WEBVTT - No Signs of Late Cycle Behavior, Eisman Says 0:00:00.080 --> 0:00:13.040 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 0:00:13.480 --> 0:00:17.560 Jay Lee. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:33.720 Bloomberg dot Com, and of course, on the Bloomberg. I'm 0:00:33.800 --> 0:00:35.919 very pleased to say that we can welcome in New 0:00:36.000 --> 0:00:38.920 York in our studio Steve Eisman, famous of course for 0:00:38.960 --> 0:00:42.960 his successful bet against subprime mortgages, featured in a book 0:00:43.000 --> 0:00:45.680 you will know well, Michael Lewis's book The Big Short, 0:00:46.000 --> 0:00:49.600 and now a portfolio manager at new Berger Berman Group. Steve. 0:00:49.640 --> 0:00:51.360 Good morning to you, sir, and thank you very much 0:00:51.360 --> 0:00:53.800 for joining us. Glad to be here. I was looking 0:00:53.840 --> 0:00:57.080 at your Oxford Union appearance, which I'm sure was an honor, 0:00:57.280 --> 0:00:59.400 and I want to start with that. And the quote 0:00:59.440 --> 0:01:01.200 is a follows. If you had gone and said to 0:01:01.280 --> 0:01:05.399 executives pre crisis, the entire paradigm of your career is wrong. 0:01:05.480 --> 0:01:08.559 The response was, listen, kid, I made fifty million dollars 0:01:08.640 --> 0:01:12.640 last year. What did you make? What's different between now 0:01:12.920 --> 0:01:18.080 and then? There's a lot there's a lot different. Um, 0:01:18.120 --> 0:01:22.160 you know, I would say that the the gestalt. If 0:01:22.160 --> 0:01:25.720 I could use that word on Bloomberg of the regular 0:01:25.800 --> 0:01:29.920 Tory world crisis, I think you can say that. Can 0:01:29.959 --> 0:01:34.440 you can say that right pre crisis was we trust 0:01:34.480 --> 0:01:37.680 you by the regulators, and so essentially we had in 0:01:37.840 --> 0:01:41.960 a world that had the trappings of regulation, but in 0:01:42.000 --> 0:01:46.360 reality we had a completely deregulated financial services sector. And 0:01:46.440 --> 0:01:50.720 today the difference is that the industry is extremely heavily regulated, 0:01:50.760 --> 0:01:52.600 and even though there's it's going to be a major 0:01:52.680 --> 0:01:54.680 change in the Trump administration, is still gonna be a 0:01:54.760 --> 0:01:57.960 very heavily regulated industry. Something you've said is that leverage 0:01:57.960 --> 0:02:01.280 made people look like they were gene assists. Yes, is 0:02:01.280 --> 0:02:05.680 that happening now? Um, it's too early. Um, you're going 0:02:05.760 --> 0:02:07.800 to see leverage go up and returns are going to 0:02:07.880 --> 0:02:10.160 go up, and so firms are going to feel better 0:02:10.160 --> 0:02:12.840 and they'll think they're they'll they'll think they're a lot smarter. 0:02:13.520 --> 0:02:15.840 But it's you know, it's just math. You know, the 0:02:15.880 --> 0:02:18.280 more leverage you can put on, the more the higher 0:02:18.320 --> 0:02:20.639 are we well, Steve, it raises the question you say 0:02:20.639 --> 0:02:22.200 it's too early. A lot of people trying to work 0:02:22.200 --> 0:02:24.720 out where the cycle we actually are. Do you see 0:02:24.760 --> 0:02:28.120 any signs of like cycle behavior. No, they don't. I 0:02:28.200 --> 0:02:31.880 really don't. I look for them every day. Credit quality 0:02:31.960 --> 0:02:35.560 is still superior. In fact, some areas that people were 0:02:35.600 --> 0:02:38.440 concerned about, like me, they've gotten better. You know sometime, 0:02:38.520 --> 0:02:42.079 auto credit quality seems to have started to get a 0:02:42.120 --> 0:02:46.320 little bit better. Credit card industry, which saw some higher 0:02:46.320 --> 0:02:48.519 delinquencies and higher losses. I think those are going to 0:02:48.560 --> 0:02:50.400 start to go down. So are The answer that question 0:02:50.480 --> 0:02:52.639 is now, how forensic have you been at the moment, Steve? 