Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane jay Ley.
Speaker 1: We bring you insight from the best in economics, finance,
Speaker 1: investment and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. We
Speaker 1: have a wonderful guest to begin across the nation in worldwide.
Speaker 1: He's Adam Posen, Yes, running the Peterson Institute, but far
Speaker 1: more one of our leading economists, including a very visible
Speaker 1: effort at the American Economic Association meetings over the weekend. Adam,
Speaker 1: I thought much more than normal these headline These meetings
Speaker 1: made headlines. What was the lead thought that you got
Speaker 1: out of the discussions of posing, yelling Bernanke and others. Uh.
Speaker 1: The main thought, of course, centered around Ben Bernanke's annual
Speaker 1: presidential address. Uh. Not that he gives it every year,
Speaker 1: but this year he was president, and it was a
Speaker 1: major plea, an argument more than plea, that monetary policy
Speaker 1: can offset the next recession successfully, that there is room
Speaker 1: to go negative on interest rates, that quee done properly
Speaker 1: on a large scale can make a big difference. And frankly,
Speaker 1: there was a pushback on that for me to a
Speaker 1: limited degree, from Janet Yelling his successor, from Larry Summers
Speaker 1: Um and I think this was a really important discussion
Speaker 1: to have. There's a huge amount of convergence on the
Speaker 1: idea of public investment UH in this low inflation, low
Speaker 1: interest rate environment, and there is a desire to have
Speaker 1: a constructive front, so I think I think there was
Speaker 1: a lot going on there. Also for the profession, was
Speaker 1: a lot going on about changes in the profession where
Speaker 1: Ben Bernanky Janet Yelling have been really leading some efforts
Speaker 1: about diversity and sexism less racism, but that's not as
Speaker 1: big a deal for the rest of the world. And
Speaker 1: every econ one on one book, including Abel Bernancy. There's
Speaker 1: chapter twenty seven which is naval gazing, which is what
Speaker 1: economists like to do. Alan Blinder of Princeton does that
Speaker 1: this morning with an essay in the Wall Street Journal.
Speaker 1: Really talking about this two percent target, which is a
Speaker 1: huge debate. I spoke to Charles Evans of Chicago, a
Speaker 1: Federaries serve President Chicago about to at length. I think
Speaker 1: it was six seven weeks ago. Is is well defined
Speaker 1: for our audience the two percent debate very simply the
Speaker 1: idea is that if you go directly for zero percent
Speaker 1: inflation target, you're probably going to mess things up because
Speaker 1: there's creeping price changes and it tends to be deflationary
Speaker 1: in real terms if which sounds contradictory, but anyway, the
Speaker 1: effect is deflationary if you set for too lower target.
Speaker 1: So all the central banks converged on a two percent
Speaker 1: target in the late nineties early two thousand's, and Ben
Speaker 1: bernanke Rick Michigan, a number of people myself included, all
Speaker 1: contributed to that. The argument right now is completely excuse
Speaker 1: me that the inflation expectations are, if anything, being dragged
Speaker 1: to the downside towards zero. You look at bond markets
Speaker 1: in Europe and Japan until lesser degree US, they're pricing
Speaker 1: and no inflation and no interest rate hikes out many
Speaker 1: many years. And so the question is if you get
Speaker 1: to a recession, you don't have much room to cut rates,
Speaker 1: and and we're maybe driving down inflation in bad ways
Speaker 1: and expectations in bad ways by not achieving our inflation target.
Speaker 1: So the debate is is it better to raise the
Speaker 1: inflation target. If you raise the inflation target, can you
Speaker 1: get there? How do you get there? I don't want
Speaker 1: to interrupt. To me, that's the heart of the matter
Speaker 1: is the execution. Okay, anybody can set a target, or
Speaker 1: a strategy or a theme, etcetera. But the heart of
Speaker 1: it to me at imposing is then you have to
Speaker 1: affect a pro Is there any proof that a central
Speaker 1: bank can reflate short of pretty money? I'll you know
Speaker 1: the deutsch Land of a long time ago. At the moment,
Speaker 1: the evidence isn't great. Um So I my main pitch
Speaker 1: in these sessions at a A was Unfortunately, if you
Speaker 1: look at Japan, the Bank of Japan over the last
Speaker 1: five years roughly has done pretty much everything that Bernankey
Speaker 1: or Krugman or I or many people ask them to
Speaker 1: do for their own reasons and including setting inflation target,
Speaker 1: including doing aggressive que and the amount of difference it's
Speaker 1: made in terms of inflation outcomes has been minimal. On
Speaker 1: the other hand, I would hate to run the experiment.
