WEBVTT - Surveillance: Fed Dot Plot Is Not a Good Idea, Orphanides Says 0:00:00.040 --> 0:00:02.640 Who you put your trust in matters. Investors have put 0:00:02.680 --> 0:00:07.040 their trust and independent registered investment advisors to the two 0:00:07.040 --> 0:00:10.680 and four trillion dollars. Why learn more at find your 0:00:10.760 --> 0:00:26.360 Independent Advisor dot com. Welcome to the Bloomberg Surveillance Podcast. 0:00:26.760 --> 0:00:30.480 I'm Tom Keene with David Gura. Daily we bring you 0:00:30.520 --> 0:00:35.560 insight from the best in economics, finance, investment and international relations. 0:00:35.960 --> 0:00:40.559 Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and 0:00:40.640 --> 0:00:47.479 of course on the Bloomberg. This is why we do 0:00:47.520 --> 0:00:50.080 Bloomberg Surveillance. It's a quality of the guests, and we 0:00:50.120 --> 0:00:51.920 do that in London, we do that in New York. 0:00:51.960 --> 0:00:56.240 Michael Spencer the Yesterday. Richard Clarina with us from PIMCO 0:00:56.840 --> 0:00:59.680 today of course for years of work at Columbia University 0:01:00.040 --> 0:01:03.440 and now from the Massachusetts Institute of Technology in Boston 0:01:03.920 --> 0:01:07.680 at the nacios or finds he is a former ECB official, 0:01:07.720 --> 0:01:11.800 which barely describes his research, contribution to economics and of 0:01:11.800 --> 0:01:15.800 course his timely work with his Cyprus during their crisis. 0:01:16.240 --> 0:01:19.080 Wonderful to have you with us, Professor. I want to 0:01:19.120 --> 0:01:21.360 get the cypress in a minute, but I want to 0:01:21.360 --> 0:01:25.319 talk about what I consider your word toolbox. What's the 0:01:25.360 --> 0:01:29.920 toolbox that Mario Draggi has if he has a constraint 0:01:30.319 --> 0:01:34.880 of a German philosophy, a German economics and the cacophony 0:01:34.959 --> 0:01:39.440 known as Italy. Well, the toolbooks he should start with 0:01:39.959 --> 0:01:43.240 is the Treaty of the European Union that gives the 0:01:43.240 --> 0:01:48.560 ECB supreme independence and one primary mandate, which the c 0:01:48.720 --> 0:01:51.640 B has been missing. The c B has not been 0:01:51.680 --> 0:01:56.000 easy monetary policy sufficiently to reach inflation of just under 0:01:56.040 --> 0:01:59.840 two percent, which is their objective, and they can uh 0:02:00.160 --> 0:02:04.280 use the power of their balance it to to get there. Uh. 0:02:04.760 --> 0:02:08.240 You mentioned Germany and political constraint. This is what the 0:02:08.400 --> 0:02:12.200 c B should have been ignoring while they meet their mandate. 0:02:13.240 --> 0:02:17.000 But Mr orphanedez if, like the markets believe Mario Druggie 0:02:17.160 --> 0:02:22.359 will extend QUEI today. What are the implications of tapering? 0:02:22.440 --> 0:02:26.080 Does it make it that much harder to then withdraw 0:02:26.240 --> 0:02:30.960 some of the support? Frankly, I think talk of tapering 0:02:31.240 --> 0:02:35.399 was premature in the in the Euro Area. Let's let's 0:02:35.440 --> 0:02:38.280 go back to the basics. Core inflation in the EU 0:02:38.440 --> 0:02:41.680 Area has been at or below one percent for almost 0:02:41.680 --> 0:02:45.560 four years running. Just to just to understand how severe. 0:02:45.680 --> 0:02:49.240 The undershoot of inflation is monetary policy should have been 0:02:49.280 --> 0:02:52.480 far more expansionary, and this is what should have been 0:02:52.480 --> 0:02:55.760 done by expanding the balance it the CB started expanding 0:02:55.880 --> 0:02:59.560 balance its way too late. They only started QUEI in 0:02:59.560 --> 0:03:02.600 in mark of twenty fifteen, and they did not do 0:03:02.680 --> 0:03:06.040 it at a pace that is sufficient to make up 0:03:06.080 --> 0:03:09.720 for the for the previous misses. Right now, in my view, 0:03:10.280 --> 0:03:14.280 they should actually announce that they will continue the asset 0:03:14.400 --> 0:03:19.760 purchases throughout seventeen UH and frankly they may need to 0:03:19.800 --> 0:03:22.959 do much more of that. The fact that they've