at the high end

565
00:31:51,400 --> 00:31:54,440
Speaker 1: seeing slower wage growth, so that premium that the high

566
00:31:54,560 --> 00:31:58,120
Speaker 1: end had been sort of commanding or compelling isn't isn't

567
00:31:59,200 --> 00:32:01,840
Speaker 1: isn't a strong as it had been before, Maybe because

568
00:32:01,880 --> 00:32:04,479
Speaker 1: the labor markets tighter and Neil always great to get

569
00:32:04,480 --> 00:32:06,080
Speaker 1: your thoughts happen to get to you, and it's a

570
00:32:06,200 --> 00:32:07,920
Speaker 1: nil down to that. Very nice sence, Macro, head of

571
00:32:07,920 --> 00:32:10,600
Speaker 1: Economic Research, joining us on the upside risk to the

572
00:32:10,640 --> 00:32:13,400
Speaker 1: economy in the United States of America through twenty and

573
00:32:13,400 --> 00:32:17,800
Speaker 1: ahead of payrolls Friday. Thanks for listening to the Bloomberg

574
00:32:17,800 --> 00:32:23,760
Speaker 1: Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,

575
00:32:24,160 --> 00:32:28,360
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at

576
00:32:28,400 --> 00:32:32,680
Speaker 1: Tom Keane before the podcast. You can always catch us worldwide.

577
00:32:33,120 --> 00:32:34,200
Speaker 1: I'm Bloomberg Radio.