0:02:52.720 --> 0:02:54.560 I mean, many people know you as the person that 0:02:54.720 --> 0:02:58.520 really undressed and stripped back these collateralized dead obligations and 0:02:58.600 --> 0:03:01.919 looked at how messy some of these individual things actually were. 0:03:02.280 --> 0:03:04.200 Are you getting that forensic at the moment? Are you 0:03:04.280 --> 0:03:06.280 still that forensic in your day to day work. I'm 0:03:06.280 --> 0:03:09.800 always forensic. You go through securitization data every single month. 0:03:09.880 --> 0:03:13.760 That's that's kind of like my bible. And there's just 0:03:14.000 --> 0:03:16.919 no signs of stress there are. So when people talk 0:03:16.960 --> 0:03:20.320 about the books for subprime autos and they're saying the 0:03:20.440 --> 0:03:23.760 debt loads are piling up there, there's something to worry about. 0:03:23.760 --> 0:03:26.520 His students that could say whatever they want, But we'll 0:03:26.560 --> 0:03:29.360 come to student loans in a second, please, you know, 0:03:29.400 --> 0:03:31.760 with respect to everything else other than the student loans, 0:03:32.080 --> 0:03:35.800 the credit data is excellent. Steve Iceman with us on 0:03:36.040 --> 0:03:38.160 what is going up? Talk about a vector from the 0:03:38.160 --> 0:03:41.600 lower left of the upper right student loans. How do 0:03:41.640 --> 0:03:46.040 you get forensic on student loans? Um? Well, let's make 0:03:46.120 --> 0:03:49.120 something very clear. The student loan problem is not a 0:03:49.200 --> 0:03:53.200 financial services sector problem. It's not a systemic problem the 0:03:53.280 --> 0:03:58.840 United States government problem. Most of all student loans and 0:03:58.920 --> 0:04:02.840 United States are government gar inteed, So you know, whatever 0:04:02.880 --> 0:04:05.920 problems show up, that's a taxpayer problem. That is a problem. 0:04:05.920 --> 0:04:08.520 It's going to be dispersed throughout the US economy. But 0:04:08.600 --> 0:04:12.120 it is not a financial system systemic issue. Is it 0:04:12.160 --> 0:04:14.800 a problem for the next generation stave or is it 0:04:14.880 --> 0:04:18.760 a problem we need to get ready to deal with imminently? Um, 0:04:18.800 --> 0:04:22.520 It's a problem that exists right now, you know. Um. 0:04:22.839 --> 0:04:26.640 I it's terrible that people graduate from college and grad 0:04:26.680 --> 0:04:28.840 school with as much dead as they have. It affects 0:04:28.839 --> 0:04:32.160 the housing market to a certainly a significant degree. It 0:04:32.160 --> 0:04:34.440 affects people for the rest of their lives. I think 0:04:34.440 --> 0:04:37.000 the current system of the way we finance higher education 0:04:37.080 --> 0:04:41.720 is appalling. How would you change it? Well, that's a 0:04:41.720 --> 0:04:44.479 long story. I look, I make I think there's we 0:04:44.560 --> 0:04:50.039 need to make community colleges, if not free, at least 0:04:50.040 --> 0:04:53.000 heavily subsidized by the government. A lot of state universities 0:04:53.000 --> 0:04:55.240 should be much more heavily subsidized. I mean, what people 0:04:55.279 --> 0:04:58.240 pay for education is it is ridiculous. I have to 0:04:58.880 --> 0:05:00.800 I have twin girls who are in school right now 0:05:00.920 --> 0:05:04.400 that what it costs to go to university is insane. 0:05:05.279 --> 0:05:09.800 Within that is within the debate on education and financing 0:05:09.920 --> 0:05:13.760 is also education is the underpinning for the future of 0:05:13.920 --> 0:05:17.360 America that has to fold into investment. Are the kids today, 0:05:17.400 --> 0:05:19.920 the people you know, I'm gonna say thirty five and 0:05:20.000 --> 0:05:22.800 under where they've really not known anything except post crisis 0:05:22.880 --> 0:05:27.680 nominal rates and such. Are they as educated about volatility? 0:05:27.920 --> 0:05:31.520 Is they should? Absolutely not. There's an entire generation of 0:05:31.560 --> 0:05:34.280 people who now work on Wall Street who have no 0:05:34.360 --> 0:05:36.840 idea what volatility is. How do we teach it to them? 0:05:36.839 --> 0:05:42.320 Just experience enjoying school? The hard knocks, Well, it's it's 0:05:42.360 --> 0:05:45.080 called watching the bid walk away. And we don't really 0:05:45.080 --> 0:05:47.000 haven't seen that in a while now, we have not. 0:05:47.080 --> 0:05:48.600 We haven't seen that in a very very long time. 0:05:48.800 --> 0:05:51.160 Do you see any opportunities in the equity market. Did 0:05:51.200 --> 0:05:54.279 you stay un far more fixed on fixed income and 0:05:54.400 --> 0:05:56.640 debt instruments, So I don't do anything in fixed income. 