Speaker 1: If they hadn't done that, what would have happened in Japan?
Speaker 1: They would have been in deflation, possibly accelerating inflation with
Speaker 1: more harm. And I mean, I can't jump in. I
Speaker 1: just want to bring the conversation to the story of
Speaker 1: the moment and talk about the federal reserves, involvement in
Speaker 1: asset prices and its role shapey financial conditions. What we've
Speaker 1: seen over the last week quite clearly is renewed sans
Speaker 1: renewed tensions in the Middle East, and yet a financial
Speaker 1: market is set of financial markets that don't show real
Speaker 1: signs of stress. There is a belief, because we've been
Speaker 1: conditioned over the last couple of years, that if we
Speaker 1: get into any difficulty, the FETE will be there to
Speaker 1: ball a sound. I just wonder from your conversations over
Speaker 1: the last week how much discomfort there is with that
Speaker 1: at the moment, and how uncomfortable should central banks be
Speaker 1: with this situation? Well, I think I think John, the
Speaker 1: the issue is sorry that the central banks recognized that
Speaker 1: a they shouldn't be making judgments on geopolitical matters. They
Speaker 1: have no way to do that. But be that, going
Speaker 1: back to nine eleven and before, the impact on macroeconomic
Speaker 1: outcomes of even oil disruptions, of even major security threats
Speaker 1: do not tend to be lasting. Again, that doesn't mean
Speaker 1: they're not important, but it means that in terms of
Speaker 1: the course of the things central banks are supposed to
Speaker 1: talk about, which include inflation, unemployment, financial stability. These national
Speaker 1: security threats, even very big ones, do not tend to
Speaker 1: matter that much, and I and so they should not
Speaker 1: be reacting to this. And I think for once markets
Speaker 1: are pricing that correctly that they should not expect much
Speaker 1: to come out of this. Long term product of investment
Speaker 1: is going to be disrupted. Waste of human lives, waste
Speaker 1: of money, waste of opportunities is going to occur, But
Speaker 1: in terms of trading relative values not not really an issue.
Speaker 1: One last quick point, as was stressing one of the
Speaker 1: session with a lot of central bank officials Sunday morning
Speaker 1: at a E A phil plane from the e c B,
Speaker 1: the deput Government Bank in Japan all pointed out that
Speaker 1: they've had low rates for a very long time and
Speaker 1: no asset bubbles in recent years, and so I think
Speaker 1: people are overly concerned about that. And do you think
Speaker 1: that's the case though, when you look at the fixed
Speaker 1: income market and see at one point last year that
Speaker 1: we had seventeen trillion dollars of negative yielding assets, largely
Speaker 1: because of central bank involvements in financial markets, I find
Speaker 1: it difficult to get my hands around the idea that
Speaker 1: the ECB can sit there comfortably and say that they
Speaker 1: have not no role and asset prices and asset distication
Speaker 1: to the point that we might even have a bumble. Yeah,
Speaker 1: I realized that that's a very common point of view.
Speaker 1: But I think the world divides john into the people
Speaker 1: who think we have low rates because central banks took action,
Speaker 1: versus versus we take action because we have low rates.
Speaker 1: And I think there are very fundamental causes of these
Speaker 1: low rates. And it's demographics, it's technology, it's low growth prospects.
Speaker 1: It's been added to by the Trump administration creating huge
Speaker 1: amounts of uncertainty about the trade regime and now security.
Speaker 1: These all drive down real factors. There's no investment demand
Speaker 1: and the central banks are merely reacting to that. People
Speaker 1: would like to say it's the central banks causing it,
Speaker 1: and the central banks don't always admit that they're not
Speaker 1: causing it because they don't want to seem powerless. But
Speaker 1: in my view, it's the other way around. Okay, this
Speaker 1: is really important. It will be a huge topic with
Speaker 1: Sherman Greenspan this morning. What is causing the dearth of
Speaker 1: business investment? Yeah, and that that's the question, and I
Speaker 1: tend to be I am reluctantly. But in recent years,
Speaker 1: and you and I have talked about this time come
Speaker 1: around to sort of a Robert Gordon point of view,
Speaker 1: which is that there's been some kind of fundamental technology.