delayed 0:03:23.880 --> 0:03:27.240 initiating the que program is what creates a difficulty they 0:03:27.280 --> 0:03:29.240 have right now where they have to do much more 0:03:29.520 --> 0:03:32.680 than they would otherwise would have to right so this 0:03:32.760 --> 0:03:36.400 is extremely significant. Mr Orphanidez, When do you think tapering 0:03:36.520 --> 0:03:38.560 should start? If you think it was premature to talk 0:03:38.600 --> 0:03:40.680 about it two months ago, and if you believe that 0:03:40.720 --> 0:03:47.280 there's more quee coming, are we talking tapering in eighteen? Even? Frankly, 0:03:47.880 --> 0:03:51.240 eighteen would probably be be a reasonable guest right now, 0:03:51.280 --> 0:03:54.160 but only if they do the appropriate monetary policy in 0:03:54.240 --> 0:03:58.280 coming months. The longer they have two tight conditions, then 0:03:58.600 --> 0:04:01.320 the longer we have inflation that is too low, and 0:04:01.400 --> 0:04:03.520 as long as inflation is too low, it's really pretty 0:04:03.600 --> 0:04:07.040 mature to talk about tapering. If they were to really 0:04:07.080 --> 0:04:10.400 extend the pace of US purchases, in my view, they 0:04:10.440 --> 0:04:14.280 should have increased the right there, the pace of purchases 0:04:15.080 --> 0:04:18.000 over the next year. Then they could be too Then 0:04:18.000 --> 0:04:20.440 they could be talking about tapering in twenty eight. If 0:04:20.440 --> 0:04:23.960 they keep under delivering, then that that may have to 0:04:24.000 --> 0:04:28.000 come even later. In the last weeks or so, Professor, 0:04:28.040 --> 0:04:31.480 any number of times I have cited Cypress is an 0:04:31.520 --> 0:04:36.360 example of clearing markets, of facing crisis, of making tough decisions. 0:04:36.680 --> 0:04:39.679 You live that with your Cypress a few years back. 0:04:40.080 --> 0:04:44.240 What can Italy, as an example, learn from your experience 0:04:44.400 --> 0:04:48.440 and your leader's experience in Cypress in clearing markets. What 0:04:48.480 --> 0:04:53.039 does Italy need to learn and do well? To tell 0:04:53.080 --> 0:04:56.960 you the truth? I hope that that Cyprus is not 0:04:57.560 --> 0:05:01.360 comparable to Twitterly, what we seen in Cyprus in twenty 0:05:01.480 --> 0:05:05.599 thirteen was unnecessary in distraction. I remember I was watching 0:05:05.640 --> 0:05:10.760 that from from Boston in dismay. This was just an 0:05:10.839 --> 0:05:15.120 example of the gratuitous distraction of the real economy that 0:05:15.200 --> 0:05:17.599 has been going on during the crisis. I hope we 0:05:17.720 --> 0:05:20.560 do not see something like that in in Italy. What 0:05:20.680 --> 0:05:24.279 we need in Italy is is well known. First of all, 0:05:24.520 --> 0:05:29.160 the talent government should implement more structural reforms so that 0:05:29.240 --> 0:05:33.320 the medium term growth can can rise. And then second 0:05:33.480 --> 0:05:35.960 we actually need a boost in aggregate demand, which is 0:05:36.000 --> 0:05:38.720 where the c B comes in. By maintaining two tight 0:05:38.760 --> 0:05:42.560 monetary policy, nominal income growth in Italy is too low, 0:05:43.320 --> 0:05:47.400 this actually deteriorate and that dynamics. This makes a fairm 0:05:47.440 --> 0:05:51.760 profitability lower, This raises npls. So the fact that we're 0:05:51.760 --> 0:05:54.880 talking about say banking issue in Italy right now, well, 0:05:54.920 --> 0:05:58.400 this is policy made. This isn't bad banks. The banking 0:05:58.400 --> 0:06:00.880 system in in Italy was a really very good shape 0:06:00.880 --> 0:06:03.000 at the beginning of the crisis. But if you have 0:06:03.080 --> 0:06:05.640 a five year long recession, then you end up with 0:06:06.080 --> 0:06:08.039 problem to the banks as well. Okay, let's do this. 0:06:08.120 --> 0:06:10.599 My question to Richard Clarida doesn't matter. Would you ask 0:06:10.600 --> 0:06:14.120 a question please, if your colleague Mr Richard Clarata with 0:06:14.200 --> 0:06:19.760 the Nazis athanasios, uh, you know, both of us are 0:06:19.760 --> 0:06:24.080 wants and