0:05:56.640 --> 0:05:58.640 I don't see I don't see much of opportunities and 0:05:58.680 --> 0:06:01.080 fixed income until it rates going up. I think all 0:06:01.120 --> 0:06:05.360 the opportunities are in the equity markets. Long and short. Okay, 0:06:05.360 --> 0:06:08.400 what do you want? Give us some categories of lawns 0:06:08.640 --> 0:06:11.160 right now that you find attractive. Does that fold over 0:06:11.200 --> 0:06:16.080 to banks? The biggest capital allocation is financials, mostly banks. 0:06:16.279 --> 0:06:21.279 My second largest capital allocation is tech. UM and my 0:06:23.040 --> 0:06:27.039 shorts are well. We could talk about well. I imagine 0:06:27.040 --> 0:06:29.680 most people that's the first thing they asked you, Steve, 0:06:29.960 --> 0:06:32.040 what are you sure? Well my shorts? I mean, I've 0:06:32.080 --> 0:06:34.360 in public about this. Um the only bank that I'm 0:06:34.400 --> 0:06:37.120 short as well as Fargo give me the wine. UM. 0:06:37.360 --> 0:06:40.400 I think Wells Fargo is going obviously is going through 0:06:40.400 --> 0:06:43.360 a torrential change in its culture. You know, Wells Fargo 0:06:43.440 --> 0:06:47.240 historically has been a bank that out earns on an 0:06:47.240 --> 0:06:50.360 are we and r away basis other banks, and given 0:06:50.560 --> 0:06:54.600 the regulatory environment for Wells Fargo, the change in the culture, UM, 0:06:54.920 --> 0:06:56.760 Wells Fargo is just going to come a normal bank 0:06:57.240 --> 0:07:00.680 in terms of its profitability. A normal bank perform one 0:07:00.720 --> 0:07:04.320 in this environment, though, and when it can't grow. Interesting, 0:07:04.480 --> 0:07:08.440 and that they are not allowed to grow. And you know, 0:07:08.520 --> 0:07:12.960 the CEO, after the FED capped them two weeks ago, 0:07:13.120 --> 0:07:14.960 got on on a conference call and said this was 0:07:15.000 --> 0:07:17.200 only going to impact their earnings by about two to four. 0:07:19.040 --> 0:07:21.800 I don't know how he could have said that, because no, 0:07:21.800 --> 0:07:25.240 no bank that I know of has had the regulators 0:07:25.280 --> 0:07:27.880 capped their assets when the bank is healthy. So it's 0:07:27.920 --> 0:07:31.760 impossible to know what that's going to mean. But Steve, 0:07:31.880 --> 0:07:33.200 let me be clear here. Did you put the short 0:07:33.240 --> 0:07:35.880 on before the Federal Reserve made that move or afterwards? 0:07:36.320 --> 0:07:41.120 I put the short on last summer interesting, very very 0:07:41.120 --> 0:07:44.840 early on, then well after the scandal had obviously broken, 0:07:45.080 --> 0:07:47.920 but before the regulators really did anything. Let's do this. 0:07:48.040 --> 0:07:52.679 Someone's either calling. It's either Sunderland calling John Ferrell, probably 0:07:52.720 --> 0:07:56.440 my wife, it's one of your kids. I think it's 0:07:56.480 --> 0:08:00.000 my wife. It's her, it's her tone, that's her tone, 0:08:00.080 --> 0:08:03.200 Mrs Eisman. He'll be with you in a moment, Steve 0:08:03.200 --> 0:08:05.240 Eisman with us, and we will continue thrilled it. All 0:08:05.280 --> 0:08:07.880 of you of Global Wall Street are listening this morning 0:08:07.920 --> 0:08:25.920 to Mr Jerome Snyder with a snow up pim Coast 0:08:25.960 --> 0:08:28.440 with a short term paper. By short we mean short. 