1 00:00:00,320 --> 00:00:04,160 Speaker 1: Who you put your trust in matters. Investors have put 2 00:00:04,200 --> 00:00:07,640 Speaker 1: their trust in independent registered investment advisors to the tune 3 00:00:07,640 --> 00:00:12,240 Speaker 1: of four trillion dollars. Why learn more and find your 4 00:00:12,240 --> 00:00:27,240 Speaker 1: independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast. 5 00:00:27,280 --> 00:00:31,320 Speaker 1: I'm Tom Keane. Always with Michael McKee. Daily we bring 6 00:00:31,360 --> 00:00:35,280 Speaker 1: you insight from the best in economics, finance, investment, and 7 00:00:35,360 --> 00:00:41,519 Speaker 1: international relations. Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, 8 00:00:41,560 --> 00:00:48,200 Speaker 1: and of course on the Bloomberg. We're joined by RBS Chairman, 9 00:00:48,400 --> 00:00:51,040 Speaker 1: Sir Howard Davies. Sir, how great have you on program 10 00:00:51,080 --> 00:00:53,559 Speaker 1: as always because you have some great insight into what 11 00:00:53,640 --> 00:00:57,680 Speaker 1: monetary policy should be doing or isn't doing correctly? If 12 00:00:57,720 --> 00:00:59,800 Speaker 1: you were done at Yellen? What is your number one 13 00:00:59,800 --> 00:01:02,040 Speaker 1: per scription for Jackson Hall? Is it to try and 14 00:01:02,040 --> 00:01:04,960 Speaker 1: and give market indication of when you raise rates so 15 00:01:05,120 --> 00:01:07,039 Speaker 1: very short term? Or is it just too cool the 16 00:01:07,080 --> 00:01:09,959 Speaker 1: markets like guys, if we see another downturn, we can 17 00:01:09,959 --> 00:01:12,520 Speaker 1: deal with it. Yeah. I think it would be good 18 00:01:12,680 --> 00:01:16,720 Speaker 1: if she were able to produce a clear and coherent 19 00:01:16,720 --> 00:01:18,800 Speaker 1: message from the Fed. But I fear she's going to 20 00:01:18,880 --> 00:01:22,440 Speaker 1: have a problem because the Fed have now moved into 21 00:01:22,480 --> 00:01:25,200 Speaker 1: a position quite unlike what we used to see in 22 00:01:25,200 --> 00:01:28,360 Speaker 1: the Green Span years, when the different members of the 23 00:01:28,400 --> 00:01:30,440 Speaker 1: f O m C are speaking out in different ways 24 00:01:30,480 --> 00:01:34,440 Speaker 1: and they're behaving more like the British Monetary Policy Committee 25 00:01:34,440 --> 00:01:36,440 Speaker 1: in fact, which of course has always been set up 26 00:01:36,480 --> 00:01:40,000 Speaker 1: that way with independent views and votes for the longest time. 27 00:01:40,040 --> 00:01:42,560 Speaker 1: Of course, under Greenspan there was never any sense of 28 00:01:42,680 --> 00:01:45,320 Speaker 1: a vote really. I mean they chatted and then the 29 00:01:45,520 --> 00:01:47,480 Speaker 1: chairman told them what they were going to do, and 30 00:01:47,600 --> 00:01:50,720 Speaker 1: occasionally there would be a descent. But now you've got 31 00:01:50,840 --> 00:01:52,680 Speaker 1: quite a spectrum of views and I don't think she 32 00:01:52,760 --> 00:01:54,919 Speaker 1: can put that genie back in the bottle. I'm afraid. 33 00:01:55,120 --> 00:01:57,920 Speaker 1: Even then, I have to get used to noise. My 34 00:01:58,080 --> 00:02:00,800 Speaker 1: own view is that there are too much noise can 35 00:02:00,880 --> 00:02:04,200 Speaker 1: actually be quite damaging for markets. I think where it 36 00:02:04,320 --> 00:02:08,679 Speaker 1: gets particularly damaging is where we've had here occasions when 37 00:02:08,840 --> 00:02:11,440 Speaker 1: the governor of the Bank has been in a minority, 38 00:02:11,760 --> 00:02:14,200 Speaker 1: which happened once or twice onto the Mervin King era. 39 00:02:14,840 --> 00:02:17,920 Speaker 1: Then I think the markets do get seriously confused. But unfortunately, 40 00:02:18,120 --> 00:02:19,760 Speaker 1: I think commentators are going to have to get used 41 00:02:19,760 --> 00:02:22,160 Speaker 1: to the fact that we are going to get different 42 00:02:22,200 --> 00:02:24,880 Speaker 1: messages from different members of the f O m C, 43 00:02:25,320 --> 00:02:27,880 Speaker 1: and some of it, as Stan Fisher said rather amusingly 44 00:02:27,919 --> 00:02:31,040 Speaker 1: in his remarks last week, because there are just some 45 00:02:31,160 --> 00:02:33,519 Speaker 1: people who are optimists and some people who are pessimists. 46 00:02:33,720 --> 00:02:36,120 Speaker 1: He gave three reasons for his view, and he said, basically, 47 00:02:36,240 --> 00:02:38,720 Speaker 1: the third one is I'm an optimist. I actually think 48 00:02:38,760 --> 00:02:41,080 Speaker 1: the US economy is going to pick up. I can't 49 00:02:41,160 --> 00:02:44,520 Speaker 1: prove that, but I think I'm an optimist, whereas Leo Brainard, 50 00:02:44,560 --> 00:02:46,680 Speaker 1: I think, is on the other side of that argument. 51 00:02:46,840 --> 00:02:48,880 Speaker 1: But if you look at the hard data, I mean, 52 00:02:49,560 --> 00:02:52,799 Speaker 1: unless they're really waiting, which we understand for inflation and 53 00:02:52,880 --> 00:02:55,919 Speaker 1: wage growth, they should. They should be ready for a 54 00:02:56,040 --> 00:03:00,600 Speaker 1: rate hike. They should be. Yeah. But of course what 55 00:03:00,800 --> 00:03:03,040 Speaker 1: they are also looking at, and this is like the 56 00:03:03,120 --> 00:03:05,720 Speaker 1: old fashioned monetary economics, but which has come back into fashion, 57 00:03:06,400 --> 00:03:10,600 Speaker 1: is the impact of the rising dollar um and so 58 00:03:10,880 --> 00:03:14,320 Speaker 1: you'll see stand Fisher say, Well, you know, in many cases, 59 00:03:14,360 --> 00:03:17,000 Speaker 1: I would many ways i'd see an argument for raising rates. 60 00:03:17,040 --> 00:03:19,959 Speaker 1: But actually we've had a tightening of monetary conditions through 61 00:03:20,360 --> 00:03:23,720 Speaker 1: an appreciation of the dollar, and in this country, in 62 00:03:23,919 --> 00:03:27,359 Speaker 1: a more open trading economy than than the US continental economy, 63 00:03:27,560 --> 00:03:29,240 Speaker 1: we always do think that way. We tend to sort 64 00:03:29,280 --> 00:03:31,800 Speaker 1: of look at a combination of interest rates and sterling 65 00:03:32,160 --> 00:03:34,960 Speaker 1: for an indicator of monetary tightness. And that's the language 66 00:03:35,000 --> 00:03:38,000 Speaker 1: that fed are starting to use. It's fascinating they're becoming 67 00:03:38,000 --> 00:03:40,400 Speaker 1: a bit more British in the way they behave. Whether 68 00:03:40,520 --> 00:03:43,840 Speaker 1: that's a good thing, we'll see. I put me right 69 00:03:43,880 --> 00:03:47,720 Speaker 1: in my place. Good morning, sir Howard. Advice Chairman Fisher 70 00:03:47,920 --> 00:03:51,280 Speaker 1: addresses productivity. I'm sure you're looking at it as well. 71 00:03:51,360 --> 00:03:53,280 Speaker 1: Let's bring up the chart, folks. This is an early 72 00:03:53,400 --> 00:03:55,920 Speaker 1: candidate for chart of the year. We're not there yet. 73 00:03:55,960 --> 00:03:59,200 Speaker 1: There's the massive falloff in productivity. Back to the one 74 00:03:59,280 --> 00:04:03,080 Speaker 1: off moment of nine eight is that's an extraordinary four 75 00:04:03,200 --> 00:04:07,120 Speaker 1: year moving average, Sir Howard. This is front and center 76 00:04:07,200 --> 00:04:11,000 Speaker 1: for each and every economy. Is this just because of technology? 77 00:04:11,080 --> 00:04:14,240 Speaker 1: I mean you're an else as seenance po. Can you 78 00:04:14,440 --> 00:04:18,480 Speaker 1: state that the diffusement of technology across all of our 79 00:04:18,560 --> 00:04:23,640 Speaker 1: economy is causes drop in productivity? It's a very big puzzle. 