1 00:00:00,040 --> 00:00:02,640 Speaker 1: Who you put your trust in matters. Investors have put 2 00:00:02,680 --> 00:00:07,040 Speaker 1: their trust and independent registered investment advisors to the two 3 00:00:07,040 --> 00:00:10,680 Speaker 1: and four trillion dollars. Why learn more at find your 4 00:00:10,760 --> 00:00:26,360 Speaker 1: Independent Advisor dot com. Welcome to the Bloomberg Surveillance Podcast. 5 00:00:26,760 --> 00:00:30,480 Speaker 1: I'm Tom Keene with David Gura. Daily we bring you 6 00:00:30,520 --> 00:00:35,560 Speaker 1: insight from the best in economics, finance, investment and international relations. 7 00:00:35,960 --> 00:00:40,559 Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and 8 00:00:40,640 --> 00:00:47,479 Speaker 1: of course on the Bloomberg. This is why we do 9 00:00:47,520 --> 00:00:50,080 Speaker 1: Bloomberg Surveillance. It's a quality of the guests, and we 10 00:00:50,120 --> 00:00:51,920 Speaker 1: do that in London, we do that in New York. 11 00:00:51,960 --> 00:00:56,240 Speaker 1: Michael Spencer the Yesterday. Richard Clarina with us from PIMCO 12 00:00:56,840 --> 00:00:59,680 Speaker 1: today of course for years of work at Columbia University 13 00:01:00,040 --> 00:01:03,440 Speaker 1: and now from the Massachusetts Institute of Technology in Boston 14 00:01:03,920 --> 00:01:07,680 Speaker 1: at the nacios or finds he is a former ECB official, 15 00:01:07,720 --> 00:01:11,800 Speaker 1: which barely describes his research, contribution to economics and of 16 00:01:11,800 --> 00:01:15,800 Speaker 1: course his timely work with his Cyprus during their crisis. 17 00:01:16,240 --> 00:01:19,080 Speaker 1: Wonderful to have you with us, Professor. I want to 18 00:01:19,120 --> 00:01:21,360 Speaker 1: get the cypress in a minute, but I want to 19 00:01:21,360 --> 00:01:25,319 Speaker 1: talk about what I consider your word toolbox. What's the 20 00:01:25,360 --> 00:01:29,920 Speaker 1: toolbox that Mario Draggi has if he has a constraint 21 00:01:30,319 --> 00:01:34,880 Speaker 1: of a German philosophy, a German economics and the cacophony 22 00:01:34,959 --> 00:01:39,440 Speaker 1: known as Italy. Well, the toolbooks he should start with 23 00:01:39,959 --> 00:01:43,240 Speaker 1: is the Treaty of the European Union that gives the 24 00:01:43,240 --> 00:01:48,560 Speaker 1: ECB supreme independence and one primary mandate, which the c 25 00:01:48,720 --> 00:01:51,640 Speaker 1: B has been missing. The c B has not been 26 00:01:51,680 --> 00:01:56,000 Speaker 1: easy monetary policy sufficiently to reach inflation of just under 27 00:01:56,040 --> 00:01:59,840 Speaker 1: two percent, which is their objective, and they can uh 28 00:02:00,160 --> 00:02:04,280 Speaker 1: use the power of their balance it to to get there. Uh. 29 00:02:04,760 --> 00:02:08,240 Speaker 1: You mentioned Germany and political constraint. This is what the 30 00:02:08,400 --> 00:02:12,200 Speaker 1: c B should have been ignoring while they meet their mandate. 31 00:02:13,240 --> 00:02:17,000 Speaker 1: But Mr orphanedez if, like the markets believe Mario Druggie 32 00:02:17,160 --> 00:02:22,359 Speaker 1: will extend QUEI today. What are the implications of tapering? 33 00:02:22,440 --> 00:02:26,080 Speaker 1: Does it make it that much harder to then withdraw 34 00:02:26,240 --> 00:02:30,960 Speaker 1: some of the support? Frankly, I think talk of tapering 35 00:02:31,240 --> 00:02:35,399 Speaker 1: was premature in the in the Euro Area. Let's let's 36 00:02:35,440 --> 00:02:38,280 Speaker 1: go back to the basics. Core inflation in the EU 37 00:02:38,440 --> 00:02:41,680 Speaker 1: Area has been at or below one percent for almost 38 00:02:41,680 --> 00:02:45,560 Speaker 1: four years running. Just to just to understand how severe. 39 00:02:45,680 --> 00:02:49,240 Speaker 1: The undershoot of inflation is monetary policy should have been 40 00:02:49,280 --> 00:02:52,480 Speaker 1: far more expansionary, and this is what should have been 41 00:02:52,480 --> 00:02:55,760 Speaker 1: done by expanding the balance it the CB started expanding 42 00:02:55,880 --> 00:02:59,560 Speaker 1: balance its way too late. They only started QUEI in 43 00:02:59,560 --> 00:03:02,600 Speaker 1: in mark of twenty fifteen, and they did not do 44 00:03:02,680 --> 00:03:06,040 Speaker 1: it at a pace that is sufficient to make up 45 00:03:06,080 --> 00:03:09,720 Speaker 1: for the for the previous misses. Right now, in my view, 46 00:03:10,280 --> 00:03:14,280 Speaker 1: they should actually announce that they will continue the asset 47 00:03:14,400 --> 00:03:19,760 Speaker 1: purchases throughout seventeen UH and frankly they may need to 48 00:03:19,800 --> 00:03:22,959 Speaker 1: do much more of that. The fact that they've delayed 49 00:03:23,880 --> 00:03:27,240 Speaker 1: initiating the que program is what creates a difficulty they 50 00:03:27,280 --> 00:03:29,240 Speaker 1: have right now where they have to do much more 51 00:03:29,520 --> 00:03:32,680 Speaker 1: than they would otherwise would have to right so this 52 00:03:32,760 --> 00:03:36,400 Speaker 1: is extremely significant. Mr Orphanidez, When do you think tapering 53 00:03:36,520 --> 00:03:38,560 Speaker 1: should start? If you think it was premature to talk 54 00:03:38,600 --> 00:03:40,680 Speaker 1: about it two months ago, and if you believe that 55 00:03:40,720 --> 00:03:47,280 Speaker 1: there's more quee coming, are we talking tapering in eighteen? Even? Frankly, 56 00:03:47,880 --> 00:03:51,240 Speaker 1: eighteen would probably be be a reasonable guest right now, 57 00:03:51,280 --> 00:03:54,160 Speaker 1: but only if they do the appropriate monetary policy in 58 00:03:54,240 --> 00:03:58,280 Speaker 1: coming months. The longer they have two tight conditions, then 59 00:03:58,600 --> 00:04:01,320 Speaker 1: the longer we have inflation that is too low, and 60 00:04:01,400 --> 00:04:03,520 Speaker 1: as long as inflation is too low, it's really pretty 61 00:04:03,600 --> 00:04:07,040 Speaker 1: mature to talk about tapering. If they were to really 62 00:04:07,080 --> 00:04:10,400 Speaker 1: extend the pace of US purchases, in my view, they 63 00:04:10,440 --> 00:04:14,280 Speaker 1: should have increased the right there, the pace of purchases 64 00:04:15,080 --> 00:04:18,000 Speaker 1: over the next year. Then they could be too Then 65 00:04:18,000 --> 00:04:20,440 Speaker 1: they could be talking about tapering in twenty eight. If 66 00:04:20,440 --> 00:04:23,960 Speaker 1: they keep under delivering, then that that may have to 67 00:04:24,000 --> 00:04:28,000 Speaker 1: come even later. In the last weeks or so, Professor, 68 00:04:28,040 --> 00:04:31,480 Speaker 1: any number of times I have cited Cypress is an 69 00:04:31,520 --> 00:04:36,360 Speaker 1: example of clearing markets, of facing crisis, of making tough decisions. 70 00:04:36,680 --> 00:04:39,679 Speaker 1: You live that with your Cypress a few years back. 71 00:04:40,080 --> 00:04:44,240 Speaker 1: What can Italy, as an example, learn from your experience 72 00:04:44,400 --> 00:04:48,440 Speaker 1: and your leader's experience in Cypress in clearing markets. What 73 00:04:48,480 --> 00:04:53,039 Speaker 1: does Italy need to learn and do well? To tell 74 00:04:53,080 --> 00:04:56,960 Speaker 1: you the truth? I hope that that Cyprus is not 75 00:04:57,560 --> 00:05:01,360 Speaker 1: comparable to Twitterly, what we seen in Cyprus in twenty 76 00:05:01,480 --> 00:05:05,599 Speaker 1: thirteen was unnecessary in distraction. I remember I was watching 77 00:05:05,640 --> 00:05:10,760 Speaker 1: that from from Boston in dismay. This was just an 78 00:05:10,839 --> 00:05:15,120 Speaker 1: example of the gratuitous distraction of the real economy that 79 00:05:15,200 --> 00:05:17,599 Speaker 1: has been going on during the crisis. I hope we 80 00:05:17,720 --> 00:05:20,560 Speaker 1: do not see something like that in in Italy. What 81 00:05:20,680 --> 00:05:24,279 Speaker 1: we need in Italy is is well known. First of all, 82 00:05:24,520 --> 00:05:29,160 Speaker 1: the talent government should implement more structural reforms so that 83 00:05:29,240 --> 00:05:33,320 Speaker 1: the medium term growth can can rise. And then second 84 00:05:33,480 --> 00:05:35,960 Speaker 1: we actually need a boost in aggregate demand, which is 85 00:05:36,000 --> 00:05:38,720 Speaker 1: where the c B comes in. By maintaining two tight 86 00:05:38,760 --> 00:05:42,560 Speaker 1: monetary policy, nominal income growth in Italy is too low, 87 00:05:43,320 --> 00:05:47,400 Speaker 1: this actually deteriorate and that dynamics. This makes a fairm 88 00:05:47,440 --> 00:05:51,760 Speaker 1: profitability lower, This raises npls. So the fact that we're 89 00:05:51,760 --> 00:05:54,880 Speaker 1: talking about say banking issue in Italy right now, well, 90 00:05:54,920 --> 00:05:58,400 Speaker 1: this is policy made. This isn't bad banks. The banking 91 00:05:58,400 --> 00:06:00,880 Speaker 1: system in in Italy was a really very good shape 92 00:06:00,880 --> 00:06:03,000 Speaker 1: at the beginning of the crisis. But if you have 93 00:06:03,080 --> 00:06:05,640 Speaker 1: a five year long recession, then you end up with 94 00:06:06,080 --> 00:06:08,039 Speaker 1: problem to the banks as well. Okay, let's do this. 95 00:06:08,120 --> 00:06:10,599 Speaker 1: My question to Richard Clarida doesn't matter. Would you ask 96 00:06:10,600 --> 00:06:14,120 Speaker 1: a question please, if your colleague Mr Richard Clarata with 97 00:06:14,200 --> 00:06:19,760 Speaker 1: the Nazis athanasios, uh, you know, both of us are 98 00:06:19,760 --> 00:06:24,080 Speaker 1: wants and there's been some discussion increased in recent years 99 00:06:24,120 --> 00:06:28,200 Speaker 1: on the FED and potentially other central banks. Uh. Reprofiling 100 00:06:28,200 --> 00:06:31,560 Speaker 1: inflation targeting to price level targeting. The e CP is 101 00:06:31,600 --> 00:06:33,920 