0:08:28.640 --> 0:08:31.000 I want you to explain to the retail audience why 0:08:31.080 --> 0:08:34.559 pros look at one year, six months and three months 0:08:34.520 --> 0:08:37.200 of paper. Well, quite honestly, you know, when you look 0:08:37.200 --> 0:08:39.080 at the front end of the tebow curve, a couple 0:08:39.080 --> 0:08:42.320 of things have happened. We've had over five billion dollars 0:08:42.320 --> 0:08:45.520 of new tebill supply come onto the market uh two 0:08:45.640 --> 0:08:48.200 or fifty billion over the past month alone, uh in 0:08:48.200 --> 0:08:50.800 in this year projected, which is a profound amount just 0:08:50.800 --> 0:08:52.679 simply because we have to absorb it. Well, why why 0:08:52.800 --> 0:08:55.360 is that important? Was there a problem? And absorber again? Well, 0:08:55.600 --> 0:08:59.200 there's actually has been actually a dearth of paper in 0:08:59.200 --> 0:09:01.840 that short term space and as a result, front end 0:09:01.880 --> 0:09:03.839 yields have been anemic for many years. So one of 0:09:03.880 --> 0:09:06.400 the profound things, Tom, is that, you know, we finally 0:09:06.400 --> 0:09:08.520 have the one year T bill rate above two percent. 0:09:08.679 --> 0:09:11.880 So it's actually pretty interesting. The entire flat, entire curve, 0:09:11.920 --> 0:09:14.160 as we all point to the two Stens curve, as 0:09:14.200 --> 0:09:15.960 you know, move from you know, a hundred basis points 0:09:15.960 --> 0:09:18.280 to eighty basis points to the low low forties or 0:09:18.320 --> 0:09:21.319 mid forties too, back about sixty basis points. That's one 0:09:21.400 --> 0:09:23.920 aspect of it. But just recognize the fact that front 0:09:23.960 --> 0:09:27.080 in yields have actually increased, and that flatness has actually 0:09:27.120 --> 0:09:31.040 allowed some sabers at least in part, to participate in 0:09:31.080 --> 0:09:33.480 that upward drift of yields and to incorporate them. So 0:09:33.840 --> 0:09:36.840 T bills, short term bond funds, things like that that 0:09:36.920 --> 0:09:40.280 can really adapt to uh, the higher yields and embrace 0:09:40.360 --> 0:09:43.679 them have actually been beneficiaries of this rising rate environment. 0:09:43.760 --> 0:09:45.280 So I just want to frame what's happening in the 0:09:45.360 --> 0:09:47.120 United States for America at the moment, because I think 0:09:47.120 --> 0:09:50.360 it's really important for savers at the moment. Deposit baits 0:09:50.360 --> 0:09:52.960 and the jargon incredibly love. What that basically means is 0:09:53.000 --> 0:09:55.040 that the federal reserve interest rates are going up and 0:09:55.080 --> 0:09:58.080 the banks aren't pace passing it onto that deposit base. Now, 0:09:58.200 --> 0:10:01.560 I'm trying to understand why everyone doesn't know about the 0:10:01.559 --> 0:10:03.319 fact that one month TA bills and now one and 0:10:03.360 --> 0:10:06.000 a half percent, and why we haven't got this flood 0:10:06.000 --> 0:10:10.480 of deposits coming from these banks into tabills. Why isn't 0:10:10.520 --> 0:10:12.800 that happening, Why aren't people waking up to the fact 0:10:13.080 --> 0:10:14.760 that you can now get one and a half percent 0:10:15.040 --> 0:10:17.079 in a one month TA bill when you are getting 0:10:17.120 --> 0:10:19.360 basis points. What was your bank account? Well, what was 0:10:19.360 --> 0:10:21.960 the last time a bank said to you, Hey, I 0:10:21.960 --> 0:10:24.719 actually wanted They're not going to right, So let's just 0:10:24.760 --> 0:10:27.040 put the logic behind this. Banks don't necessarily want to 0:10:27.080 --> 0:10:30.280 pay more for deposits than they want to. Similarly, there's 0:10:30.320 --> 0:10:33.439 been structural changes over the past few years. We've seen 0:10:33.480 --> 0:10:37.320 a restounding response to money market fund reform, a story 0:10:37.360 --> 0:10:39.880 that's more than five years old. Happened in two thousand 0:10:39.840 --> 0:10:42.440 and sixteen. But as rates have increased during this rate 0:10:42.480 --> 0:10:46.400 hiking cycle, yields and money market funds have remained rather anemic. Mean, 0:10:46.480 --> 0:10:49.760 they haven't recalibrated as high as benchmark rates. Still, the 0:10:49.760 --> 0:10:53.560 average money market fund yields about one point three percent 0:10:53.640 --> 0:10:57.040 after fees, which is pretty small. Deposits at the same time, 0:10:57.080 --> 0:11:01.440 while they've beta has actually increased slightly, hasn't as increased 0:11:01.480 --> 0:11:04.280 to the point that we've seen in previous rate hiking cycles. 