80 00:04:24,000 --> 00:04:28,120 Speaker 1: I mean I'm somewhat influenced by those who say that 81 00:04:28,560 --> 00:04:32,719 Speaker 1: as our economy moves towards an even greater dominance by 82 00:04:32,800 --> 00:04:36,520 Speaker 1: the service sector, um, and of course by the government 83 00:04:36,680 --> 00:04:42,400 Speaker 1: sector that productivity measurements become more problematic. Productivity is of 84 00:04:42,480 --> 00:04:45,760 Speaker 1: course very easy to measure in a car plant. Um. 85 00:04:46,000 --> 00:04:48,440 Speaker 1: It's much more difficult to measure actually in a bank. 86 00:04:49,080 --> 00:04:51,520 Speaker 1: In fact, in some cases, some of the productivity measures 87 00:04:51,560 --> 00:04:54,280 Speaker 1: in a bank are a sign of inefficiency, if you like. 88 00:04:54,640 --> 00:04:57,240 Speaker 1: You know, the more transactions and things that you achieve, 89 00:04:57,640 --> 00:04:59,599 Speaker 1: the better. But some of that may not be actually 90 00:04:59,640 --> 00:05:03,400 Speaker 1: particular really useful activity. Really, so I think that there 91 00:05:03,520 --> 00:05:06,880 Speaker 1: is a problem in the way in which productivity has 92 00:05:06,960 --> 00:05:10,599 Speaker 1: calculated in the service sector. However, that has not changed 93 00:05:10,720 --> 00:05:14,920 Speaker 1: hugely and therefore we must be seeing something here. Um. 94 00:05:15,400 --> 00:05:18,279 Speaker 1: I think that we may be seeing a position where 95 00:05:19,279 --> 00:05:22,080 Speaker 1: you know, the impact I mean, this is the Robert 96 00:05:22,160 --> 00:05:25,280 Speaker 1: Gordon type hypothesis in his latest book. You know, the 97 00:05:25,400 --> 00:05:29,640 Speaker 1: impact of these technologies has sort of diminished, and we 98 00:05:29,760 --> 00:05:33,280 Speaker 1: had a big leap um in the Greenspan era, if 99 00:05:33,320 --> 00:05:36,080 Speaker 1: you like, but now that's kind of leveled off. In Vice, 100 00:05:36,120 --> 00:05:40,320 Speaker 1: Sherman Fisher is coined the phrase ultra accommodative. And as 101 00:05:40,400 --> 00:05:43,680 Speaker 1: we go to Jackson Hall, the basic idea is, are 102 00:05:43,760 --> 00:05:47,000 Speaker 1: we alter Jackson Hall in that I mean, does the 103 00:05:47,240 --> 00:05:51,640 Speaker 1: orthodox formulas. Do they work now or do the leaders 104 00:05:51,680 --> 00:05:54,160 Speaker 1: of our economics have to come up with new in 105 00:05:54,279 --> 00:05:59,239 Speaker 1: original thinking. Yeah, I think that the latter is probably true. 106 00:06:00,080 --> 00:06:03,039 Speaker 1: Think once you get to a zero bound, you really 107 00:06:03,120 --> 00:06:06,280 Speaker 1: do need to think about what impact you're having with 108 00:06:06,360 --> 00:06:10,200 Speaker 1: the interest rates. We don't really know what impact QUEE 109 00:06:10,360 --> 00:06:14,120 Speaker 1: on the scale that it's been implemented is having. I 110 00:06:14,200 --> 00:06:16,839 Speaker 1: think there's some interesting thinking coming out of the FED. 111 00:06:16,920 --> 00:06:19,839 Speaker 1: The president of the San Francisco FED has talked about 112 00:06:19,880 --> 00:06:22,719 Speaker 1: the need to change the monetary policy framework and target 113 00:06:22,800 --> 00:06:27,400 Speaker 1: a higher level of inflation as the central rate, which 114 00:06:27,400 --> 00:06:29,840 Speaker 1: Oliver Olivier Blanche from the i m F also said, 115 00:06:30,000 --> 00:06:32,360 Speaker 1: I think all of that's up for grabs. So I 116 00:06:32,520 --> 00:06:34,920 Speaker 1: really do think we're entering a period where some of 117 00:06:35,000 --> 00:06:40,480 Speaker 1: the previous certainties are no longer quite so certain and 118 00:06:40,560 --> 00:06:43,440 Speaker 1: we do need to rethink the monetary policy framework. Tom, 119 00:06:43,640 --> 00:06:46,080 Speaker 1: we have Sir Howard Davis for an exclusive interview, so 120 00:06:46,160 --> 00:06:48,479 Speaker 1: we have to talk a little bit about RBS. RBS 121 00:06:48,520 --> 00:06:50,880 Speaker 1: has set negative interest rate to some of its biggest 122 00:06:50,880 --> 00:06:54,120 Speaker 1: trading clients. They all have to pay interest on collateral. Now, 123 00:06:54,240 --> 00:06:57,560 Speaker 1: this comes as a consequence of low central bank interest rates. 124 00:06:58,160 --> 00:07:00,360 Speaker 1: This had actually quite a lot of press in the UK, 125 00:07:00,600 --> 00:07:02,400 Speaker 1: but you're not the first bank to do something similar. 126 00:07:02,680 --> 00:07:04,120 Speaker 1: I guess that you've got a lot of press just 127 00:07:04,200 --> 00:07:07,360 Speaker 1: because you're your government owned Well, I think actually we've 128 00:07:07,360 --> 00:07:10,280 Speaker 1: got a lot of press on it because two or 129 00:07:10,320 --> 00:07:13,360 Speaker 1: three weeks ago we wrote to quite a lot of clients, 130 00:07:13,400 --> 00:07:16,640 Speaker 1: including small business clads, changing our terms and conditions. I'm 131 00:07:16,680 --> 00:07:21,560 Speaker 1: afraid this was a bureaucratic exercise that got misunderstood. But 132 00:07:21,800 --> 00:07:23,880 Speaker 1: you know, hey, perhaps we should have reckoned it would 133 00:07:23,880 --> 00:07:26,640 Speaker 1: be misunderstood the sound principle that if a thing can 134 00:07:26,680 --> 00:07:30,160 Speaker 1: be misunderstood, it will be But this was to put 135 00:07:30,240 --> 00:07:32,400 Speaker 1: our terms and conditions in line with other people who 136 00:07:32,760 --> 00:07:35,800 Speaker 1: typically have a provision that they can charge negative interest rates, 137 00:07:35,840 --> 00:07:38,640 Speaker 1: which we didn't. So that was in a sentiment of 138 00:07:38,680 --> 00:07:41,160 Speaker 1: a bureaucratic glitch. The more recent one is to put 139 00:07:41,240 --> 00:07:42,800 Speaker 1: us in line with quite a lot of banks in 140 00:07:42,880 --> 00:07:45,440 Speaker 1: the big trading area. So this is on big accounts 141 00:07:45,920 --> 00:07:50,000 Speaker 1: of collateral deposited for short periods of time, and you 142 00:07:50,160 --> 00:07:52,880 Speaker 1: have to protect yourself against a position where you suddenly 143 00:07:53,000 --> 00:07:55,200 Speaker 1: have a large inflow of cash which is coming in 144 00:07:55,280 --> 00:07:56,920 Speaker 1: and you're not charging anything, and then you're having to 145 00:07:56,960 --> 00:07:59,040 Speaker 1: put it with the central bank, and they're charging you, 146 00:07:59,360 --> 00:08:02,880 Speaker 1: so you know, and I'm afraid that's a rather mechanical point, 147 00:08:02,920 --> 00:08:04,680 Speaker 1: as other banks have come to as well. You have 148 00:08:04,800 --> 00:08:07,880 Speaker 1: unique insight because you're a banker, but you're as an economist. 149 00:08:07,920 --> 00:08:11,000 Speaker 1: Are you very uneasy with negative rates? Mark Carney promised 150 00:08:11,000 --> 00:08:13,680 Speaker 1: almost that he would never go into negative territory, but 151 00:08:13,880 --> 00:08:17,440 Speaker 1: he may have to at something. Yeah, Well, I guess 152 00:08:17,520 --> 00:08:19,640 Speaker 1: you'll search quite a long way to try to find 153 00:08:19,680 --> 00:08:22,280 Speaker 1: a banker who is enthusiastic about negative interest rates. But 154 00:08:22,840 --> 00:08:27,800 Speaker 1: because well, I don't like the idea either, and I'm afraid, 155 00:08:27,880 --> 00:08:31,360 Speaker 1: going back to our conversation five minutes ago, I'm personally 156 00:08:31,680 --> 00:08:35,200 Speaker 1: in favor of trying to lift over time the level 157 00:08:35,360 --> 00:08:38,839 Speaker 1: of inflation that we target, because my concern is that 158 00:08:39,080 --> 00:08:42,280 Speaker 1: negative interest rates set up all kinds of perverse incentives 159 00:08:42,320 --> 00:08:45,199 Speaker 1: in society, people to hold excess cash, which is not 160 00:08:45,280 --> 00:08:47,360 Speaker 1: a good thing for a whole variety of reasons. And 161 00:08:47,640 --> 00:08:50,120 Speaker 1: they also mean that the central bank is not really 162 00:08:50,200 --> 00:08:53,240 Speaker 1: in control. Once you reach the lower band, you don't 163 00:08:53,480 --> 00:08:56,800 Speaker 1: know how the economy will respond, and you're pushing on 164 00:08:56,840 --> 00:08:59,480 Speaker 1: a piece of string, often through the banking system. And 165 00:08:59,640 --> 00:09:02,000 Speaker 1: so I think that what we really need to learn 166 00:09:02,080 --> 00:09:05,000 Speaker 1: from this is that we've probably got used to trying 167 00:09:05,080 --> 00:09:07,480 Speaker 1: to target an inflation rate which is so low that 168 00:09:07,640 --> 00:09:09,960 Speaker 1: for quite a large period of the cycle, you may 169 00:09:10,040 --> 00:09:12,480 Speaker 1: find yourself at a low, abandoned there, or out of control. 