Speaker 1: not the only central bank that's fallen short. The Fed's 102 00:06:33,920 --> 00:06:38,480 Speaker 1: fallen short of its inflation target for four years. And so, 103 00:06:38,640 --> 00:06:40,920 Speaker 1: without getting into whether or not central banks should do that, 104 00:06:40,920 --> 00:06:43,000 Speaker 1: do you think in the next five years we'll see 105 00:06:43,040 --> 00:06:48,800 Speaker 1: a major central bank redefined inflation targeting? Is price level targeting? Well, 106 00:06:48,880 --> 00:06:51,520 Speaker 1: that's that's that's a very good question if we are 107 00:06:51,600 --> 00:06:54,839 Speaker 1: to see one, my bed would be on starting with 108 00:06:54,920 --> 00:06:58,080 Speaker 1: the Bank of Canada. Bank of Canada has a has 109 00:06:58,120 --> 00:07:01,680 Speaker 1: a story of actually considered what is best practice over 110 00:07:01,760 --> 00:07:04,640 Speaker 1: the years and trying to do this. When I'm thinking 111 00:07:04,680 --> 00:07:07,080 Speaker 1: about the Federal Reserve, I think the Federal Reserve, even 112 00:07:07,080 --> 00:07:09,640 Speaker 1: though it came late, it has managed to achieve price 113 00:07:09,720 --> 00:07:13,360 Speaker 1: ability and it has actually crossed over beyond full employment, 114 00:07:13,360 --> 00:07:16,160 Speaker 1: which has over done it. So really, in the case 115 00:07:16,200 --> 00:07:18,520 Speaker 1: of the c B, I would have been so happy 116 00:07:18,640 --> 00:07:23,320 Speaker 1: if they could just do what their mandate has been 117 00:07:23,440 --> 00:07:25,840 Speaker 1: over the last two years, over the last several years. 118 00:07:26,040 --> 00:07:29,080 Speaker 1: Before we start talking about about price level targeting, I 119 00:07:29,160 --> 00:07:31,040 Speaker 1: want to have to agree with you. If we had 120 00:07:31,120 --> 00:07:34,480 Speaker 1: price level targeting, things would have been easier. In the 121 00:07:34,560 --> 00:07:36,520 Speaker 1: current point. I need to go to both you. This 122 00:07:36,600 --> 00:07:39,960 Speaker 1: is crucial. Professor of Finiti is John B. Taylor's name 123 00:07:40,000 --> 00:07:43,200 Speaker 1: has been vetted to after we move on from yelling 124 00:07:43,280 --> 00:07:46,560 Speaker 1: if we have a Trump administration, John Taylor with the 125 00:07:46,640 --> 00:07:50,160 Speaker 1: more rules based theme than discretion. Is that an appropriate 126 00:07:50,240 --> 00:07:54,280 Speaker 1: stance of the US Federal Reserve system in my view? 127 00:07:54,320 --> 00:07:57,240 Speaker 1: And John Taylor is an excellent candidate for the for 128 00:07:57,400 --> 00:08:00,760 Speaker 1: the Federal Reserve. I think we do it to hold 129 00:08:00,840 --> 00:08:04,680 Speaker 1: central banks accountable to their mandate. Same thing I've been 130 00:08:04,680 --> 00:08:06,800 Speaker 1: saying about the c B I could say about the FED. 131 00:08:07,080 --> 00:08:08,880 Speaker 1: The Fed has done a better job than they have 132 00:08:08,960 --> 00:08:12,640 Speaker 1: been the last several years. Still being more systematic and 133 00:08:12,720 --> 00:08:17,320 Speaker 1: accountable would be an improvement for the next ten, ten, 134 00:08:17,360 --> 00:08:21,160 Speaker 1: twenty years. Anatalia, so often it is how do you 135 00:08:21,280 --> 00:08:24,000 Speaker 1: view or how would your view were you still an 136 00:08:24,000 --> 00:08:26,600 Speaker 1: ECB board member. The referendum in it today, does it 137 00:08:26,880 --> 00:08:29,480 Speaker 1: push and press more, you drug it to do more? 138 00:08:29,960 --> 00:08:32,080 Speaker 1: Or would you still say that he needs to put 139 00:08:32,440 --> 00:08:35,560 Speaker 1: even if we didn't have the referendum giving Renzi sixty 140 00:08:35,640 --> 00:08:40,680 Speaker 1: percent of no votes. Well, listen, the rise of populism 141 00:08:40,880 --> 00:08:45,079 Speaker 1: is a concern in the euro Area. But what's the 142 00:08:45,120 --> 00:08:49,360 Speaker 1: best way to fight populism, deliver growth. So, frankly, I 143 00:08:49,480 --> 00:08:51,880 Speaker 1: go back to my basic recipe. If the c B 144 00:08:52,120 --> 00:08:55,160 Speaker 1: had been doing its job, growth would have been faster 145 00:08:55,320 --> 00:08:57,520 Speaker 1: in the euro Area. That would have been the best 146 00:08:57,600 --> 00:09:00,520 Speaker 1: defense against the rise of populism. I do worry about 147 00:09:00,559 --> 00:09:05,120 Speaker 1: political factors. We have elections coming up in in in Europe, 148 00:09:05,120 --> 00:09:07,240 Speaker 1: we have the Netherlands, we have France, we have we 149 00:09:07,360 --> 00:09:11,760 Speaker 1: have Germany, and we see populism anywhere. Frankly, the establishment 150 00:09:11,880 --> 00:09:16,080 Speaker 1: recipe is not working. We actually do need to deliver 151 00:09:16,240 --> 00:09:20,240 Speaker 1: more growth with easier policy. And this is we've been 152 00:09:20,240 --> 00:09:22,400 Speaker 1: talking about the c B. I have to say, and 153 00:09:22,600 --> 00:09:25,120 Speaker 1: and here I should give praise to the European Commission 154 00:09:25,280 --> 00:09:28,080 Speaker 1: last month, for the first time in their history, they 155 00:09:28,080 --> 00:09:30,920 Speaker 1: actually took a stance on phisical policy for the U 156 00:09:31,200 --> 00:09:33,839 Speaker 1: as a whole and the knowledge that phisical policy is 157 00:09:33,880 --> 00:09:37,880 Speaker 1: too tight as well. Right now, Athana is with us 158 00:09:38,160 --> 00:09:40,079 Speaker 1: from Boston. He is with m I T and with 159 00:09:40,200 --> 00:09:43,520 Speaker 1: Colombia and PIMCO. Richard Claria, Professor Claire, let me start. 160 00:09:43,679 --> 00:09:46,240 Speaker 1: You bring up the dots right now and basically the 161 00:09:46,360 --> 00:09:49,400 Speaker 1: vigilantees and Cherry Yellen are finally on the same page. 162 00:09:49,400 --> 00:09:51,319 Speaker 1: Is at the correct state. You know, that's why I 163 00:09:51,400 --> 00:09:53,200 Speaker 1: love the show, because you nailed it. For the last 164 00:09:53,280 --> 00:09:56,600 Speaker 1: three years, the dots have been detached on the markets, 165 00:09:56,600 --> 00:09:58,120 Speaker 1: and the dots have been doing all the moving, the 166 00:09:58,200 --> 00:10:01,680 Speaker 1: red lines coming up in all asked five weeks, we've 167 00:10:01,679 --> 00:10:04,120 Speaker 1: actually had market pricing move up towards the dots. So 168 00:10:04,360 --> 00:10:07,319 Speaker 1: it actually can go both ways. Okay, within that, there's 169 00:10:07,360 --> 00:10:10,280 Speaker 1: the dots, Professor fern Needs and I mean this with 170 00:10:10,440 --> 00:10:13,200 Speaker 1: great respect for your research at the FED years ago. 171 00:10:14,000 --> 00:10:18,880 Speaker 1: Does your toolbox include the dots? No, no, it did not. 172 00:10:20,080 --> 00:10:23,400 Speaker 1: And as a matter of fact, I don't think that 173 00:10:23,960 --> 00:10:26,160 Speaker 1: that having the dots out there is a good idea. 174 00:10:27,000 --> 00:10:31,000 Speaker 1: It creates this this disconnect between markets and the f MC. 175 00:10:31,120 --> 00:10:33,480 Speaker 1: I would much rather that the FAT says we're going 176 00:10:33,520 --> 00:10:35,559 Speaker 1: to do our job and deliver price stability and full 177 00:10:35,640 --> 00:10:38,960 Speaker 1: employment without trying to guess what the FED funds there 178 00:10:39,000 --> 00:10:41,920 Speaker 1: is going to be three years out all right, and 179 00:10:42,240 --> 00:10:44,480 Speaker 1: mr finding this. I'm here in London and actually the 180 00:10:44,600 --> 00:10:46,640 Speaker 1: NPC is very different to what the FED used to 181 00:10:46,679 --> 00:10:48,160 Speaker 1: be like, and a lot of people saying, well, look, 182 00:10:48,200 --> 00:10:50,360 Speaker 1: the FEED is now trying to be more like NPC 183 00:10:50,559 --> 00:10:54,320 Speaker 1: have different views, They argue, not openly but you hear 184 00:10:54,520 --> 00:10:57,199 Speaker 1: very different things. Is it more confusing for a central 185 00:10:57,240 --> 00:11:01,160 Speaker 1: bank to be transparent or not? Well, I think there 186 00:11:01,240 --> 00:11:04,719 Speaker 1: are there are limits to how useful transparency can be, 187 00:11:05,360 --> 00:11:07,400 Speaker 1: and in the case of the FED, I think that 188 00:11:07,520 --> 00:11:10,960 Speaker 1: those limits have been crossed. The dots were a very 189 00:11:11,080 --> 00:11:14,240 Speaker 1: useful device to have during the crisis when the FED 190 00:11:14,400 --> 00:11:16,840 Speaker 1: was trying to communicate that it would keep interest rates 191 00:11:17,800 --> 00:11:21,600 Speaker 1: low for much longer than the markets thought at the time. 192 00:11:21,640 --> 00:11:24,840 Speaker 1: It was a useful tool. But frankly, when you are 193 00:11:24,880 --> 00:11:28,120 Speaker 1: in the business of providing guesses for things you don't 194 00:11:28,280 --> 00:11:31,079 Speaker 1: know about, like FED funds three years out, this is 195 00:11:31,160 --> 00:11:35,240 Speaker 1: where you cross the limits of transparency and you end 196 00:11:35,360 --> 00:11:42,640 Speaker 1: up risking misinforming investors rather than providing useful information. Do 197 00:11:42,720 --> 00:11:44,920 Speaker 1: you agree with that, Richard? And you know, on the 198 00:11:45,000 --> 00:11:47,280 Speaker 1: basis of it, it was basically to give the market 199 00:11:47,320 --> 00:11:49,800 Speaker 1: a glimpse of how people were thinking, even if they 200 00:11:49,840 --> 00:11:51,760 Speaker 1: were wrong. Well, there are a lot of problems with 201 00:11:51,800 --> 00:11:54,000 Speaker 1: the doctors I've said, I think on your show, you know, 202 00:11:54,080 --> 00:11:57,319 Speaker 1: the dots are very precisely answer to an uninteresting question. 