there's been some discussion increased in recent years 0:06:24.120 --> 0:06:28.200 on the FED and potentially other central banks. Uh. Reprofiling 0:06:28.200 --> 0:06:31.560 inflation targeting to price level targeting. The e CP is 0:06:31.600 --> 0:06:33.920 not the only central bank that's fallen short. The Fed's 0:06:33.920 --> 0:06:38.480 fallen short of its inflation target for four years. And so, 0:06:38.640 --> 0:06:40.920 without getting into whether or not central banks should do that, 0:06:40.920 --> 0:06:43.000 do you think in the next five years we'll see 0:06:43.040 --> 0:06:48.800 a major central bank redefined inflation targeting? Is price level targeting? Well, 0:06:48.880 --> 0:06:51.520 that's that's that's a very good question if we are 0:06:51.600 --> 0:06:54.839 to see one, my bed would be on starting with 0:06:54.920 --> 0:06:58.080 the Bank of Canada. Bank of Canada has a has 0:06:58.120 --> 0:07:01.680 a story of actually considered what is best practice over 0:07:01.760 --> 0:07:04.640 the years and trying to do this. When I'm thinking 0:07:04.680 --> 0:07:07.080 about the Federal Reserve, I think the Federal Reserve, even 0:07:07.080 --> 0:07:09.640 though it came late, it has managed to achieve price 0:07:09.720 --> 0:07:13.360 ability and it has actually crossed over beyond full employment, 0:07:13.360 --> 0:07:16.160 which has over done it. So really, in the case 0:07:16.200 --> 0:07:18.520 of the c B, I would have been so happy 0:07:18.640 --> 0:07:23.320 if they could just do what their mandate has been 0:07:23.440 --> 0:07:25.840 over the last two years, over the last several years. 0:07:26.040 --> 0:07:29.080 Before we start talking about about price level targeting, I 0:07:29.160 --> 0:07:31.040 want to have to agree with you. If we had 0:07:31.120 --> 0:07:34.480 price level targeting, things would have been easier. In the 0:07:34.560 --> 0:07:36.520 current point. I need to go to both you. This 0:07:36.600 --> 0:07:39.960 is crucial. Professor of Finiti is John B. Taylor's name 0:07:40.000 --> 0:07:43.200 has been vetted to after we move on from yelling 0:07:43.280 --> 0:07:46.560 if we have a Trump administration, John Taylor with the 0:07:46.640 --> 0:07:50.160 more rules based theme than discretion. Is that an appropriate 0:07:50.240 --> 0:07:54.280 stance of the US Federal Reserve system in my view? 0:07:54.320 --> 0:07:57.240 And John Taylor is an excellent candidate for the for 0:07:57.400 --> 0:08:00.760 the Federal Reserve. I think we do it to hold 0:08:00.840 --> 0:08:04.680 central banks accountable to their mandate. Same thing I've been 0:08:04.680 --> 0:08:06.800 saying about the c B I could say about the FED. 0:08:07.080 --> 0:08:08.880 The Fed has done a better job than they have 0:08:08.960 --> 0:08:12.640 been the last several years. Still being more systematic and 0:08:12.720 --> 0:08:17.320 accountable would be an improvement for the next ten, ten, 0:08:17.360 --> 0:08:21.160 twenty years. Anatalia, so often it is how do you 0:08:21.280 --> 0:08:24.000 view or how would your view were you still an 0:08:24.000 --> 0:08:26.600 ECB board member. The referendum in it today, does it 0:08:26.880 --> 0:08:29.480 push and press more, you drug it to do more? 0:08:29.960 --> 0:08:32.080 Or would you still say that he needs to put 0:08:32.440 --> 0:08:35.560 even if we didn't have the referendum giving Renzi sixty 0:08:35.640 --> 0:08:40.680 percent of no votes. Well, listen, the rise of populism 0:08:40.880 --> 0:08:45.079 is a concern in the euro Area. But what's the 0:08:45.120 --> 0:08:49.360 best way to fight populism, deliver growth. So, frankly, I 0:08:49.480 --> 0:08:51.880 go back to my basic recipe. If the c B 0:08:52.120 --> 0:08:55.160 had been doing its job, growth would have been faster 0:08:55.320 --> 0:08:57.520 in the euro Area. That would have been the best 0:08:57.600 --> 0:09:00.520 defense against the rise of populism. I do worry about 0:09:00.559 --> 0:09:05.120 political factors. We have elections coming up in in in Europe, 0:09:05.120 --> 0:09:07.240 we have the Netherlands, we have France, we have we 