170 00:09:12,600 --> 00:09:15,280 Speaker 1: And that's what I don't like, sir Howard. You know 171 00:09:15,400 --> 00:09:18,559 Speaker 1: as well as anyone with your sterling academics, the idea 172 00:09:18,559 --> 00:09:21,920 Speaker 1: of momentum or inertial force. I look at negative rates 173 00:09:22,520 --> 00:09:25,360 Speaker 1: is a chronic x access. It's not that we are 174 00:09:25,559 --> 00:09:29,800 Speaker 1: at negative rates, it's how long we have been here, Anthony, 175 00:09:29,840 --> 00:09:32,000 Speaker 1: bring up the chart if you were this is just 176 00:09:32,120 --> 00:09:35,560 Speaker 1: two year and ten year German rates. And I'm sorry, Howard, 177 00:09:35,640 --> 00:09:37,640 Speaker 1: this is getting old, particularly when you look at the 178 00:09:37,679 --> 00:09:42,520 Speaker 1: short term space. The ramifications of this are simple. Don't 179 00:09:42,559 --> 00:09:45,400 Speaker 1: we just have to clear balance sheets? Isn't that what 180 00:09:45,559 --> 00:09:49,040 Speaker 1: all this exercises about is the denial of the need 181 00:09:49,280 --> 00:09:55,839 Speaker 1: to clear and reset balance sheets. Yeah, what we've seen 182 00:09:56,320 --> 00:10:02,240 Speaker 1: is since the crisis, too little the leveraging. Unfortunately, there 183 00:10:02,320 --> 00:10:04,439 Speaker 1: was a very interesting McKinsey report a few months ago 184 00:10:04,559 --> 00:10:08,040 Speaker 1: called debt and not much deleveraging. And in spite of 185 00:10:08,720 --> 00:10:12,240 Speaker 1: zero interest rates or very low interest rates, the debt 186 00:10:12,360 --> 00:10:15,800 Speaker 1: position has not been cleared, and we still have governments, 187 00:10:15,840 --> 00:10:18,560 Speaker 1: of course in particular very highly leveraged, but still quite 188 00:10:18,559 --> 00:10:21,080 Speaker 1: a lot of other people as well. And I think 189 00:10:21,160 --> 00:10:24,520 Speaker 1: you're right exactly that unless we clear off some of 190 00:10:24,640 --> 00:10:27,599 Speaker 1: this debt, we are going to be faced with a 191 00:10:27,720 --> 00:10:31,679 Speaker 1: chronic position of negative or zero interest rates for quite 192 00:10:31,720 --> 00:10:34,319 Speaker 1: a long time. And that has a bad consequence in 193 00:10:34,440 --> 00:10:37,760 Speaker 1: that when people then look at uncertainty in the economy 194 00:10:37,800 --> 00:10:40,040 Speaker 1: and they say, well, supposing we do face a bit 195 00:10:40,080 --> 00:10:42,080 Speaker 1: of a recession, what will the central bank do? When 196 00:10:42,120 --> 00:10:44,679 Speaker 1: they ask themselves, well, we can't see what the central 197 00:10:44,720 --> 00:10:47,800 Speaker 1: bank could do because they're at the lower band already. 198 00:10:48,040 --> 00:10:51,800 Speaker 1: So that feeds back into a problem of confidence, in 199 00:10:51,880 --> 00:10:54,280 Speaker 1: that you're not sure that if you do run into 200 00:10:54,320 --> 00:10:56,719 Speaker 1: trouble that the cavalry can ride over the hill and 201 00:10:56,800 --> 00:10:59,640 Speaker 1: rescue you, because they don't seem to have any ammunition 202 00:10:59,760 --> 00:11:02,719 Speaker 1: left without getting you in trouble with the Queen or 203 00:11:02,800 --> 00:11:06,040 Speaker 1: the Prime Minister or the governor of the Bank of England. 204 00:11:06,640 --> 00:11:10,280 Speaker 1: Is the only solution in that balance sheet h a 205 00:11:10,400 --> 00:11:14,360 Speaker 1: combination mergers and acquisitions, is that the only place we're 206 00:11:14,400 --> 00:11:16,839 Speaker 1: going is that Europe has to be more like the 207 00:11:17,000 --> 00:11:21,000 Speaker 1: Anglo Saxon model and get an urge to merge. Well, 208 00:11:21,120 --> 00:11:28,360 Speaker 1: that's one possible. I think that also. Unfortunately, the fiscal 209 00:11:28,440 --> 00:11:33,719 Speaker 1: position still has to be addressed. I know people now 210 00:11:34,080 --> 00:11:37,719 Speaker 1: are worried about austerity, but I think personally that it 211 00:11:37,920 --> 00:11:41,559 Speaker 1: may be that taxes have to rise. I just find that, 212 00:11:42,120 --> 00:11:45,439 Speaker 1: you know, difficult and present relatively flat economic conditions. But 213 00:11:45,480 --> 00:11:47,160 Speaker 1: I can't quite see how governments are going to de 214 00:11:47,240 --> 00:11:53,200 Speaker 1: leverage otherwise, because public expenditure seems very sticky downwards. Maybe 215 00:11:53,280 --> 00:11:55,480 Speaker 1: some m and A activity in the continent of Europe 216 00:11:55,480 --> 00:11:57,840 Speaker 1: would help to some extent. I doubt if it will 217 00:11:57,880 --> 00:11:59,559 Speaker 1: going to help the banking system a great deal of 218 00:12:09,720 --> 00:12:12,880 Speaker 1: David Harrold joins US now with Harris Associates. He's a 219 00:12:12,960 --> 00:12:15,400 Speaker 1: class act. He comes on when it's killing and he 220 00:12:15,480 --> 00:12:19,520 Speaker 1: comes on when it's tough. We greatly appreciate his perspective, David, 221 00:12:19,559 --> 00:12:24,080 Speaker 1: Emerging markets have been a challenge large cap, MidCap, small cap, 222 00:12:24,720 --> 00:12:27,800 Speaker 1: and clearly in the last six weeks on surveillance we're 223 00:12:27,840 --> 00:12:30,959 Speaker 1: seeing a glimmer of hope. There. Are you more optimistic 224 00:12:31,000 --> 00:12:35,480 Speaker 1: about adding value in EA in the coming year. Well, 225 00:12:35,600 --> 00:12:39,080 Speaker 1: sadly his prices go up. It's actually harder to find value. 226 00:12:39,360 --> 00:12:41,240 Speaker 1: I mean, if you just take a look back at 227 00:12:41,280 --> 00:12:44,000 Speaker 1: what's happening in e M. They bottomed in the late 228 00:12:44,120 --> 00:12:48,480 Speaker 1: nineties during the global the Asian financial crisis, and there 229 00:12:48,600 --> 00:12:51,800 Speaker 1: was problems in Russia and in Latin America, and that's 230 00:12:51,840 --> 00:12:53,960 Speaker 1: when they were at their bare bones cheapest. And then 231 00:12:54,040 --> 00:12:57,120 Speaker 1: as the next decade went on, the wall of money 232 00:12:57,240 --> 00:13:00,520 Speaker 1: started creeping into this asset class. And by the time 233 00:13:00,600 --> 00:13:06,120 Speaker 1: you got to the end of way, way way over valued, 234 00:13:06,280 --> 00:13:11,800 Speaker 1: our funds basically had zero in e M. And and 235 00:13:11,880 --> 00:13:14,480 Speaker 1: then of course the money started coming out and value 236 00:13:14,480 --> 00:13:18,520 Speaker 1: started coming back to the surface. So people gotta people 237 00:13:18,640 --> 00:13:20,520 Speaker 1: kind of look at this the wrong way. When more 238 00:13:20,600 --> 00:13:24,120 Speaker 1: money pours in, they think it's more attractive. But prices 239 00:13:24,200 --> 00:13:27,560 Speaker 1: go up to the underly intrinsic value. The businesses don't 240 00:13:27,640 --> 00:13:30,199 Speaker 1: move as fast as prices, So we tend to like 241 00:13:30,400 --> 00:13:33,360 Speaker 1: these things when there's price weakness, not price strength, Well, 242 00:13:33,360 --> 00:13:35,520 Speaker 1: then you must like Glenn Coore, I know you've been visible. 