203 00:11:57,720 --> 00:12:00,679 Speaker 1: That being said, I think there are there's information and 204 00:12:00,840 --> 00:12:02,439 Speaker 1: if I were doing it, I would I would not 205 00:12:02,559 --> 00:12:04,560 Speaker 1: get rid of the dots. I would I would refine 206 00:12:05,000 --> 00:12:07,440 Speaker 1: uh and and improve them. But I agree they've created 207 00:12:07,480 --> 00:12:10,360 Speaker 1: as many headaches as they've solved in the last couple 208 00:12:10,400 --> 00:12:12,880 Speaker 1: of years. Let me rip up the script here, and 209 00:12:12,880 --> 00:12:14,920 Speaker 1: I think this is important. Mr Bullet out of St. 210 00:12:15,000 --> 00:12:18,360 Speaker 1: Louis is an original guy in part of his latest theory, 211 00:12:18,400 --> 00:12:21,440 Speaker 1: and he will say, this is a small, non vetted paper. 212 00:12:22,120 --> 00:12:24,160 Speaker 1: You know, I'm dealing here with heavyweights Claire and or 213 00:12:24,200 --> 00:12:26,760 Speaker 1: Fans and Bullard. I don't want to get Mr Bullard 214 00:12:26,840 --> 00:12:29,520 Speaker 1: upset at me, but he talks about don't move until 215 00:12:29,520 --> 00:12:32,800 Speaker 1: there's a regime change. Is James Bullard getting his regime 216 00:12:32,920 --> 00:12:36,680 Speaker 1: change or some well that's to be determinable. Only weigh 217 00:12:36,679 --> 00:12:38,959 Speaker 1: in on that. Jim is very thoughtful and and the 218 00:12:39,040 --> 00:12:41,880 Speaker 1: basic point he's making is when I have some sympathy 219 00:12:42,000 --> 00:12:43,840 Speaker 1: with which is you need to think of a rules 220 00:12:43,880 --> 00:12:47,360 Speaker 1: based policy as a guide post um. And I've called 221 00:12:47,360 --> 00:12:49,719 Speaker 1: it a forward looking Taylor rule. And essentially what he's 222 00:12:49,720 --> 00:12:52,440 Speaker 1: saying is that the problem right now is it's very 223 00:12:52,480 --> 00:12:55,000 Speaker 1: hard to look into the future because we can either 224 00:12:55,080 --> 00:12:57,720 Speaker 1: be stuck in a low interest rate equilibrium, in which 225 00:12:57,720 --> 00:12:59,760 Speaker 1: case we're never going to hike more than once or twice, 226 00:13:00,200 --> 00:13:02,000 Speaker 1: or we go back to a better accolademy will be 227 00:13:02,080 --> 00:13:04,120 Speaker 1: hawking a lot. Since I don't know, I'm not going 228 00:13:04,160 --> 00:13:07,360 Speaker 1: to give up FORKA. This is this is critical, Professor Orphan. 229 00:13:07,440 --> 00:13:09,280 Speaker 1: It is if it's an ex and A we're out 230 00:13:09,360 --> 00:13:12,480 Speaker 1: front fed or it's an ex post, we gotta wait, wait, 231 00:13:12,559 --> 00:13:16,680 Speaker 1: wait till after the fact fed, which is given Professor 232 00:13:17,000 --> 00:13:22,640 Speaker 1: Dr Bullard's great interest in a regime change before you act, 233 00:13:23,080 --> 00:13:26,160 Speaker 1: are we at that point? Well, I wouldn't put so 234 00:13:26,320 --> 00:13:30,040 Speaker 1: much emphasis on the regime change perces as in what 235 00:13:30,240 --> 00:13:33,160 Speaker 1: Riach said, which is, we really don't know where the 236 00:13:33,200 --> 00:13:34,839 Speaker 1: fat funds er should be going to have. We have 237 00:13:35,040 --> 00:13:38,000 Speaker 1: too much, too much uncertainty in too many UH, in 238 00:13:38,120 --> 00:13:41,480 Speaker 1: too many mothers. There has been the discussion on what 239 00:13:41,679 --> 00:13:44,160 Speaker 1: is the equilibrium really interest rate for the past several years. 240 00:13:44,360 --> 00:13:46,839 Speaker 1: It's one of the reasons why you really should not 241 00:13:47,080 --> 00:13:50,319 Speaker 1: think that you can't tell a priority what the fat 242 00:13:50,360 --> 00:13:52,520 Speaker 1: funds wer should be so so much way out. The 243 00:13:52,640 --> 00:13:55,560 Speaker 1: way to do this, UH is really to to look 244 00:13:55,640 --> 00:13:59,599 Speaker 1: at what is the distribution of risks for inflation and 245 00:13:59,760 --> 00:14:03,160 Speaker 1: for economic activity and make sure you're guiding policies so 246 00:14:03,400 --> 00:14:06,680 Speaker 1: that so that risks are balanced going forward. This is why, 247 00:14:07,040 --> 00:14:09,880 Speaker 1: in my view, for example, the FEDS should should have 248 00:14:09,960 --> 00:14:13,199 Speaker 1: been acting much faster with an employment rate going so 249 00:14:13,400 --> 00:14:17,280 Speaker 1: low and now crossing reasonable estimates of the full employment, 250 00:14:17,800 --> 00:14:20,360 Speaker 1: they should have been already moving up. You don't need 251 00:14:20,440 --> 00:14:21,960 Speaker 1: to know what the FATS front is going to be 252 00:14:22,240 --> 00:14:24,440 Speaker 1: three years ound in order to say, hey, you know 253 00:14:24,680 --> 00:14:29,120 Speaker 1: we actually need somewhat tighter monetary policy today, right, because 254 00:14:29,160 --> 00:14:31,480 Speaker 1: you just need to look at the data and that 255 00:14:32,200 --> 00:14:33,840 Speaker 1: you look at the data. You look at the data 256 00:14:34,000 --> 00:14:36,160 Speaker 1: and how the data you look at the data, and 257 00:14:36,240 --> 00:14:40,640 Speaker 1: how the data is influencing uh ther your forecasts and 258 00:14:40,760 --> 00:14:43,640 Speaker 1: the risks to the forecast a year or two out. 259 00:14:43,760 --> 00:14:46,680 Speaker 1: That's that's all you need to do. Very good, Thank 260 00:14:46,720 --> 00:15:04,120 Speaker 1: you so much. Jathani Finis, Massachusetts Institute of Technology. I 261 00:15:04,160 --> 00:15:05,840 Speaker 1: want to bring an Abbey Joseph Cohen now she is, 262 00:15:05,840 --> 00:15:08,480 Speaker 1: as I said, senior investment strategist at Goldman Sachs, President 263 00:15:08,920 --> 00:15:11,040 Speaker 1: of the Global Markets Institute. Great to have you with us, 264 00:15:11,960 --> 00:15:15,080 Speaker 1: Thank you so much. Happy to participate. Tell us a 265 00:15:15,120 --> 00:15:18,040 Speaker 1: bit about the the the interplay here between US equities 266 00:15:18,040 --> 00:15:20,800 Speaker 1: and what's going on in Frankfurt today. How are investors 267 00:15:20,840 --> 00:15:24,360 Speaker 1: here in the US watching what's happening with the ECB. Well, 268 00:15:24,560 --> 00:15:27,800 Speaker 1: clearly there's always attention when there's a decision to be 269 00:15:27,960 --> 00:15:31,160 Speaker 1: made by a major central bank, but let's step away 270 00:15:31,200 --> 00:15:33,080 Speaker 1: from that for a moment. It was all of this 271 00:15:33,240 --> 00:15:37,080 Speaker 1: discussion about monetary policy. I think when the history is 272 00:15:37,160 --> 00:15:40,080 Speaker 1: written of the last several years, the real story will 273 00:15:40,120 --> 00:15:44,040 Speaker 1: be the absence of fiscal policy. We see enormous pressure 274 00:15:44,080 --> 00:15:47,680 Speaker 1: on central banks, including the ECB and the SAID to 275 00:15:48,000 --> 00:15:51,040 Speaker 1: provide as much stimulus as they can through the use 276 00:15:51,120 --> 00:15:55,960 Speaker 1: of monetary policy, including some new tools that they've created 277 00:15:56,320 --> 00:15:59,360 Speaker 1: and put in their toolbox. On the other hand, I 278 00:15:59,440 --> 00:16:02,040 Speaker 1: think when we look at Europe in particular, what we 279 00:16:02,160 --> 00:16:05,280 Speaker 1: see is that, uh, they are facing a number of 280 00:16:05,320 --> 00:16:09,080 Speaker 1: other structural issues. There has been very little in the 281 00:16:09,160 --> 00:16:12,920 Speaker 1: way of fiscal policy because of the monstrous record. They've 282 00:16:12,960 --> 00:16:16,560 Speaker 1: been trying to keep their fiscal deficits as low as 283 00:16:16,760 --> 00:16:19,720 Speaker 1: as they can, but there are also the structural problems 284 00:16:19,800 --> 00:16:25,440 Speaker 1: in terms of slow labor force growth and also educational attainment, 285 00:16:25,720 --> 00:16:27,840 Speaker 1: which is not keeping up with the sort of jobs 286 00:16:27,880 --> 00:16:30,880 Speaker 1: that are being created. Since the election here in the US, 287 00:16:30,920 --> 00:16:35,000 Speaker 1: the conversation has centered squarely on the prospects for more 288 00:16:35,080 --> 00:16:39,680 Speaker 1: fiscal stimulus here in the US, tax reform changes to 289 00:16:39,760 --> 00:16:42,400 Speaker 1: the tax policy as well. What degree do you think 290 00:16:42,440 --> 00:16:45,320 Speaker 1: Europe is watching that? You mentioned the absence of fiscal 291 00:16:45,400 --> 00:16:48,440 Speaker 1: policy in Europe? How closely or policy makers they're paying 292 00:16:48,440 --> 00:16:50,240 Speaker 1: attention to what plays out here in the US over 293 00:16:50,240 --> 00:16:52,960 Speaker 1: the next I let's say six to twelve months couple. 294 00:16:53,040 --> 00:16:55,720 Speaker 1: Like everyone else, they're paying a great deal of attention 295 00:16:55,880 --> 00:17:00,680 Speaker 1: and wondering which way policy will actually settle. UM. You know, 296 00:17:00,760 --> 00:17:03,440 Speaker 1: there are a lot of discussions during the campaign, but 297 00:17:03,600 --> 00:17:07,680 Speaker 1: some of the specifics UM not only are not yet known, 298 00:17:08,080 --> 00:17:11,320 Speaker 1: but they may be at odds with what Republicans in 299 00:17:11,480 --> 00:17:15,560 Speaker 1: the House and Senate might like UH to move forward on. 300 00:17:15,760 --> 00:17:19,720 Speaker 1: So what do we think, what do we believe will happen? Yes, 301 00:17:19,800 --> 00:17:23,480 Speaker 1: I think everyone in the financial markets. Well, let me 302 00:17:23,560 --> 00:17:27,600 Speaker 1: not make that broad statement. Almost everyone in the financial 303 00:17:27,680 --> 00:17:31,680 Speaker 1: markets is assuming some form of fiscal stimulus. When we 304 00:17:31,800 --> 00:17:34,920 Speaker 1: look at corporate tax reform, what we do know is 305 00:17:35,000 --> 00:17:38,920 Speaker 1: that during the Obama administration there has been support on 306 00:17:39,040 --> 00:17:41,959 Speaker 1: the Democratic side of the aisle for corporate tax reform. 