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Speaker 1: The central banks are not the answer. After all these
Speaker 1: years and all of they've done, they still can't fix
Speaker 1: the global economy. Now we're in impotence territory. Hi, and
Speaker 1: welcome back to Bloomberg Benchmark, a podcast about the global economy.
Speaker 1: It's Thursday, April fourteen. I'm Daniel Moss, Executive editor for
Speaker 1: Global Economics at Bloomberg News. My co hosts Archieto and
Speaker 1: Tory still will are out this week, so it's just me.
Speaker 1: We Most of us familiar with the concept of outsourcing,
Speaker 1: the idea that companies and governments find it cheaper or
Speaker 1: more efficient to have outside groups hand all things like
Speaker 1: customers support, legal services, programming, bill collection, data entry, and
Speaker 1: so on. And yes, sometimes this takes place overseas a
Speaker 1: common example of the ubiquitous call centers. Whatever you want
Speaker 1: to check your bank, balanced, book a hotel, or inquire
Speaker 1: about something on your cell phone bill. But outsourcing monetary
Speaker 1: policy that seems to take it to a whole other level.
Speaker 1: Get in a way, that's what the Federal Reserve has done.
Speaker 1: Chair Janet Yellen effectively said as much last week when
Speaker 1: she told an audience in New York that the FED
Speaker 1: dialed back its projections for how many times it will
Speaker 1: increase interest rates in response to investors dialing back. First,
Speaker 1: our colleague Rich Miller listened to her speech, picked up
Speaker 1: on the theme, and wrote about it for Bloomberg News.
Speaker 1: Rich has been following the US economy and the FED
Speaker 1: for more than three decades. He joins us from Washington, Rich,
Speaker 1: great to have you. Thanks for having me, Dan. Well,
Speaker 1: the textbooks tell us that markets are, in theory supposed
Speaker 1: to respond to what you make is saying. Do this
Speaker 1: seems like the world has been turned upside down. What's
Speaker 1: going on? Well, first of all, I just want to say,
Speaker 1: of course, Janet Yellen didn't say in her speech that
Speaker 1: the Fed is outsourcing monetary policy, and Feed officials would
Speaker 1: undoubtedly object to that. But but what she laid out
Speaker 1: in the speech, sure as heck, sounded like that. What
Speaker 1: happened was the markets got a little bit scared about
Speaker 1: global growth in China, so they adjusted down the amount
Speaker 1: of interest rate increases they expected from the Fed. In response,
Speaker 1: long term interest rates went down. Those long term interest
Speaker 1: rates lower long term interest rates provided the economy with
Speaker 1: some stimulus and helped keep the economy on track in
Speaker 1: the face of this jitters about global growth. So Janet
Speaker 1: Yellen said, this is great. This is like an automatic stabilizer.
Speaker 1: I mean, it's sort of sort of like an ideal
Speaker 1: marriage where your partner sort of knows you so well
Speaker 1: that you don't even have to ask for the present
Speaker 1: for your birthday. She or he gets it before you
Speaker 1: even ask. Well, we know the FED keeps a close
Speaker 1: eye on markets. They said that that's no secret. But
Speaker 1: this does seem to elevate it to a new level. Yes,
Speaker 1: yes it does. I think there was a little bit
Speaker 1: of an ulterior motive here. The FED has gotten slammed
Speaker 1: on Capitol Hill by a Republican law may because and
Speaker 1: by some Republican leaning leaning economists for following a policy
Speaker 1: that's too discretionary two seat of the pants, and these people,
Speaker 1: these lawmakers claim that investors don't understand what the Fed's
Speaker 1: gonna do and that hurts the economy. Yelling was basically said,
Speaker 1: was trying to say yes, the markets do understand what
Speaker 1: we're gonna do, and in fact they had just before
Speaker 1: we adjust. So I think there was a little bit
Speaker 1: of a political backstory here that's going on the way
Speaker 1: she described the relationship between the two of them. What
Speaker 1: are the risks of this approach? Uh, Well, the risk
Speaker 1: are uh what mis misunderstandings and upsets like in a marriage, right,
Speaker 1: we're you know, hearken back to what was at the
Speaker 1: middle of two thousand and fourteen. Investors work evinced that
Speaker 1: the FED was going to have what was called quantitative
Speaker 1: easing forever. It was going to keep on buying bonds
Speaker 1: in the market and keep on supporting the economy. Then
Speaker 1: Chairman Ben Bernanky said, well, maybe we're gonna end it,