0:11:04.360 --> 0:11:07.120 So long story short is, savers are earning a little 0:11:07.160 --> 0:11:08.679 bit more than they woul did probably a year or 0:11:08.679 --> 0:11:11.040 two ago, but not much more so. The key to 0:11:11.080 --> 0:11:14.160 success in capital preservation, the key to success in earning income, 0:11:14.400 --> 0:11:17.360 and the key to success in avoiding volatility in overall 0:11:17.400 --> 0:11:20.520 portfolios is finding ways that can adapt and embrace to 0:11:20.640 --> 0:11:23.360 earn those higher yields. One year tebows are one way 0:11:23.360 --> 0:11:25.880 to do it. Still fairly conservative in that regard, but 0:11:25.920 --> 0:11:28.560 we can actually look to points of the yield curve 0:11:28.600 --> 0:11:31.000 in the front end the zero to two year space specifically, 0:11:31.000 --> 0:11:33.920 and zero to two your corporates which are relatively safe 0:11:34.040 --> 0:11:36.720 offer yields of about two point five to three percent 0:11:36.760 --> 0:11:39.640 in some cases and have benefited actually from a structural 0:11:39.640 --> 0:11:43.520 widening that we've seen in spreads over the past four 0:11:43.559 --> 0:11:45.680 weeks or so. So I'm gonna pull a page from 0:11:45.760 --> 0:11:48.120 the two thousand eight playbooks, so if you will so, 0:11:48.360 --> 0:11:51.240 libral o I s the library versus the spread of 0:11:51.280 --> 0:11:54.719 overnight index swaps, which is rebo effectively are are five 0:11:54.760 --> 0:11:58.840 funds rate effectively has moved from basically ten basis points 0:11:58.840 --> 0:12:01.120 at the end of last year that spread to about 0:12:01.160 --> 0:12:03.719 forty basis points. In two thousand and eight would have 0:12:03.720 --> 0:12:06.400 been saying, holy cow, this is a systemic event. Let's 0:12:06.400 --> 0:12:09.640 pay attention to it. Now, we're actually saying there's really 0:12:09.640 --> 0:12:11.480 no systemic issue here. We would have heard about it 0:12:11.480 --> 0:12:13.720 from Jerome Pale, who loves to talk about regulation and 0:12:13.720 --> 0:12:16.839 systemic issues. But the reality is is that that's not 0:12:16.920 --> 0:12:19.400 necessarily the case right now. So it's an opportunity. So 0:12:19.440 --> 0:12:21.800 we we actually published a blog piece yesterday on pimco 0:12:21.960 --> 0:12:24.959 dot com two applies to this point. But it's really 0:12:25.160 --> 0:12:29.319 recognized that this is an opportunity to embrace these higher yields, 0:12:29.400 --> 0:12:31.600 higher spreads in the front of the curve, propelled by 0:12:31.679 --> 0:12:33.760 as you mentioned, higher yields and T bills and things 0:12:33.840 --> 0:12:36.800 like that, Tom. But at the same time, look, let's 0:12:36.800 --> 0:12:39.160 look at the entire composition and recognize that the entire 0:12:39.240 --> 0:12:41.880 yield curve is relatively flat and take advantage of it. John, 0:12:41.920 --> 0:12:48.880 I'm I'm tearing up literally library. Oh yes, we haven't 0:12:48.920 --> 0:12:53.200 mentioned it a decade. It was like gospel over a 0:12:53.240 --> 0:12:56.000 decade ago. I've just brought up the chart from a 0:12:56.080 --> 0:12:59.240 decade ago, and I'll freshen it up and from Bluebird 0:12:59.320 --> 0:13:02.000 Radio you'll see it first time. I can't talk to 0:13:02.080 --> 0:13:05.440 John you, so so my question doesn't wait wait, wait, 0:13:05.559 --> 0:13:08.680 does anybody care about libr o I s you care? 0:13:08.880 --> 0:13:10.760 You care? If you are a saver and want to 0:13:10.840 --> 0:13:14.240 embrace these higher yields and find ways that have capital 0:13:14.280 --> 0:13:18.079 preservation and utilize this structural widening to do that. That's 0:13:18.080 --> 0:13:21.200 why you care. Don't sell on the alarm and break 0:13:21.280 --> 0:13:24.240 and break the firebox yet so dry as you speak 0:13:24.280 --> 0:13:27.640 to the other Portfonio managers at PIMCO, are you seeing 0:13:27.640 --> 0:13:31.120 a situation evolved where short rates starts compete for capital 0:13:31.600 --> 0:13:34.920 elsewhere in things like investment right in things like high 0:13:34.960 --> 0:13:37.520 