243 00:13:35,600 --> 00:13:39,240 Speaker 1: There's six dollars US seven dollars US down to a 244 00:13:39,360 --> 00:13:42,240 Speaker 1: dollar a share with a bounce here, I guess, David, 245 00:13:42,280 --> 00:13:45,240 Speaker 1: it's up a hundred percent from early this year. That's 246 00:13:45,280 --> 00:13:47,920 Speaker 1: a great idea, But how do you discern a dead 247 00:13:48,040 --> 00:13:52,040 Speaker 1: cat bounce for something like all the mining soap opera 248 00:13:52,120 --> 00:13:56,120 Speaker 1: of Glencore versus really a place to buy more shares 249 00:13:56,160 --> 00:13:58,679 Speaker 1: and add value. Yeah, what you really have to do 250 00:13:58,800 --> 00:14:02,400 Speaker 1: with something like Glencore is look at value creation within 251 00:14:02,480 --> 00:14:05,679 Speaker 1: the business and look what's happening within the business. And 252 00:14:06,000 --> 00:14:10,199 Speaker 1: literally eleven months ago they embarked on a kind of 253 00:14:10,240 --> 00:14:14,720 Speaker 1: a textbook recovering to strengthen their balance sheet. Their balance 254 00:14:14,760 --> 00:14:18,400 Speaker 1: sheet was stretched and with weak commodity prices, they needed 255 00:14:18,440 --> 00:14:20,560 Speaker 1: to strength in their balance sheet. And they did three things. 256 00:14:20,680 --> 00:14:23,640 Speaker 1: They raise some equity capital, they sold some assets, and 257 00:14:23,680 --> 00:14:27,000 Speaker 1: they cut capex. And now it's it's this year. Fast 258 00:14:27,040 --> 00:14:30,320 Speaker 1: forward to this year. We look at nearly twenty plus 259 00:14:30,400 --> 00:14:33,760 Speaker 1: billion in debt reduction and one of the only major 260 00:14:33,840 --> 00:14:37,600 Speaker 1: mining companies, if not the only, that will be generating 261 00:14:37,720 --> 00:14:41,640 Speaker 1: free cash this year. I remember a third or so 262 00:14:41,800 --> 00:14:44,320 Speaker 1: of their ebit comes from their trading operations, which is 263 00:14:44,480 --> 00:14:47,680 Speaker 1: fairly stable, and then two thirds comes from the mining 264 00:14:47,800 --> 00:14:53,000 Speaker 1: of such commodities in order of importance, Copper, colon zinc, 265 00:14:53,240 --> 00:14:56,960 Speaker 1: and colon zinc of bounce pretty strong this year. Copper 266 00:14:57,040 --> 00:15:00,440 Speaker 1: their biggest commodity. Still hasn't bounced all that much. It's 267 00:15:00,520 --> 00:15:03,000 Speaker 1: up a little bit, but it hasn't bounced that much, 268 00:15:03,040 --> 00:15:05,800 Speaker 1: and it's below what we think is its normal natural price. 269 00:15:06,360 --> 00:15:10,320 Speaker 1: So we think at this price, especially given how Glencore 270 00:15:10,400 --> 00:15:15,000 Speaker 1: has transformed itself balance from a Balanceie perspective, Glencore offers 271 00:15:15,040 --> 00:15:18,360 Speaker 1: excellent value today despite the fact that's well over a 272 00:15:18,440 --> 00:15:21,920 Speaker 1: hundred percent since since it's lows. David, first of all, 273 00:15:21,960 --> 00:15:24,360 Speaker 1: thank you so much. I'm so delighted to be speaking 274 00:15:24,400 --> 00:15:27,480 Speaker 1: to you. Are you buying therefore more Glencore? But we 275 00:15:27,520 --> 00:15:34,200 Speaker 1: don't talk about current trading, but what happened? Yeah, well, 276 00:15:34,640 --> 00:15:36,320 Speaker 1: let me tell you what we do as we price 277 00:15:36,400 --> 00:15:40,000 Speaker 1: the business, and our belief and intrinsic value of Glencore 278 00:15:40,320 --> 00:15:43,680 Speaker 1: barely changed over the last eight nine ten months, and 279 00:15:43,760 --> 00:15:46,760 Speaker 1: Glencore went down all the way to a law of 280 00:15:46,920 --> 00:15:51,240 Speaker 1: six p at the end of last year and today 281 00:15:51,360 --> 00:15:54,920 Speaker 1: trades at two p. So yes, we certainly added to 282 00:15:54,960 --> 00:15:59,800 Speaker 1: our position quite aggressively when it was especially below a hundred. 283 00:16:00,200 --> 00:16:04,000 Speaker 1: We at one point owned over eight percent of the company. Well, 284 00:16:04,920 --> 00:16:08,480 Speaker 1: when the stock bounced from below hundred to almost a 285 00:16:08,560 --> 00:16:12,160 Speaker 1: hundred ninety, you know again, our view on value. The 286 00:16:12,280 --> 00:16:14,320 Speaker 1: value to the business didn't go up a hundred ft, 287 00:16:14,840 --> 00:16:17,960 Speaker 1: so we did have to reposition the portfolio. The position 288 00:16:18,040 --> 00:16:21,560 Speaker 1: in the portfolio. It's still one of our top two positions, 289 00:16:21,680 --> 00:16:24,200 Speaker 1: but we don't own eight and a half percent anymore, 290 00:16:24,320 --> 00:16:29,520 Speaker 1: but we'll probably own around six percent, somewhere around six. Uh. Now, 291 00:16:29,560 --> 00:16:32,320 Speaker 1: if it's it's been weak now off that high, it 292 00:16:32,480 --> 00:16:36,240 Speaker 1: continues to fall again. The intrinsic value hasn't fallen and 293 00:16:36,360 --> 00:16:39,520 Speaker 1: we will build up again. So it's all based on 294 00:16:39,960 --> 00:16:44,040 Speaker 1: the relationship between price, what mr Market gives us and 295 00:16:44,120 --> 00:16:48,640 Speaker 1: the underlying intrinsic value. Again, price is volatile, intrinsic value 296 00:16:48,720 --> 00:16:52,040 Speaker 1: is not given us opportunity, right, what does it mean? So? 297 00:16:52,160 --> 00:16:55,200 Speaker 1: Morgan Stanley put a research note today though, and it's 298 00:16:55,240 --> 00:16:58,520 Speaker 1: called Glencore Vindigated. Now they're talking about their decision to 299 00:16:58,600 --> 00:17:02,440 Speaker 1: cut sync Um, and again they're also raising the possibility 300 00:17:02,520 --> 00:17:06,000 Speaker 1: that Glencore Mines may restart. Maybe when we look at 301 00:17:06,040 --> 00:17:08,560 Speaker 1: Glencore twelve months ago, we thought this was dead in 302 00:17:08,600 --> 00:17:11,760 Speaker 1: the water. Are they getting their mojo back? Yeah, they're 303 00:17:11,760 --> 00:17:14,640 Speaker 1: certainly there are always a company with a lot of mojo, 304 00:17:14,760 --> 00:17:16,680 Speaker 1: But you know what, they made a one mistake in 305 00:17:16,800 --> 00:17:19,280 Speaker 1: my view, they just had too much debt at the 306 00:17:19,400 --> 00:17:23,760 Speaker 1: wrong time of the cycle. They're they're tough managers of assets, 307 00:17:23,920 --> 00:17:27,920 Speaker 1: they're great traders, um. But the problem is it isn't 308 00:17:27,960 --> 00:17:29,800 Speaker 1: just their mojo. You have to look at the other 309 00:17:30,080 --> 00:17:32,800 Speaker 1: miners in the sector, and there's a lot of these 310 00:17:32,840 --> 00:17:36,240 Speaker 1: other miners just keep popping out stuff no matter what 311 00:17:36,359 --> 00:17:39,160 Speaker 1: the marginal cost is, just just to get cash flow. 312 00:17:39,720 --> 00:17:42,480 Speaker 1: And you know, look at Freeports that they have a 313 00:17:42,560 --> 00:17:45,399 Speaker 1: high cost copper mine in the US. They shouldn't be. 314 00:17:46,359 --> 00:17:49,159 Speaker 1: They should be saving that copper for one price goes up, 315 00:17:49,400 --> 00:17:51,959 Speaker 1: not just keep flooding the market. And Glencore is good 316 00:17:52,000 --> 00:17:55,200 Speaker 1: at that, as exemplified by the Zinc both. David give 317 00:17:55,280 --> 00:17:58,280 Speaker 1: us an update on the well being and future of 318 00:17:58,400 --> 00:18:02,520 Speaker 1: European bank You've been a big investor. It's been challenging, 319 00:18:02,600 --> 00:18:05,399 Speaker 1: to say the least. Where's the light at the end 320 00:18:05,480 --> 00:18:08,440 Speaker 1: of the proverbial Swiss tunnel. I mean that the bank 321 00:18:08,520 --> 00:18:11,320 Speaker 1: stocks in Europe seemed to be the recipient of any 322 00:18:11,400 --> 00:18:15,800 Speaker 1: knee jerk reaction of what happens and global geopolitical on 323 00:18:15,920 --> 00:18:19,280 Speaker 1: the global geopolitical scene, and it doesn't matter which bank 324 00:18:19,359 --> 00:18:21,639 Speaker 1: you are, just when they were starting to recover a 325 00:18:21,760 --> 00:18:24,240 Speaker 1: little bit. They did start off the year very poorly. 