Speaker 1: maybe we're gonna taper it, and then the markets through
Speaker 1: a hissy fit. They had a tantrum, Right, So that's
Speaker 1: that's the risks that there's misunderstandings that could then lead
Speaker 1: to blow ups later that could hurt the economy. It
Speaker 1: really makes me wonder again to use the marriage analogy,
Speaker 1: who's in charge here? Who right right now? Yeah? Well,
Speaker 1: I guess in some marriages, uh, someone is clearly in
Speaker 1: charge and and someone isn't. But I think in most
Speaker 1: it's kind of a constant, kind of at least in mind,
Speaker 1: constant kind of jockeying back and forth, trying hopefully to
Speaker 1: get to a common goal, which in this case is
Speaker 1: you know, a well functioning economy. I mean, one of
Speaker 1: the problems is is that the goals don't always fully align. Usually,
Speaker 1: you know, investors want are well functioning, growing economy, but
Speaker 1: sometimes they were more interested in, you know, the fact
Speaker 1: that their investments are doing well a bad But I
Speaker 1: think it's never clear. I think there's a constant learning
Speaker 1: process back and forth between the markets and the economy,
Speaker 1: just like in a marriage. Just to use another analogy,
Speaker 1: isn't this a little bit like giving a drug addict
Speaker 1: more heroin? I mean, if you empower the markets to
Speaker 1: that extent and publicly say you did it after markets
Speaker 1: did it, doesn't this just risk emboldening investors and they're
Speaker 1: going to want more and more and more and more
Speaker 1: and more, and the FED finds itself trapped. I think
Speaker 1: there is a risk for that, and then eventually the
Speaker 1: FED will have to disappoint the markets, and then you
Speaker 1: get this kind of upset like we had with the
Speaker 1: taper tantrum. So I think there is a definite risk,
Speaker 1: and I guess it's up to the FED to try
Speaker 1: to communicate clearly with the markets what when it thinks
Speaker 1: they're they're going too far. It also, I mean, we've
Speaker 1: gotten used to seeing the markets want more and more stimulus.
Speaker 1: But it is kind of interesting when you think about
Speaker 1: the initial years after the Great Recession. If you look
Speaker 1: at the markets back then, they were always expecting the
Speaker 1: FED to raise interest rates like a year out, but
Speaker 1: the FED didn't have any intention to do that. So
Speaker 1: the FED eventually had to go out and explicitly say, look,
Speaker 1: we aren't going to raise interest rates until like the
Speaker 1: middle of two thousand fifteen. Don't worry boys and girls.
Speaker 1: So you know, there is risks, but that's just the
Speaker 1: way things work. And what is the risk that Fed
Speaker 1: officials misread the message that markets are conveying. I mean,
Speaker 1: I think it's great obviously, Um I guess, I guess
Speaker 1: trying to stick with this marriage analogy, you know, one
Speaker 1: of the partners is kind of someone who's whose moods
Speaker 1: flips from elation to dejection, and that's the markets right
Speaker 1: as as it flips. As investors flipped from greed to fear.
Speaker 1: Then you have the other partner who's maybe stolid and
Speaker 1: looks at models and rarely changes his or her mind.
Speaker 1: And sometimes the one who's, you know, saying you know
Speaker 1: the end is near is right. Oftentimes the one who's
Speaker 1: saying the end is in he is not right. But
Speaker 1: sometimes the one who says don't worry, be happy or
Speaker 1: don't worry things are copasetic is wrong. So you know
Speaker 1: why they have, you know, a huge they fed have
Speaker 1: a huge bunch of people in New York sort of
Speaker 1: in constant contact with the markets, trying to figure out
Speaker 1: what the message of the markets are trying then to say, well,
Speaker 1: do we agree with what the markets are worried about
Speaker 1: or what the markets think of doing, or do we not? Well,
Speaker 1: I hope this marriage doesn't end in an expensive custody trial. Definitely, Definitely,
Speaker 1: it's been great to have your perspective. Keep up the
Speaker 1: good work. Thanks, thanks, thanks a lot for inviting me.
Speaker 1: Enjoyed it, and now a would from our sponsor. This
Speaker 1: episode of Bloomberg Benchmark is sponsored by HSBC, with over
Speaker 1: eight thousand global relationship managers on the ground in over
Speaker 1: sixty countries. HSBC makes your global ambition their local business HSBC. Well,
Speaker 1: the issues that Rich outlined touch on things you know,
Speaker 1: we wrestle with daily here at Bloomberg News and helping
Speaker 1: us flesh it out and maybe even have it out.