307 00:17:42,400 --> 00:17:46,639 Speaker 1: Some of the proposals not all that different in context, 308 00:17:47,000 --> 00:17:51,560 Speaker 1: UH than the Republican proposals, but nothing happened during Mr 309 00:17:51,680 --> 00:17:55,000 Speaker 1: Obama's terms of office, in large part because the Democrats 310 00:17:55,119 --> 00:17:59,640 Speaker 1: didn't want to separate corporate tax reform from individual tax 311 00:17:59,720 --> 00:18:03,680 Speaker 1: reform form. UM. If we can move forward now on 312 00:18:03,800 --> 00:18:06,720 Speaker 1: the corporate tax reform, we are expecting to see a 313 00:18:06,840 --> 00:18:10,119 Speaker 1: reduction in what's called the statutory tax rate, but that 314 00:18:10,320 --> 00:18:14,639 Speaker 1: happens through the elimination of other deductions and credits and 315 00:18:14,760 --> 00:18:17,520 Speaker 1: so on. UM, and so what we'll be looking for 316 00:18:17,880 --> 00:18:21,200 Speaker 1: is the effective tax rate. The effect tax rate for 317 00:18:21,240 --> 00:18:25,440 Speaker 1: the SMP five is now below It's not the thirty 318 00:18:25,480 --> 00:18:29,280 Speaker 1: eight or thirty nine percent that so many people speak about. Uh. 319 00:18:29,400 --> 00:18:31,960 Speaker 1: The other thing that many people are focused on, of course, 320 00:18:32,080 --> 00:18:36,560 Speaker 1: is repatriation of the money that is sitting outside the 321 00:18:36,680 --> 00:18:40,480 Speaker 1: United States. Uh. These are the results of profits earned 322 00:18:40,520 --> 00:18:44,160 Speaker 1: by US companies outside the United States where the tax rates, 323 00:18:44,240 --> 00:18:47,280 Speaker 1: the statutory rates are lower, and they didn't want to 324 00:18:47,320 --> 00:18:50,680 Speaker 1: get hit by the double whammy of bringing these back 325 00:18:50,760 --> 00:18:54,200 Speaker 1: repatriating these funds at a higher rate. I think there'll 326 00:18:54,240 --> 00:18:56,760 Speaker 1: be a lot of discussion of that repatriation, how this 327 00:18:56,960 --> 00:19:00,320 Speaker 1: gets done. Even within the Republican Party, there's seemed to 328 00:19:00,359 --> 00:19:03,920 Speaker 1: be two or three separate proposals. One of the things 329 00:19:04,000 --> 00:19:08,600 Speaker 1: that we see happening for investors is that there adjusting 330 00:19:08,680 --> 00:19:12,520 Speaker 1: their portfolios to look at these companies that may be 331 00:19:12,680 --> 00:19:16,760 Speaker 1: bringing their money back, etcetera. We don't yet know whether 332 00:19:16,880 --> 00:19:22,440 Speaker 1: that money can be used directly for share repurchases for 333 00:19:22,760 --> 00:19:25,440 Speaker 1: m and A activity, or as many of the Democrats 334 00:19:25,520 --> 00:19:29,720 Speaker 1: have suggested, there should be some link between repatriation and 335 00:19:30,080 --> 00:19:33,560 Speaker 1: reinvestment of that money in the United States for things 336 00:19:33,640 --> 00:19:36,960 Speaker 1: like cathics and job creation. And now it sounds like 337 00:19:37,000 --> 00:19:38,680 Speaker 1: from from what you're describing that there is there is 338 00:19:38,760 --> 00:19:41,240 Speaker 1: no shortage of uncertainty. And I wonder what you make 339 00:19:41,280 --> 00:19:44,320 Speaker 1: of the market reaction. Sort of in the immediate aftermath 340 00:19:44,560 --> 00:19:46,560 Speaker 1: of the election, we saw a lot of investors betting 341 00:19:46,600 --> 00:19:48,879 Speaker 1: on the prospects of of stimulus here, betting on the 342 00:19:48,960 --> 00:19:53,760 Speaker 1: prospect of investment in infrastructure. Say, have have calmer minds prevail? 343 00:19:53,840 --> 00:19:56,920 Speaker 1: Of clear minds prevailed if things calmed out a bit, Well, 344 00:19:57,119 --> 00:19:59,960 Speaker 1: let me put it in two different phases. I find 345 00:20:00,080 --> 00:20:02,720 Speaker 1: may um if we harken back to some of the 346 00:20:02,800 --> 00:20:06,560 Speaker 1: conversations that I've had uh with you and Tom and 347 00:20:07,040 --> 00:20:10,440 Speaker 1: others over the last several months. The point I was 348 00:20:10,560 --> 00:20:15,159 Speaker 1: making is that based upon the dynamic of the U 349 00:20:15,320 --> 00:20:19,040 Speaker 1: S economy, the sort of profit generation, the job creation 350 00:20:19,119 --> 00:20:22,320 Speaker 1: that we were seeing, and so on, SMP five hundred 351 00:20:22,440 --> 00:20:26,560 Speaker 1: at DRED was the right number UH in my view 352 00:20:26,720 --> 00:20:29,160 Speaker 1: for the end of two thousand and sixteen. So that's 353 00:20:29,160 --> 00:20:32,840 Speaker 1: where we are UM number one, number two. The other 354 00:20:32,960 --> 00:20:36,160 Speaker 1: point that I made very strongly is that I thought 355 00:20:36,200 --> 00:20:39,560 Speaker 1: that interest rates have been way too low UH. And 356 00:20:39,720 --> 00:20:42,760 Speaker 1: so we have in fact seen a notable rise in rates, 357 00:20:43,240 --> 00:20:47,520 Speaker 1: but they're still below what our fixed income teams might 358 00:20:47,640 --> 00:20:50,840 Speaker 1: consider to be fair value UM. And so we do 359 00:20:51,000 --> 00:20:55,080 Speaker 1: think that said will be raising rates here in December. 360 00:20:55,240 --> 00:20:58,639 Speaker 1: We think that will be some ongoing moves. Yes, that's 361 00:20:58,920 --> 00:21:01,639 Speaker 1: the so called policy he rates. But we have already 362 00:21:01,720 --> 00:21:05,400 Speaker 1: seen intermediate and long yields move higher. With a ten 363 00:21:05,520 --> 00:21:08,560 Speaker 1: year at about a two point four percent, we think 364 00:21:08,640 --> 00:21:11,000 Speaker 1: in the coming months we ought to be seeing it 365 00:21:11,200 --> 00:21:13,840 Speaker 1: something like two point seven. So, to get back to 366 00:21:13,920 --> 00:21:16,760 Speaker 1: your question, much of what has happened in the markets 367 00:21:17,280 --> 00:21:21,840 Speaker 1: since the election have been consistent with an underlying economy 368 00:21:22,119 --> 00:21:25,600 Speaker 1: that is growing UH, that seems to have very good 369 00:21:25,960 --> 00:21:30,159 Speaker 1: legs as stable UM is generating good corporate profits and 370 00:21:30,280 --> 00:21:34,200 Speaker 1: so on. If we turn our attention to the stock selection. 371 00:21:35,000 --> 00:21:37,960 Speaker 1: What we see, uh, is that we've already moved into 372 00:21:38,000 --> 00:21:41,480 Speaker 1: a different phase. The first phase of the post election 373 00:21:41,640 --> 00:21:45,480 Speaker 1: rally had to do with infrastructure companies, with those that 374 00:21:45,520 --> 00:21:48,560 Speaker 1: would benefit from it, those that might benefit from a 375 00:21:48,680 --> 00:21:52,080 Speaker 1: change in the regulatory environment, and so on. And now 376 00:21:52,160 --> 00:21:55,239 Speaker 1: we've seen a real move towards what my colleagues are 377 00:21:55,280 --> 00:22:00,520 Speaker 1: referring to as the reflation trade. Basically, the economy doing well, 378 00:22:01,040 --> 00:22:06,239 Speaker 1: inflation beginning to move up, prices rising, wages moving up. 379 00:22:06,320 --> 00:22:08,600 Speaker 1: By the way, wages moving up is a good thing, 380 00:22:08,880 --> 00:22:11,320 Speaker 1: not a bad thing, um. And so we are seeing 381 00:22:11,640 --> 00:22:14,840 Speaker 1: a shift into some of the more cyclical aspects of 382 00:22:14,960 --> 00:22:18,960 Speaker 1: the stock market. When you look at a degree which 383 00:22:19,000 --> 00:22:20,840 Speaker 1: the next leg of this is going to be earnings driven, 384 00:22:20,880 --> 00:22:22,359 Speaker 1: what do you see and what's the cabalist going to 385 00:22:22,440 --> 00:22:26,320 Speaker 1: be for that? Um? If we just do the straight 386 00:22:26,359 --> 00:22:30,760 Speaker 1: analysis of earnings driven and so on, it looks okay, um. 387 00:22:30,920 --> 00:22:34,000 Speaker 1: And and so the S and P of forecasts for 388 00:22:34,200 --> 00:22:38,040 Speaker 1: two thousand and seventeen our team is showing an increase 389 00:22:38,119 --> 00:22:42,400 Speaker 1: of about um. The consensus is a little bit higher, 390 00:22:42,560 --> 00:22:46,200 Speaker 1: something like twelve or thirteen percent. So there seems to 391 00:22:46,320 --> 00:22:50,680 Speaker 1: be good earning support for still higher stock prices, and 392 00:22:50,800 --> 00:22:53,919 Speaker 1: that may in fact continue to drive the stock market 393 00:22:54,600 --> 00:22:58,720 Speaker 1: until we see what the actual policies will be from 394 00:22:58,760 --> 00:23:03,879 Speaker 1: the new administration. UH fiscal policy respecting stimulus, yes, but 395 00:23:04,000 --> 00:23:07,639 Speaker 1: it's also important to look at things like trade policy. Um. 396 00:23:07,960 --> 00:23:10,720 Speaker 1: One thing that I can't stress enough is the following. 397 00:23:11,160 --> 00:23:15,400 Speaker 1: Over the last decade, the US economy using GDP has 398 00:23:15,440 --> 00:23:20,800 Speaker 1: grown per adom about two The single fastest growing sector 399 00:23:21,000 --> 00:23:24,359 Speaker 1: of our economy has been trade, where the annual growth 400 00:23:24,520 --> 00:23:27,760 Speaker 1: rate has been about six percent. If in fact we 401 00:23:27,880 --> 00:23:32,960 Speaker 1: are moving into more of a protectionist era, that's not 402 00:23:33,400 --> 00:23:36,760 Speaker 1: so good, if you will, for US companies that have 403 00:23:36,880 --> 00:23:41,119 Speaker 1: been doing very well by exporting producing things here selling 404 00:23:41,200 --> 00:23:43,960 Speaker 1: them abroad. It is one of the truly most elegant 405 00:23:44,160 --> 00:23:48,280 Speaker 1: reading rarely, David, can you take a classic restaurant in 406 00:23:48,400 --> 00:23:51,440 Speaker 1: the classic hotel and not screw it up? They did 407 00:23:51,520 --> 00:23:54,760 Speaker 1: that here at the Pier Hotel with Perne was beautiful. 