326 00:18:24,359 --> 00:18:26,760 Speaker 1: Just as they were starting to recover breaks it comes 327 00:18:26,800 --> 00:18:29,440 Speaker 1: and they get slammed back, and they're getting they're getting 328 00:18:29,520 --> 00:18:32,520 Speaker 1: slammed because of a couple of fears. One is the 329 00:18:32,640 --> 00:18:35,800 Speaker 1: fear of what the low and negative rates due to 330 00:18:35,840 --> 00:18:39,360 Speaker 1: their spreads. Uh So this doesn't make people feel very good. 331 00:18:40,200 --> 00:18:42,639 Speaker 1: Number two is and you mentioned it earlier. I was 332 00:18:42,720 --> 00:18:45,480 Speaker 1: on my way in listening talking about the Italian banking system. 333 00:18:45,560 --> 00:18:49,080 Speaker 1: There's some issues there, and because of these things, people 334 00:18:49,560 --> 00:18:51,879 Speaker 1: just are not at all at ease at de plying 335 00:18:52,000 --> 00:18:57,120 Speaker 1: capital towards banks in Europe, despite their price and their 336 00:18:57,160 --> 00:19:00,159 Speaker 1: price being well belown trims of book value and most 337 00:19:00,200 --> 00:19:02,960 Speaker 1: of these instances, and I would say what has not 338 00:19:03,240 --> 00:19:07,160 Speaker 1: happened is as a result of these low and negative rates, 339 00:19:07,160 --> 00:19:10,680 Speaker 1: who haven't seen the collapse in earnings? Why? Because banks 340 00:19:10,760 --> 00:19:13,800 Speaker 1: earned money just not by the interest rates spread, but 341 00:19:14,000 --> 00:19:17,919 Speaker 1: by credit growth. And we have seen low credit growth 342 00:19:17,960 --> 00:19:21,160 Speaker 1: in Europe, and by lower loan losses and higher fees 343 00:19:21,280 --> 00:19:25,000 Speaker 1: and lower costs, and these other drivers of bank earnings 344 00:19:25,040 --> 00:19:29,280 Speaker 1: have been enough to date to at least keep earnings 345 00:19:29,440 --> 00:19:32,720 Speaker 1: slow growing or stable and so as a result, you 346 00:19:32,880 --> 00:19:36,879 Speaker 1: see to me very very good opportunity, especially when you 347 00:19:36,960 --> 00:19:40,320 Speaker 1: consider the repaired balance sheets in the capital positions of 348 00:19:40,400 --> 00:19:43,119 Speaker 1: these banks. David Harrow with us of Harris Associates on 349 00:19:43,160 --> 00:19:45,960 Speaker 1: the banks and Francine Laqui, you wanted to continue with 350 00:19:46,040 --> 00:19:49,840 Speaker 1: this discussion on the banks. I did. I absolutely did, 351 00:19:49,920 --> 00:19:51,920 Speaker 1: Tom and I want to get to David and ask 352 00:19:52,040 --> 00:19:55,080 Speaker 1: him about what we call these opaque assets right that 353 00:19:55,119 --> 00:19:57,600 Speaker 1: we see in a lot of the European banks, Deutsche, 354 00:19:57,760 --> 00:20:00,840 Speaker 1: Credit Suite and Berkelay say they're hardest to value securities. 355 00:20:00,920 --> 00:20:04,480 Speaker 1: David Harrow, these level three assets are worth a hundred 356 00:20:04,560 --> 00:20:09,440 Speaker 1: and two point five billion dollars. Should we panic No, 357 00:20:09,800 --> 00:20:13,040 Speaker 1: not necessarily. And what what's happening is that as a 358 00:20:13,119 --> 00:20:16,240 Speaker 1: result of those assets being harder to price, they are, 359 00:20:16,960 --> 00:20:19,000 Speaker 1: according to the bossil free rules, have to have a 360 00:20:19,119 --> 00:20:22,440 Speaker 1: much higher capital position against these assets. And this is 361 00:20:22,520 --> 00:20:24,399 Speaker 1: why you see a lot of these banks trying to 362 00:20:24,560 --> 00:20:27,880 Speaker 1: trim slowly these assets. I don't know so much about 363 00:20:27,920 --> 00:20:30,320 Speaker 1: Deutsche BAK because we don't own them, but if you 364 00:20:30,400 --> 00:20:33,080 Speaker 1: look at Credit Suites, they have been putting these assets 365 00:20:33,119 --> 00:20:36,879 Speaker 1: into a resolution business and just slowly selling them and 366 00:20:37,000 --> 00:20:39,080 Speaker 1: so that's that's what we want them to do. In fact, 367 00:20:39,160 --> 00:20:42,520 Speaker 1: we want them to focus on the businesses they have 368 00:20:42,840 --> 00:20:46,080 Speaker 1: which can earn good returns to the cycle. Uh. And 369 00:20:46,160 --> 00:20:48,359 Speaker 1: this has been kind of a painful process, but they 370 00:20:48,480 --> 00:20:51,240 Speaker 1: keep proceeding in that way and keep on winding of 371 00:20:51,359 --> 00:20:54,280 Speaker 1: these What you you deem is harder to price assets. 372 00:20:54,880 --> 00:20:57,679 Speaker 1: But the reason, the reason why even though these assets 373 00:20:57,800 --> 00:20:59,919 Speaker 1: might be profitable, the reason why a lot of these 374 00:21:00,040 --> 00:21:03,400 Speaker 1: banks want to offload them is because they require higher 375 00:21:03,480 --> 00:21:07,600 Speaker 1: capital behind them and and as a result they want 376 00:21:07,640 --> 00:21:10,399 Speaker 1: to get rid of them. Uh. Some of these assets 377 00:21:10,440 --> 00:21:13,440 Speaker 1: are very good assets and income earning assets, but the 378 00:21:13,520 --> 00:21:16,560 Speaker 1: regulator just doesn't care about that. At times, they just 379 00:21:16,880 --> 00:21:21,159 Speaker 1: because of their liquidity, because their difficulty in pricing, they 380 00:21:21,240 --> 00:21:24,879 Speaker 1: want them gone. So that's that's what we see happening, David, 381 00:21:25,000 --> 00:21:27,280 Speaker 1: in the when you look at criticit, So the share 382 00:21:27,400 --> 00:21:30,720 Speaker 1: price has recovered somewhat. I mean it's really quantified books, 383 00:21:30,760 --> 00:21:33,000 Speaker 1: it's a little bit. And and the share price has 384 00:21:33,040 --> 00:21:35,879 Speaker 1: gone down quite a lot in the last twelve to 385 00:21:36,040 --> 00:21:39,640 Speaker 1: eighteen months. Is it an improvement in the general environment 386 00:21:40,119 --> 00:21:43,920 Speaker 1: or are people actually starting to see something in the bank. Well, 387 00:21:44,040 --> 00:21:47,200 Speaker 1: this has been quite a story. They have a new 388 00:21:47,880 --> 00:21:50,840 Speaker 1: CEO that came in last summer at about this time, 389 00:21:51,520 --> 00:21:53,359 Speaker 1: and he started to review the bank and he was 390 00:21:53,440 --> 00:21:57,879 Speaker 1: the one who actually accelerated this whole change and an 391 00:21:57,920 --> 00:22:01,680 Speaker 1: approach to to really accelerate rating, to move UH, to 392 00:22:01,840 --> 00:22:05,479 Speaker 1: move risk. Weided assets into the private bank as as 393 00:22:05,680 --> 00:22:09,920 Speaker 1: as opposed to the investment bank, and so he's accelerated this. 394 00:22:10,080 --> 00:22:13,200 Speaker 1: It's ruffled a lot of feathers in the process of 395 00:22:13,320 --> 00:22:17,440 Speaker 1: doing so. Literally, this this company, which was trading last 396 00:22:17,520 --> 00:22:20,400 Speaker 1: year in the mid to high twenties, hit a low 397 00:22:20,600 --> 00:22:24,760 