0:09:07.360 --> 0:09:11.760 have Germany, and we see populism anywhere. Frankly, the establishment 0:09:11.880 --> 0:09:16.080 recipe is not working. We actually do need to deliver 0:09:16.240 --> 0:09:20.240 more growth with easier policy. And this is we've been 0:09:20.240 --> 0:09:22.400 talking about the c B. I have to say, and 0:09:22.600 --> 0:09:25.120 and here I should give praise to the European Commission 0:09:25.280 --> 0:09:28.080 last month, for the first time in their history, they 0:09:28.080 --> 0:09:30.920 actually took a stance on phisical policy for the U 0:09:31.200 --> 0:09:33.839 as a whole and the knowledge that phisical policy is 0:09:33.880 --> 0:09:37.880 too tight as well. Right now, Athana is with us 0:09:38.160 --> 0:09:40.079 from Boston. He is with m I T and with 0:09:40.200 --> 0:09:43.520 Colombia and PIMCO. Richard Claria, Professor Claire, let me start. 0:09:43.679 --> 0:09:46.240 You bring up the dots right now and basically the 0:09:46.360 --> 0:09:49.400 vigilantees and Cherry Yellen are finally on the same page. 0:09:49.400 --> 0:09:51.319 Is at the correct state. You know, that's why I 0:09:51.400 --> 0:09:53.200 love the show, because you nailed it. For the last 0:09:53.280 --> 0:09:56.600 three years, the dots have been detached on the markets, 0:09:56.600 --> 0:09:58.120 and the dots have been doing all the moving, the 0:09:58.200 --> 0:10:01.680 red lines coming up in all asked five weeks, we've 0:10:01.679 --> 0:10:04.120 actually had market pricing move up towards the dots. So 0:10:04.360 --> 0:10:07.319 it actually can go both ways. Okay, within that, there's 0:10:07.360 --> 0:10:10.280 the dots, Professor fern Needs and I mean this with 0:10:10.440 --> 0:10:13.200 great respect for your research at the FED years ago. 0:10:14.000 --> 0:10:18.880 Does your toolbox include the dots? No, no, it did not. 0:10:20.080 --> 0:10:23.400 And as a matter of fact, I don't think that 0:10:23.960 --> 0:10:26.160 that having the dots out there is a good idea. 0:10:27.000 --> 0:10:31.000 It creates this this disconnect between markets and the f MC. 0:10:31.120 --> 0:10:33.480 I would much rather that the FAT says we're going 0:10:33.520 --> 0:10:35.559 to do our job and deliver price stability and full 0:10:35.640 --> 0:10:38.960 employment without trying to guess what the FED funds there 0:10:39.000 --> 0:10:41.920 is going to be three years out all right, and 0:10:42.240 --> 0:10:44.480 mr finding this. I'm here in London and actually the 0:10:44.600 --> 0:10:46.640 NPC is very different to what the FED used to 0:10:46.679 --> 0:10:48.160 be like, and a lot of people saying, well, look, 0:10:48.200 --> 0:10:50.360 the FEED is now trying to be more like NPC 0:10:50.559 --> 0:10:54.320 have different views, They argue, not openly but you hear 0:10:54.520 --> 0:10:57.199 very different things. Is it more confusing for a central 0:10:57.240 --> 0:11:01.160 bank to be transparent or not? Well, I think there 0:11:01.240 --> 0:11:04.719 are there are limits to how useful transparency can be, 0:11:05.360 --> 0:11:07.400 and in the case of the FED, I think that 0:11:07.520 --> 0:11:10.960 those limits have been crossed. The dots were a very 0:11:11.080 --> 0:11:14.240 useful device to have during the crisis when the FED 0:11:14.400 --> 0:11:16.840 was trying to communicate that it would keep interest rates 0:11:17.800 --> 0:11:21.600 low for much longer than the markets thought at the time. 0:11:21.640 --> 0:11:24.840 It was a useful tool. But frankly, when you are 0:11:24.880 --> 0:11:28.120 in the business of providing guesses for things you don't 0:11:28.280 --> 0:11:31.079 know about, like FED funds three years out, this is 0:11:31.160 --> 0:11:35.240 where you cross the limits of transparency and you end 0:11:35.360 --> 0:11:42.640 up risking misinforming investors rather than providing useful information. Do 0:11:42.720 --> 0:11:44.920 you agree with that, Richard? And you know, on the 0:11:45.000 --> 0:11:47.280 basis of it, it was basically to give the market 0:11:47.320 --> 0:11:49.800 a glimpse of how people were thinking, even if they 0:11:49.840 --> 0:11:51.760 were wrong. Well, there are a lot of problems with 0:11:51.800 --> 0:11:54.000 the doctors I've said, I think on your show, you know, 0:11:54.080 --> 0:11:57.319 the dots are very precisely answer to an uninteresting question. 