Speaker 1: That's where Greenspan is too. Alan Greenspan has come around
Speaker 1: the Northwestern Yeah, because when you look at the to me,
Speaker 1: the big arguments are first that almost all the rich countries,
Speaker 1: including Japan, Western Europe, US all slowed down in productivity
Speaker 1: growth that roughly the same time, and it was before
Speaker 1: the crisis, and that that to me suggested some kind
Speaker 1: of global fundamental It's been phenomenal, Adam Post, and thank
Speaker 1: you so much for joining us from American Economic Association meetings.
Speaker 1: He is with the Peterson Institute. It is not a
Speaker 1: surprise to those that no international relations that, without question,
Speaker 1: the most trend essay that we have seen some Stephen A. Cook,
Speaker 1: he is with a Council on Foreign Relations. His book
Speaker 1: False Dawn is absolutely definitive and at times heart wrenching
Speaker 1: on his experience of the Middle East. And we are
Speaker 1: thrilled they could join us. He could join us this
Speaker 1: morning in our Washington studios. Stephen Cook you stopped this
Speaker 1: debate distracted by John Bolton yesterday afternoon with your publication
Speaker 1: in Foreign Policy. You minced no words, we should leave
Speaker 1: and leave. Now. What has been in a response to
Speaker 1: your essay yesterday, Well, it's actually been rather surprising. There's
Speaker 1: been a lot of support for the essay. I've heard
Speaker 1: from members of Congress, former members of Congress, former ambassadors,
Speaker 1: my dissertation supervisor, UH, and a variety of others. It's
Speaker 1: been a former marine to former Marines who served in
Speaker 1: the Rock. They've said, look, after now almost seventeen years,
Speaker 1: you're calling a spade a spade that there's not much
Speaker 1: for the United States to do in Iraq, and to
Speaker 1: take out Costam Suleimani over over Iraq, a place where
Speaker 1: Americans are vulnerable for no discernible reason, seems to be
Speaker 1: a policy that is unnecessarily reckless. You're the pro I'm
Speaker 1: the amateur. The night that night to two am in
Speaker 1: the morning, I stood in the Bloomberg Television Studios in
Speaker 1: New York and open the National Geographic Atlas, looked at
Speaker 1: the map and said, you've got to be kidding me.
Speaker 1: That was in two thousand three. You just visited Iraq,
Speaker 1: which we agree is totally changed from oh three oh five,
Speaker 1: and on and on and on. What did you observe
Speaker 1: there that says to you leave and leave now? The
Speaker 1: bottom line for me and Iraq was that Iraq really
Speaker 1: isn't a state. Uh that map no longer exists. There
Speaker 1: is a territory that we call Iraq, and there are
Speaker 1: discernible borders. But as the classic definition, the state of
Speaker 1: the state that controls the monopoly of violence that can
Speaker 1: enforce property rights doesn't exist. You have a number of
Speaker 1: different a number of myriad of armed groups fighting over
Speaker 1: national resources and impoverishing what would otherwise be a wealthy country.
Speaker 1: It is simply a river into the Persian Gulf. On
Speaker 1: the right side is Iranian oil fields. On the left
Speaker 1: side Iraq's treasure. What keeps Iran from just not moving
Speaker 1: west over the river to pick up all those oil fields?
Speaker 1: It really doesn't have to Iran. As every any Iraqi
Speaker 1: you will tell you that Iran is the most influential
Speaker 1: farm presence in the country. The protests that broke out
Speaker 1: in Iraq in October were in part about Iranian dominance.