yield Is that happening? Well, what you actually see is 0:13:37.559 --> 0:13:40.920 that um, we no longer are are the of the 0:13:40.960 --> 0:13:43.959 opinion that front and rates are undervalued. Let's say so 0:13:44.040 --> 0:13:46.000 at this point in time to year notes right or 0:13:46.040 --> 0:13:48.360 at two point two six is pretty welfair value for 0:13:48.400 --> 0:13:50.640 at least three rate hikes over this year and so 0:13:50.679 --> 0:13:53.280 forth and so on. The risk to us that we 0:13:53.320 --> 0:13:55.840 think is that the propensity that we have additional hikes 0:13:55.840 --> 0:13:57.800 that the market has now been put on guard for, 0:13:58.120 --> 0:14:00.920 in part by Palace testimony yesterday day of what happens 0:14:00.920 --> 0:14:03.360 in two thousand, nineteen and twenty and beyond. And so 0:14:03.400 --> 0:14:05.719 if you can see continued growth, things that are in 0:14:05.760 --> 0:14:08.440 the five year the tenure sector perhaps are a little 0:14:08.440 --> 0:14:11.760 bit underpriced or grossly mispriced if you see actually growth 0:14:12.000 --> 0:14:14.600 and further tightenings that need to occur over that horizon. 0:14:14.640 --> 0:14:16.240 So that's really the debate at this point in time 0:14:16.440 --> 0:14:18.640 in terms of crowding out, It really becomes in terms 0:14:18.640 --> 0:14:22.280 of what's your target horizon, what's your what's your notion 0:14:22.320 --> 0:14:25.440 for volatility? Again, all volatilities and fixed income actually are 0:14:26.080 --> 0:14:29.760 resoundingly low compared to what we've seen inequities and things 0:14:29.800 --> 0:14:32.040 like that in the response function. Even to past testimony 0:14:32.160 --> 0:14:36.400 yesterday in in rates fall until getting lankish was was 0:14:36.520 --> 0:14:39.280 none basically, So we have to basically do it as 0:14:39.560 --> 0:14:42.880 as not necessarily crowding out, but really trying to find 0:14:43.240 --> 0:14:45.480 utilize the front end as a way to meet objective 0:14:45.560 --> 0:14:50.480 just for sheer optionality and more importantly flexibility for the future. 0:14:50.600 --> 0:14:53.320 People who want to incorporate the front end are utilizing 0:14:53.360 --> 0:14:56.600 as a holding place for reducing volatility and flexibility for 0:14:56.640 --> 0:14:59.560 future allocations. They might want to other outsets as they recalibrate. 0:14:59.600 --> 0:15:02.120 You mentioned chaman Pal. Do you think he was overly 0:15:02.160 --> 0:15:05.800 optimistic in his first semi annual testimony. No, I think 0:15:05.800 --> 0:15:07.480 he was trying to be balanced. Actually, what he was 0:15:07.520 --> 0:15:09.640 doing was flexing his muscle to demonstrate that he has 0:15:09.680 --> 0:15:12.680 that optionality, the same optionality that that you know that 0:15:12.840 --> 0:15:15.600 Yelling had, a Bernanke had and everything else, but at 0:15:15.600 --> 0:15:18.480 the same time recognized the fact that he is a 0:15:18.520 --> 0:15:20.240 voice of one at this point in time and hasn't 0:15:20.280 --> 0:15:23.120 had a proper caucus to represent everybody, and seeing the 0:15:23.200 --> 0:15:26.280 SCP dots as they evolved. I just took the average 0:15:26.400 --> 0:15:28.960 of library oh I asked through the crisis, back when 0:15:29.040 --> 0:15:31.960 I was quoting it every twelve minutes. Thank you, folks 0:15:32.000 --> 0:15:35.320 for those that listen, uh long ago and far away, 0:15:35.680 --> 0:15:39.200 the average library ois spread was point eight five or 0:15:39.240 --> 0:15:42.680 nowhere near that. No, nowhere near that. As we moved 0:15:42.760 --> 0:15:46.720 towards that, does just schrom Snyder start paying attention more, 0:15:47.000 --> 0:15:49.160 I doubt will move towards that. I just think it's 0:15:49.160 --> 0:15:51.440 it's just worth highlighting that that there's been a pretty 0:15:51.480 --> 0:15:53.760 dramatic jump since the end of the year, um and 0:15:53.800 --> 0:15:55.880 it's something worthy to take advantage of. And again, the 0:15:55.960 --> 0:15:58.680 reasons are very different time this time around. Right, That's 