Speaker 1: and July post Brexit below ten. Now it adds balanced 398 00:22:24,840 --> 00:22:28,520 Speaker 1: as you mentioned, eleven six. But this is still nowhere 399 00:22:28,600 --> 00:22:31,920 Speaker 1: near where it should be. If they do this transformation right, 400 00:22:32,840 --> 00:22:34,840 Speaker 1: this is a business that should trade for at least 401 00:22:34,880 --> 00:22:38,119 Speaker 1: one and a half times book value because the growth 402 00:22:38,359 --> 00:22:40,840 Speaker 1: and the income that the book is generating should be 403 00:22:40,880 --> 00:22:44,240 Speaker 1: a lot stable er coming out of that private bank. 404 00:22:44,320 --> 00:22:47,359 Speaker 1: And instead today we have a book value of about 405 00:22:47,440 --> 00:22:50,680 Speaker 1: half of but just over half our value um. And 406 00:22:50,760 --> 00:22:52,880 Speaker 1: so we think this if if they if they could 407 00:22:52,920 --> 00:22:56,440 Speaker 1: follow through the executionist plan, this, this stock has got 408 00:22:56,480 --> 00:23:00,520 Speaker 1: a lot more upside. David Bloomers just have an article 409 00:23:00,560 --> 00:23:04,680 Speaker 1: out on Bill Bill Gates and next net Worth, which 410 00:23:04,760 --> 00:23:07,600 Speaker 1: is genormous, and a lot of that is a recovery 411 00:23:07,600 --> 00:23:10,760 Speaker 1: in Microsoft. Microsoft was a dog and a value stock 412 00:23:10,880 --> 00:23:13,520 Speaker 1: for years. Pretty soon we're going to talk about it 413 00:23:13,600 --> 00:23:17,520 Speaker 1: breaking out the new highs pass two thousand. How do 414 00:23:17,600 --> 00:23:21,240 Speaker 1: you look at a value stock when it's present pe 415 00:23:21,440 --> 00:23:24,639 Speaker 1: is twenty five or twenty six or even twenty seven. 416 00:23:24,920 --> 00:23:27,560 Speaker 1: How do you deal with that world? What you have 417 00:23:27,760 --> 00:23:32,600 Speaker 1: to do toomas to normalize the earning stream? Earnings are 418 00:23:32,720 --> 00:23:36,280 Speaker 1: a flow concept. Think of a river, and rivers, as 419 00:23:36,359 --> 00:23:40,240 Speaker 1: we know, get wider and they get narrower, and you know, 420 00:23:40,400 --> 00:23:42,520 Speaker 1: just think of the Mississippi River at its source, you 421 00:23:42,600 --> 00:23:46,800 Speaker 1: could jump over it, and where it ends, it's Louisiana 422 00:23:46,880 --> 00:23:49,359 Speaker 1: and it's like a like. And what you have to 423 00:23:49,440 --> 00:23:51,960 Speaker 1: do is look at those earning streams and try to 424 00:23:52,119 --> 00:23:54,520 Speaker 1: normalize it. Not what it does in the peak now, 425 00:23:54,560 --> 00:23:56,440 Speaker 1: but it does in the trough. And that's how you 426 00:23:56,520 --> 00:23:59,520 Speaker 1: priced the business. You priced the business based on It's 427 00:23:59,520 --> 00:24:02,240 Speaker 1: a normal earnings, not peak er trough. What tends to 428 00:24:02,320 --> 00:24:06,000 Speaker 1: happen in the market is when our companies accelerating their earnings, 429 00:24:06,040 --> 00:24:08,520 Speaker 1: the momentum players get behind it. They really like it. 430 00:24:08,760 --> 00:24:12,160 Speaker 1: There and they're willing to pay a high price without thinking, well, 431 00:24:12,280 --> 00:24:15,760 Speaker 1: where are we in the cycle of in the earning 432 00:24:15,840 --> 00:24:18,560 Speaker 1: cycle for and let's not just price it at the peak. 433 00:24:19,000 --> 00:24:21,960 Speaker 1: Let's price it normalize. And on the downside, the market 434 00:24:22,080 --> 00:24:27,040 Speaker 1: gets very distraught over trough earnings and that's probably exactly 435 00:24:27,080 --> 00:24:29,240 Speaker 1: when you should be looking at a business. But David 436 00:24:29,280 --> 00:24:33,080 Speaker 1: thinkings David Arrow with us this morning. Who you put 437 00:24:33,119 --> 00:24:36,879 Speaker 1: your trust in matters? Investors have put their trust in 438 00:24:37,040 --> 00:24:41,200 Speaker 1: independent registered investment advisors to the tune of four trillion dollars. 439 00:24:42,000 --> 00:24:45,800 Speaker 1: Why they see their role is to serve, not sell. 440 00:24:46,640 --> 00:24:49,000 Speaker 1: That's why Charles Schwab is committed to the success of 441 00:24:49,080 --> 00:24:54,160 Speaker 1: over seven thousand independent financial advisors who passionately dedicate themselves 442 00:24:54,560 --> 00:24:58,399 Speaker 1: to helping people achieve their financial goals. Learn more and 443 00:24:58,600 --> 00:25:05,920 Speaker 1: find your independent advisor dot com. Muhammadhlarian with us and 444 00:25:06,800 --> 00:25:09,879 Speaker 1: still in celebration of his book, Mommed. What has been 445 00:25:09,920 --> 00:25:12,920 Speaker 1: the biggest surprise of putting out your new effort? What 446 00:25:13,000 --> 00:25:15,520 Speaker 1: has been the biggest surprise of the response of the 447 00:25:15,600 --> 00:25:19,440 Speaker 1: book com I think how quickly now people realize that 448 00:25:20,560 --> 00:25:23,320 Speaker 1: central banks have been the only game in town, and 449 00:25:23,480 --> 00:25:29,160 Speaker 1: how much people now agree that you've got to pivot 450 00:25:29,640 --> 00:25:32,840 Speaker 1: more comprehensive, polished response. If Janet Yellen is the only 451 00:25:32,960 --> 00:25:35,399 Speaker 1: game in town at Jackson Hall. She does it with 452 00:25:35,480 --> 00:25:38,120 Speaker 1: the backdrop of one of our themes this morning, which 453 00:25:38,200 --> 00:25:41,840 Speaker 1: is horrific productivity. How could she even talk about raising 454 00:25:41,960 --> 00:25:45,920 Speaker 1: rates given the productivity and industrial production of the nation. 455 00:25:47,280 --> 00:25:50,680 Speaker 1: I think because there is also the risk of financial 456 00:25:50,800 --> 00:25:54,280 Speaker 1: stability down the road. So one of the problems when 457 00:25:54,359 --> 00:25:58,240 Speaker 1: you rely on an incomplete instrument is not only do 458 00:25:58,280 --> 00:26:00,720 Speaker 1: you not get the fault benefits and therefore the wheel 459 00:26:00,720 --> 00:26:04,879 Speaker 1: economy doesn't respond fully, but also you incur what Chairman 460 00:26:04,920 --> 00:26:09,479 Speaker 1: Bernanke called in August, the costs and risks, the collateral damage, 461 00:26:10,240 --> 00:26:14,800 Speaker 1: and the FED has to worry that it's it may 462 00:26:14,880 --> 00:26:18,879 Speaker 1: be fueling financial stability down the road. And that I 463 00:26:18,960 --> 00:26:24,040 Speaker 1: think is the strongest argument for trying to slowly normalize rates. 464 00:26:25,119 --> 00:26:28,560 Speaker 1: And that's because otherwise you contribute to excessive risk taking. 465 00:26:29,200 --> 00:26:31,359 Speaker 1: Right And actually, Mohammad, great to speak to you this 466 00:26:31,440 --> 00:26:34,480 Speaker 1: morning's francy in here. Instead of squabbling over these short 467 00:26:34,560 --> 00:26:38,280 Speaker 1: term interest rates, should really focus longer term about what 468 00:26:38,480 --> 00:26:41,960 Speaker 1: Janet Yelle could do to counter a crisis correct friencing. 