Speaker 1: Our killing of customs. Solimana has really changed the terms
Speaker 1: of the debate, those protesters as still want or Iran out,
Speaker 1: but now the Iraqi parliament also wants the United States out. Stephen,
Speaker 1: is that the president's objective to get out of the
Speaker 1: Middle lag so many people full of walls and now
Speaker 1: the scratching their heads after last week because it still
Speaker 1: is objective. Well, your question speaks to the strategic and
Speaker 1: coherence of the administration at this point. The President says
Speaker 1: he wants to reduce America's footprint in the Middle East,
Speaker 1: yet he takes actions that threatened to draw the United
Speaker 1: States further into the region. Stephen, if the United States retrenches,
Speaker 1: where does it leave the coalition of the fight against
Speaker 1: ISIS in the region? Well, it's a very good question,
Speaker 1: and I think that the United States can continue to
Speaker 1: fight terrorism without having as large and as vulnerable a
Speaker 1: footprint as it does in a place like a rock
Speaker 1: where we're really not welcome, and that where we're so
Speaker 1: hamstrung and so impotent that there's not much that we
Speaker 1: can do at the moment. As you know, over the
Speaker 1: last several decades, General Sulemani was at the epicentral and
Speaker 1: effort to build out a sheer sphere of influence. So
Speaker 1: imagine there are some allies, some allies of the United
Speaker 1: States that did want them in the Middle East to
Speaker 1: help them push back against that. Stephen, your thoughts on
Speaker 1: that situation, Well, I think that it's undoubtedly the case
Speaker 1: that the Saudias, the Maratis, the Israelis are particularly interested
Speaker 1: in ensuring that the United States remains in the Middle
Speaker 1: East to counter Iran. I don't think that anybody is
Speaker 1: arguing that the United States should just withdraw from the
Speaker 1: Middle East. Iraq is a zombie state. Iraq is not
Speaker 1: a place where the United States can do much good
Speaker 1: at this point. But we have lots of presents, and
Speaker 1: there's a smart way to be in the Middle East,
Speaker 1: and being in a rock and killing customs Sulimani over
Speaker 1: Iraq doesn't seem to be a good thing. Steve, When
Speaker 1: we've heard very little from Israel in the last couple
Speaker 1: of days, why, well, the Israelis are obviously quite concerned
Speaker 1: about blowback on them. Uh. It's well known that his
Speaker 1: Balah and Iranian proxy Lebanese terrorist group has hundreds of
Speaker 1: thousands of rockets that can be rained down on Israel. Now,
Speaker 1: Israel has made a lot of progress in developing defenses
Speaker 1: against this. But the sheer number of rockets in the
Speaker 1: possession of his law is deeply worrying to the Israelis UH,
Speaker 1: and they do not want to be implicated in this.
Speaker 1: They don't want to be the focal point of Iran's retaliation.
Speaker 1: Isn't it quite original? State? And that we have all
Speaker 1: of these various different, contradicting interests in the region, and
Speaker 1: yet we struggle to identify one nation in the Middle
Speaker 1: East at the moment that was happy with that strike
Speaker 1: Thursday night and to Friday original list. That that is
Speaker 1: I think a very very good point. Uh. We are
Speaker 1: at a point in the Middle East where it's very
Speaker 1: very hard for American policymakers to define exactly what's important
Speaker 1: to us, and this leads to a series of contradictory policies.
Speaker 1: President Trump has been unpredictable, but this is also a
Speaker 1: problem with the Obama administration identifying what's important, developing a strategy,
Speaker 1: matching up national resources to that strategy, and pursuing those interests.
Speaker 1: It's been a problem for some time all of your
Speaker 1: nationwide we wellcommuter Bloomberg surveillance. John Farrow in New York
Speaker 1: Time Time keenan Washington and the Stephen A. Cook of
Speaker 1: the Council on Foreign Relations, And again you've seen my
Speaker 1: rave review for his False Dawn, which is decidedly not dated. Protest,
Speaker 1: democracy and violence, Stephen A. Cook, how do you respond
Speaker 1: to every pro I've ever talked to that said, Look,
Speaker 1: Iran is the one real economy, real nation, real culture,
Speaker 1: real middle class of the Middle East. Have we just
Speaker 1: frittered it away with the agony since nineteen seventy nine?
Speaker 1: Have we handed away forever Persia? Well, it's I think
Speaker 1: it's a very very tough issue. There has been a
Speaker 1: lot of effort on the part of people in Washington
Speaker 1: to think of ways and how to improve relations with Iran,
Speaker 1: but Iran has to want to do that as well.
Speaker 1: We had the Joint Comprehensive Plan of Action, but then
Speaker 1: once that was signed General cut some solar money went
Speaker 1: out to consolidate and extend Iran's influence around the region.
Speaker 1: That made it very difficult for actually people both on
Speaker 1: both sides of both sides of the debate to defend
Speaker 1: uh a warming of relations between the two countries. So
Speaker 1: let me ask you this question. And I asked to
Speaker 1: have the atmstra VENs in general Kimmitt as well. We've
Speaker 1: got a lot of people listening with family in the
Speaker 1: military exposed in a new and different way in the
Speaker 1: last three or four days. How do you respond when
Speaker 1: you see troop movements and troop announcements Bloomberg with the
Speaker 1: Marines moving from the Mediterranean into the Persian Gulf. How
Speaker 1: do you, as a academic respond to these military movements. Well,
Speaker 1: one of the things that that concerns me is that
Speaker 1: we are moving forces back into the Middle East. But
Speaker 1: it's entirely unclear to anybody why we are doing it.