408 00:23:54,920 --> 00:23:58,399 Speaker 1: Is here for the power piece. I don't think I 409 00:23:58,440 --> 00:24:02,399 Speaker 1: can afford an orange juice. That's it's another water for 410 00:24:03,080 --> 00:24:05,639 Speaker 1: it is the power breakfast at the Pierre Hotel. This 411 00:24:05,800 --> 00:24:09,360 Speaker 1: is the hotel where Elizabeth Taylor lived, among other were 412 00:24:09,440 --> 00:24:12,159 Speaker 1: these sailor all lived here for years, and at the 413 00:24:12,320 --> 00:24:15,680 Speaker 1: very top of the hotel was a sconce. One of 414 00:24:15,720 --> 00:24:19,119 Speaker 1: the most important people in American investment in finance, the 415 00:24:19,240 --> 00:24:23,200 Speaker 1: late Martin's Wage. He helped court here on investment and 416 00:24:23,320 --> 00:24:25,879 Speaker 1: as our steam guest, who's Abby Joseph Cohen, It is 417 00:24:26,000 --> 00:24:30,000 Speaker 1: wonderful to speak to you from Marty's Wage's abode. As 418 00:24:30,080 --> 00:24:34,480 Speaker 1: you know, Uh, Marty's Wage always said, don't fight the Fed. 419 00:24:35,040 --> 00:24:37,639 Speaker 1: We can't fight Janet Yellen right now, so what do 420 00:24:37,880 --> 00:24:43,920 Speaker 1: we do? Marty's Wage also loved sitting wearing baseball attire. Um. 421 00:24:44,480 --> 00:24:47,359 Speaker 1: Something that I think many people don't know is that 422 00:24:47,520 --> 00:24:50,639 Speaker 1: he was an avid fan um and always had his 423 00:24:50,680 --> 00:24:54,359 Speaker 1: baseball cap with him. But but let's get back to business, 424 00:24:54,400 --> 00:24:57,200 Speaker 1: shall we. Um? What shall we talk about? Tom Well? 425 00:24:57,240 --> 00:24:59,879 Speaker 1: I think the FED. I think the idea of Mrs 426 00:25:00,160 --> 00:25:02,879 Speaker 1: It's a claim comment, don't fight the Fed. This is 427 00:25:02,920 --> 00:25:06,040 Speaker 1: a Fed in motion, isn't it? This is a Fed 428 00:25:06,200 --> 00:25:09,600 Speaker 1: in motion? But for good reason, our economy, in my 429 00:25:09,760 --> 00:25:13,240 Speaker 1: view and the view of many others, no longer requires 430 00:25:13,400 --> 00:25:17,879 Speaker 1: as much monetary stimulus. Obviously, they've been withdrawing the Kiwi. 431 00:25:18,160 --> 00:25:21,720 Speaker 1: They've begun to raise interest rates, and we think more 432 00:25:21,840 --> 00:25:26,000 Speaker 1: increases will becoming. The fact that intermediate long yields have 433 00:25:26,160 --> 00:25:29,200 Speaker 1: already moved up I think as a reflection not just 434 00:25:29,359 --> 00:25:32,600 Speaker 1: that investors are expecting the FED to move, but the 435 00:25:32,720 --> 00:25:36,520 Speaker 1: FED probably should. This is an economy that is growing 436 00:25:36,680 --> 00:25:38,919 Speaker 1: in this quarter two and a half to three percent. 437 00:25:39,400 --> 00:25:42,800 Speaker 1: Maybe that's goost a little bit by inventory accumulation, But 438 00:25:42,920 --> 00:25:45,040 Speaker 1: an economy that's been growing, let's call it about to 439 00:25:45,240 --> 00:25:49,120 Speaker 1: two and a half percent, generating lots of jobs. Wages 440 00:25:49,200 --> 00:25:52,359 Speaker 1: have begun to rise, many prices have begun to rise. 441 00:25:52,840 --> 00:25:55,800 Speaker 1: It's time for interest rates to move up. And by 442 00:25:55,840 --> 00:25:59,160 Speaker 1: the way, when they do, interest rates will still be low. 443 00:26:00,040 --> 00:26:03,640 Speaker 1: We are at record low levels. If they move up somewhat, 444 00:26:04,040 --> 00:26:07,120 Speaker 1: we don't think it's going to deter economic activity. It's 445 00:26:07,200 --> 00:26:10,800 Speaker 1: partial differential Thursday. So let's do that right now. Abby. 446 00:26:10,960 --> 00:26:13,040 Speaker 1: If we get the rays, if we get the feed 447 00:26:13,119 --> 00:26:15,760 Speaker 1: in action, if we get the president elect and action, 448 00:26:16,359 --> 00:26:20,320 Speaker 1: is it an increase in inflation out running an increase 449 00:26:20,600 --> 00:26:22,560 Speaker 1: in real growth or can we get the best of 450 00:26:22,600 --> 00:26:27,159 Speaker 1: all worlds? I believe initially we will have growth that 451 00:26:27,320 --> 00:26:31,200 Speaker 1: people focus on. The inflation will come later. The sort 452 00:26:31,240 --> 00:26:33,719 Speaker 1: of increases we're seeing in wages and so on now, 453 00:26:33,880 --> 00:26:37,560 Speaker 1: in my view, not particularly inflationary, because it's coming after 454 00:26:37,680 --> 00:26:41,200 Speaker 1: a period in which wages in many categories were stagnant. 455 00:26:41,560 --> 00:26:45,600 Speaker 1: Good wage growth is good for middle class consumption, obviously, 456 00:26:45,720 --> 00:26:48,920 Speaker 1: the number one largest sector of the U. S economy. 457 00:26:49,400 --> 00:26:53,520 Speaker 1: The inflation, I believe, always comes later when we begin 458 00:26:53,640 --> 00:26:57,280 Speaker 1: to see that there are capacity constraints UM in the 459 00:26:57,400 --> 00:27:02,280 Speaker 1: labor markets, UM in the production and capacity of the 460 00:27:02,400 --> 00:27:04,960 Speaker 1: US economy and so on. We haven't seen it. But 461 00:27:05,119 --> 00:27:09,000 Speaker 1: there's something else that I think will be pushing inflation 462 00:27:09,119 --> 00:27:12,639 Speaker 1: up somewhat, and that is commodity prices UM. We have 463 00:27:12,760 --> 00:27:15,960 Speaker 1: benefited for quite a while now from low energy prices 464 00:27:16,680 --> 00:27:21,480 Speaker 1: that has really pushed down headline cp I. Of course, 465 00:27:21,560 --> 00:27:24,680 Speaker 1: c p I UM never really got quite that low. 466 00:27:24,760 --> 00:27:28,080 Speaker 1: Core CPI has begun to rise, and the headline inflation, 467 00:27:28,160 --> 00:27:32,440 Speaker 1: of course, will reflect the increases not just an energy prices, 468 00:27:32,480 --> 00:27:35,080 Speaker 1: but ultimately some of the other commodities that we're seeing 469 00:27:35,160 --> 00:27:37,120 Speaker 1: move higher. Aby Joseph Co we have about a minute 470 00:27:37,200 --> 00:27:39,040 Speaker 1: left and we'll have to get you to join us here. 471 00:27:39,200 --> 00:27:40,840 Speaker 1: Next time you can. You can bring a baseball cap 472 00:27:40,920 --> 00:27:42,920 Speaker 1: if if you like, but let me ask you about 473 00:27:43,240 --> 00:27:45,320 Speaker 1: and I'm not one of those orange juices. There you go, 474 00:27:45,440 --> 00:27:48,320 Speaker 1: They're very They're delicious. Uh. We look at the dollar here, 475 00:27:48,520 --> 00:27:52,520 Speaker 1: Bloomer dollar spotted slightly weaker this morning. But the tale 476 00:27:52,520 --> 00:27:55,399 Speaker 1: of the strong dollar has been the overarching narrative here 477 00:27:55,400 --> 00:27:56,800 Speaker 1: for a while. How long do you expect that that 478 00:27:56,960 --> 00:27:59,760 Speaker 1: story to continue here? And do you expect this administration 479 00:27:59,800 --> 00:28:04,000 Speaker 1: to to a similar strong dollar policy. A dollar story, 480 00:28:04,280 --> 00:28:08,639 Speaker 1: or any currency story, is always a relative story, and 481 00:28:09,080 --> 00:28:12,280 Speaker 1: we tend to focus as Americans on what we're doing 482 00:28:12,720 --> 00:28:15,320 Speaker 1: that is pushing the dollar up. Let's keep in mind 483 00:28:15,400 --> 00:28:18,800 Speaker 1: that Europe is not looking all that robust. Other parts 484 00:28:18,840 --> 00:28:21,560 Speaker 1: of the world are not looking all that robust, and 485 00:28:21,680 --> 00:28:25,800 Speaker 1: that is contributing to the idea of dollar as reserve currency, 486 00:28:26,000 --> 00:28:29,680 Speaker 1: safe haven uh and and so on. Um. We think 487 00:28:29,760 --> 00:28:32,560 Speaker 1: the dollar will continue to rise relative to the euro 488 00:28:33,119 --> 00:28:35,760 Speaker 1: relative to some of these are the currencies, but on 489 00:28:35,880 --> 00:28:39,400 Speaker 1: a percentage basis, we've probably seen a good deal of 490 00:28:39,480 --> 00:28:42,680 Speaker 1: the move already. Keep in mind that all of the 491 00:28:42,800 --> 00:28:46,120 Speaker 1: things being equal, this is not great for economic growth. 492 00:28:46,720 --> 00:28:50,640 Speaker 1: If the as the dollar rises, our exports become less 493 00:28:50,680 --> 00:28:54,080 Speaker 1: competitively priced. The most recent trade data show that there 494 00:28:54,200 --> 00:28:57,040 Speaker 1: was some problem there. Abby, Thank you so much. Ms 495 00:28:57,080 --> 00:29:00,240 Speaker 1: Cohen appears this morning courtesy and Nicholas backs from of 496 00:29:00,280 --> 00:29:03,080 Speaker 1: the Washington Capital as they took it to the Bruins 497 00:29:03,760 --> 00:29:06,400 Speaker 1: last night. We will continue from the Pierre Hotel, the 498 00:29:06,440 --> 00:29:17,680 Speaker 1: Power Breakfast at the Pierre. This is Bloomberg. Who you 499 00:29:17,800 --> 00:29:21,240 Speaker 1: put your trust in? Matters. Investors have put their trust 500 00:29:21,320 --> 00:29:25,120 Speaker 1: in independent registered investment advisors to the tune of four 501 00:29:25,200 --> 00:29:29,160 Speaker 1: trillion dollars. Why they see their roles to serve, not sell. 502 00:29:29,680 --> 00:29:32,920 Speaker 1: That's why Charles Schwab is committed to the success over 503 00:29:33,080 --> 00:29:39,280 Speaker 1: seven thousand independent financial advisors who passionately dedicate themselves to 504 00:29:39,440 --> 00:29:44,240 Speaker 1: helping people achieve their financial goals. Learn more at find 505 00:29:44,440 --> 00:29:54,040 Speaker 1: your Independent Advisor dot com. It is a wonderful day 506 00:29:54,080 --> 00:29:56,920 Speaker 1: of celebration for Bloomberg Surveillance. My book of the year 507 00:29:57,680 --> 00:30:01,320 Speaker 1: is Kenna Rogoffs The Cursor Cash, which is exceptionally brave book. 508 00:30:01,880 --> 00:30:05,680 Speaker 1: And the first book has advanced uh in uh into 509 00:30:05,760 --> 00:30:09,800 Speaker 1: two thousand seventeen with the Undoing Project. And if I 510 00:30:09,840 --> 00:30:12,000 Speaker 1: didn't tell you who the author was, you say, Okay, Tom, 511 00:30:12,040 --> 00:30:14,840 Speaker 1: I trust you. I'm going to read the Undoing Project, 512 00:30:15,160 --> 00:30:16,920 Speaker 1: but we're gonna do the big long year and mentioned 513 00:30:16,960 --> 00:30:20,040 Speaker 1: that this is the new effort by one Michael Lewis. Michael, 514 00:30:20,040 --> 00:30:23,520 Speaker 1: good morning, Good morning, Tom. Congratulations you've done it again. 