Speaker 1: Two of my colleagues, Bob Burgess and Madeline Limp. Bob
Speaker 1: is executive editor for Markets and Madeline is executive editor
Speaker 1: for Bloomberg First World, tell us a little bit about
Speaker 1: what that actually is. Hi, Dan, thank you for the introduction,
Speaker 1: and Bloomberg First Wood is a very short bullet point
Speaker 1: service about markets, issues and news that's of interest to
Speaker 1: markets in a very quick and condensed form. Well, Bob,
Speaker 1: you've got to feel vindicated by this Markets of one, right.
Speaker 1: I'll never be able to mix it up with you
Speaker 1: in quite the same way in our morning and afternoon
Speaker 1: news meetings. Rich. I think I brought up some very
Speaker 1: interesting topics. But the one thing Rich didn't talk about
Speaker 1: was markets are always forward looking. Okay, markets are not
Speaker 1: necessarily reactive to central banks, but they're more pricing in
Speaker 1: what is going to happen in the future. We're it's
Speaker 1: going to be the cost of money six months out,
Speaker 1: a year out, and so what we've seen over the
Speaker 1: past three years is that the markets have been continually
Speaker 1: more right on the outlook for for the economy and
Speaker 1: um the market has generally been more pessimistic on the
Speaker 1: pace of growth, the FED has been more optimistic. And
Speaker 1: what we've seen over the past twelve to eighteen months,
Speaker 1: maybe even two years, is that the Fed's outlook in
Speaker 1: the economy has continually come down to the markets view
Speaker 1: of the economy. And yet markets will move in response
Speaker 1: to specific central bank events on any given day, often
Speaker 1: the way they should. You're drawing a distinction between the
Speaker 1: longer term and the short term. Markets will always have
Speaker 1: immediate reaction to whoever central bank does on a certain day,
Speaker 1: but the markets are going to be pricing in what
Speaker 1: is going to be, what they think is going to be,
Speaker 1: or what the market things is going to be happening
Speaker 1: four months out to a year out. And one of
Speaker 1: the big debates that's going on in markets these days,
Speaker 1: and you and I and Madeline have have talked a
Speaker 1: lot about this is just how effective is central bank
Speaker 1: you know, policy these days? As you and I have
Speaker 1: debated in Madeline has Uh, We've all talked about a
Speaker 1: lot in recent weeks is is sort of the effectiveness
Speaker 1: of of global central banks and policies. We talked a
Speaker 1: lot about the diminishing returns as central banks are getting
Speaker 1: from uh, this era of lower no interest rates. Uh.
Speaker 1: Kid Jokes, who's the chief market strategist at Society Generally,
Speaker 1: actually had a very good no doubt talking about how
Speaker 1: after the trillions of dollars of money that has been
Speaker 1: pumped into the global economy by central banks, here we
Speaker 1: are in two thousand sixteen, able two thousand sixteen, and
Speaker 1: all we're seeing is very low growth. This is your
Speaker 1: impotent point exactly. We're going to get to that in
Speaker 1: just a second, because I've got something for you all that.
Speaker 1: But Madeline, and your experience other markets always right, and
Speaker 1: how do you determine what they're actually saying? You can
Speaker 1: see what a phenomenal logical market level is, but how
Speaker 1: do you know that the interpretation is right? Well? I
Speaker 1: think it all depends on your perspective, right, And always
Speaker 1: remember my short position is your long position. If you
Speaker 1: believe something is going up, you've got to sell it
Speaker 1: to somebody. So it's it's a given take situation. But
Speaker 1: I do think that more broadly in a market based
Speaker 1: capitalist system, as we have for aessential bank, not to
Speaker 1: pay attention to the markets and what the markets are saying.
Speaker 1: These are ultimately smart people who are doing their analysis
Speaker 1: and putting their money on the line, or their investors
Speaker 1: money on the line. That you can't really ignore that.
Speaker 1: And I would sort of warn that you know, where
Speaker 1: not talking about the stock market here and it's various
Speaker 1: ups and downs. Nor are we talking about the FX
Speaker 1: markets another completely different story. We are talking about the
Speaker 1: bond market here, which can be volatile admittedly, but if
Speaker 1: you look at the ten year yield since December, it
Speaker 1: has been more or less on a downtrend and two
Speaker 1: percent is the level that is really hard for the
Speaker 1: ten ure yield to get above in the US, and
Speaker 1: I think that tells you something about what investors feel
Speaker 1: is the outlook for growth. But for both of you
Speaker 1: in your jobs, one of the things I find frustrating
Speaker 1: is how do you cut through the noise and find
Speaker 1: out what actually is the central point? Because it does
Speaker 1: feel like one day market participants are saying that there
Speaker 1: needs to do this and they're hopeless at that. Then
Speaker 1: the next day they're saying precisely the opposite how do
Speaker 1: you sort out, to quote Nate Silver, the signal from
Speaker 1: the noise. As Medal has said, there's always going to
Speaker 1: be a buyer and a seller, and you're always going
Speaker 1: to have the ups and downs of the markets. But
Speaker 1: what we need to do every day is is take
Speaker 1: a step back, take a look at the big picture
Speaker 1: and try to get a sense of what does the
Speaker 1: bigger picture or message that the markets are are are sending.