Speaker 1: If there is an interest, if there is a strategy
Speaker 1: that is at play here, then we need to know
Speaker 1: about it. Otherwise, these guys are being sent to the
Speaker 1: Middle East for no discernible Folks want to rip up
Speaker 1: the scripture. This is so keen. Thank you for your
Speaker 1: notes on our coverage from Friday, Stephen Cook. It's just simple.
Speaker 1: The military prose and the academic prose say the same thing.
Speaker 1: What's the strategy? How do we find an American strategy
Speaker 1: for the Middle East? Well, this is I think this
Speaker 1: is a problem that any I think any president at
Speaker 1: this point is going and I'm not going to pin
Speaker 1: this on the President Trump. That's right. We the Cold
Speaker 1: War ended thirty years ago and the world is changing.
Speaker 1: And I think that it's very very hard after now
Speaker 1: being in the region in this very significant way for
Speaker 1: almost two decades, it's very hard to discern what it
Speaker 1: is important to the United States. Is it building democratic societies?
Speaker 1: Is it fighting terrorism? Is it oil? Is it Israel?
Speaker 1: No one has a real clear answer to this, and
Speaker 1: it's I think it's up to us people, academics, military strategists,
Speaker 1: and others to debate this. Do we decide what it is?
Speaker 1: With a great sacrifice, So all in America off of
Speaker 1: September eleven, of two thousand one, and to steal a
Speaker 1: line from Freed Zicaria, what does the post nine eleven
Speaker 1: world look like to you? It looks like a mess? Uh.
Speaker 1: There is no real Uh. It seems it's a very
Speaker 1: long time ago in nine eleven where we had this
Speaker 1: purpose and we've lost it. We've gotten wrapped around the
Speaker 1: axle on politics in the Middle East, on things that
Speaker 1: aren't as important to us. It's now time to sit
Speaker 1: back and consider exactly what's important to the United States
Speaker 1: in this part of the world. Thank you so much
Speaker 1: for coming and Stephen and Cook folks, and the counts
Speaker 1: on foreign relations. I will put out on Twitter and
Speaker 1: LinkedIn today his important essay and foreign policy places. Saide
Speaker 1: that Jena Mountain Adams is with us Blimbag Intelligence chief
Speaker 1: Equity strategists, your thoughts on obvious the East Cold Gina.
Speaker 1: Then we'll get to the call at Bloomberg more volatility,
Speaker 1: closer to trend levels, higher equity markets through the year. Though,
Speaker 1: what do you come down on that? Uh? You know,
Speaker 1: if I can, I can sympathize with the idea that
Speaker 1: equity markets continue their advance that they've been in for
Speaker 1: more than a decade. Now, you know, I don't I
Speaker 1: don't know about the higher vall call. I think that
Speaker 1: you'd have to have a pretty significant change in market
Speaker 1: structure in order to get higher prices with higher volatility.
Speaker 1: That certainly was the case in the very very late
Speaker 1: market extension of into two thousand. You know, if that's
Speaker 1: your call that we're going to go into some kind
Speaker 1: of melt up phase, then you will see volatility rise
Speaker 1: as prices rise. I think it's real. I really struggled
Speaker 1: to make the case that we're in a melt up,
Speaker 1: I think instead, you know, investors are somewhat hesitant. It's
Speaker 1: really a story of liquidity driving prices, and that to
Speaker 1: me means volatility stays low as prices advanced. That would
Speaker 1: be my only issue, um is I think you do
Speaker 1: needed to see a big change in the way that
Speaker 1: markets behave and see a massive shift and sentiment as well,
Speaker 1: really driving some kind of melt up phase in order
Speaker 1: to have praises rates with volatility. So let's talk about
Speaker 1: something important, because you've touched on it. I remember in January,
Speaker 1: I think it was there was a feeling that maybe
Speaker 1: this was it, this was the melt up, that final
Speaker 1: stages of a ball market where things start to rip
Speaker 1: and everyone starts to participate. Two years later, here we
Speaker 1: are still talking about the same dynamic, potentially the characteristics
Speaker 1: of a late cycle, end of cycle melt up in
Speaker 1: a ball market. What are they and why is it
Speaker 1: so different to what we see in the last compliments.