0:15:58.680 --> 0:16:01.640 the key point is the mill you is different. What's 0:16:01.680 --> 0:16:05.760 the key confidence maker? As we see Library O I 0:16:05.920 --> 0:16:08.960 s go from dead flat up to point four zero 0:16:09.080 --> 0:16:11.960 three three confidence maker is that we don't see any 0:16:11.960 --> 0:16:14.800 structural weakness in the financial system at this time around 0:16:14.920 --> 0:16:17.840 is simply recalibration of understanding where the financing costs and 0:16:17.840 --> 0:16:21.800 the ability to under the ability to obtain financing within 0:16:21.840 --> 0:16:24.760 the markets is what the critical. So we've spend an 0:16:24.800 --> 0:16:26.600 inordinate amount of time of the past few weeks, me 0:16:26.640 --> 0:16:29.080 and my and the short term desk team at PIMCO, 0:16:29.480 --> 0:16:32.200 and and when you talk to the participants, whether they're 0:16:32.400 --> 0:16:35.840 domestic banks, banks, they all sort of point the finger 0:16:35.920 --> 0:16:38.920 at different things, and so there's probably twenty different variables 0:16:38.920 --> 0:16:40.880 no matter what periodical you say, no matter what they 0:16:40.880 --> 0:16:43.440 pointed to, whether they say is this bank needs funding, 0:16:43.560 --> 0:16:45.760 or it's it's the weakness in the dollar, or it's 0:16:46.080 --> 0:16:49.920 the people Japanese your end, or whatever the excuses, the 0:16:49.960 --> 0:16:52.360 point is that all these things are coming together and 0:16:52.400 --> 0:16:55.200 there is no single weakness per se that we say 0:16:55.360 --> 0:16:57.640 into this is critical. Running out of time in two 0:16:57.680 --> 0:17:01.280 thousand and eighteen is library ois the litmus paper that 0:17:01.440 --> 0:17:05.040 commercial paper used to be ages ago. Uh, they're very 0:17:05.080 --> 0:17:07.920 related and we're gonna see funding spreads wide and specifically 0:17:07.960 --> 0:17:11.280 with regard to some financial institutions as a result, But 0:17:11.359 --> 0:17:13.639 don't lose sleep over it. Look to utilize it as 0:17:13.640 --> 0:17:16.280 an opportunity at this point in time, because the fundamental 0:17:16.320 --> 0:17:18.879 situation is entirely different than two thousand eight. John was 0:17:18.880 --> 0:17:20.840 that in English? It was I think it did a 0:17:20.880 --> 0:17:26.080 great this is great. I'm gonna put the chart up. 0:17:26.119 --> 0:17:28.280 Blue Wood Radio will see it first. I think we 0:17:28.359 --> 0:17:32.439 have to start clos I didn't mean to bring out 0:17:32.440 --> 0:17:34.840 an old book, but actually what sick is John, I 0:17:34.920 --> 0:17:40.000 was wearing this bow tie in two thousand eight. I 0:17:40.000 --> 0:17:43.679 can believe that. Jorm Schneider, thank you as always for 0:17:43.720 --> 0:17:47.040 the clinic. On a blast from the past, libra O, 0:17:47.200 --> 0:18:03.240 I s we need to stalk China, and we do that. 0:18:03.280 --> 0:18:06.280 Of course. Of Ambassador Hass to the Council on Foreign Relations, 0:18:06.560 --> 0:18:09.800 he has a luxury of a terrific China team, including 0:18:09.840 --> 0:18:13.520 Elizabeth Economy. His even greater luxury is to have a 0:18:13.560 --> 0:18:17.600 book review from John Faroe. John, you are raving about 0:18:17.720 --> 0:18:20.720 Richard Hass A World in Disarray. Well, I just have 0:18:20.800 --> 0:18:23.120 to say, for anyone that hasn't read A World in Disarray, 0:18:23.160 --> 0:18:26.000 if even if you have a deep knowledge of foreign policy, 0:18:26.119 --> 0:18:27.879 it will add something to your life and even if 0:18:27.920 --> 0:18:29.840 you don't, in fact, particularly if you don't, we'll give 0:18:29.840 --> 0:18:32.639 you the back history some really important topics that we 0:18:32.720 --> 0:18:36.240 explore at the moment, whether it's North Korea, China, et cetera. 0:18:36.400 --> 0:18:38.640 So please do pick it up and give it a read. 0:18:38.680 --> 0:18:40.919 And I'm really pleased to say that Richard Hass joins us. 0:18:41.000 --> 0:18:42.760 Now I'm Richard. It's always great to catsh up with 0:18:42.760 --> 0:18:45.960 you and get your insight. Once again, China front and center. 