515 00:30:23,800 --> 00:30:26,160 Speaker 1: No one would ever think you would take within the 516 00:30:26,240 --> 00:30:29,760 Speaker 1: trade Kaman in Diversky and put it into the poetry 517 00:30:29,840 --> 00:30:33,560 Speaker 1: that you've done with the Undoing Project. Um. David Gurr 518 00:30:33,600 --> 00:30:36,160 Speaker 1: has got a million questions, as do I, But I 519 00:30:36,320 --> 00:30:39,120 Speaker 1: want to go to the heart of the matter, which 520 00:30:39,240 --> 00:30:43,320 Speaker 1: is how did you take the challenges and complexity of 521 00:30:43,520 --> 00:30:49,360 Speaker 1: game theory, psychology and really obtuse mathematics and bring it 522 00:30:49,720 --> 00:30:53,120 Speaker 1: as accessibly as you did to the Undoing Project? How 523 00:30:53,160 --> 00:30:55,640 Speaker 1: did you write the book? Um? The key to the 524 00:30:55,680 --> 00:30:57,800 Speaker 1: whole thing was the love story between the two men 525 00:30:58,480 --> 00:31:01,320 Speaker 1: and and the that was the That was the big 526 00:31:01,440 --> 00:31:04,560 Speaker 1: key that it gave that the relationship was so emotionally 527 00:31:04,720 --> 00:31:07,640 Speaker 1: charged and interesting, and the characters were so interesting that 528 00:31:07,720 --> 00:31:10,400 Speaker 1: I that I figured that that once you hooked with 529 00:31:10,520 --> 00:31:12,760 Speaker 1: the reader with the characters in that story, they'd follow 530 00:31:13,000 --> 00:31:15,160 Speaker 1: They follow you anywhere. And David jump in here. But 531 00:31:15,400 --> 00:31:17,400 Speaker 1: I really want to say that this is the one 532 00:31:18,360 --> 00:31:21,160 Speaker 1: Michael Lewis book where you can see the movie as 533 00:31:21,200 --> 00:31:24,720 Speaker 1: you read the book. And I never thought about common 534 00:31:24,800 --> 00:31:27,480 Speaker 1: in divers King. But I mean this is the sequel 535 00:31:27,560 --> 00:31:30,200 Speaker 1: to The Big Short. You can literally see the damn movie. 536 00:31:30,480 --> 00:31:32,680 Speaker 1: The book is so lively. Michael, talk a bit more 537 00:31:32,720 --> 00:31:36,280 Speaker 1: about that relationship. These two professors working together more than 538 00:31:36,360 --> 00:31:39,280 Speaker 1: just a professional relationship. They were very close friends, more 539 00:31:39,360 --> 00:31:42,600 Speaker 1: than just an academic relationship, because they were these Israelis 540 00:31:42,600 --> 00:31:44,800 Speaker 1: who were on and off the battlefield every six years, 541 00:31:44,840 --> 00:31:46,440 Speaker 1: you know. I mean they were dragged into the real 542 00:31:46,520 --> 00:31:49,160 Speaker 1: world in a way that academics seldom are, and had 543 00:31:49,240 --> 00:31:53,600 Speaker 1: huge influences on the real ward, like reshaping the Israeli military. Uh. 544 00:31:54,000 --> 00:31:58,120 Speaker 1: And the the relationship struck everybody around them as bizarre 545 00:31:58,320 --> 00:32:00,640 Speaker 1: because they were seen as opposite. I mean, it was 546 00:32:00,680 --> 00:32:05,120 Speaker 1: a Felix and Oscar relationship, and uh they were. It 547 00:32:05,320 --> 00:32:07,360 Speaker 1: was it was and what it was. And I think 548 00:32:07,400 --> 00:32:09,760 Speaker 1: what was so exciting to the two of them is 549 00:32:09,840 --> 00:32:12,479 Speaker 1: that they found they were different with each other than 550 00:32:12,520 --> 00:32:14,400 Speaker 1: they were with anybody else. They got into a room 551 00:32:14,400 --> 00:32:18,040 Speaker 1: and they became different people, and uh, they brought out 552 00:32:18,440 --> 00:32:20,920 Speaker 1: they brought out stuff in each other's minds that didn't 553 00:32:21,280 --> 00:32:23,920 Speaker 1: didn't come out except when they were with each other. 554 00:32:23,960 --> 00:32:25,520 Speaker 1: I mean it was it's if you look at their work, 555 00:32:26,520 --> 00:32:30,080 Speaker 1: what what Amos Tversky and Danny Knaman did together is 556 00:32:30,200 --> 00:32:32,600 Speaker 1: so different from anything either one of them did alone. 557 00:32:33,280 --> 00:32:35,240 Speaker 1: Uh it's it's like, I don't know, it's like two 558 00:32:35,240 --> 00:32:37,520 Speaker 1: people who can kind of sing, but when they get together, 559 00:32:37,600 --> 00:32:42,320 Speaker 1: it sounds beautiful. Uh So, the the the that was 560 00:32:42,400 --> 00:32:44,040 Speaker 1: part that was part of what interested in me is 561 00:32:44,120 --> 00:32:47,160 Speaker 1: that you had this collaboration that was just genuinely a collaboration. 562 00:32:47,240 --> 00:32:50,360 Speaker 1: You couldn't untangle the one from the other. And the 563 00:32:50,720 --> 00:32:52,680 Speaker 1: tragedy of the thing was that the world kind of 564 00:32:52,720 --> 00:32:55,240 Speaker 1: wouldn't let that love that be that they really wanted 565 00:32:55,280 --> 00:32:58,480 Speaker 1: to know who did what and assigned credit and all that, 566 00:32:58,760 --> 00:33:02,720 Speaker 1: and it horran the relationship. Michael Lewis they, of course 567 00:33:02,760 --> 00:33:05,280 Speaker 1: we're path breakers in the field is behavioral economics. For 568 00:33:05,360 --> 00:33:07,880 Speaker 1: those who don't know it, give us the definition what 569 00:33:08,040 --> 00:33:09,720 Speaker 1: is behavior like? Well, so it's funny you say that, 570 00:33:09,840 --> 00:33:13,000 Speaker 1: because yes, in a way, they they gave birth to 571 00:33:13,080 --> 00:33:15,680 Speaker 1: behavioral economics without even thinking they were that's what they 572 00:33:15,720 --> 00:33:17,400 Speaker 1: were doing. I mean it was like with a flick 573 00:33:17,440 --> 00:33:21,600 Speaker 1: of the risk because their work in sort of exploring 574 00:33:21,680 --> 00:33:25,640 Speaker 1: how the human mind deals with uncertainty and makes judgments 575 00:33:25,680 --> 00:33:30,040 Speaker 1: and decisions. Uh, was firmly withinside, you know, psychology, and 576 00:33:30,120 --> 00:33:32,160 Speaker 1: then it bleeds out in all kinds of ways when 577 00:33:32,200 --> 00:33:35,880 Speaker 1: they show that people are make systematic errors and and 578 00:33:36,080 --> 00:33:40,600 Speaker 1: behavioral economics is taking essentially taking on board. It's a 579 00:33:40,640 --> 00:33:43,560 Speaker 1: funny name for because what behavioral economics is is psychology. 580 00:33:44,720 --> 00:33:49,560 Speaker 1: It's it's it's it's taking, it's taking insights from psychology 581 00:33:49,720 --> 00:33:53,480 Speaker 1: and trying to play out play with their implications in 582 00:33:53,920 --> 00:33:57,160 Speaker 1: in in the economy. I think of behavioral economics and 583 00:33:57,200 --> 00:33:59,760 Speaker 1: how easily applied it is to to sports. I think 584 00:33:59,800 --> 00:34:02,920 Speaker 1: if your previous work, Tom brought up moneyball, were these 585 00:34:03,000 --> 00:34:06,520 Speaker 1: two guys sports fans that they see those applications when 586 00:34:06,560 --> 00:34:09,400 Speaker 1: they were doing their work. Amos Tversky very much so 587 00:34:09,600 --> 00:34:12,840 Speaker 1: Danny Danny Common didn't have much interested in sports, but 588 00:34:13,120 --> 00:34:18,640 Speaker 1: but Amos Tversky actually he was doing moneyball like stuff. 589 00:34:19,160 --> 00:34:22,640 Speaker 1: Uh way back in the eighties he was writing papers 590 00:34:22,680 --> 00:34:25,920 Speaker 1: about the myth of a hot hand in basketball or 591 00:34:26,040 --> 00:34:29,520 Speaker 1: that that he showed that streaked shooting was not actually 592 00:34:29,600 --> 00:34:35,200 Speaker 1: streaked shooting, that it was perfectly explainable as uh as 593 00:34:35,320 --> 00:34:38,759 Speaker 1: a kind of part of a random pattern. But they 594 00:34:39,040 --> 00:34:42,799 Speaker 1: they the more, the more direct connection with the whole 595 00:34:42,840 --> 00:34:46,080 Speaker 1: Moneyball stuff, is that that they they sort of ex 596 00:34:46,360 --> 00:34:51,320 Speaker 1: Their work explains, you know, why baseball scouts misjudge baseball players. 597 00:34:51,640 --> 00:34:53,719 Speaker 1: They explain what's going on in the minds of people 598 00:34:53,760 --> 00:34:56,960 Speaker 1: who were evaluating other people for any kind of job. 599 00:34:57,239 --> 00:35:00,279 Speaker 1: And so oddly, when I got into this, what I 600 00:35:00,360 --> 00:35:02,040 Speaker 1: really thought of it, this is kind of the prequel 601 00:35:02,200 --> 00:35:05,400 Speaker 1: or origin story for Moneyball. I love how you framed 602 00:35:05,400 --> 00:35:08,560 Speaker 1: at the beginning, Michael Lewis, how you were getting massive 603 00:35:08,600 --> 00:35:11,479 Speaker 1: acclaim for money Paul, even before Brad Pitt was cast 604 00:35:11,560 --> 00:35:15,120 Speaker 1: in the movie. And and there were these two upstarts 605 00:35:15,160 --> 00:35:18,239 Speaker 1: out of Chicago who said, Michael, maybe it's not an 606 00:35:18,280 --> 00:35:21,759 Speaker 1: original that I could It was absolutely shocking to me 607 00:35:21,840 --> 00:35:24,799 Speaker 1: that I had written this entire book about the way 608 00:35:24,880 --> 00:35:28,759 Speaker 1: this baseball team had found players who were misvalued and 609 00:35:29,000 --> 00:35:31,680 Speaker 1: and talked about things like biases. I mean, they were 610 00:35:31,840 --> 00:35:34,920 Speaker 1: the behavior economics had infiltrated the Oakland A's front office 611 00:35:35,120 --> 00:35:38,080 Speaker 1: and so condom and into verse he had via behavior economics. 