0:11:57.720 --> 0:12:00.679 That being said, I think there are there's information and 0:12:00.840 --> 0:12:02.439 if I were doing it, I would I would not 0:12:02.559 --> 0:12:04.560 get rid of the dots. I would I would refine 0:12:05.000 --> 0:12:07.440 uh and and improve them. But I agree they've created 0:12:07.480 --> 0:12:10.360 as many headaches as they've solved in the last couple 0:12:10.400 --> 0:12:12.880 of years. Let me rip up the script here, and 0:12:12.880 --> 0:12:14.920 I think this is important. Mr Bullet out of St. 0:12:15.000 --> 0:12:18.360 Louis is an original guy in part of his latest theory, 0:12:18.400 --> 0:12:21.440 and he will say, this is a small, non vetted paper. 0:12:22.120 --> 0:12:24.160 You know, I'm dealing here with heavyweights Claire and or 0:12:24.200 --> 0:12:26.760 Fans and Bullard. I don't want to get Mr Bullard 0:12:26.840 --> 0:12:29.520 upset at me, but he talks about don't move until 0:12:29.520 --> 0:12:32.800 there's a regime change. Is James Bullard getting his regime 0:12:32.920 --> 0:12:36.680 change or some well that's to be determinable. Only weigh 0:12:36.679 --> 0:12:38.959 in on that. Jim is very thoughtful and and the 0:12:39.040 --> 0:12:41.880 basic point he's making is when I have some sympathy 0:12:42.000 --> 0:12:43.840 with which is you need to think of a rules 0:12:43.880 --> 0:12:47.360 based policy as a guide post um. And I've called 0:12:47.360 --> 0:12:49.719 it a forward looking Taylor rule. And essentially what he's 0:12:49.720 --> 0:12:52.440 saying is that the problem right now is it's very 0:12:52.480 --> 0:12:55.000 hard to look into the future because we can either 0:12:55.080 --> 0:12:57.720 be stuck in a low interest rate equilibrium, in which 0:12:57.720 --> 0:12:59.760 case we're never going to hike more than once or twice, 0:13:00.200 --> 0:13:02.000 or we go back to a better accolademy will be 0:13:02.080 --> 0:13:04.120 hawking a lot. Since I don't know, I'm not going 0:13:04.160 --> 0:13:07.360 to give up FORKA. This is this is critical, Professor Orphan. 0:13:07.440 --> 0:13:09.280 It is if it's an ex and A we're out 0:13:09.360 --> 0:13:12.480 front fed or it's an ex post, we gotta wait, wait, 0:13:12.559 --> 0:13:16.680 wait till after the fact fed, which is given Professor 0:13:17.000 --> 0:13:22.640 Dr Bullard's great interest in a regime change before you act, 0:13:23.080 --> 0:13:26.160 are we at that point? Well, I wouldn't put so 0:13:26.320 --> 0:13:30.040 much emphasis on the regime change perces as in what 0:13:30.240 --> 0:13:33.160 Riach said, which is, we really don't know where the 0:13:33.200 --> 0:13:34.839 fat funds er should be going to have. We have 0:13:35.040 --> 0:13:38.000 too much, too much uncertainty in too many UH, in 0:13:38.120 --> 0:13:41.480 too many mothers. There has been the discussion on what 0:13:41.679 --> 0:13:44.160 is the equilibrium really interest rate for the past several years. 0:13:44.360 --> 0:13:46.839 It's one of the reasons why you really should not 0:13:47.080 --> 0:13:50.319 think that you can't tell a priority what the fat 0:13:50.360 --> 0:13:52.520 funds wer should be so so much way out. The 0:13:52.640 --> 0:13:55.560 way to do this, UH is really to to look 0:13:55.640 --> 0:13:59.599 at what is the distribution of risks for inflation and 0:13:59.760 --> 0:14:03.160 for economic activity and make sure you're guiding policies so 0:14:03.400 --> 0:14:06.680 that so that risks are balanced going forward. This is why, 0:14:07.040 --> 0:14:09.880 in my view, for example, the FEDS should should have 0:14:09.960 --> 0:14:13.199 been acting much faster with an employment rate going so 0:14:13.400 --> 0:14:17.280 low and now crossing reasonable estimates of the full employment, 0:14:17.800 --> 0:14:20.360 they should have been already moving up. You don't need 0:14:20.440 --> 0:14:21.960 to know what