0:18:46.040 --> 0:18:47.960 Can we just take a step back and get your 0:18:48.000 --> 0:18:52.520 thoughts on the idea that is President She forever. First 0:18:52.520 --> 0:18:55.760 of all, thank you for that generous introduction. Look, the 0:18:55.760 --> 0:18:59.439 news from China on one level isn't surprising given the 0:18:59.480 --> 0:19:03.520 anti option campaign, the amount of enemies that President She 0:19:03.680 --> 0:19:06.000 has made. The idea that he would one way or 0:19:06.040 --> 0:19:09.600 another key effective power after his second term ended in 0:19:09.680 --> 0:19:12.639 five years, we kind of figured that would happen. There 0:19:12.720 --> 0:19:15.320 was a precedent for that when Doom Shao King stepped down. 0:19:15.840 --> 0:19:19.280 He basically was the power behind the scene through the 0:19:19.440 --> 0:19:22.480 this funny title and the Bridge Association. I used to 0:19:22.560 --> 0:19:24.800 kid that I thought Juan Thing would become the first 0:19:24.880 --> 0:19:28.399 violin and the People's Orchestra. What surprised me was that 0:19:28.520 --> 0:19:30.560 it was done now with five years to go in 0:19:30.640 --> 0:19:33.600 his second term, and it was done so explicitly and 0:19:33.680 --> 0:19:36.439 done through the idea of changing or just ignoring the 0:19:36.480 --> 0:19:41.280 constitutional UH term limit. And that suggests to me that 0:19:41.320 --> 0:19:43.800 this is a pre emptive strike. This is a pre 0:19:43.800 --> 0:19:46.640 emptive strike by Sijan thing that he's sending the message 0:19:46.920 --> 0:19:49.760 he's not just going to be there for five years, 0:19:49.960 --> 0:19:52.800 he's going to be there for ten, fifteen, whatever. And 0:19:52.800 --> 0:19:55.320 it also says to me that there must be significant 0:19:55.359 --> 0:19:58.159 domestic pushback that he felt the need to do this 0:19:58.240 --> 0:20:01.280 pre emptively. Ambassador, we are the honor not only of 0:20:01.400 --> 0:20:04.160 you today, but speaking with Stephen Saying out of Oxford, 0:20:04.160 --> 0:20:07.480 with the University of London UH in their um the 0:20:07.680 --> 0:20:10.119 s O a s Chinese Institute as well, and he 0:20:10.200 --> 0:20:14.439 spoke of the nuances domestically but also abroad. Was this 0:20:14.520 --> 0:20:22.439 a preemptive strike against theories such as Ross Navarro? I 0:20:22.480 --> 0:20:24.399 think it's much more to do with domestic that's the 0:20:24.480 --> 0:20:29.119 Chinese priority. It's take a step back the fact that 0:20:29.160 --> 0:20:31.919 you have this thing called the Communist Party, that's this 0:20:32.080 --> 0:20:35.760 layer of governance between the citizen rate the economy. On 0:20:35.760 --> 0:20:38.920 one hand, and the government on the other it's it's 0:20:38.960 --> 0:20:42.040 what ninety million people who are members of the Communist Party, 0:20:42.080 --> 0:20:45.040 This whole thing is an artificial construct. It says to 0:20:45.119 --> 0:20:48.080 me the Chinese leadership does not take for granted as 0:20:48.119 --> 0:20:53.560 a given the cohesion of the country politically, socially, even territorially. 0:20:53.840 --> 0:20:56.639 But I think this suggests is a tougher line on Taiwan, 0:20:57.600 --> 0:20:59.800 on other issues that would be seen to threaten the 0:20:59.800 --> 0:21:04.400 and hegrity of Chinese territory, a continuing crackdown on descent, 0:21:04.800 --> 0:21:09.520 greater role in overseeing the quote unquote private uh sector, 0:21:09.800 --> 0:21:12.800 possibly a slightly more nationalist line in their in their 0:21:12.840 --> 0:21:15.600 foreign policy behavior. Just in terms of the relationship between 0:21:15.600 --> 0:21:17.399 the United States and China at the moment, there is 0:21:17.440 --> 0:21:20.800 a conversation at the moment about tariffs being introduced. There 0:21:20.880 --> 0:21:24.040 is also a conversation from the Treasury Secretary Stephen Manu 0:21:24.119 --> 0:21:27.160 Chin that maybe the President the United States is keen 0:21:27.200 --> 0:21:28.600 to return and have a look at t p P 0:21:29.160 --> 0:21:31.240