469 00:26:42,040 --> 00:26:46,359 Speaker 1: And that's absolutely right, Um, you've got to realize that 470 00:26:46,800 --> 00:26:49,560 Speaker 1: the last thing you want is for your your central 471 00:26:49,600 --> 00:26:54,119 Speaker 1: bank to be ineffective. I worry tremendously about Japan. I 472 00:26:54,240 --> 00:26:56,879 Speaker 1: worried in Japan's case, the Bank of Japan may not 473 00:26:57,040 --> 00:27:00,480 Speaker 1: just be ineffective, it may have become counterproductive. The FAT 474 00:27:00,520 --> 00:27:02,439 Speaker 1: doesn't want to get there, the e CP doesn't want 475 00:27:02,440 --> 00:27:04,159 Speaker 1: to get the Bank of England doesn't want to get there, 476 00:27:04,440 --> 00:27:06,879 Speaker 1: and and they have that at the bank of their mind. So, 477 00:27:07,080 --> 00:27:10,440 Speaker 1: but what happens if a central bank becomes counterproductive? And 478 00:27:10,480 --> 00:27:12,200 Speaker 1: this is something that Governor Krode of the Bank of 479 00:27:12,240 --> 00:27:14,840 Speaker 1: Japan would really push against, right he even said today 480 00:27:14,920 --> 00:27:18,159 Speaker 1: that he could go into further negative territory. Then what 481 00:27:18,359 --> 00:27:20,600 Speaker 1: does a central bank need to do? They need to 482 00:27:20,640 --> 00:27:24,320 Speaker 1: step away or just try something radically different. So two 483 00:27:24,359 --> 00:27:27,360 Speaker 1: things that it's not whether they can use an instrument more, 484 00:27:27,920 --> 00:27:30,960 Speaker 1: it's whether they can get the results they want. The 485 00:27:31,080 --> 00:27:33,440 Speaker 1: last time the Bank of Japan went negative, they ended 486 00:27:33,560 --> 00:27:36,399 Speaker 1: up with a stronger yen. So they ended up with 487 00:27:36,480 --> 00:27:41,040 Speaker 1: a completely opposite outcome of what they wanted. In terms 488 00:27:41,040 --> 00:27:44,520 Speaker 1: of what central banks must do. Unfortunately, the destiny is 489 00:27:44,600 --> 00:27:48,520 Speaker 1: no longer in their hand. Unfortunately, it depends on other 490 00:27:48,640 --> 00:27:56,240 Speaker 1: policymakers coming in and assisting them in battling sluggish economic growth. 491 00:27:57,760 --> 00:27:59,639 Speaker 1: So it's no longer up to them as much as 492 00:27:59,680 --> 00:28:03,440 Speaker 1: it is up to other the fiscal agency, those who 493 00:28:03,840 --> 00:28:07,360 Speaker 1: can implement pro growth reforms and those who can complete 494 00:28:07,400 --> 00:28:10,320 Speaker 1: financial architectures. So what would you like to hear from 495 00:28:10,400 --> 00:28:12,359 Speaker 1: Jenna Yalen at Jackson Hall. I mean, she needs to 496 00:28:12,440 --> 00:28:15,480 Speaker 1: navigate so that the longer term issues. I guess she 497 00:28:15,640 --> 00:28:17,440 Speaker 1: needs to maybe try I don't know if she wants 498 00:28:17,520 --> 00:28:20,200 Speaker 1: to but redress the market expectations for a rate hike 499 00:28:20,400 --> 00:28:23,879 Speaker 1: or not this year. So a little bit from along 500 00:28:23,920 --> 00:28:26,280 Speaker 1: the lines of what Stan Fisher told us over the weekend. 501 00:28:26,760 --> 00:28:29,680 Speaker 1: I thought his speech was excellent. He laid out what 502 00:28:29,800 --> 00:28:34,200 Speaker 1: the economy has achieved, he laid out the big issues, 503 00:28:34,280 --> 00:28:38,520 Speaker 1: the questions, and he acknowledged that you need other policy 504 00:28:38,640 --> 00:28:40,239 Speaker 1: makers to step up to the plate. And I think 505 00:28:40,320 --> 00:28:42,240 Speaker 1: that's a message you need to repeat over and over 506 00:28:42,720 --> 00:28:46,000 Speaker 1: again hoping that you get through to the political system. 507 00:28:46,560 --> 00:28:49,360 Speaker 1: Why I get the idea, I'm ahammed of rhetoric. And 508 00:28:49,520 --> 00:28:53,120 Speaker 1: you know his professor, Fisher said, he's an optimist. We 509 00:28:53,240 --> 00:28:57,760 Speaker 1: know you are, is well, the reality is economic data. 510 00:28:58,200 --> 00:29:02,760 Speaker 1: Is Governor Kearney leading with clear talk. It seems that 511 00:29:02,840 --> 00:29:06,320 Speaker 1: when he speaks he just says, look, inflation is not there. 512 00:29:06,680 --> 00:29:10,280 Speaker 1: Do you detect a language difference between the rhetoric of 513 00:29:10,400 --> 00:29:13,640 Speaker 1: BOE versus the Fed? You know? I wrote an article 514 00:29:13,880 --> 00:29:18,760 Speaker 1: after the Bank of England's lost policy announcement saying, Wow, 515 00:29:18,840 --> 00:29:24,000 Speaker 1: they were really effective. Why First they combine a range 516 00:29:24,240 --> 00:29:26,800 Speaker 1: of policies. So not only did that cut interest rates, 517 00:29:27,320 --> 00:29:30,960 Speaker 1: not only did they introduce a new quee which was expanded, 518 00:29:31,040 --> 00:29:34,480 Speaker 1: but they also had a new lending scheme, recognizing that 519 00:29:34,600 --> 00:29:38,360 Speaker 1: they have to minimize to the extent possible the negative 520 00:29:38,400 --> 00:29:42,479 Speaker 1: impact of lower interest rates. Second, that communication was very 521 00:29:42,560 --> 00:29:45,040 Speaker 1: clear as to what they can do and what they 522 00:29:45,160 --> 00:29:47,960 Speaker 1: cannot do, and they stress what they cannot do, which 523 00:29:48,000 --> 00:29:51,040 Speaker 1: is unusual for central bank to do so. Um So 524 00:29:51,160 --> 00:29:54,240 Speaker 1: the Bank of England has led the way both in 525 00:29:54,400 --> 00:29:58,560 Speaker 1: being more comprehensive trying to limit the collateral damage of 526 00:29:58,760 --> 00:30:02,440 Speaker 1: ultra low interest rates, and also in terms of communicating. 527 00:30:02,760 --> 00:30:05,479 Speaker 1: The question for them is the same question for the ECB, 528 00:30:05,720 --> 00:30:08,160 Speaker 1: is the same question for the Fed is will the 529 00:30:08,240 --> 00:30:11,520 Speaker 1: government step up to the plate with this? Muhammad Larian 530 00:30:11,600 --> 00:30:15,840 Speaker 1: Darker Larian uh Francine and I have followed the struggle 531 00:30:16,040 --> 00:30:19,040 Speaker 1: of Europe and to me and Sir Howard Davies mentioning 532 00:30:19,080 --> 00:30:21,560 Speaker 1: this this morning, so much of it is the clearing 533 00:30:21,600 --> 00:30:26,640 Speaker 1: of balance sheets. Tim Geitner talked consistently and persistently about 534 00:30:26,760 --> 00:30:30,440 Speaker 1: this nine and even ten years ago, the idea of 535 00:30:30,560 --> 00:30:34,600 Speaker 1: delaying and delaying the clearing of balance sheets to provide 536 00:30:34,680 --> 00:30:38,959 Speaker 1: stability to the system. As his chairman bernanke, why are 537 00:30:39,000 --> 00:30:41,640 Speaker 1: we doing this and when do we finally clear out 538 00:30:41,800 --> 00:30:44,840 Speaker 1: our balance sheets? So the lesson, the lesson of history, 539 00:30:44,920 --> 00:30:46,680 Speaker 1: not only from the U S, but go back to 540 00:30:46,760 --> 00:30:48,880 Speaker 1: the Latin mac and crisis, go back to the last 541 00:30:48,960 --> 00:30:52,000 Speaker 1: decade of the eighties, is that if you have excessive 542 00:30:52,000 --> 00:30:58,080 Speaker 1: indebtedness bloated balance sheets, it undermines economic performance in a 543 00:30:58,120 --> 00:31:01,600 Speaker 1: sustainable way. So in theory, the best thing to do 544 00:31:02,040 --> 00:31:06,200 Speaker 1: is to go after the bloated balance sheet, recognize the losses, 545 00:31:06,280 --> 00:31:10,920 Speaker 1: and move on. That's the economic answer. The political answer 546 00:31:11,160 --> 00:31:16,200 Speaker 1: is who incurs the loss, who takes the loss? And 547 00:31:16,320 --> 00:31:21,640 Speaker 1: the reason why it has been difficult is because governments 548 00:31:21,680 --> 00:31:24,600 Speaker 1: find it very hard to impose the losses on different 549 00:31:24,680 --> 00:31:27,960 Speaker 1: parts of society. So the hope is somehow if you 550 00:31:28,040 --> 00:31:31,080 Speaker 1: wait long enough, things will get better. And they do 551 00:31:31,200 --> 00:31:34,840 Speaker 1: get better when you run a financial repression regime as 552 00:31:34,880 --> 00:31:38,160 Speaker 1: we have been doing, because you are subsidizing letters and 553 00:31:38,240 --> 00:31:41,520 Speaker 1: your taxing creditors. But the basic problem has been how 554 00:31:41,600 --> 00:31:44,320 Speaker 1: do you impose the