the FATS front is going to be 0:14:22.240 --> 0:14:24.440 three years ound in order to say, hey, you know 0:14:24.680 --> 0:14:29.120 we actually need somewhat tighter monetary policy today, right, because 0:14:29.160 --> 0:14:31.480 you just need to look at the data and that 0:14:32.200 --> 0:14:33.840 you look at the data. You look at the data 0:14:34.000 --> 0:14:36.160 and how the data you look at the data, and 0:14:36.240 --> 0:14:40.640 how the data is influencing uh ther your forecasts and 0:14:40.760 --> 0:14:43.640 the risks to the forecast a year or two out. 0:14:43.760 --> 0:14:46.680 That's that's all you need to do. Very good, Thank 0:14:46.720 --> 0:15:04.120 you so much. Jathani Finis, Massachusetts Institute of Technology. I 0:15:04.160 --> 0:15:05.840 want to bring an Abbey Joseph Cohen now she is, 0:15:05.840 --> 0:15:08.480 as I said, senior investment strategist at Goldman Sachs, President 0:15:08.920 --> 0:15:11.040 of the Global Markets Institute. Great to have you with us, 0:15:11.960 --> 0:15:15.080 Thank you so much. Happy to participate. Tell us a 0:15:15.120 --> 0:15:18.040 bit about the the the interplay here between US equities 0:15:18.040 --> 0:15:20.800 and what's going on in Frankfurt today. How are investors 0:15:20.840 --> 0:15:24.360 here in the US watching what's happening with the ECB. Well, 0:15:24.560 --> 0:15:27.800 clearly there's always attention when there's a decision to be 0:15:27.960 --> 0:15:31.160 made by a major central bank, but let's step away 0:15:31.200 --> 0:15:33.080 from that for a moment. It was all of this 0:15:33.240 --> 0:15:37.080 discussion about monetary policy. I think when the history is 0:15:37.160 --> 0:15:40.080 written of the last several years, the real story will 0:15:40.120 --> 0:15:44.040 be the absence of fiscal policy. We see enormous pressure 0:15:44.080 --> 0:15:47.680 on central banks, including the ECB and the SAID to 0:15:48.000 --> 0:15:51.040 provide as much stimulus as they can through the use 0:15:51.120 --> 0:15:55.960 of monetary policy, including some new tools that they've created 0:15:56.320 --> 0:15:59.360 and put in their toolbox. On the other hand, I 0:15:59.440 --> 0:16:02.040 think when we look at Europe in particular, what we 0:16:02.160 --> 0:16:05.280 see is that, uh, they are facing a number of 0:16:05.320 --> 0:16:09.080 other structural issues. There has been very little in the 0:16:09.160 --> 0:16:12.920 way of fiscal policy because of the monstrous record. They've 0:16:12.960 --> 0:16:16.560 been trying to keep their fiscal deficits as low as 0:16:16.760 --> 0:16:19.720 as they can, but there are also the structural problems 0:16:19.800 --> 0:16:25.440 in terms of slow labor force growth and also educational attainment, 0:16:25.720 --> 0:16:27.840 which is not keeping up with the sort of jobs 0:16:27.880 --> 0:16:30.880 that are being created. Since the election here in the US, 0:16:30.920 --> 0:16:35.000 the conversation has centered squarely on the prospects for more 0:16:35.080 --> 0:16:39.680 fiscal stimulus here in the US, tax reform changes to 0:16:39.760 --> 0:16:42.400 the tax policy as well. What degree do you think 0:16:42.440 --> 0:16:45.320 Europe is watching that? You mentioned the absence of fiscal 0:16:45.400 --> 0:16:48.440 policy in Europe? How closely or policy makers they're paying 0:16:48.440 --> 0:16:50.240 attention to what plays out here in the US over 0:16:50.240 --> 0:16:52.960 the next I let's say six to twelve months couple. 0:16:53.040 --> 0:16:55.720 Like everyone else, they're paying a great deal of attention 0:16:55.880 --> 0:17:00.680 and wondering which way policy will actually settle. UM. You know, 0:17:00.760 --> 0:17:03.440 there are a lot of discussions during the campaign, but 0:17:03.600 --> 0:17:07.680 some of the specifics UM not only are not yet known, 0:17:08.080 --> 0:17:11.320 but they may be at odds with what Republicans in 0:17:11.480 --> 0:17:15.560 the House and Senate might like UH to move forward on. 0:17:15.760 --> 0:17:19.720 So what do we think, what do we believe will happen? Yes, 0:17:19.800 --> 0:17:23.480 I think everyone in the financial markets. Well, let me 0:17:23.560 --> 0:17:27.600 not make that broad statement. Almost everyone in the financial 0:17:27.680 --> 0:17:31.680 markets is assuming some form of fiscal stimulus. When we 0:17:31.800 --> 0:17:34.920 look at corporate tax reform, what we do know is 0:17:35.000 --> 0:17:38.920 that during the Obama administration there has been support on 0:17:39.040 --> 0:17:41.959 the Democratic side of the aisle for corporate tax reform. 