Speaker 1: Who you put your trust in matters. Investors have put
Speaker 1: their trust and independent registered investment advisors to the two
Speaker 1: and four trillion dollars. Why learn more at find your
Speaker 1: Independent Advisor dot com. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best in economics, finance, investment and international relations.
Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and
Speaker 1: of course on the Bloomberg. This is why we do
Speaker 1: Bloomberg Surveillance. It's a quality of the guests, and we
Speaker 1: do that in London, we do that in New York.
Speaker 1: Michael Spencer the Yesterday. Richard Clarina with us from PIMCO
Speaker 1: today of course for years of work at Columbia University
Speaker 1: and now from the Massachusetts Institute of Technology in Boston
Speaker 1: at the nacios or finds he is a former ECB official,
Speaker 1: which barely describes his research, contribution to economics and of
Speaker 1: course his timely work with his Cyprus during their crisis.
Speaker 1: Wonderful to have you with us, Professor. I want to
Speaker 1: get the cypress in a minute, but I want to
Speaker 1: talk about what I consider your word toolbox. What's the
Speaker 1: toolbox that Mario Draggi has if he has a constraint
Speaker 1: of a German philosophy, a German economics and the cacophony
Speaker 1: known as Italy. Well, the toolbooks he should start with
Speaker 1: is the Treaty of the European Union that gives the
Speaker 1: ECB supreme independence and one primary mandate, which the c
Speaker 1: B has been missing. The c B has not been
Speaker 1: easy monetary policy sufficiently to reach inflation of just under
Speaker 1: two percent, which is their objective, and they can uh
Speaker 1: use the power of their balance it to to get there. Uh.
Speaker 1: You mentioned Germany and political constraint. This is what the
Speaker 1: c B should have been ignoring while they meet their mandate.
Speaker 1: But Mr orphanedez if, like the markets believe Mario Druggie
Speaker 1: will extend QUEI today. What are the implications of tapering?
Speaker 1: Does it make it that much harder to then withdraw
Speaker 1: some of the support? Frankly, I think talk of tapering
Speaker 1: was premature in the in the Euro Area. Let's let's
Speaker 1: go back to the basics. Core inflation in the EU
Speaker 1: Area has been at or below one percent for almost
Speaker 1: four years running. Just to just to understand how severe.
Speaker 1: The undershoot of inflation is monetary policy should have been
Speaker 1: far more expansionary, and this is what should have been
Speaker 1: done by expanding the balance it the CB started expanding
Speaker 1: balance its way too late. They only started QUEI in
Speaker 1: in mark of twenty fifteen, and they did not do
Speaker 1: it at a pace that is sufficient to make up
Speaker 1: for the for the previous misses. Right now, in my view,
Speaker 1: they should actually announce that they will continue the asset
Speaker 1: purchases throughout seventeen UH and frankly they may need to
Speaker 1: do much more of that. The fact that they've delayed
Speaker 1: initiating the que program is what creates a difficulty they
Speaker 1: have right now where they have to do much more
Speaker 1: than they would otherwise would have to right so this
Speaker 1: is extremely significant. Mr Orphanidez, When do you think tapering
Speaker 1: should start? If you think it was premature to talk
Speaker 1: about it two months ago, and if you believe that
Speaker 1: there's more quee coming, are we talking tapering in eighteen? Even? Frankly,
Speaker 1: eighteen would probably be be a reasonable guest right now,
Speaker 1: but only if they do the appropriate monetary policy in
Speaker 1: coming months. The longer they have two tight conditions, then
Speaker 1: the longer we have inflation that is too low, and
Speaker 1: as long as inflation is too low, it's really pretty
Speaker 1: mature to talk about tapering. If they were to really
Speaker 1: extend the pace of US purchases, in my view, they
Speaker 1: should have increased the right there, the pace of purchases
Speaker 1: over the next year. Then they could be too Then
Speaker 1: they could be talking about tapering in twenty eight. If
Speaker 1: they keep under delivering, then that that may have to
Speaker 1: come even later. In the last weeks or so, Professor,
Speaker 1: any number of times I have cited Cypress is an
Speaker 1: example of clearing markets, of facing crisis, of making tough decisions.
Speaker 1: You live that with your Cypress a few years back.
Speaker 1: What can Italy, as an example, learn from your experience
Speaker 1: and your leader's experience in Cypress in clearing markets. What
Speaker 1: does Italy need to learn and do well? To tell
Speaker 1: you the truth? I hope that that Cyprus is not
Speaker 1: comparable to Twitterly, what we seen in Cyprus in twenty
Speaker 1: thirteen was unnecessary in distraction. I remember I was watching
Speaker 1: that from from Boston in dismay. This was just an
Speaker 1: example of the gratuitous distraction of the real economy that
Speaker 1: has been going on during the crisis. I hope we
Speaker 1: do not see something like that in in Italy. What
Speaker 1: we need in Italy is is well known. First of all,
Speaker 1: the talent government should implement more structural reforms so that
Speaker 1: the medium term growth can can rise. And then second
Speaker 1: we actually need a boost in aggregate demand, which is
Speaker 1: where the c B comes in. By maintaining two tight
Speaker 1: monetary policy, nominal income growth in Italy is too low,
Speaker 1: this actually deteriorate and that dynamics. This makes a fairm
Speaker 1: profitability lower, This raises npls. So the fact that we're
Speaker 1: talking about say banking issue in Italy right now, well,
Speaker 1: this is policy made. This isn't bad banks. The banking
Speaker 1: system in in Italy was a really very good shape
Speaker 1: at the beginning of the crisis. But if you have
Speaker 1: a five year long recession, then you end up with
Speaker 1: problem to the banks as well. Okay, let's do this.