Speaker 1: So if there are really just several pillars that characterize
Speaker 1: a melt up, in our mind, you have to have
Speaker 1: rising prices on rising volatility on deteriorating fundamentals. That means
Speaker 1: a decelerating earning scrowth outlook on just a massive explosion
Speaker 1: and optimism reflected in the sentiment surveys. That we've been
Speaker 1: missing a lot of those characteristics at various points in
Speaker 1: this cycle. But the one that really has we've struggled
Speaker 1: to sort of find is that massive optimistic sentiment. I
Speaker 1: think in fits and starts, you do develop periods in
Speaker 1: which investors are a little bit more enthusiastic. Late seventeen
Speaker 1: was one of those periods. We did see a major
Speaker 1: market peak occur in early eighteen, but it proved not
Speaker 1: to be the secular bull market peak because you didn't
Speaker 1: have enough long term build and optimism I would suggest
Speaker 1: to really support a massive melt up peak developing. I
Speaker 1: think we're in a similar state now. We probably are
Speaker 1: a little excessively optimistic. You see it in the strategists
Speaker 1: all caving on their on their forecast, right. You know,
Speaker 1: I used to be one of these strategists, and thank
Speaker 1: god I don't have to do this forecasting anymore, because
Speaker 1: it is really, really, you know, it's tricky when the
Speaker 1: market is inflating on sentiment and sentiment and alone, it's
Speaker 1: really difficult to predict how far it's going to go,
Speaker 1: but we haven't seen a massive improvement and fundamentals to
Speaker 1: really drive those market outcomes right now, so we are
Speaker 1: probably slightly over optimistic in the short run. That said,
Speaker 1: most of the flows over the course of the last
Speaker 1: several years have gone to the bond market, not into
Speaker 1: the equity market. You did see some equity influence at
Speaker 1: the end of last year, but not nearly as much
Speaker 1: as you would normally see when stocks are peaking and
Speaker 1: sentiment is overly enthusiastic. Gena and the zeitgeis this morning,
Speaker 1: is any given company switching from share buy back to
Speaker 1: dividends increased dividends? Walk us through that. In this case,
Speaker 1: it was an essay on Apple computer and they really
Speaker 1: need to get their act together and just switch from
Speaker 1: share buy back, massive two dividend growth more sprightly. What's
Speaker 1: the soil? What there? What's the distinction between share buy
Speaker 1: back and dividends? I think it's signal more than anything.
Speaker 1: I think that traditionally, the signal of a switch from
Speaker 1: sort of a short term boost to share prices via
Speaker 1: share buy back to a longer term commitment to dividend
Speaker 1: is a signal of a slowing longer term growth outlook
Speaker 1: to most investors, and so the results is, if you
Speaker 1: are committing to a long term higher dividend, pay higher
Speaker 1: dividend growth over over an extended period, the investor thinks fantastic.
Speaker 1: It is a certainty of income. However, it also maybe
Speaker 1: suggests you don't have a whole lot to do with
Speaker 1: your cash, you don't have a whole lot of investment prospects.
Speaker 1: Maybe your long term growth rate is going to slow
Speaker 1: going forward. I mean you traditionally see the you know,
Speaker 1: slow growing stables, more defensive places, the bigger dividend players
Speaker 1: in the equity market. Gina Martin Adams with us as
Speaker 1: we're in the doubt twenty nine thousand. Watch I'm kidding, Gina.
Speaker 1: Manufacturing has been a tough spot on the I M.
Speaker 1: I should point out on that particular reading in that sector,
Speaker 1: not terrific services holding up. That's the story worldwide, particularly
Speaker 1: in Europe, and I wonder if that continues. One of
Speaker 1: the great themes of that has been Neil dudd Is
Speaker 1: excellence a renaissance. Mcrowis really been quite good of pushing
Speaker 1: against the certitude of the gloom crew. Uh. Neil Donna
Speaker 1: let us reframe right now, you're called twelve months forward
Speaker 1: on g d P. What is that statistic? Well, I
Speaker 1: mean if you look at your Bloomberg News consensus, Uh,
Speaker 1: they have GDP running basically below two personal a year,
Speaker 1: and um, you know, I wouldn't be surprised if we
Speaker 1: print something, um, you know, close to two and a half.
Speaker 1: I think the composition of growth is improving. I mean,
Speaker 1: you know, you look at I mean, investment spending will
Speaker 1: probably be a little bit better, and inventory investment certainly
Speaker 1: will be a little bit better. The trade deficits somewhat narrower.