laws in a political acceptable way 555 00:31:44,880 --> 00:31:47,719 Speaker 1: that doesn't undermine what you're trying to do. And Europe 556 00:31:47,760 --> 00:31:49,960 Speaker 1: hasn't been able to get his act together. It took 557 00:31:50,040 --> 00:31:51,960 Speaker 1: Latin America a very long time to do it in 558 00:31:52,000 --> 00:31:56,040 Speaker 1: the eighties. Um, the United States is luckier because this 559 00:31:56,200 --> 00:31:59,920 Speaker 1: financial architecture is more complete. But that's and actually, you know, 560 00:32:00,280 --> 00:32:02,800 Speaker 1: going back to that, the US is luckier, but it 561 00:32:02,920 --> 00:32:05,800 Speaker 1: was also more painful, right. I mean, I have a 562 00:32:05,920 --> 00:32:08,200 Speaker 1: lot of Americans every day telling you, well, why is 563 00:32:08,560 --> 00:32:11,080 Speaker 1: the Italian banks not sorted? Why is it taking it 564 00:32:11,240 --> 00:32:14,400 Speaker 1: so long? Let's remind ourselves that actually we didn't have 565 00:32:14,960 --> 00:32:17,680 Speaker 1: stayed intervention in the Italian banks. We did here in 566 00:32:17,720 --> 00:32:19,440 Speaker 1: the UK with the collapse of Black Rock, and we 567 00:32:19,520 --> 00:32:22,920 Speaker 1: certainly had the demon brothers in the States correct and something. 568 00:32:23,960 --> 00:32:26,760 Speaker 1: I'm glad you raised Italy because Italy brings in an 569 00:32:26,840 --> 00:32:29,600 Speaker 1: added aspect that you know, to say, sudden have when 570 00:32:29,720 --> 00:32:33,080 Speaker 1: what you want to do at the national level conflicts 571 00:32:33,160 --> 00:32:36,280 Speaker 1: with what you've agreed to at the regional level. Italy 572 00:32:36,400 --> 00:32:38,960 Speaker 1: has a certain view as to how it should deal 573 00:32:39,040 --> 00:32:43,200 Speaker 1: with its banks. It wants to protect the retail investor 574 00:32:43,280 --> 00:32:47,360 Speaker 1: quote unquote, she or he has invested in in various 575 00:32:47,400 --> 00:32:50,000 Speaker 1: bank securities, and there's a good reason why you may 576 00:32:50,080 --> 00:32:54,440 Speaker 1: want to protect them. But there's a regional framework that 577 00:32:54,920 --> 00:32:57,600 Speaker 1: imposes losses in a certain way. So Italy is an 578 00:32:57,600 --> 00:33:01,360 Speaker 1: example whereby not only is it hard to begin with, 579 00:33:01,840 --> 00:33:05,440 Speaker 1: but it gets even harder when national objectives conflict with 580 00:33:05,560 --> 00:33:10,240 Speaker 1: regional ones. Well, the national objectives become more like the 581 00:33:10,320 --> 00:33:13,160 Speaker 1: regional ones. Now that we have Brexit, so our Europeans 582 00:33:13,240 --> 00:33:16,200 Speaker 1: going to get closer and actually watch out for their 583 00:33:16,320 --> 00:33:18,600 Speaker 1: interests a little bit more so, you know, if it 584 00:33:18,760 --> 00:33:20,960 Speaker 1: has to do with the banks, where we see these 585 00:33:21,000 --> 00:33:25,320 Speaker 1: Bailian rules thrown out the window. I hope that there 586 00:33:25,320 --> 00:33:28,880 Speaker 1: will be more sensitivity to national politics and I hope 587 00:33:28,920 --> 00:33:31,840 Speaker 1: that Brexit will serve as a wake up call. Italy 588 00:33:32,000 --> 00:33:35,040 Speaker 1: is particularly important, as you've reported over and over again, 589 00:33:35,080 --> 00:33:38,440 Speaker 1: because as their inferendum coming up, and if that referendum 590 00:33:38,560 --> 00:33:42,240 Speaker 1: is lost and if the government falls, then you will 591 00:33:42,360 --> 00:33:48,440 Speaker 1: complicate tremendously um the political configuration in Europe, so so 592 00:33:48,600 --> 00:33:52,440 Speaker 1: Italy in a number of ways is a leading indicator 593 00:33:53,040 --> 00:33:57,520 Speaker 1: of whether Europe adapts post Brexit or whether Europe does 594 00:33:57,600 --> 00:34:00,800 Speaker 1: not adapt post b Exit. What is it T decision 595 00:34:01,280 --> 00:34:03,720 Speaker 1: for the autumn of two thousand and sixteen? If I 596 00:34:03,760 --> 00:34:06,600 Speaker 1: look at the only game in Town and your magnificent 597 00:34:06,760 --> 00:34:11,040 Speaker 1: chapter later on about game theory and about the strategy 598 00:34:11,120 --> 00:34:14,239 Speaker 1: that must be h take and maybe it's your your 599 00:34:14,280 --> 00:34:18,120 Speaker 1: wonderful chapter of the Keys to Navigating a bimodal distribution, 600 00:34:18,760 --> 00:34:21,600 Speaker 1: I think we all get the phrase T decision, doctor Larry, 601 00:34:21,680 --> 00:34:24,359 Speaker 1: And what is the T decision that needs to be made? 602 00:34:24,920 --> 00:34:27,239 Speaker 1: So if you talk in terms of game theory, and 603 00:34:27,320 --> 00:34:29,759 Speaker 1: I know you love that Tom, as do I, then 604 00:34:30,440 --> 00:34:33,360 Speaker 1: the concept of Mike Spence and Alba Price Winner is 605 00:34:33,400 --> 00:34:38,560 Speaker 1: incredibly powerful. The world has been playing non cooperatively, a 606 00:34:38,640 --> 00:34:42,560 Speaker 1: cooperative game. So in order for people to be better 607 00:34:42,719 --> 00:34:46,920 Speaker 1: off collectively, they have to coordinate economic policy much more. 608 00:34:47,000 --> 00:34:49,799 Speaker 1: They have to be much more cooperative. But we are 609 00:34:49,840 --> 00:34:53,440 Speaker 1: playing a non cooperative game. And you see this in 610 00:34:53,600 --> 00:34:55,839 Speaker 1: terms of the exchanges. The end shouldn't be at one 611 00:34:56,080 --> 00:34:59,759 Speaker 1: d versus at dollars that doesn't help Japan in any 612 00:34:59,840 --> 00:35:03,920 Speaker 1: way and actually doesn't help global rebalancing interest rates. We 613 00:35:04,000 --> 00:35:06,840 Speaker 1: have a way to the bottom that is undermining the 614 00:35:06,960 --> 00:35:10,239 Speaker 1: functioning of the financial system. What is the catalyst for 615 00:35:10,320 --> 00:35:13,640 Speaker 1: those differential equations to get us to a cooperative system. 616 00:35:14,200 --> 00:35:16,800 Speaker 1: I fear that it will be. It will have to 617 00:35:16,840 --> 00:35:18,919 Speaker 1: be a crisis. I hope it's not, but I fear 618 00:35:18,920 --> 00:35:21,400 Speaker 1: it will have to be the crisis. The best moment 619 00:35:21,840 --> 00:35:25,960 Speaker 1: of global economic cooperation was an April two thou and 620 00:35:26,080 --> 00:35:29,759 Speaker 1: nine when the G twin team met in London and 621 00:35:30,200 --> 00:35:34,520 Speaker 1: took steps that avoided a multi depression. Unfortunately, the catalyst 622 00:35:34,960 --> 00:35:37,600 Speaker 1: was the two thousand and a financial crisis. So I 623 00:35:37,760 --> 00:35:40,320 Speaker 1: hope it's not going to be a crisis, but I 624 00:35:40,760 --> 00:35:43,160 Speaker 1: fear it will be. And the only question is how 625 00:35:43,239 --> 00:35:47,719 Speaker 1: big a crisis you need to improve global economic governance. Jaguarian, 626 00:35:47,800 --> 00:35:51,080 Speaker 1: thank you so much. Thanks for listening to the Bloomberg 627 00:35:51,120 --> 00:35:56,600 Speaker 1: Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud, 628 00:35:57,000 --> 00:36:00,960 Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at 629 00:36:01,000 --> 00:36:05,759 Speaker 1: Tom Keane, Michael McKee is at Economy Before the podcast, 630 00:36:05,880 --> 00:36:16,040 Speaker 1: you can always catch us worldwide. I'm Bloomberg Radio who 631 00:36:16,160 --> 00:36:19,880 Speaker 1: you put your trust in matters. Investors have put their 632 00:36:19,880 --> 00:36:23,239 Speaker 1: trust in independent registered investment advisors to the tune of 633 00:36:23,320 --> 00:36:28,280 Speaker 1: four trillion dollars. 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