612 00:35:38,160 --> 00:35:40,080 Speaker 1: And then I didn't know about it, and that there 613 00:35:40,200 --> 00:35:43,520 Speaker 1: was said that that that there was this early story. 614 00:35:44,160 --> 00:35:45,640 Speaker 1: I didn't know that it was going to be a book, 615 00:35:45,680 --> 00:35:48,800 Speaker 1: but I just thought, how did I miss that. Yeah, Michael, 616 00:35:49,320 --> 00:35:52,600 Speaker 1: you you and the book with the tragedy. For all 617 00:35:52,680 --> 00:35:54,799 Speaker 1: of us that love economics, I think of the death 618 00:35:54,880 --> 00:35:58,839 Speaker 1: of Rudiger Dornbush of m I T is the only equivalent. 619 00:35:59,480 --> 00:36:03,960 Speaker 1: The sadness of Amos Tversky dying described for us what 620 00:36:04,320 --> 00:36:08,320 Speaker 1: Mr Traversky meant for Mr Khanman and all of a 621 00:36:08,400 --> 00:36:14,200 Speaker 1: certain generation of economics. He he really was maybe the 622 00:36:14,360 --> 00:36:19,719 Speaker 1: most vivid, uh pungent mind of his time, and that 623 00:36:20,360 --> 00:36:22,480 Speaker 1: everybody who knew him couldn't get him out of his head, 624 00:36:22,600 --> 00:36:26,840 Speaker 1: get their heads there is uh he he um. People 625 00:36:26,880 --> 00:36:29,160 Speaker 1: who worked with him for the rest of their lives, 626 00:36:29,400 --> 00:36:32,920 Speaker 1: whenever they were faced some problem, would always ask themselves, 627 00:36:33,000 --> 00:36:37,480 Speaker 1: what would Amos say? Uh? Richard Nisbitt, the psychology at Michigan, 628 00:36:38,040 --> 00:36:41,760 Speaker 1: designed a online intelligence test and it was the longer 629 00:36:41,840 --> 00:36:44,080 Speaker 1: it takes you after you've met Amos to figure out 630 00:36:44,160 --> 00:36:46,399 Speaker 1: that Amos is smarter than you, the stupider you are 631 00:36:47,000 --> 00:36:49,680 Speaker 1: he was, and then nobody disputed it. His mind was 632 00:36:49,840 --> 00:36:52,600 Speaker 1: just had this agility and this ability to move to 633 00:36:52,760 --> 00:36:55,480 Speaker 1: levels of abstraction very quickly that you don't find in 634 00:36:55,520 --> 00:36:58,479 Speaker 1: any field. Uh. I mean, my favorite aim of story 635 00:36:58,640 --> 00:37:01,280 Speaker 1: is that he was in I did to uh party 636 00:37:01,360 --> 00:37:04,520 Speaker 1: filled with some of the world's greatest physicists, and he 637 00:37:04,640 --> 00:37:07,480 Speaker 1: just kind of by accident, and nobody knew who he 638 00:37:07,760 --> 00:37:10,440 Speaker 1: was because he was a psychologist. And after the party 639 00:37:10,480 --> 00:37:12,640 Speaker 1: one of the young physicists called the host and said, 640 00:37:12,920 --> 00:37:15,520 Speaker 1: who was that physicist I was talking to? And they said, 641 00:37:15,520 --> 00:37:17,719 Speaker 1: and he said, they couldn't figure out who he was 642 00:37:17,760 --> 00:37:19,920 Speaker 1: talking about, he says, and they said, and they finally realized, 643 00:37:19,920 --> 00:37:22,200 Speaker 1: oh no, no, he wasn't a physicist. That was Amos diversity. 644 00:37:22,200 --> 00:37:24,680 Speaker 1: He's a psychologist. And the young physicist said, he's the 645 00:37:24,760 --> 00:37:29,879 Speaker 1: smartest physicist I've ever met. And and so this guy 646 00:37:30,200 --> 00:37:34,719 Speaker 1: he was he was superman uh and uh and really 647 00:37:35,080 --> 00:37:39,440 Speaker 1: a really peculiar personality and not a self consciously smarty 648 00:37:39,480 --> 00:37:41,719 Speaker 1: pants guy. He was a warrior, he was. He was 649 00:37:41,760 --> 00:37:43,840 Speaker 1: a war hero. He was he was raised in Israel 650 00:37:43,960 --> 00:37:47,200 Speaker 1: to be a spartan um. And in any case, he 651 00:37:47,440 --> 00:37:51,600 Speaker 1: was the most alive person anybody knew, and his early 652 00:37:51,719 --> 00:37:55,640 Speaker 1: death it struck everybody is just like totally improbable that 653 00:37:55,719 --> 00:37:58,560 Speaker 1: Amos is dead. And one of the things I noticed 654 00:37:58,640 --> 00:38:00,719 Speaker 1: and working on the book, is that people have kept 655 00:38:00,800 --> 00:38:03,080 Speaker 1: him alive. They keep alive in his memory. But that's fair, 656 00:38:03,560 --> 00:38:06,840 Speaker 1: that's so true. They don't where they refused. His filing 657 00:38:06,920 --> 00:38:10,440 Speaker 1: cabinets from twenty years ago that he had outside his 658 00:38:10,520 --> 00:38:12,960 Speaker 1: office at Stanford University are still in the hallway at 659 00:38:12,960 --> 00:38:16,080 Speaker 1: Stanford University. What Michael Lewis just said, there's that's the 660 00:38:16,160 --> 00:38:19,440 Speaker 1: smartest thing I've ever heard. That that's so true. And 661 00:38:19,480 --> 00:38:22,560 Speaker 1: it's true of Rudy dorn Bush and Amos Tversky. We 662 00:38:23,160 --> 00:38:26,200 Speaker 1: people just keep them alive. They need them, they still 663 00:38:26,320 --> 00:38:29,600 Speaker 1: need them, uh, and so they find ways to keep 664 00:38:29,680 --> 00:38:31,840 Speaker 1: them alive. And I think, you know, it's funny. I 665 00:38:31,920 --> 00:38:34,000 Speaker 1: think my book is part of that effort. That I think, 666 00:38:34,040 --> 00:38:36,279 Speaker 1: and then the people who enabled my book and made 667 00:38:36,320 --> 00:38:39,320 Speaker 1: it possible for me to write it, a big motive 668 00:38:39,560 --> 00:38:42,480 Speaker 1: was keeping Amos alive. We're going to continue this discussion 669 00:38:42,520 --> 00:38:46,720 Speaker 1: of Bloomberg Television. Michael Lewis with us today on Bloomberg Radio, 670 00:38:47,120 --> 00:38:49,640 Speaker 1: and I'll be blunt, folks. I'm still waiting through the 671 00:38:49,760 --> 00:38:52,239 Speaker 1: end of the year books. I'm gonna be right out front. 672 00:38:52,320 --> 00:38:55,560 Speaker 1: This is the read for two thousand seventeen. Michael Lewis. 673 00:38:55,680 --> 00:39:00,239 Speaker 1: The undoing project the accessibility, including the opening chapter on 674 00:39:00,360 --> 00:39:04,239 Speaker 1: the n b A is shocking what he has done 675 00:39:04,600 --> 00:39:07,960 Speaker 1: to what we all study, which is common antiversity. The 676 00:39:08,040 --> 00:39:25,239 Speaker 1: undoing project of friendship changed our minds. Michael Lewis, It's 677 00:39:25,320 --> 00:39:27,080 Speaker 1: rare that we speak to a CEO that I can 678 00:39:27,120 --> 00:39:29,680 Speaker 1: say not only changed in the industry, changed his company 679 00:39:29,719 --> 00:39:32,960 Speaker 1: and all that, but maybe changed America. He's out of 680 00:39:32,960 --> 00:39:36,799 Speaker 1: the University of Texas, Austin. He is he bleeds Southwest. 681 00:39:36,840 --> 00:39:40,400 Speaker 1: Southwest Air Love. Gary Kelly joins us right now, Gary, 682 00:39:40,440 --> 00:39:43,720 Speaker 1: good morning. I think Gary. The thing I would notice 683 00:39:43,840 --> 00:39:47,560 Speaker 1: is the great Southwest Air tradition that all babies born 684 00:39:47,680 --> 00:39:51,560 Speaker 1: on the airplane are named Gary Kelly. Right. What's it 685 00:39:51,640 --> 00:39:54,000 Speaker 1: like when you get an email that a child has 686 00:39:54,080 --> 00:39:57,440 Speaker 1: been born on one of your airplanes? Well, um, you know, 687 00:39:57,560 --> 00:40:00,120 Speaker 1: the first obviously, the first reaction is I hope all 688 00:40:00,160 --> 00:40:02,920 Speaker 1: went well, and you know, we diverted that flight to 689 00:40:03,400 --> 00:40:05,560 Speaker 1: make sure that mother and baby were safe and and 690 00:40:05,680 --> 00:40:08,680 Speaker 1: the baby was a little premature, so I think your 691 00:40:08,719 --> 00:40:11,759 Speaker 1: body was concerned. But the last report I had is 692 00:40:11,840 --> 00:40:16,839 Speaker 1: that everybody's doing wells. But yeah, it's it's uh, yeah, 693 00:40:17,000 --> 00:40:20,600 Speaker 1: it's interesting. We have over fifty thousand employees at Southwest. 694 00:40:20,800 --> 00:40:23,319 Speaker 1: We serve a hundred and twenty million customers a year 695 00:40:23,400 --> 00:40:27,000 Speaker 1: where the largest airline in America and things happen every day, 696 00:40:27,080 --> 00:40:28,680 Speaker 1: you know. So it's just a part of being a 697 00:40:28,719 --> 00:40:31,560 Speaker 1: part of society. That's nicely put in within the fifty 698 00:40:31,640 --> 00:40:34,680 Speaker 1: year tradition of forty five year tradition of Southwest air 699 00:40:34,760 --> 00:40:37,080 Speaker 1: I know the no layoff angle on that You've had 700 00:40:37,120 --> 00:40:40,879 Speaker 1: a two thousand sixteen of not labor war, but real 701 00:40:41,080 --> 00:40:45,040 Speaker 1: back and forth with your employees. I know there's been 702 00:40:45,160 --> 00:40:47,960 Speaker 1: recent settlements. Are you gonna have more of this into 703 00:40:48,080 --> 00:40:50,840 Speaker 1: next year? And is this a new reality for airlines? 704 00:40:51,400 --> 00:40:54,800 Speaker 1: Is battles between fancy executives and their labor. Is this 705 00:40:54,880 --> 00:41:01,440 Speaker 1: where we're heading? Well, good question. I think that you know, 706 00:41:02,000 --> 00:41:04,279 Speaker 1: I don't know about the rest of the industry. I 707 00:41:04,320 --> 00:41:08,160 Speaker 1: would just talk about Southwest with with my comments. Um, 708 00:41:08,960 --> 00:41:14,480 Speaker 1: we view Southwest as a family, and Uh, families have disagreements, 709 00:41:14,640 --> 00:41:21,040 Speaker 1: that's not new in labor negotiations are always vigorous. UM. 710 00:41:22,080 --> 00:41:25,640 Speaker 1: I'm glad that we're able to take care of our people, 711 00:41:26,239 --> 00:41:29,279 Speaker 1: pay them extraordinarily. Well, Uh, you've made the point. We've 712 00:41:29,320 --> 00:41:32,479 Speaker 1: never had a furlougher in our history. I love our people. 