0:17:42.400 --> 0:17:46.639 Some of the proposals not all that different in context, 0:17:47.000 --> 0:17:51.560 UH than the Republican proposals, but nothing happened during Mr 0:17:51.680 --> 0:17:55.000 Obama's terms of office, in large part because the Democrats 0:17:55.119 --> 0:17:59.640 didn't want to separate corporate tax reform from individual tax 0:17:59.720 --> 0:18:03.680 reform form. UM. If we can move forward now on 0:18:03.800 --> 0:18:06.720 the corporate tax reform, we are expecting to see a 0:18:06.840 --> 0:18:10.119 reduction in what's called the statutory tax rate, but that 0:18:10.320 --> 0:18:14.639 happens through the elimination of other deductions and credits and 0:18:14.760 --> 0:18:17.520 so on. UM, and so what we'll be looking for 0:18:17.880 --> 0:18:21.200 is the effective tax rate. The effect tax rate for 0:18:21.240 --> 0:18:25.440 the SMP five is now below It's not the thirty 0:18:25.480 --> 0:18:29.280 eight or thirty nine percent that so many people speak about. Uh. 0:18:29.400 --> 0:18:31.960 The other thing that many people are focused on, of course, 0:18:32.080 --> 0:18:36.560 is repatriation of the money that is sitting outside the 0:18:36.680 --> 0:18:40.480 United States. Uh. These are the results of profits earned 0:18:40.520 --> 0:18:44.160 by US companies outside the United States where the tax rates, 0:18:44.240 --> 0:18:47.280 the statutory rates are lower, and they didn't want to 0:18:47.320 --> 0:18:50.680 get hit by the double whammy of bringing these back 0:18:50.760 --> 0:18:54.200 repatriating these funds at a higher rate. I think there'll 0:18:54.240 --> 0:18:56.760 be a lot of discussion of that repatriation, how this 0:18:56.960 --> 0:19:00.320 gets done. Even within the Republican Party, there's seemed to 0:19:00.359 --> 0:19:03.920 be two or three separate proposals. One of the things 0:19:04.000 --> 0:19:08.600 that we see happening for investors is that there adjusting 0:19:08.680 --> 0:19:12.520 their portfolios to look at these companies that may be 0:19:12.680 --> 0:19:16.760 bringing their money back, etcetera. We don't yet know whether 0:19:16.880 --> 0:19:22.440 that money can be used directly for share repurchases for 0:19:22.760 --> 0:19:25.440 m and A activity, or as many of the Democrats 0:19:25.520 --> 0:19:29.720 have suggested, there should be some link between repatriation and 0:19:30.080 --> 0:19:33.560 reinvestment of that money in the United States for things 0:19:33.640 --> 0:19:36.960 like cathics and job creation. And now it sounds like 0:19:37.000 --> 0:19:38.680 from from what you're describing that there is there is 0:19:38.760 --> 0:19:41.240 no shortage of uncertainty. And I wonder what you make 0:19:41.280 --> 0:19:44.320 of the market reaction. Sort of in the immediate aftermath 0:19:44.560 --> 0:19:46.560 of the election, we saw a lot of investors betting 0:19:46.600 --> 0:19:48.879 on the prospects of of stimulus here, betting on the 0:19:48.960 --> 0:19:53.760 prospect of investment in infrastructure. Say, have have calmer minds prevail? 