Speaker 1: And I think that in these days it's clear that
Speaker 1: the markets are signaling that the outlook for the global
Speaker 1: economy is is pretty anemic. I mean, as Madeline said,
Speaker 1: he's talking about the tenure yield. Globally, bon yields on
Speaker 1: average are down one to one point three percent, a
Speaker 1: record low. Does anemic often get conflated, mistakenly with disastrous
Speaker 1: If we go back to January, in the first half
Speaker 1: of February, the narrative coming not just from the markets,
Speaker 1: but from some family serious economists as well, you could
Speaker 1: be forgiven for thinking the apocalypse was with us, and
Speaker 1: now here we are. The macro economic data hasn't changed dramatically,
Speaker 1: certainly within the US, China hasn't fallen apart, and the
Speaker 1: Eurozone is like, you know, hanging in there. Well, what
Speaker 1: I would say is you're right. I mean, at the
Speaker 1: beginning of the year, there was a number of different
Speaker 1: events that happened that caused a lot of terminal markets.
Speaker 1: You had China weakening its its currency, raising concerns about
Speaker 1: a currency war. Oil and commodities continued to collapse um
Speaker 1: raising concern about deflation, global recession, defaults by energy companies
Speaker 1: that have raised a hundreds of billions of dollars in
Speaker 1: recent years. You had all these events coming together at
Speaker 1: the same time. You had the Bank of Japan going
Speaker 1: into negative interest rates and the European Central Bank going
Speaker 1: further into a negative interest rates, and the message that
Speaker 1: was sending the markets was the central banks are not
Speaker 1: the answer. After all these years and all of they've done,
Speaker 1: they still can't fix the global economy. Now we're in
Speaker 1: impotence territory for one of a better time. Right. But
Speaker 1: you know, so I think that you know, taking a
Speaker 1: look at all that the first couple of months of
Speaker 1: the year, it was very turbulent markets and markets were, um,
Speaker 1: we're reacting to that. They weren't just reacting to to
Speaker 1: what central banks were doing. March was a tremendous comeback.
Speaker 1: I think in the SMP we were down ten percent
Speaker 1: through mid February and then the SMP five recouped all
Speaker 1: that through the end of March. It was the biggest
Speaker 1: turnaround in history for the markets. So that makes me
Speaker 1: wonder who was right in January February or were they
Speaker 1: both right? They were both right. The markets are not
Speaker 1: signaling now that it's all clear, while back in February
Speaker 1: and January. In February, there's a lot of concern about
Speaker 1: as I said, deflation, global recession that's come out of
Speaker 1: the market, but the market is not signaling that it's
Speaker 1: all clear, right. And I would just add to that
Speaker 1: with Bob says, is that you have to just be
Speaker 1: mindful of when when you talk about the market, what
Speaker 1: your how you look at things. I really do think
Speaker 1: the perspective rely matters if you take what the market
Speaker 1: is pricing in now for it, like Bob says, in
Speaker 1: the next years ahead, you know, rather than looking at
Speaker 1: the noise, you have to kind of look at the
Speaker 1: long term and then sort of from there. And it
Speaker 1: wouldn't be tenable to have the market pricing in you know,
Speaker 1: very low likelihood of maybe even two rate tags this
Speaker 1: year and the Fed still maintaining no, we're going to
Speaker 1: raise rates for You can't have that dicotomy go on
Speaker 1: for too long. At some point, something has to converge.
Speaker 1: And I think for the FED to look at the model,
Speaker 1: and you know, the FED looks at it's economic models,
Speaker 1: the market looks at their economic models, and I think
Speaker 1: taking it together, it's just using all the data that
Speaker 1: you can to formulate the best policy that you can
Speaker 1: come up with. I think right or wrong is a
Speaker 1: hard question to answer, because ultimately, if the policy is
Speaker 1: set right, then yes, you should see growth pick up.
Speaker 1: Right come the middle of the year, the picture looks different.