Speaker 1: We've seen the dollar come off the boil of that's
Speaker 1: going to support exports and and help narrow the trade gaps.
Speaker 1: So um, you know, it's not an economy that's off
Speaker 1: to the races. But you know, it's always about This
Speaker 1: job is all about what is the market pricing in
Speaker 1: and what do you think the like the outcome is
Speaker 1: going to be, and then pick your battles with the
Speaker 1: consensus wisely, and I think the consensus a little bit
Speaker 1: too cautious on growth, for which is one of the
Speaker 1: reasons why I think this upward march in equity prices
Speaker 1: in the US will probably continue. You have been a
Speaker 1: well you've been you know, you've been wonderfully resilient about
Speaker 1: this versus the gloom crew. And you've just explained, well,
Speaker 1: but you explain how we get there. How do you
Speaker 1: look at the resiliency of the American consumer? Is that
Speaker 1: a foundation for your optimism or is it almost a
Speaker 1: one off to your optimism? Well, I mean, certainly, consumer
Speaker 1: balance sheets, household balance sheets are in a much better
Speaker 1: place then they've been in years. Um. You know, look
Speaker 1: at the household savings race. It's actually been rising even
Speaker 1: as consumer spendings have been doing reasonably well. We've seen, um,
Speaker 1: in addition of financial obligations ratios at rock bottom levels.
Speaker 1: So the household balance sheets very strong. The upside risk,
Speaker 1: of course, is that you know, we've seen this recovery
Speaker 1: and equity prices. People feel better about their situation, they
Speaker 1: begin to draw down some of that precautionary savings, and
Speaker 1: the consumer actually does even better than what it's been doing.
Speaker 1: So um, yeah, I mean, I think the consumer is
Speaker 1: basically running in place. The risks are to the upside
Speaker 1: um um, and we know that. I mean that's also
Speaker 1: reflective in the housing market's sort of been the one
Speaker 1: thing that no one's been talking about. But I mean, hey, look,
Speaker 1: I mean new home sales are up what ten to
Speaker 1: fift over the last twelve months. Those are signed contracts
Speaker 1: and new houses those that leads construction activity. So I
Speaker 1: think construction activity is also likely to be a tail
Speaker 1: went for growth in. So you know, UM wasn't a
Speaker 1: great year for the economy and it was mostly about consumers.
Speaker 1: I do think we'll have a better better balance uh
Speaker 1: in the in in the year ahead. No, you know
Speaker 1: how this works. There's always a diates of in somewhere
Speaker 1: to confirm your prize for anyone looking at the economy
Speaker 1: right now. And if you barish on the economy, you
Speaker 1: might be focused on manufacturing. So two questions from me.
Speaker 1: The best read to get on manufacturing right now. You've
Speaker 1: done some terrific work on pointing out the difference between
Speaker 1: say the I S M and the p M I
Speaker 1: and my follow up question to that, Neil, would be
Speaker 1: the importance even if you do get a read of
Speaker 1: weakness in manufacturing, the importance to the overall economy and
Speaker 1: how that's diminished over the last ten years. Just your
Speaker 1: point on those two things, Well, I mean, So, I
Speaker 1: mean there's an issue between the two major surveys of
Speaker 1: one of sample size and construction. Right. So the market
Speaker 1: pm I actually overweights the forward looking indicators like new orders,
Speaker 1: while while the I s M equally lates them. All um,
Speaker 1: um and so um we've seen, we've seen UM. In addition,
Speaker 1: it's a sample size right, market p M I has
Speaker 1: eight hundreds, I s MUS three hundred. Some have made
Speaker 1: the point that, you know, the market p M I
Speaker 1: is less sensitive to what's going on in the global economy.
Speaker 1: The I s M it's more sensitive to what's happening globally.