0:19:53.840 --> 0:19:56.920 Of clear minds prevailed if things calmed out a bit, Well, 0:19:57.119 --> 0:19:59.960 let me put it in two different phases. I find 0:20:00.080 --> 0:20:02.720 may um if we harken back to some of the 0:20:02.800 --> 0:20:06.560 conversations that I've had uh with you and Tom and 0:20:07.040 --> 0:20:10.440 others over the last several months. The point I was 0:20:10.560 --> 0:20:15.159 making is that based upon the dynamic of the U 0:20:15.320 --> 0:20:19.040 S economy, the sort of profit generation, the job creation 0:20:19.119 --> 0:20:22.320 that we were seeing, and so on, SMP five hundred 0:20:22.440 --> 0:20:26.560 at DRED was the right number UH in my view 0:20:26.720 --> 0:20:29.160 for the end of two thousand and sixteen. So that's 0:20:29.160 --> 0:20:32.840 where we are UM number one, number two. The other 0:20:32.960 --> 0:20:36.160 point that I made very strongly is that I thought 0:20:36.200 --> 0:20:39.560 that interest rates have been way too low UH. And 0:20:39.720 --> 0:20:42.760 so we have in fact seen a notable rise in rates, 0:20:43.240 --> 0:20:47.520 but they're still below what our fixed income teams might 0:20:47.640 --> 0:20:50.840 consider to be fair value UM. And so we do 0:20:51.000 --> 0:20:55.080 think that said will be raising rates here in December. 0:20:55.240 --> 0:20:58.639 We think that will be some ongoing moves. Yes, that's 0:20:58.920 --> 0:21:01.639 the so called policy he rates. But we have already 0:21:01.720 --> 0:21:05.400 seen intermediate and long yields move higher. With a ten 0:21:05.520 --> 0:21:08.560 year at about a two point four percent, we think 0:21:08.640 --> 0:21:11.000 in the coming months we ought to be seeing it 0:21:11.200 --> 0:21:13.840 something like two point seven. So, to get back to 0:21:13.920 --> 0:21:16.760 your question, much of what has happened in the markets 0:21:17.280 --> 0:21:21.840 since the election have been consistent with an underlying economy 0:21:22.119 --> 0:21:25.600 that is growing UH, that seems to have very good 0:21:25.960 --> 0:21:30.159 legs as stable UM is generating good corporate profits and 0:21:30.280 --> 0:21:34.200 so on. If we turn our attention to the stock selection. 0:21:35.000 --> 0:21:37.960 What we see, uh, is that we've already moved into 0:21:38.000 --> 0:21:41.480 a different phase. The first phase of the post election 0:21:41.640 --> 0:21:45.480 rally had to do with infrastructure companies, with those that 0:21:45.520 --> 0:21:48.560 would benefit from it, those that might benefit from a 0:21:48.680 --> 0:21:52.080 change in the regulatory environment, and so on. And now 0:21:52.160 --> 0:21:55.239 we've seen a real move towards what my colleagues are 0:21:55.280 --> 0:22:00.520 referring to as the reflation trade. Basically, the economy doing well, 0:22:01.040 --> 0:22:06.239 inflation beginning to move up, prices rising, wages moving up. 0:22:06.320 --> 0:22:08.600 By the way, wages moving up is a good thing, 0:22:08.880 --> 0:22:11.320 not a bad thing, um. And so we are seeing 0:22:11.640 --> 0:22:14.840 a shift into some of the more cyclical aspects of 0:22:14.960 --> 0:22:18.960 the stock market. When you look at a degree which 0:22:19.000 --> 0:22:20.840 the next leg of this is going to be earnings driven, 0:22:20.880 --> 0:22:22.359 what do you see and what's the cabalist going to 0:22:22.440 --> 0:22:26.320 be for that? Um? If we just do the straight 0:22:26.359 --> 0:22:30.760 analysis of earnings driven and so on, it looks okay, um. 0:22:30.920 --> 0:22:34.000 And and so the S and P of forecasts for 0:22:34.200 --> 0:22:38.040 two thousand and seventeen our team is showing an increase 0:22:38.119 --> 0:22:42.400 of about um. The consensus is a little bit higher, 0:22:42.560 --> 0:22:46.200 something like twelve or thirteen percent. So there seems to 0:22:46.320 --> 0:22:50.680 be good earning support for still higher stock prices, and 0:22:50.800 --> 0:22:53.919 that may in fact continue to drive the stock market 0:22:54.600 --> 0:22:58.720 until we see what the actual policies will be from 0:22:58.760 --> 0:23:03.879 the new administration. UH fiscal policy respecting stimulus, yes, but 0:23:04.000 --> 0:23:07.639 it's also important to look at things like trade policy. Um. 0:23:07.960 --> 0:23:10.720 One thing that I can't stress enough is the following. 0:23:11.160 --> 0:23:15.400 Over the last decade, the US economy using GDP has 0:23:15.440 --> 0:23:20.800 grown per adom about two The single fastest growing sector 0:23:21.000 --> 0:23:24.359 of our economy has been trade, where the annual growth 0:23:24.520 --> 0:23:27.760 rate has been about six percent. If in fact we 0:23:27.880 --> 0:23:32.960