Speaker 1: You're trying to create the conditions now that foster growth
Speaker 1: in the future, and I think that's a really hard
Speaker 1: balance to achieve and we shouldn't be trying to parse
Speaker 1: too much out of the day to day moves, and
Speaker 1: I would really warn against looking too close listens at
Speaker 1: that point. But but the other thing, you know is
Speaker 1: I think what happened at the beginning of the year
Speaker 1: is people were setting up for the FED. You know,
Speaker 1: the FED was tightening policy. They started in December, and
Speaker 1: people were trying to set up for that, and there
Speaker 1: was a lot of volatility around and I think that
Speaker 1: added to the whole concern of what was going on,
Speaker 1: and some big names thought that they would have to
Speaker 1: revert to queue and that they would take interest rates
Speaker 1: off the table together. Now they've scaled back their projections,
Speaker 1: as Rich was just saying, but they haven't taken them
Speaker 1: off the table, and they certainly haven't eased Let's get
Speaker 1: back to the eye word body. I can buy the
Speaker 1: argument that the central bank efforts now suffering diminishing returns,
Speaker 1: but there still is a return there. Are you sure
Speaker 1: it's impotence. I think it depends on how you look
Speaker 1: at it from the market perspective. If you're looking about
Speaker 1: at strictly what central banks are doing to asset prices,
Speaker 1: it's probably not evident because there's still the e c B,
Speaker 1: the b o J, they're still buying bonds, um and
Speaker 1: other financial assets. The federals are even though it's not
Speaker 1: creating money to buy bonds, it's reinvesting the proceeds from
Speaker 1: maturing bonds into new security, so that money is is
Speaker 1: cycling back in. That's actually that's supporting the bond market.
Speaker 1: There's no question about it. But when people start talking
Speaker 1: about whether the central banks and the Fed are are
Speaker 1: impotent or not, they are talking really about the transition
Speaker 1: mechanism in the sense that is the wealth in the
Speaker 1: financial markets that the central banks have created, is that
Speaker 1: leaking into or helping the real economy, And in a
Speaker 1: lot of ways they're saying that it's not helping the
Speaker 1: real economy. Take a look at them the the Atlanta
Speaker 1: Fed in its estimates of GDP for the first quarter,
Speaker 1: I think it's down to below one percent now the
Speaker 1: beginning of the year was supposed to be something between
Speaker 1: two and a half to three so that I think
Speaker 1: when the markets see that, sees that it tells them something.
Speaker 1: To be fair to the Atlanta Fair, that is a
Speaker 1: tracking estimate which does change week by week depending on
Speaker 1: incoming data. And I just wanted to say that, well,
Speaker 1: that is the crux of what the ECB is doing
Speaker 1: to get away from the vetch just a little bit.
Speaker 1: They're buying program of corporate bonds. What will really matter
Speaker 1: is whether that trickles truth too small and medium sized companies,
Speaker 1: and as we know in Europe, those are much less
Speaker 1: dependent on the markets and do a lot more through
Speaker 1: bank financings. Are any of the market participants that your
Speaker 1: teams are talking to saying that the initial stimulus, and
Speaker 1: by initial I mean say from late two thousand and
Speaker 1: seven through two for arguments, say, are they saying those
Speaker 1: were ineffective in staving off depression? There's no question about it.
Speaker 1: But but that was two thousand, two thousand ten, two
Speaker 1: thousand seven, two thousand and ten. We're now in two
Speaker 1: thousand sixteen. It doesn't seem to be working as effectively
Speaker 1: as it did then. So that's an argument for diminishing returns.
Speaker 1: It is, but remember when when the FED begins to
Speaker 1: stop reinvestment, that's going to be another big adjustment, particularly
Speaker 1: for one market that never gets much mentioned, which is
Speaker 1: the mortgage backed securities market. That is going to be
Speaker 1: something to watch. Well, Madeline, you're responsible for first word.
Speaker 1: That means for the last word. I do have to
Speaker 1: come back to Bob by all means well he said
Speaker 1: it as metal as said earlier. I mean, if you're
Speaker 1: trying to answer the questions about whether markets are right
Speaker 1: or wrong, there is no answer to that. The markets
Speaker 1: are going to is going to vacillate from day to
Speaker 1: day on the incoming data. But if you take a
Speaker 1: step back, take a look at the markets as a whole,
Speaker 1: the message that they're signaling is that central banks can't
Speaker 1: do it alone. And meanwhile, every Fed official says, hey,
Speaker 1: but the April meeting is still alive. Meeting or Bob
Speaker 1: and Madeline, thanks for joy and us. We're going to
Speaker 1: definitely have you back, and thank you to all of
Speaker 1: you for listening to Bloomberg Benchmark. We will be back
Speaker 1: next week. Until then, you can find us on the
Speaker 1: Bloomberg terminal and Bloomberg dot com, as well as iTunes,
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Speaker 1: C at Tory Steelwell, and at Aco seven. This episode
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