Speaker 1: My question to Richard Clarida doesn't matter. Would you ask
Speaker 1: a question please, if your colleague Mr Richard Clarata with
Speaker 1: the Nazis athanasios, uh, you know, both of us are
Speaker 1: wants and there's been some discussion increased in recent years
Speaker 1: on the FED and potentially other central banks. Uh. Reprofiling
Speaker 1: inflation targeting to price level targeting. The e CP is
Speaker 1: not the only central bank that's fallen short. The Fed's
Speaker 1: fallen short of its inflation target for four years. And so,
Speaker 1: without getting into whether or not central banks should do that,
Speaker 1: do you think in the next five years we'll see
Speaker 1: a major central bank redefined inflation targeting? Is price level targeting? Well,
Speaker 1: that's that's that's a very good question if we are
Speaker 1: to see one, my bed would be on starting with
Speaker 1: the Bank of Canada. Bank of Canada has a has
Speaker 1: a story of actually considered what is best practice over
Speaker 1: the years and trying to do this. When I'm thinking
Speaker 1: about the Federal Reserve, I think the Federal Reserve, even
Speaker 1: though it came late, it has managed to achieve price
Speaker 1: ability and it has actually crossed over beyond full employment,
Speaker 1: which has over done it. So really, in the case
Speaker 1: of the c B, I would have been so happy
Speaker 1: if they could just do what their mandate has been
Speaker 1: over the last two years, over the last several years.
Speaker 1: Before we start talking about about price level targeting, I
Speaker 1: want to have to agree with you. If we had
Speaker 1: price level targeting, things would have been easier. In the
Speaker 1: current point. I need to go to both you. This
Speaker 1: is crucial. Professor of Finiti is John B. Taylor's name
Speaker 1: has been vetted to after we move on from yelling
Speaker 1: if we have a Trump administration, John Taylor with the
Speaker 1: more rules based theme than discretion. Is that an appropriate
Speaker 1: stance of the US Federal Reserve system in my view?
Speaker 1: And John Taylor is an excellent candidate for the for
Speaker 1: the Federal Reserve. I think we do it to hold
Speaker 1: central banks accountable to their mandate. Same thing I've been
Speaker 1: saying about the c B I could say about the FED.
Speaker 1: The Fed has done a better job than they have
Speaker 1: been the last several years. Still being more systematic and
Speaker 1: accountable would be an improvement for the next ten, ten,
Speaker 1: twenty years. Anatalia, so often it is how do you
Speaker 1: view or how would your view were you still an
Speaker 1: ECB board member. The referendum in it today, does it
Speaker 1: push and press more, you drug it to do more?
Speaker 1: Or would you still say that he needs to put
Speaker 1: even if we didn't have the referendum giving Renzi sixty
Speaker 1: percent of no votes. Well, listen, the rise of populism
Speaker 1: is a concern in the euro Area. But what's the
Speaker 1: best way to fight populism, deliver growth. So, frankly, I
Speaker 1: go back to my basic recipe. If the c B
Speaker 1: had been doing its job, growth would have been faster
Speaker 1: in the euro Area. That would have been the best
Speaker 1: defense against the rise of populism. I do worry about
Speaker 1: political factors. We have elections coming up in in in Europe,
Speaker 1: we have the Netherlands, we have France, we have we
Speaker 1: have Germany, and we see populism anywhere. Frankly, the establishment
Speaker 1: recipe is not working. We actually do need to deliver
Speaker 1: more growth with easier policy. And this is we've been
Speaker 1: talking about the c B. I have to say, and
Speaker 1: and here I should give praise to the European Commission
Speaker 1: last month, for the first time in their history, they
Speaker 1: actually took a stance on phisical policy for the U
Speaker 1: as a whole and the knowledge that phisical policy is
Speaker 1: too tight as well. Right now, Athana is with us
Speaker 1: from Boston. He is with m I T and with
Speaker 1: Colombia and PIMCO. Richard Claria, Professor Claire, let me start.
Speaker 1: You bring up the dots right now and basically the
Speaker 1: vigilantees and Cherry Yellen are finally on the same page.
Speaker 1: Is at the correct state. You know, that's why I
Speaker 1: love the show, because you nailed it. For the last
Speaker 1: three years, the dots have been detached on the markets,
Speaker 1: and the dots have been doing all the moving, the
Speaker 1: red lines coming up in all asked five weeks, we've
Speaker 1: actually had market pricing move up towards the dots. So
Speaker 1: it actually can go both ways. Okay, within that, there's
Speaker 1: the dots, Professor fern Needs and I mean this with
Speaker 1: great respect for your research at the FED years ago.
Speaker 1: Does your toolbox include the dots? No, no, it did not.
Speaker 1: And as a matter of fact, I don't think that
Speaker 1: that having the dots out there is a good idea.
Speaker 1: It creates this this disconnect between markets and the f MC.
Speaker 1: I would much rather that the FAT says we're going
Speaker 1: to do our job and deliver price stability and full
Speaker 1: employment without trying to guess what the FED funds there
Speaker 1: is going to be three years out all right, and
Speaker 1: mr finding this. I'm here in London and actually the
Speaker 1: NPC is very different to what the FED used to
Speaker 1: be like, and a lot of people saying, well, look,
Speaker 1: the FEED is now trying to be more like NPC
Speaker 1: have different views, They argue, not openly but you hear
Speaker 1: very different things. Is it more confusing for a central
Speaker 1: bank to be transparent or not? Well, I think there
Speaker 1: are there are limits to how useful transparency can be,
Speaker 1: and in the case of the FED, I think that
Speaker 1: those limits have been crossed. The dots were a very
Speaker 1: useful device to have during the crisis when the FED
Speaker 1: was trying to communicate that it would keep interest rates
Speaker 1: low for much longer than the markets thought at the time.
Speaker 1: It was a useful tool. But frankly, when you are
Speaker 1: in the business of providing guesses for things you don't
Speaker 1: know about, like FED funds three years out, this is
Speaker 1: where you cross the limits of transparency and you end
Speaker 1: up risking misinforming investors rather than providing useful information. Do
Speaker 1: you agree with that, Richard? And you know, on the
Speaker 1: basis of it, it was basically to give the market
Speaker 1: a glimpse of how people were thinking, even if they
Speaker 1: were wrong. Well, there are a lot of problems with
Speaker 1: the doctors I've said, I think on your show, you know,
Speaker 1: the dots are very precisely answer to an uninteresting question.
Speaker 1: That being said, I think there are there's information and
Speaker 1: if I were doing it, I would I would not
Speaker 1: get rid of the dots. I would I would refine
Speaker 1: uh and and improve them. But I agree they've created
Speaker 1: as many headaches as they've solved in the last couple
Speaker 1: of years. Let me rip up the script here, and
Speaker 1: I think this is important. Mr Bullet out of St.
Speaker 1: Louis is an original guy in part of his latest theory,
Speaker 1: and he will say, this is a small, non vetted paper.
Speaker 1: You know, I'm dealing here with heavyweights Claire and or
Speaker 1: Fans and Bullard. I don't want to get Mr Bullard
Speaker 1: upset at me, but he talks about don't move until
Speaker 1: there's a regime change. Is James Bullard getting his regime
Speaker 1: change or some well that's to be determinable. Only weigh
Speaker 1: in on that. Jim is very thoughtful and and the
Speaker 1: basic point he's making is when I have some sympathy
Speaker 1: with which is you need to think of a rules
Speaker 1: based policy as a guide post um. And I've called
Speaker 1: it a forward looking Taylor rule. And essentially what he's
Speaker 1: saying is that the problem right now is it's very
Speaker 1: hard to look into the future because we can either
Speaker 1: be stuck in a low interest rate equilibrium, in which
Speaker 1: case we're never going to hike more than once or twice,
Speaker 1: or we go back to a better accolademy will be
Speaker 1: hawking a lot. Since I don't know, I'm not going
Speaker 1: to give up FORKA. This is this is critical, Professor Orphan.
Speaker 1: It is if it's an ex and A we're out
Speaker 1: front fed or it's an ex post, we gotta wait, wait,
Speaker 1: wait till after the fact fed, which is given Professor
Speaker 1: Dr Bullard's great interest in a regime change before you act,
Speaker 1: are we at that point? Well, I wouldn't put so
Speaker 1: much emphasis on the regime change perces as in what
Speaker 1: Riach said, which is, we really don't know where the
Speaker 1: fat funds er should be going to have. We have
Speaker 1: too much, too much uncertainty in too many UH, in
Speaker 1: too many mothers. There has been the discussion on what
Speaker 1: is the equilibrium really interest rate for the past several years.
Speaker 1: It's one of the reasons why you really should not
Speaker 1: think that you can't tell a priority what the fat
Speaker 1: funds wer should be so so much way out. The
Speaker 1: way to do this, UH is really to to look
Speaker 1: at what is the distribution of risks for inflation and
Speaker 1: for economic activity and make sure you're guiding policies so
Speaker 1: that so that risks are balanced going forward. This is why,
Speaker 1: in my view, for example, the FEDS should should have
Speaker 1: been acting much faster with an employment rate going so
Speaker 1: low and now crossing reasonable estimates of the full employment,
Speaker 1: they should have been already moving up. You don't need
Speaker 1: to know what the FATS front is going to be
Speaker 1: three years ound in order to say, hey, you know
Speaker 1: we actually need somewhat tighter monetary policy today, right, because
Speaker 1: you just need to look at the data and that
Speaker 1: you look at the data. You look at the data
Speaker 1: and how the data you look at the data, and
Speaker 1: how the data is influencing uh ther your forecasts and
Speaker 1: the risks to the forecast a year or two out.
Speaker 1: That's that's all you need to do. Very good, Thank
Speaker 1: you so much. Jathani Finis, Massachusetts Institute of Technology. I
Speaker 1: want to bring an Abbey Joseph Cohen now she is,
Speaker 1: as I said, senior investment strategist at Goldman Sachs, President
Speaker 1: of the Global Markets Institute. Great to have you with us,
Speaker 1: Thank you so much. Happy to participate. Tell us a
Speaker 1: bit about the the the interplay here between US equities
Speaker 1: and what's going on in Frankfurt today. How are investors
Speaker 1: here in the US watching what's happening with the ECB. Well,
Speaker 1: clearly there's always attention when there's a decision to be
Speaker 1: made by a major central bank, but let's step away
Speaker 1: from that for a moment. It was all of this
Speaker 1: discussion about monetary policy. I think when the history is
Speaker 1: written of the last several years, the real story will
Speaker 1: be the absence of fiscal policy. We see enormous pressure
Speaker 1: on central banks, including the ECB and the SAID to
Speaker 1: provide as much stimulus as they can through the use
Speaker 1: of monetary policy, including some new tools that they've created
Speaker 1: and put in their toolbox. On the other hand, I
Speaker 1: think when we look at Europe in particular, what we
Speaker 1: see is that, uh, they are facing a number of
Speaker 1: other structural issues. There has been very little in the
Speaker 1: way of fiscal policy because of the monstrous record. They've
Speaker 1: been trying to keep their fiscal deficits as low as
Speaker 1: as they can, but there are also the structural problems
Speaker 1: in terms of slow labor force growth and also educational attainment,
Speaker 1: which is not keeping up with the sort of jobs
Speaker 1: that are being created. Since the election here in the US,
Speaker 1: the conversation has centered squarely on the prospects for more
Speaker 1: fiscal stimulus here in the US, tax reform changes to
Speaker 1: the tax policy as well. What degree do you think
Speaker 1: Europe is watching that? You mentioned the absence of fiscal
Speaker 1: policy in Europe? How closely or policy makers they're paying
Speaker 1: attention to what plays out here in the US over
Speaker 1: the next I let's say six to twelve months couple.
Speaker 1: Like everyone else, they're paying a great deal of attention
Speaker 1: and wondering which way policy will actually settle. UM. You know,
Speaker 1: there are a lot of discussions during the campaign, but
Speaker 1: some of the specifics UM not only are not yet known,
Speaker 1: but they may be at odds with what Republicans in
Speaker 1: the House and Senate might like UH to move forward on.
Speaker 1: So what do we think, what do we believe will happen? Yes,
Speaker 1: I think everyone in the financial markets. Well, let me
Speaker 1: not make that broad statement. Almost everyone in the financial
Speaker 1: markets is assuming some form of fiscal stimulus. When we
Speaker 1: look at corporate tax reform, what we do know is
Speaker 1: that during the Obama administration there has been support on
Speaker 1: the Democratic side of the aisle for corporate tax reform.
Speaker 1: Some of the proposals not all that different in context,
Speaker 1: UH than the Republican proposals, but nothing happened during Mr
Speaker 1: Obama's terms of office, in large part because the Democrats
Speaker 1: didn't want to separate corporate tax reform from individual tax
Speaker 1: reform form. UM. If we can move forward now on
Speaker 1: the corporate tax reform, we are expecting to see a
Speaker 1: reduction in what's called the statutory tax rate, but that
Speaker 1: happens through the elimination of other deductions and credits and
Speaker 1: so on. UM, and so what we'll be looking for
Speaker 1: is the effective tax rate. The effect tax rate for
Speaker 1: the SMP five is now below It's not the thirty
Speaker 1: eight or thirty nine percent that so many people speak about. Uh.
Speaker 1: The other thing that many people are focused on, of course,
Speaker 1: is repatriation of the money that is sitting outside the
Speaker 1: United States. Uh. These are the results of profits earned
Speaker 1: by US companies outside the United States where the tax rates,
Speaker 1: the statutory rates are lower, and they didn't want to
Speaker 1: get hit by the double whammy of bringing these back
Speaker 1: repatriating these funds at a higher rate. I think there'll
Speaker 1: be a lot of discussion of that repatriation, how this
Speaker 1: gets done. Even within the Republican Party, there's seemed to
Speaker 1: be two or three separate proposals. One of the things
Speaker 1: that we see happening for investors is that there adjusting
Speaker 1: their portfolios to look at these companies that may be
Speaker 1: bringing their money back, etcetera. We don't yet know whether
Speaker 1: that money can be used directly for share repurchases for
Speaker 1: m and A activity, or as many of the Democrats
Speaker 1: have suggested, there should be some link between repatriation and
Speaker 1: reinvestment of that money in the United States for things
Speaker 1: like cathics and job creation. And now it sounds like
Speaker 1: from from what you're describing that there is there is
Speaker 1: no shortage of uncertainty. And I wonder what you make
Speaker 1: of the market reaction. Sort of in the immediate aftermath
Speaker 1: of the election, we saw a lot of investors betting
Speaker 1: on the prospects of of stimulus here, betting on the
Speaker 1: prospect of investment in infrastructure. Say, have have calmer minds prevail?
Speaker 1: Of clear minds prevailed if things calmed out a bit, Well,
Speaker 1: let me put it in two different phases. I find
Speaker 1: may um if we harken back to some of the
Speaker 1: conversations that I've had uh with you and Tom and
Speaker 1: others over the last several months. The point I was
Speaker 1: making is that based upon the dynamic of the U
Speaker 1: S economy, the sort of profit generation, the job creation
Speaker 1: that we were seeing, and so on, SMP five hundred
Speaker 1: at DRED was the right number UH in my view
Speaker 1: for the end of two thousand and sixteen. So that's
Speaker 1: where we are UM number one, number two. The other
Speaker 1: point that I made very strongly is that I thought
Speaker 1: that interest rates have been way too low UH. And
Speaker 1: so we have in fact seen a notable rise in rates,
Speaker 1: but they're still below what our fixed income teams might
Speaker 1: consider to be fair value UM. And so we do
Speaker 1: think that said will be raising rates here in December.
Speaker 1: We think that will be some ongoing moves. Yes, that's
Speaker 1: the so called policy he rates. But we have already
Speaker 1: seen intermediate and long yields move higher. With a ten
Speaker 1: year at about a two point four percent, we think
Speaker 1: in the coming months we ought to be seeing it
Speaker 1: something like two point seven. So, to get back to
Speaker 1: your question, much of what has happened in the markets
Speaker 1: since the election have been consistent with an underlying economy
Speaker 1: that is growing UH, that seems to have very good
Speaker 1: legs as stable UM is generating good corporate profits and
Speaker 1: so on. If we turn our attention to the stock selection.
Speaker 1: What we see, uh, is that we've already moved into
Speaker 1: a different phase. The first phase of the post election
Speaker 1: rally had to do with infrastructure companies, with those that
Speaker 1: would benefit from it, those that might benefit from a
Speaker 1: change in the regulatory environment, and so on. And now
Speaker 1: we've seen a real move towards what my colleagues are
Speaker 1: referring to as the reflation trade. Basically, the economy doing well,
Speaker 1: inflation beginning to move up, prices rising, wages moving up.
Speaker 1: By the way, wages moving up is a good thing,
Speaker 1: not a bad thing, um. And so we are seeing
Speaker 1: a shift into some of the more cyclical aspects of
Speaker 1: the stock market. When you look at a degree which
Speaker 1: the next leg of this is going to be earnings driven,
Speaker 1: what do you see and what's the cabalist going to
Speaker 1: be for that? Um? If we just do the straight
Speaker 1: analysis of earnings driven and so on, it looks okay, um.
Speaker 1: And and so the S and P of forecasts for
Speaker 1: two thousand and seventeen our team is showing an increase
Speaker 1: of about um. The consensus is a little bit higher,
Speaker 1: something like twelve or thirteen percent. So there seems to
Speaker 1: be good earning support for still higher stock prices, and
Speaker 1: that may in fact continue to drive the stock market
Speaker 1: until we see what the actual policies will be from
Speaker 1: the new administration. UH fiscal policy respecting stimulus, yes, but
Speaker 1: it's also important to look at things like trade policy. Um.
Speaker 1: One thing that I can't stress enough is the following.
Speaker 1: Over the last decade, the US economy using GDP has
Speaker 1: grown per adom about two The single fastest growing sector
Speaker 1: of our economy has been trade, where the annual growth
Speaker 1: rate has been about six percent. If in fact we
Speaker 1: are moving into more of a protectionist era, that's not
Speaker 1: so good, if you will, for US companies that have
Speaker 1: been doing very well by exporting producing things here selling
Speaker 1: them abroad. It is one of the truly most elegant
Speaker 1: reading rarely, David, can you take a classic restaurant in
Speaker 1: the classic hotel and not screw it up? They did
Speaker 1: that here at the Pier Hotel with Perne was beautiful.
Speaker 1: Is here for the power piece. I don't think I
Speaker 1: can afford an orange juice. That's it's another water for
Speaker 1: it is the power breakfast at the Pierre Hotel. This
Speaker 1: is the hotel where Elizabeth Taylor lived, among other were
Speaker 1: these sailor all lived here for years, and at the
Speaker 1: very top of the hotel was a sconce. One of
Speaker 1: the most important people in American investment in finance, the
Speaker 1: late Martin's Wage. He helped court here on investment and
Speaker 1: as our steam guest, who's Abby Joseph Cohen, It is
Speaker 1: wonderful to speak to you from Marty's Wage's abode. As
Speaker 1: you know, Uh, Marty's Wage always said, don't fight the Fed.
Speaker 1: We can't fight Janet Yellen right now, so what do
Speaker 1: we do? Marty's Wage also loved sitting wearing baseball attire. Um.
Speaker 1: Something that I think many people don't know is that
Speaker 1: he was an avid fan um and always had his
Speaker 1: baseball cap with him. But but let's get back to business,
Speaker 1: shall we. Um? What shall we talk about? Tom Well?
Speaker 1: I think the FED. I think the idea of Mrs
Speaker 1: It's a claim comment, don't fight the Fed. This is
Speaker 1: a Fed in motion, isn't it? This is a Fed
Speaker 1: in motion? But for good reason, our economy, in my
Speaker 1: view and the view of many others, no longer requires
Speaker 1: as much monetary stimulus. Obviously, they've been withdrawing the Kiwi.
Speaker 1: They've begun to raise interest rates, and we think more
Speaker 1: increases will becoming. The fact that intermediate long yields have
Speaker 1: already moved up I think as a reflection not just
Speaker 1: that investors are expecting the FED to move, but the
Speaker 1: FED probably should. This is an economy that is growing
Speaker 1: in this quarter two and a half to three percent.
Speaker 1: Maybe that's goost a little bit by inventory accumulation, But
Speaker 1: an economy that's been growing, let's call it about to
Speaker 1: two and a half percent, generating lots of jobs. Wages
Speaker 1: have begun to rise, many prices have begun to rise.
Speaker 1: It's time for interest rates to move up. And by
Speaker 1: the way, when they do, interest rates will still be low.
Speaker 1: We are at record low levels. If they move up somewhat,
Speaker 1: we don't think it's going to deter economic activity. It's
Speaker 1: partial differential Thursday. So let's do that right now. Abby.
Speaker 1: If we get the rays, if we get the feed
Speaker 1: in action, if we get the president elect and action,
Speaker 1: is it an increase in inflation out running an increase
Speaker 1: in real growth or can we get the best of
Speaker 1: all worlds? I believe initially we will have growth that
Speaker 1: people focus on. The inflation will come later. The sort
Speaker 1: of increases we're seeing in wages and so on now,
Speaker 1: in my view, not particularly inflationary, because it's coming after
Speaker 1: a period in which wages in many categories were stagnant.
Speaker 1: Good wage growth is good for middle class consumption, obviously,
Speaker 1: the number one largest sector of the U. S economy.
Speaker 1: The inflation, I believe, always comes later when we begin
Speaker 1: to see that there are capacity constraints UM in the
Speaker 1: labor markets, UM in the production and capacity of the
Speaker 1: US economy and so on. We haven't seen it. But
Speaker 1: there's something else that I think will be pushing inflation
Speaker 1: up somewhat, and that is commodity prices UM. We have
Speaker 1: benefited for quite a while now from low energy prices
Speaker 1: that has really pushed down headline cp I. Of course,
Speaker 1: c p I UM never really got quite that low.
Speaker 1: Core CPI has begun to rise, and the headline inflation,
Speaker 1: of course, will reflect the increases not just an energy prices,
Speaker 1: but ultimately some of the other commodities that we're seeing
Speaker 1: move higher. Aby Joseph Co we have about a minute
Speaker 1: left and we'll have to get you to join us here.
Speaker 1: Next time you can. You can bring a baseball cap
Speaker 1: if if you like, but let me ask you about
Speaker 1: and I'm not one of those orange juices. There you go,
Speaker 1: They're very They're delicious. Uh. We look at the dollar here,
Speaker 1: Bloomer dollar spotted slightly weaker this morning. But the tale
Speaker 1: of the strong dollar has been the overarching narrative here
Speaker 1: for a while. How long do you expect that that
Speaker 1: story to continue here? And do you expect this administration
Speaker 1: to to a similar strong dollar policy. A dollar story,
Speaker 1: or any currency story, is always a relative story, and
Speaker 1: we tend to focus as Americans on what we're doing
Speaker 1: that is pushing the dollar up. Let's keep in mind
Speaker 1: that Europe is not looking all that robust. Other parts
Speaker 1: of the world are not looking all that robust, and
Speaker 1: that is contributing to the idea of dollar as reserve currency,
Speaker 1: safe haven uh and and so on. Um. We think
Speaker 1: the dollar will continue to rise relative to the euro
Speaker 1: relative to some of these are the currencies, but on
Speaker 1: a percentage basis, we've probably seen a good deal of
Speaker 1: the move already. Keep in mind that all of the
Speaker 1: things being equal, this is not great for economic growth.
Speaker 1: If the as the dollar rises, our exports become less
Speaker 1: competitively priced. The most recent trade data show that there
Speaker 1: was some problem there. Abby, Thank you so much. Ms
Speaker 1: Cohen appears this morning courtesy and Nicholas backs from of
Speaker 1: the Washington Capital as they took it to the Bruins
Speaker 1: last night. We will continue from the Pierre Hotel, the
Speaker 1: Power Breakfast at the Pierre. This is Bloomberg. Who you
Speaker 1: put your trust in? Matters. Investors have put their trust
Speaker 1: in independent registered investment advisors to the tune of four
Speaker 1: trillion dollars. Why they see their roles to serve, not sell.
Speaker 1: That's why Charles Schwab is committed to the success over
Speaker 1: seven thousand independent financial advisors who passionately dedicate themselves to
Speaker 1: helping people achieve their financial goals. Learn more at find
Speaker 1: your Independent Advisor dot com. It is a wonderful day
Speaker 1: of celebration for Bloomberg Surveillance. My book of the year
Speaker 1: is Kenna Rogoffs The Cursor Cash, which is exceptionally brave book.
Speaker 1: And the first book has advanced uh in uh into
Speaker 1: two thousand seventeen with the Undoing Project. And if I
Speaker 1: didn't tell you who the author was, you say, Okay, Tom,
Speaker 1: I trust you. I'm going to read the Undoing Project,
Speaker 1: but we're gonna do the big long year and mentioned
Speaker 1: that this is the new effort by one Michael Lewis. Michael,
Speaker 1: good morning, Good morning, Tom. Congratulations you've done it again.
Speaker 1: No one would ever think you would take within the
Speaker 1: trade Kaman in Diversky and put it into the poetry
Speaker 1: that you've done with the Undoing Project. Um. David Gurr
Speaker 1: has got a million questions, as do I, But I
Speaker 1: want to go to the heart of the matter, which
Speaker 1: is how did you take the challenges and complexity of
Speaker 1: game theory, psychology and really obtuse mathematics and bring it
Speaker 1: as accessibly as you did to the Undoing Project? How
Speaker 1: did you write the book? Um? The key to the
Speaker 1: whole thing was the love story between the two men
Speaker 1: and and the that was the That was the big
Speaker 1: key that it gave that the relationship was so emotionally
Speaker 1: charged and interesting, and the characters were so interesting that
Speaker 1: I that I figured that that once you hooked with
Speaker 1: the reader with the characters in that story, they'd follow
Speaker 1: They follow you anywhere. And David jump in here. But
Speaker 1: I really want to say that this is the one
Speaker 1: Michael Lewis book where you can see the movie as
Speaker 1: you read the book. And I never thought about common
Speaker 1: in divers King. But I mean this is the sequel
Speaker 1: to The Big Short. You can literally see the damn movie.
Speaker 1: The book is so lively. Michael, talk a bit more
Speaker 1: about that relationship. These two professors working together more than
Speaker 1: just a professional relationship. They were very close friends, more
Speaker 1: than just an academic relationship, because they were these Israelis
Speaker 1: who were on and off the battlefield every six years,
Speaker 1: you know. I mean they were dragged into the real
Speaker 1: world in a way that academics seldom are, and had
Speaker 1: huge influences on the real ward, like reshaping the Israeli military. Uh.
Speaker 1: And the the relationship struck everybody around them as bizarre
Speaker 1: because they were seen as opposite. I mean, it was
Speaker 1: a Felix and Oscar relationship, and uh they were. It
Speaker 1: was it was and what it was. And I think
Speaker 1: what was so exciting to the two of them is
Speaker 1: that they found they were different with each other than
Speaker 1: they were with anybody else. They got into a room
Speaker 1: and they became different people, and uh, they brought out
Speaker 1: they brought out stuff in each other's minds that didn't
Speaker 1: didn't come out except when they were with each other.
Speaker 1: I mean it was it's if you look at their work,
Speaker 1: what what Amos Tversky and Danny Knaman did together is
Speaker 1: so different from anything either one of them did alone.
Speaker 1: Uh it's it's like, I don't know, it's like two
Speaker 1: people who can kind of sing, but when they get together,
Speaker 1: it sounds beautiful. Uh So, the the the that was
Speaker 1: part that was part of what interested in me is
Speaker 1: that you had this collaboration that was just genuinely a collaboration.
Speaker 1: You couldn't untangle the one from the other. And the
Speaker 1: tragedy of the thing was that the world kind of
Speaker 1: wouldn't let that love that be that they really wanted
Speaker 1: to know who did what and assigned credit and all that,
Speaker 1: and it horran the relationship. Michael Lewis they, of course
Speaker 1: we're path breakers in the field is behavioral economics. For
Speaker 1: those who don't know it, give us the definition what
Speaker 1: is behavior like? Well, so it's funny you say that,
Speaker 1: because yes, in a way, they they gave birth to
Speaker 1: behavioral economics without even thinking they were that's what they
Speaker 1: were doing. I mean it was like with a flick
Speaker 1: of the risk because their work in sort of exploring
Speaker 1: how the human mind deals with uncertainty and makes judgments
Speaker 1: and decisions. Uh, was firmly withinside, you know, psychology, and
Speaker 1: then it bleeds out in all kinds of ways when
Speaker 1: they show that people are make systematic errors and and
Speaker 1: behavioral economics is taking essentially taking on board. It's a
Speaker 1: funny name for because what behavioral economics is is psychology.
Speaker 1: It's it's it's it's taking, it's taking insights from psychology
Speaker 1: and trying to play out play with their implications in
Speaker 1: in in the economy. I think of behavioral economics and
Speaker 1: how easily applied it is to to sports. I think
Speaker 1: if your previous work, Tom brought up moneyball, were these
Speaker 1: two guys sports fans that they see those applications when
Speaker 1: they were doing their work. Amos Tversky very much so
Speaker 1: Danny Danny Common didn't have much interested in sports, but
Speaker 1: but Amos Tversky actually he was doing moneyball like stuff.
Speaker 1: Uh way back in the eighties he was writing papers
Speaker 1: about the myth of a hot hand in basketball or
Speaker 1: that that he showed that streaked shooting was not actually
Speaker 1: streaked shooting, that it was perfectly explainable as uh as
Speaker 1: a kind of part of a random pattern. But they
Speaker 1: they the more, the more direct connection with the whole
Speaker 1: Moneyball stuff, is that that they they sort of ex
Speaker 1: Their work explains, you know, why baseball scouts misjudge baseball players.
Speaker 1: They explain what's going on in the minds of people
Speaker 1: who were evaluating other people for any kind of job.
Speaker 1: And so oddly, when I got into this, what I
Speaker 1: really thought of it, this is kind of the prequel
Speaker 1: or origin story for Moneyball. I love how you framed
Speaker 1: at the beginning, Michael Lewis, how you were getting massive
Speaker 1: acclaim for money Paul, even before Brad Pitt was cast
Speaker 1: in the movie. And and there were these two upstarts
Speaker 1: out of Chicago who said, Michael, maybe it's not an
Speaker 1: original that I could It was absolutely shocking to me
Speaker 1: that I had written this entire book about the way
Speaker 1: this baseball team had found players who were misvalued and
Speaker 1: and talked about things like biases. I mean, they were
Speaker 1: the behavior economics had infiltrated the Oakland A's front office
Speaker 1: and so condom and into verse he had via behavior economics.
Speaker 1: And then I didn't know about it, and that there
Speaker 1: was said that that that there was this early story.
Speaker 1: I didn't know that it was going to be a book,
Speaker 1: but I just thought, how did I miss that. Yeah, Michael,
Speaker 1: you you and the book with the tragedy. For all
Speaker 1: of us that love economics, I think of the death
Speaker 1: of Rudiger Dornbush of m I T is the only equivalent.
Speaker 1: The sadness of Amos Tversky dying described for us what
Speaker 1: Mr Traversky meant for Mr Khanman and all of a
Speaker 1: certain generation of economics. He he really was maybe the
Speaker 1: most vivid, uh pungent mind of his time, and that
Speaker 1: everybody who knew him couldn't get him out of his head,
Speaker 1: get their heads there is uh he he um. People
Speaker 1: who worked with him for the rest of their lives,
Speaker 1: whenever they were faced some problem, would always ask themselves,
Speaker 1: what would Amos say? Uh? Richard Nisbitt, the psychology at Michigan,
Speaker 1: designed a online intelligence test and it was the longer
Speaker 1: it takes you after you've met Amos to figure out
Speaker 1: that Amos is smarter than you, the stupider you are
Speaker 1: he was, and then nobody disputed it. His mind was
Speaker 1: just had this agility and this ability to move to
Speaker 1: levels of abstraction very quickly that you don't find in
Speaker 1: any field. Uh. I mean, my favorite aim of story
Speaker 1: is that he was in I did to uh party
Speaker 1: filled with some of the world's greatest physicists, and he
Speaker 1: just kind of by accident, and nobody knew who he
Speaker 1: was because he was a psychologist. And after the party
Speaker 1: one of the young physicists called the host and said,
Speaker 1: who was that physicist I was talking to? And they said,
Speaker 1: and he said, they couldn't figure out who he was
Speaker 1: talking about, he says, and they said, and they finally realized,
Speaker 1: oh no, no, he wasn't a physicist. That was Amos diversity.
Speaker 1: He's a psychologist. And the young physicist said, he's the
Speaker 1: smartest physicist I've ever met. And and so this guy
Speaker 1: he was he was superman uh and uh and really
Speaker 1: a really peculiar personality and not a self consciously smarty
Speaker 1: pants guy. He was a warrior, he was. He was
Speaker 1: a war hero. He was he was raised in Israel
Speaker 1: to be a spartan um. And in any case, he
Speaker 1: was the most alive person anybody knew, and his early
Speaker 1: death it struck everybody is just like totally improbable that
Speaker 1: Amos is dead. And one of the things I noticed
Speaker 1: and working on the book, is that people have kept
Speaker 1: him alive. They keep alive in his memory. But that's fair,
Speaker 1: that's so true. They don't where they refused. His filing
Speaker 1: cabinets from twenty years ago that he had outside his
Speaker 1: office at Stanford University are still in the hallway at
Speaker 1: Stanford University. What Michael Lewis just said, there's that's the
Speaker 1: smartest thing I've ever heard. That that's so true. And
Speaker 1: it's true of Rudy dorn Bush and Amos Tversky. We
Speaker 1: people just keep them alive. They need them, they still
Speaker 1: need them, uh, and so they find ways to keep
Speaker 1: them alive. And I think, you know, it's funny. I
Speaker 1: think my book is part of that effort. That I think,
Speaker 1: and then the people who enabled my book and made
Speaker 1: it possible for me to write it, a big motive
Speaker 1: was keeping Amos alive. We're going to continue this discussion
Speaker 1: of Bloomberg Television. Michael Lewis with us today on Bloomberg Radio,
Speaker 1: and I'll be blunt, folks. I'm still waiting through the
Speaker 1: end of the year books. I'm gonna be right out front.
Speaker 1: This is the read for two thousand seventeen. Michael Lewis.
Speaker 1: The undoing project the accessibility, including the opening chapter on
Speaker 1: the n b A is shocking what he has done
Speaker 1: to what we all study, which is common antiversity. The
Speaker 1: undoing project of friendship changed our minds. Michael Lewis, It's
Speaker 1: rare that we speak to a CEO that I can
Speaker 1: say not only changed in the industry, changed his company
Speaker 1: and all that, but maybe changed America. He's out of
Speaker 1: the University of Texas, Austin. He is he bleeds Southwest.
Speaker 1: Southwest Air Love. Gary Kelly joins us right now, Gary,
Speaker 1: good morning. I think Gary. The thing I would notice
Speaker 1: is the great Southwest Air tradition that all babies born
Speaker 1: on the airplane are named Gary Kelly. Right. What's it
Speaker 1: like when you get an email that a child has
Speaker 1: been born on one of your airplanes? Well, um, you know,
Speaker 1: the first obviously, the first reaction is I hope all
Speaker 1: went well, and you know, we diverted that flight to
Speaker 1: make sure that mother and baby were safe and and
Speaker 1: the baby was a little premature, so I think your
Speaker 1: body was concerned. But the last report I had is
Speaker 1: that everybody's doing wells. But yeah, it's it's uh, yeah,
Speaker 1: it's interesting. We have over fifty thousand employees at Southwest.
Speaker 1: We serve a hundred and twenty million customers a year
Speaker 1: where the largest airline in America and things happen every day,
Speaker 1: you know. So it's just a part of being a
Speaker 1: part of society. That's nicely put in within the fifty
Speaker 1: year tradition of forty five year tradition of Southwest air
Speaker 1: I know the no layoff angle on that You've had
Speaker 1: a two thousand sixteen of not labor war, but real
Speaker 1: back and forth with your employees. I know there's been
Speaker 1: recent settlements. Are you gonna have more of this into
Speaker 1: next year? And is this a new reality for airlines?
Speaker 1: Is battles between fancy executives and their labor. Is this
Speaker 1: where we're heading? Well, good question. I think that you know,
Speaker 1: I don't know about the rest of the industry. I
Speaker 1: would just talk about Southwest with with my comments. Um,
Speaker 1: we view Southwest as a family, and Uh, families have disagreements,
Speaker 1: that's not new in labor negotiations are always vigorous. UM.
Speaker 1: I'm glad that we're able to take care of our people,
Speaker 1: pay them extraordinarily. Well, Uh, you've made the point. We've
Speaker 1: never had a furlougher in our history. I love our people.
Speaker 1: We want to do the best job that we can
Speaker 1: to take care of them. So, uh, we're a family
Speaker 1: and we love each other, and uh we'll we'll continue,
Speaker 1: I think to serve our customers very well, and that's
Speaker 1: the most important thing here. High a t a out
Speaker 1: with the report we spoke to them in Europe earlier
Speaker 1: on Bloomberg surveillance clearly showing the profitability of America versus
Speaker 1: the foreign airlines. Are we gonna see finally the foreign
Speaker 1: airlines come more into ownership and act ativity in North
Speaker 1: America in the US or is that something that waits
Speaker 1: for another day? How do you see the the framework
Speaker 1: of ownership over the next three or four years? Uh,
Speaker 1: you know, there doesn't seem to be any real energy
Speaker 1: behind making a change there. And uh, you know, we
Speaker 1: have tremendous air service in the United States. We have
Speaker 1: very very vigorous competition. Um. It just it begs the
Speaker 1: question of what problem are we trying to solve with that? Um? Yeah,
Speaker 1: So I don't see a need to change there. And
Speaker 1: um on the other hand, there have been um a
Speaker 1: lot of challenges in terms of reregulating the airline industry,
Speaker 1: and my hope is that that will abate and that's
Speaker 1: where our focus is going. To be over the next
Speaker 1: several years with the new administration Gary Kelly with Southwesteria
Speaker 1: joining us this morning. UM I I look at the
Speaker 1: state of the industry and certainly when we speak the
Speaker 1: cell side, they inform us of more persistent cash flows.
Speaker 1: The last decade, Southwest are twelve percent a year return,
Speaker 1: much of that coming in the recent um years. Do
Speaker 1: you work day to day with your strategy and with
Speaker 1: your planning for next year, assuming a more responsible industry,
Speaker 1: it will lead to persistent cash flows or are you
Speaker 1: guys gonna make the same mistakes you made for the
Speaker 1: last thirty forty years in expansion? Well, you know, I'm
Speaker 1: not going to uh assume all the mistakes that our
Speaker 1: competitors made. You know, I started at Southwest thirty years ago.
Speaker 1: Every single major airline that was in existence in nine
Speaker 1: is either gone or gone bank And to be clear,
Speaker 1: you've never gone bankrupt. Absolutely, let's say that absolutely not
Speaker 1: so every single one and we haven't made those mistakes.
Speaker 1: Is the point. Southwest has been great service, low cost,
Speaker 1: UH low fares, and we've taken great care of our
Speaker 1: people and that's served us very very well. So what
Speaker 1: the rest of the industry Three will do prospectively. I
Speaker 1: don't know. I will say that the environment, in my opinion,
Speaker 1: has never been more competitive than it is right now.
Speaker 1: We've never had stronger competitors financially than we have right now.
Speaker 1: So the industry is definitely different, and whether that will continue,
Speaker 1: that will be up to our competitors. Obviously, our job
Speaker 1: is to beat them. How do you meet that competition?
Speaker 1: I'm named the airport DFW. I'll let you decide which
Speaker 1: airport within the southwest uh span. I'm at that airport.
Speaker 1: I'm an hour behind. Maybe if we pull back from
Speaker 1: the runway, I'm three hours behind. That upsets people. The
Speaker 1: luggage upsets people. The pretzels upset people. How what's the
Speaker 1: distinctive feature of that new competition? Well, I think that
Speaker 1: you're hitting on it. The competition is better across the board.
Speaker 1: On time performance is better, baggage handling is better. There
Speaker 1: are fewer customer complaints with the d O TEA with
Speaker 1: our competitors. Uh. The costs are relatively lower than they
Speaker 1: were historically, and the fares are more competitive. So just
Speaker 1: fits the full gamut of the ways that we touch customers.
Speaker 1: Every airline is just better. It makes us if we're
Speaker 1: going to compete, we have to continue to get better also,
Speaker 1: and I would quickly add that Southwest has never been better.
Speaker 1: We're stronger today than in any point in time in
Speaker 1: our forty five year history, and will continue to invest
Speaker 1: in our customer experience and work really hard to keep
Speaker 1: our costs low so our fairs can stay low. I
Speaker 1: don't know if you know this, but only this could
Speaker 1: happen on Southwest Airlines. Brian Kelly, the points guy. His
Speaker 1: latest article is on Southwest passengers nailing the Mannequin challenge.
Speaker 1: They froze the whole plane so they can do the
Speaker 1: mannequin challenge photograph that everybody's doing now. Brian Kelly changed
Speaker 1: the business with these points, our charge cards and points
Speaker 1: and all of us getting a million miles. Is that
Speaker 1: Gary Kelly's nightmare or your best friend? Oh no, we're
Speaker 1: very intentional. Um. We have a great relationship with Chase,
Speaker 1: our our Visa credit card. If you don't have it
Speaker 1: in your wallet, you're really missing out because it is
Speaker 1: shameless plug, most generous frequent flyer program out there, and
Speaker 1: it's it's just an element of our customer experience and
Speaker 1: the customer relationship and we have very strong profits, so
Speaker 1: obviously we're able to do all that in a way
Speaker 1: that it rewards the company and our customers. Gary Kelly,
Speaker 1: I've got a race next time on board of Southwest
Speaker 1: Air twins being born. Gary Kelly is the chief executive
Speaker 1: officer of Southwest. Thanks for listening to the Boomberg Surveillance podcast.
Speaker 1: Subscribe and listen to interviews on iTunes, SoundCloud, or whichever
Speaker 1: podcast platform you prefer. I'm out on Twitter at Tom Keene.
Speaker 1: David Gura is at David Gura. Before the podcast, you
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio. Who you
Speaker 1: put your trust in matters? Investors have put their trust
Speaker 1: and independent registered investment advisors to the two and four
Speaker 1: trillion dollars. Why learn more and find your independent advisor
Speaker 1: dot com