713 00:41:32,640 --> 00:41:34,560 Speaker 1: We want to do the best job that we can 714 00:41:34,719 --> 00:41:38,360 Speaker 1: to take care of them. So, uh, we're a family 715 00:41:38,480 --> 00:41:41,640 Speaker 1: and we love each other, and uh we'll we'll continue, 716 00:41:41,719 --> 00:41:44,080 Speaker 1: I think to serve our customers very well, and that's 717 00:41:44,080 --> 00:41:46,279 Speaker 1: the most important thing here. High a t a out 718 00:41:46,320 --> 00:41:48,600 Speaker 1: with the report we spoke to them in Europe earlier 719 00:41:48,680 --> 00:41:53,080 Speaker 1: on Bloomberg surveillance clearly showing the profitability of America versus 720 00:41:53,120 --> 00:41:57,520 Speaker 1: the foreign airlines. Are we gonna see finally the foreign 721 00:41:57,560 --> 00:42:00,919 Speaker 1: airlines come more into ownership and act ativity in North 722 00:42:01,000 --> 00:42:03,959 Speaker 1: America in the US or is that something that waits 723 00:42:04,080 --> 00:42:08,400 Speaker 1: for another day? How do you see the the framework 724 00:42:08,480 --> 00:42:12,319 Speaker 1: of ownership over the next three or four years? Uh, 725 00:42:12,560 --> 00:42:15,440 Speaker 1: you know, there doesn't seem to be any real energy 726 00:42:15,560 --> 00:42:19,640 Speaker 1: behind making a change there. And uh, you know, we 727 00:42:19,760 --> 00:42:23,480 Speaker 1: have tremendous air service in the United States. We have 728 00:42:24,080 --> 00:42:28,840 Speaker 1: very very vigorous competition. Um. It just it begs the 729 00:42:28,920 --> 00:42:32,919 Speaker 1: question of what problem are we trying to solve with that? Um? Yeah, 730 00:42:33,400 --> 00:42:36,520 Speaker 1: So I don't see a need to change there. And 731 00:42:37,080 --> 00:42:41,200 Speaker 1: um on the other hand, there have been um a 732 00:42:41,320 --> 00:42:46,000 Speaker 1: lot of challenges in terms of reregulating the airline industry, 733 00:42:46,200 --> 00:42:48,839 Speaker 1: and my hope is that that will abate and that's 734 00:42:48,840 --> 00:42:50,920 Speaker 1: where our focus is going. To be over the next 735 00:42:50,960 --> 00:42:54,400 Speaker 1: several years with the new administration Gary Kelly with Southwesteria 736 00:42:54,480 --> 00:42:57,400 Speaker 1: joining us this morning. UM I I look at the 737 00:42:57,520 --> 00:42:59,640 Speaker 1: state of the industry and certainly when we speak the 738 00:42:59,719 --> 00:43:03,320 Speaker 1: cell side, they inform us of more persistent cash flows. 739 00:43:03,560 --> 00:43:07,080 Speaker 1: The last decade, Southwest are twelve percent a year return, 740 00:43:07,520 --> 00:43:10,279 Speaker 1: much of that coming in the recent um years. Do 741 00:43:10,440 --> 00:43:12,640 Speaker 1: you work day to day with your strategy and with 742 00:43:12,719 --> 00:43:17,320 Speaker 1: your planning for next year, assuming a more responsible industry, 743 00:43:17,719 --> 00:43:20,320 Speaker 1: it will lead to persistent cash flows or are you 744 00:43:20,440 --> 00:43:22,800 Speaker 1: guys gonna make the same mistakes you made for the 745 00:43:22,920 --> 00:43:26,719 Speaker 1: last thirty forty years in expansion? Well, you know, I'm 746 00:43:26,800 --> 00:43:30,520 Speaker 1: not going to uh assume all the mistakes that our 747 00:43:30,560 --> 00:43:33,600 Speaker 1: competitors made. You know, I started at Southwest thirty years ago. 748 00:43:33,760 --> 00:43:36,920 Speaker 1: Every single major airline that was in existence in nine 749 00:43:38,000 --> 00:43:40,359 Speaker 1: is either gone or gone bank And to be clear, 750 00:43:40,440 --> 00:43:43,600 Speaker 1: you've never gone bankrupt. Absolutely, let's say that absolutely not 751 00:43:43,800 --> 00:43:46,920 Speaker 1: so every single one and we haven't made those mistakes. 752 00:43:47,040 --> 00:43:51,120 Speaker 1: Is the point. Southwest has been great service, low cost, 753 00:43:51,960 --> 00:43:54,680 Speaker 1: UH low fares, and we've taken great care of our 754 00:43:54,760 --> 00:43:58,680 Speaker 1: people and that's served us very very well. So what 755 00:43:59,000 --> 00:44:01,440 Speaker 1: the rest of the industry Three will do prospectively. I 756 00:44:01,520 --> 00:44:05,720 Speaker 1: don't know. I will say that the environment, in my opinion, 757 00:44:05,960 --> 00:44:10,040 Speaker 1: has never been more competitive than it is right now. 758 00:44:10,239 --> 00:44:14,040 Speaker 1: We've never had stronger competitors financially than we have right now. 759 00:44:14,200 --> 00:44:17,280 Speaker 1: So the industry is definitely different, and whether that will continue, 760 00:44:17,360 --> 00:44:19,919 Speaker 1: that will be up to our competitors. Obviously, our job 761 00:44:20,040 --> 00:44:23,160 Speaker 1: is to beat them. How do you meet that competition? 762 00:44:23,760 --> 00:44:26,919 Speaker 1: I'm named the airport DFW. I'll let you decide which 763 00:44:26,920 --> 00:44:30,760 Speaker 1: airport within the southwest uh span. I'm at that airport. 764 00:44:31,400 --> 00:44:34,000 Speaker 1: I'm an hour behind. Maybe if we pull back from 765 00:44:34,040 --> 00:44:37,320 Speaker 1: the runway, I'm three hours behind. That upsets people. The 766 00:44:37,400 --> 00:44:41,200 Speaker 1: luggage upsets people. The pretzels upset people. How what's the 767 00:44:41,280 --> 00:44:46,360 Speaker 1: distinctive feature of that new competition? Well, I think that 768 00:44:46,600 --> 00:44:51,720 Speaker 1: you're hitting on it. The competition is better across the board. 769 00:44:52,760 --> 00:44:56,960 Speaker 1: On time performance is better, baggage handling is better. There 770 00:44:57,000 --> 00:45:00,640 Speaker 1: are fewer customer complaints with the d O TEA with 771 00:45:00,760 --> 00:45:06,600 Speaker 1: our competitors. Uh. The costs are relatively lower than they 772 00:45:06,680 --> 00:45:10,840 Speaker 1: were historically, and the fares are more competitive. So just 773 00:45:11,719 --> 00:45:16,120 Speaker 1: fits the full gamut of the ways that we touch customers. 774 00:45:17,080 --> 00:45:20,759 Speaker 1: Every airline is just better. It makes us if we're 775 00:45:20,760 --> 00:45:24,080 Speaker 1: going to compete, we have to continue to get better also, 776 00:45:24,239 --> 00:45:27,560 Speaker 1: and I would quickly add that Southwest has never been better. 777 00:45:27,960 --> 00:45:30,680 Speaker 1: We're stronger today than in any point in time in 778 00:45:30,760 --> 00:45:34,480 Speaker 1: our forty five year history, and will continue to invest 779 00:45:34,560 --> 00:45:38,440 Speaker 1: in our customer experience and work really hard to keep 780 00:45:38,520 --> 00:45:41,120 Speaker 1: our costs low so our fairs can stay low. I 781 00:45:41,160 --> 00:45:43,520 Speaker 1: don't know if you know this, but only this could 782 00:45:43,600 --> 00:45:48,000 Speaker 1: happen on Southwest Airlines. Brian Kelly, the points guy. His 783 00:45:48,200 --> 00:45:53,240 Speaker 1: latest article is on Southwest passengers nailing the Mannequin challenge. 784 00:45:53,960 --> 00:45:56,000 Speaker 1: They froze the whole plane so they can do the 785 00:45:56,080 --> 00:46:01,080 Speaker 1: mannequin challenge photograph that everybody's doing now. Brian Kelly changed 786 00:46:01,120 --> 00:46:04,360 Speaker 1: the business with these points, our charge cards and points 787 00:46:04,400 --> 00:46:06,680 Speaker 1: and all of us getting a million miles. Is that 788 00:46:06,840 --> 00:46:11,319 Speaker 1: Gary Kelly's nightmare or your best friend? Oh no, we're 789 00:46:11,440 --> 00:46:16,560 Speaker 1: very intentional. Um. We have a great relationship with Chase, 790 00:46:18,120 --> 00:46:21,759 Speaker 1: our our Visa credit card. If you don't have it 791 00:46:21,840 --> 00:46:24,360 Speaker 1: in your wallet, you're really missing out because it is 792 00:46:25,640 --> 00:46:30,400 Speaker 1: shameless plug, most generous frequent flyer program out there, and 793 00:46:31,400 --> 00:46:35,920 Speaker 1: it's it's just an element of our customer experience and 794 00:46:36,000 --> 00:46:39,640 Speaker 1: the customer relationship and we have very strong profits, so 795 00:46:39,760 --> 00:46:42,000 Speaker 1: obviously we're able to do all that in a way 796 00:46:42,120 --> 00:46:44,879 Speaker 1: that it rewards the company and our customers. Gary Kelly, 797 00:46:44,920 --> 00:46:47,239 Speaker 1: I've got a race next time on board of Southwest 798 00:46:47,280 --> 00:46:51,040 Speaker 1: Air twins being born. Gary Kelly is the chief executive 799 00:46:51,080 --> 00:47:01,480 Speaker 1: officer of Southwest. Thanks for listening to the Boomberg Surveillance podcast. 800 00:47:01,840 --> 00:47:06,920 Speaker 1: Subscribe and listen to interviews on iTunes, SoundCloud, or whichever 801 00:47:07,120 --> 00:47:11,520 Speaker 1: podcast platform you prefer. I'm out on Twitter at Tom Keene. 802 00:47:11,600 --> 00:47:15,360 Speaker 1: David Gura is at David Gura. Before the podcast, you 803 00:47:15,440 --> 00:47:31,560 Speaker 1: can always catch us worldwide. I'm Bloomberg Radio. Who you 804 00:47:31,680 --> 00:47:34,400 Speaker 1: put your trust in matters? Investors have put their trust 805 00:47:34,800 --> 00:47:38,680 Speaker 1: and independent registered investment advisors to the two and four 806 00:47:38,760 --> 00:47:43,200 Speaker 1: trillion dollars. Why learn more and find your independent advisor 807 00:47:43,800 --> 00:47:44,279 Speaker 1: dot com