Speaker 1: Uh So that's something else to think about. Um. But
Speaker 1: you know, when I look at manufacturing UM, it comes
Speaker 1: back to the inventory cycle John. Um. If you look
Speaker 1: at even the I s M, you still have more
Speaker 1: of the server respot and is telling you that their
Speaker 1: inventory levels are too low then too high. That's very
Speaker 1: unusual with the I s M sitting this far below
Speaker 1: dist Okay, So my sense is that you get an
Speaker 1: inventory tail in and that's going to necessitate further games
Speaker 1: and manufacturing production. So I would be surprised to see
Speaker 1: the I s M UM still sitting where it where
Speaker 1: it is, you know, this time and let's say three
Speaker 1: to four months. So again it's about it's not about
Speaker 1: where the data point is right now, because that's all
Speaker 1: the bears are talking about. It's about why is it
Speaker 1: gonna stay here in three months? And that's a much
Speaker 1: harder call to make. I think it's not likely to
Speaker 1: stay there. It's likely to go higher. No, you expect
Speaker 1: that inventory bill to be front loaded this year. How
Speaker 1: do you think that's going to fly out through the
Speaker 1: course of Well, it means that. I mean it's not
Speaker 1: just the US also, I mean look at Europe. I mean,
Speaker 1: if you look at the pace of contraction and insventries
Speaker 1: and in Germany for example, and we haven't seen anything
Speaker 1: like that since the sovereign debt crisis. So in other words,
Speaker 1: it wouldn't take much in the way of global growth
Speaker 1: and you know, European growth stabilization to the prompt games
Speaker 1: and production activity in those economies. I think you have
Speaker 1: a bit of a synchronized inventory cycle um in the
Speaker 1: Western world over the first six months. Neil, do we
Speaker 1: need to get used to subpar growth? I mean, there
Speaker 1: was a time it was morning in America three percent
Speaker 1: plus on we go the president has hit a real
Speaker 1: residence with the American people in search of this. Do
Speaker 1: you is a card carrying optimists give up on three
Speaker 1: plus growth? So I think the only way you get
Speaker 1: to three plus growth, Tom, in any sort of sustained way,
Speaker 1: is if you see a inflection and productivity, I mean
Speaker 1: productivity growth. Historically as a process, it does and turn
Speaker 1: on a dime. What you can say is that on
Speaker 1: the plus side, you know, if you look at the
Speaker 1: last let's say five years, productivity has been growing a
Speaker 1: little over one percent at an annual rate. Now that's
Speaker 1: very low, but if you look at the five years
Speaker 1: before that, it was basically half a percent. So we've
Speaker 1: sort of been slowly growing productivity. UM. I would say
Speaker 1: the one positive that I've seen lately is that, you know,
Speaker 1: even though we've had a weak investment year UM in
Speaker 1: the last year, UM, I do think capital deepening is
Speaker 1: growing at a more normal, normal rate than it had been,
Speaker 1: and so you know, maybe there's a chance for productivity
Speaker 1: to grow something looking at closer to normal this year,
Speaker 1: I mean maybe one and a half percent. But again
Speaker 1: it's it's a it's a process. But you know what
Speaker 1: I mean, do we need the question is do we
Speaker 1: need three and at three percent growth, I mean I
Speaker 1: think you know, look we're talking about we're gonna have.
Speaker 1: We've had, you know, improving a median household income, declines
Speaker 1: in UH, in measures of poverty, low unemployment, and that's
Speaker 1: all happened, you know, with growth running slightly above two.
Speaker 1: So um, you know, I mean to me, I think
Speaker 1: two and a half it's pretty good. I mean, this
Speaker 1: is so important. We have capital deepening with with your optimism,
Speaker 1: does labor get a better share of what's out there?
Speaker 1: Or is that just from a bygoing time? I mean, certainly,
Speaker 1: I mean that's what the FET is trying to engineer,
Speaker 1: right and totally totally meading and uh and we have
Speaker 1: when we and we have seen I mean, certainly we
Speaker 1: have seen some increase in labor share of income. And
Speaker 1: one of the interesting things I think we're seeing right
Speaker 1: now though in the labor market is it's sort of
Speaker 1: this um, you know, not necessarily falling labor share, but
Speaker 1: shifting of where the labor income is going. Because we're seeing, um,
Speaker 1: you know, folks at the low end see much faster
Speaker 1: wage growth, but interestingly enough, folks at the high end
Speaker 1: seeing slower wage growth, so that premium that the high
Speaker 1: end had been sort of commanding or compelling isn't isn't
Speaker 1: isn't a strong as it had been before, Maybe because
Speaker 1: the labor markets tighter and Neil always great to get
Speaker 1: your thoughts happen to get to you, and it's a
Speaker 1: nil down to that. Very nice sence, Macro, head of
Speaker 1: Economic Research, joining us on the upside risk to the
Speaker 1: economy in the United States of America through twenty and
Speaker 1: ahead of payrolls Friday. Thanks for listening to the Bloomberg
Speaker 1: Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Keane before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio.