WEBVTT - Surveillance: Too Much Talk Can Lower Transparency, Taylor Says 0:00:00.040 --> 0:00:02.640 Who you put your trust in matters. Investors have put 0:00:02.680 --> 0:00:07.040 their trust and independent registered investment advisors to the two 0:00:07.040 --> 0:00:10.680 and four trillion dollars. Why learn more and find your 0:00:10.760 --> 0:00:26.360 independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast. 0:00:26.760 --> 0:00:30.480 I'm Tom Keene with David Gura. Daily we bring you 0:00:30.520 --> 0:00:35.560 insight from the best in economics, finance, investment, and international relations. 0:00:35.960 --> 0:00:40.559 Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and 0:00:40.640 --> 0:00:47.479 of course, on the Bloomberg. At the end of two 0:00:47.479 --> 0:00:49.159 thousand sixteen, a good time to look back on the 0:00:49.240 --> 0:00:51.120 year that was, and I had to two thousand seventeen. 0:00:51.120 --> 0:00:53.159 And we begin today with EM and A joining us 0:00:53.159 --> 0:00:55.440 now as Peter Taky's co head of M and A 0:00:55.440 --> 0:00:56.920 at City Group, and great to have you with us 0:00:56.920 --> 0:01:00.400 here in New York. Let's let's start with how you 0:01:00.440 --> 0:01:03.760 measure the health of the M and A marketplace. We'll 0:01:03.760 --> 0:01:05.720 look back on two thousand sixteen. How was it and 0:01:05.959 --> 0:01:08.119 how do you assess how good it was? We had 0:01:08.120 --> 0:01:11.840 a we had a very strong um. It wasn't as 0:01:11.920 --> 0:01:14.479 it wasn't as strong as twenty fifteen, which was which 0:01:14.560 --> 0:01:19.360 was a record. But we're down about from that level roughly, UM, 0:01:19.400 --> 0:01:22.200 but it's still second best, second best M M and 0:01:22.280 --> 0:01:24.679 A year since the financial crisis? What was leading it 0:01:24.680 --> 0:01:26.720 on sort of sector by by sector basis? Where did 0:01:26.720 --> 0:01:28.720 you see the most growth, the most movement. We saw 0:01:28.720 --> 0:01:31.920 an awful lot of movement in technology, awful lot of 0:01:31.959 --> 0:01:35.360 movement in the industrial space. It was a relatively a 0:01:35.440 --> 0:01:38.720 relatively light year for industrial M and A in and 0:01:38.760 --> 0:01:42.040 we saw a bounce back on that, and so those 0:01:42.080 --> 0:01:45.000 two sectors saw significant increases. We saw a little bit 0:01:45.080 --> 0:01:46.720 less in the way of telecoms, for instance, in a 0:01:46.760 --> 0:01:49.520 little bit less relative to pharma than we had in 0:01:49.520 --> 0:01:51.560 in the prior year. What what is driving it at 0:01:51.600 --> 0:01:54.320 this point? Is it complimentarity, is it? Is it something else? 0:01:54.320 --> 0:01:57.760 How are these companies coming together? I think I think 0:01:58.880 --> 0:02:01.080 and and Tom Keene made this point a little earlier 0:02:01.080 --> 0:02:03.960 this morning. I think the focus now is much more 0:02:04.000 --> 0:02:09.679 on on strategic combinations and what I would call intelligent dealmaking. UM, 0:02:09.800 --> 0:02:12.280 it's a it's a challenging world environment, it's a risky 0:02:12.280 --> 0:02:16.080 world environment. In that environment, I think the investors have 0:02:16.200 --> 0:02:20.080 become more discerning as to what types of transactions really 0:02:20.080 --> 0:02:23.239 makes sense. There was a period of time from sort 0:02:23.280 --> 0:02:26.240 of eleven to halfway through fifteen, where pretty much em 0:02:26.320 --> 0:02:29.000 Andy any M and A activity was greeted with applause 0:02:29.200 --> 0:02:33.400 from the investor community. And that has definitely become what 0:02:33.440 --> 0:02:35.560 I would call it's returned to the norm in terms 0:02:35.639 --> 0:02:38.440 of in terms of the types of responsiveness that the 0:02:38.560 --> 0:02:41.000 investors have, and they've become more thoughtful about what's a 0:02:41.000 --> 0:02:42.560 good deal and what's not a good deal. How are 0:02:42.600 --> 0:02:46.400 your clients, How are people who are weighing mergers dealing 0:02:46.440 --> 0:02:48.200 with the uncertainty? I think about how in the I 0:02:48.320 --> 0:02:50.200 P O space there's been a tendency here here to 0:02:50.280 --> 0:02:53.200 sort of stop and wait, perhaps wait out whatever uncertainty 0:02:53.200 --> 0:02:54.960 there there is. Are you seeing that in the M 0:02:54.960 --> 0:02:56.960 and A space as well? What are clients saying to you? 0:02:57.600 --> 0:03:00.360 I think I think that the there's going to be 0:03:00.360 --> 0:03:03.600 a bit of a pause perhaps, uh in certain sectors 0:03:03.600 --> 0:03:07.960 that are gonna be potentially very impacted by UM, by 0:03:07.960 --> 0:03:10.360 their new administration and some of the changes that have 0:03:10.480 --> 0:03:14.760 been at least vocalized H An example is healthcare UM. 0:03:14.800 --> 0:03:17.919 I think there's there's been enough noise around the Affordable 0:03:17.960 --> 0:03:20.080 Care Act that that we might see a bit of 0:03:20.080 --> 0:03:23.639 a pause within that space as as companies try to 0:03:23.639 --> 0:03:26.800 figure out what the policies really are. UM, there has 0:03:26.840 --> 0:03:28.880 been an awful lot of talk, but not an awful 0:03:28.919 --> 0:03:31.880 lot of of really concrete policy making. And of course 0:03:32.160 --> 0:03:35.000 that's still is subject to a congressional process, which is 0:03:35.640 --> 0:03:40.520 which is difficult to day. How much does does regulation 0:03:40.640 --> 0:03:42.760 tend to change from from term to term? You have 0:03:43.280 --> 0:03:45.280 staff appointments in the Justice Department, for instance, you have 0:03:45.320 --> 0:03:48.000 people who are our career public servants. Do do the 0:03:48.120 --> 0:03:51.160 do the metrics by which they gauge judge these deals 0:03:51.280 --> 0:03:54.800 change every four years? That's a good question. UM. I 0:03:54.800 --> 0:03:57.760 don't think the metrics change. I think there can definitely 0:03:57.800 --> 0:04:02.680 be UM leanings in terms of the way that the 0:04:02.680 --> 0:04:06.040 way a particular administration or a particular a particular official 0:04:06.360 --> 0:04:09.520 interprets that data. We have definitely seen in the last 0:04:09.720 --> 0:04:12.360 couple of years, UM. Which is interesting, is it it 0:04:12.720 --> 0:04:16.520 certainly wasn't necessarily representative of the full eight years of 0:04:16.680 --> 0:04:19.640 the prior administration. UM. We've seen in the last couple 0:04:19.640 --> 0:04:23.240 of years that there has been a more hawkish tone 0:04:23.680 --> 0:04:25.840 coming out of the regulators in terms of their reaction 0:04:25.880 --> 0:04:30.720 to transactions. UM. Whether or not that will change dramatically 0:04:30.960 --> 0:04:33.520 or whether it will change slowly. I think it's difficult 0:04:33.560 --> 0:04:36.440 to It's difficult to call, but I would argue that 0:04:36.480 --> 0:04:39.240 there's likely to be changed, and I think we're going 0:04:39.279 --> 0:04:43.440 to see an environment which, again, UM, I can only 0:04:43.480 --> 0:04:47.040 respond to what our president elects commentary has been. There 0:04:47.040 --> 0:04:50.000 seems to be a bias towards towards a slightly looser 0:04:50.040 --> 0:04:52.919 regulatory environment. And what if you heard from him about 0:04:53.000 --> 0:04:55.560 deal making? It talks. He talks about that deal making 0:04:55.600 --> 0:04:57.360 a lot. It sort of in sort of grand terms, 0:04:57.360 --> 0:04:59.800 in large terms, but with your kind of deal making. 0:05:00.400 --> 0:05:01.680 Was there a lot of rhetoric about it, a lot 0:05:01.720 --> 0:05:03.720 of clarity about what his policy positions would be. The 0:05:03.720 --> 0:05:06.680 answer is not much. UM. I think I think we've 0:05:06.680 --> 0:05:09.960 heard some things from from the President elect that definitely 0:05:10.000 --> 0:05:15.400 will affect deal making. UM. Stimulus spending UM makes It 0:05:15.560 --> 0:05:18.480 makes a difference to how economy, how companies feel about 0:05:18.760 --> 0:05:22.760 the broad economic environment. Regulation makes a difference as to 0:05:23.040 --> 0:05:26.080 their optimism or lack of optimism around whether deals get done. 0:05:26.440 --> 0:05:29.479 And taxation can make a significant difference in terms of 0:05:29.520 --> 0:05:32.040 both the cost of capital and UH and the ability 0:05:32.080 --> 0:05:35.400 to pullut. What do clients do amid the political noise 0:05:35.440 --> 0:05:37.520 that follows the announcement of these these big deals. I 0:05:37.520 --> 0:05:41.480 think if the big agribusiness deals, for instance, and Christmas, 0:05:43.080 --> 0:05:45.560 that's what I'm doing today. There you go, That's what 0:05:45.560 --> 0:05:48.119 what client is doing here. But how do they filter 0:05:48.200 --> 0:05:50.080 that out? How do your clients pay much attention to 0:05:50.160 --> 0:05:52.320 sort of that or is the focus much more here 0:05:52.360 --> 0:05:54.800 on on the regulatory side? Do you mean, how how 0:05:54.839 --> 0:05:57.880 are the companies reacting to exactly the political noise or 0:05:57.880 --> 0:06:02.440 political Yeah, well, I think I think a company, uh, 0:06:02.640 --> 0:06:05.760 particularly we're talking about large companies that are affected by 0:06:05.760 --> 0:06:08.680 the political environment. They're not blind to it and uh, 0:06:08.680 --> 0:06:11.680 and they need to be thoughtful about a political reaction 0:06:11.800 --> 0:06:14.120 and whether or not that can make a difference to 0:06:14.120 --> 0:06:17.320 the rest of their business. But I would argue that 0:06:17.320 --> 0:06:19.680 that most of that thinking goes in prior to the 0:06:19.680 --> 0:06:23.919 announcement of the transaction, um as opposed to the follow 0:06:24.000 --> 0:06:27.559 through hopefully should be the execution around a well thought 0:06:27.560 --> 0:06:30.920 out strategy that was developed prior to the announcement of 0:06:30.960 --> 0:06:33.920 the transaction. Let me mind the global nous of your title, 0:06:33.960 --> 0:06:36.440 your head of co heead of Global Deals. We we've 0:06:36.440 --> 0:06:38.560 heard so much from our colleage Jeff McCracken and others 0:06:38.600 --> 0:06:42.279 about Chinese interest in getting into mergers and acquisitions around 0:06:42.320 --> 0:06:45.240 the world. What's been motivating that? What motivates China's interest 0:06:45.320 --> 0:06:47.760 here to to merge with companies outside Well, I think 0:06:47.760 --> 0:06:50.720 there's I think there's a couple of things. Um. The 0:06:51.440 --> 0:06:55.800 Chinese have definitely been much more aggressive about about deal 0:06:55.839 --> 0:06:58.840 making on a cross border basis. UM. I think that's 0:06:58.880 --> 0:07:02.799 driven by a desire to access technology. It's a driven 0:07:02.800 --> 0:07:06.440 by a desire to access commodities. UH, it's a driven 0:07:06.480 --> 0:07:10.440 in some cases by a desire potentially to offshore capital. UM. 0:07:10.480 --> 0:07:14.640 I think those motivations, they can be difficult to discern. 0:07:16.720 --> 0:07:20.400 The fact is that in certain in certain sensitive areas, 0:07:21.080 --> 0:07:24.600 I think the Chinese companies, in particularly state owned companies, 0:07:24.640 --> 0:07:26.520 have started to hit some roadblocks in terms of their 0:07:26.560 --> 0:07:30.120 ability to execute on that strategy. And therefore there's perhaps 0:07:30.120 --> 0:07:34.440 some more some more caution around around the level of activity. 0:07:34.920 --> 0:07:38.840 Peter teg with us, we've been talking about the cards 0:07:39.160 --> 0:07:42.400 you are dealt. Does a guy like you care about 0:07:42.480 --> 0:07:45.280 interest rates or is that just the myth that that 0:07:45.360 --> 0:07:48.400 there's so much money slashing around that on a day 0:07:48.440 --> 0:07:52.920 to day basis combination people are actually immune to interest 0:07:53.000 --> 0:07:57.320 rate dynamics. I I think the short answer is we're 0:07:57.320 --> 0:08:01.320 not paying much attention to it right now. Now I've 0:08:01.320 --> 0:08:03.800 been I've been doing this for long enough to certainly 0:08:03.800 --> 0:08:06.240 have seen environments where it mattered a great deal. But 0:08:06.280 --> 0:08:08.840 I would say we're nowhere near that. We're nowhere near that. 0:08:08.920 --> 0:08:12.760 Right this week we've been modeling well. One one I 0:08:12.800 --> 0:08:15.520 think it's Craig Bishop with o RBC Capital Markets made 0:08:15.600 --> 0:08:18.400 very clear nothing happened till the ten year prince three percent. 0:08:19.080 --> 0:08:21.920 He says, that's sort of a huge emotional hurdle or 0:08:21.960 --> 0:08:25.120 nowhere near that. Yeah, I'm not sure I'm prepared to 0:08:25.120 --> 0:08:26.840 put a number on it, but I I certainly would 0:08:26.840 --> 0:08:29.920 tell you that a twenty five basis point rise in rates, 0:08:30.200 --> 0:08:32.160 or for that matter of fifty basis point right or 0:08:32.320 --> 0:08:36.200 seventy basis point rise, I would actually argue that that 0:08:36.280 --> 0:08:39.480 arise indicates optimism, and optimism might be a good thing. 0:08:40.360 --> 0:08:42.520 David Garrl please make a note to Mr Carbett, who 0:08:42.520 --> 0:08:44.880 I'm sure listening, that we did not put a number 0:08:44.920 --> 0:08:50.040 on industrates this morning. It was very good off. Uh. 0:08:50.200 --> 0:08:52.920 You know when when you look at uh just sort 0:08:52.960 --> 0:08:54.640 of the we hear a lot about mergers in the 0:08:54.720 --> 0:08:56.880 energy space. Is that going to be a ripe sector 0:08:56.920 --> 0:08:59.839 for opportunity in two thousand seventeen. Do you think it's 0:08:59.840 --> 0:09:03.920 a good question the the energy sector M. We've looked 0:09:03.920 --> 0:09:06.160 at two different types of when we think about the 0:09:06.200 --> 0:09:08.040 energy sector. I think we need to bifurcated. I think 0:09:08.040 --> 0:09:11.160 there's the upstream space, which tends to be the very 0:09:12.240 --> 0:09:14.400 what people think of when they think about energy. There 0:09:14.400 --> 0:09:17.040 has been a huge amount of activity in the midstream space, 0:09:17.080 --> 0:09:20.880 the infrastructure around energy um, which has has really been 0:09:20.960 --> 0:09:24.120 quite constant over the last the last several years, particularly 0:09:24.120 --> 0:09:29.160 around the master limited partnership sector. But on the upstream side, UH, 0:09:29.280 --> 0:09:32.520 the volatility in the underlying crude price has made it 0:09:32.640 --> 0:09:36.440 very difficult to cross the trade um. When buyers and 0:09:36.520 --> 0:09:42.240 sellers disagree or at least have a lack of congruity 0:09:42.280 --> 0:09:44.520 in terms of what the outlook for the crude prices, 0:09:44.920 --> 0:09:47.360 it can be quite difficult to get those two buy 0:09:47.520 --> 0:09:50.080 those two sides too to come together on price. I 0:09:50.240 --> 0:09:53.520 was talking Peter about synergy and paradigm because you really 0:09:53.559 --> 0:09:58.120 represent the antithesis of this M and a jargon malarkey 0:09:58.240 --> 0:10:01.080 it's out there, you stud I mean, first of all, 0:10:01.520 --> 0:10:03.720 we just heard in our New York weather report it's 0:10:03.760 --> 0:10:06.760 cold in New York. Might I point out we have 0:10:06.760 --> 0:10:08.880 a guy, we have a guy in here from Ithaca, 0:10:08.920 --> 0:10:11.120 New York, a guy in here from Clinton, New York, 0:10:11.400 --> 0:10:13.840 and a guy in here from Rochester. These New York 0:10:13.840 --> 0:10:17.360 City people, Peter, they have no clue cold can get it? 0:10:17.440 --> 0:10:23.120 Hamilton's College nothing, They have no clue. What they just 0:10:23.200 --> 0:10:27.480 you know, in Clinton, New York, there's there's winter, late 0:10:27.520 --> 0:10:29.440 winter in the fourth of July. And that's all there is. 0:10:29.960 --> 0:10:33.080 There's to it. You spoke at Hamilton College at while back, 0:10:33.360 --> 0:10:35.360 and I mean I mean as seriously, and that you 0:10:35.400 --> 0:10:38.400 represent an M and A. We just go out talk 0:10:38.480 --> 0:10:41.960 to the client. No financial energy engineering, none of the 0:10:42.000 --> 0:10:44.839 bladder of M and A. You learn that tending bar 0:10:44.960 --> 0:10:47.920 in London. What did you learn tending bar in London 0:10:48.200 --> 0:10:50.679 that you drag over to Corbett's M and A shop? 0:10:52.080 --> 0:10:55.199 I think, I'm I think tending bar in London is 0:10:55.240 --> 0:10:57.319 a good lesson both in work ethic and in talking 0:10:57.320 --> 0:11:01.840 to people, um and listening. That's what you do as 0:11:01.840 --> 0:11:04.080 a bar tender, presides figure out whether to use olives 0:11:04.160 --> 0:11:06.800 or lemon. Right, Well, yeah, and the bar I worked 0:11:06.800 --> 0:11:09.080 in that no one was ordering anything that had olives 0:11:09.160 --> 0:11:15.520 or lemons, And let me ask you about bearing them. 0:11:15.559 --> 0:11:17.480 You probably want to talk to any any companies in specific. 0:11:17.600 --> 0:11:20.400 Let's let let let me introduce the latest news here 0:11:20.400 --> 0:11:22.760 about Yahoo and Verizon. Just ask you how companies approach 0:11:22.840 --> 0:11:25.920 something like that. When you when you're mid deal and 0:11:25.960 --> 0:11:27.920 you have a big eventuality like that, how how did 0:11:28.120 --> 0:11:30.880 the parties to that deal broke or some sort of 0:11:30.920 --> 0:11:33.280 agreement or figure out what to do next. Here we 0:11:33.360 --> 0:11:35.680 have a Verizon dealing with the fact that Yahoo announced 0:11:35.720 --> 0:11:38.360 a one billion uses. Information was compromised back in two 0:11:38.400 --> 0:11:40.720 thousand and thirteen. So I imagine the impulse at this 0:11:40.720 --> 0:11:42.880 point is to find out why it took so long 0:11:42.920 --> 0:11:44.480 for for a company to find that out. But how 0:11:44.720 --> 0:11:48.800 do companies reevaluate a deal like that mid stream? Obviously 0:11:48.880 --> 0:11:51.680 there's gonna be uh, there's gonna be a deep dive 0:11:51.760 --> 0:11:54.240 done in terms of in terms of the substance of it. 0:11:54.280 --> 0:11:56.960 What's what are the facts? Um? What are the fact 0:11:57.080 --> 0:12:01.439 mean for the relative value? What is to the contractual agreement? 0:12:01.440 --> 0:12:05.040 Tell you that you have to do um, it's it's 0:12:05.400 --> 0:12:08.400 it's going to be entirely facts and circumstances specific but 0:12:08.440 --> 0:12:10.559 obviously a whole lot of people are gonna be working 0:12:10.760 --> 0:12:14.880 very very hard to to try to turn a and 0:12:15.520 --> 0:12:21.240 unexpected and undesirable fact pattern and translate that into the 0:12:21.679 --> 0:12:26.640 realities of a transaction that's already out there. UH. The 0:12:26.760 --> 0:12:30.240 discount rate at which the present value of an investment's 0:12:30.280 --> 0:12:33.760 future cash flow equals the cost of investment when the 0:12:34.040 --> 0:12:37.120 I are are of an investment is greater than the 0:12:37.200 --> 0:12:41.240 required return Peter Tag makes a paycheck. That's the definition 0:12:41.280 --> 0:12:44.480 off the Bloomberg. Is Mr Trump gonna raise I r 0:12:44.559 --> 0:12:49.839 are for Global Wall Street? For Global Wall Street, I 0:12:49.880 --> 0:12:51.839 guess there's a question about what is what is Mr 0:12:51.840 --> 0:12:54.960 Trump going to do? UH? In terms of the overall 0:12:55.280 --> 0:12:58.800 the overall economy? I think a combination of stimulus, a 0:12:58.840 --> 0:13:03.000 little less regulation and UH and lower tax rates certainly, 0:13:03.760 --> 0:13:07.000 certainly to the extent that all three of those can argue, 0:13:07.160 --> 0:13:11.040 can arguably be a net benefit to our clients. One 0:13:11.040 --> 0:13:14.320 would hope that that translates through to net benefits. To 0:13:14.360 --> 0:13:16.560 make this more sophisticated and to get you into a 0:13:16.559 --> 0:13:19.559 bigger set of troubles At Citigroup, Villain Bowder in his 0:13:19.679 --> 0:13:25.000 economic team believes in lower terminal values. Trump is pushing 0:13:25.040 --> 0:13:29.000 against that with a reflation. Are you managing for this year, 0:13:29.120 --> 0:13:33.280 next year, five years out based on Bowder's lower terminal 0:13:33.400 --> 0:13:37.360 values or can you see truly a paradigm shift. I'm 0:13:37.400 --> 0:13:41.200 talking against myself here, a paradigm shift towards a higher 0:13:41.240 --> 0:13:46.240 I R R well UH reflation UM and the extent 0:13:46.280 --> 0:13:49.040 to which that translates through, certainly in the near term 0:13:49.120 --> 0:13:51.600 to UH, to higher growth and a higher top line 0:13:51.679 --> 0:13:57.200 is is a net positive. Of course, inflation eventually catches 0:13:57.280 --> 0:14:01.720 up to you and it starts moving through costs as well. UM. Ultimately, 0:14:01.880 --> 0:14:04.040 I think terminal values are a function of what do 0:14:04.080 --> 0:14:06.360 you see your discount rate at and a lower tax rate, 0:14:06.440 --> 0:14:09.360 for example, is got to be agree with you with 0:14:09.400 --> 0:14:11.400 the one off of a tax rate and the structural change, 0:14:11.520 --> 0:14:15.080 But you just nailed it. Guys like you in Industrial 0:14:15.120 --> 0:14:19.720 America work in a nominal rate space. They sort of 0:14:19.760 --> 0:14:23.360 like inflation. Unlike everybody listening to this program, it's got 0:14:23.360 --> 0:14:27.840 a uh frankly dealing in inflation adjusted space. I think 0:14:28.160 --> 0:14:31.440 as I say, I think inflation aff inflation eventually gets 0:14:31.440 --> 0:14:34.320 to both the costs and the top line UM. I 0:14:34.360 --> 0:14:37.280 think how that translates to value is going to be 0:14:37.320 --> 0:14:40.320 specific to an industry. You know, whether we're talking about 0:14:40.320 --> 0:14:44.880 technology or whether we're talking about the old rust belt economy, 0:14:44.960 --> 0:14:47.520 it's a different ends. This has been great, Peter take 0:14:47.600 --> 0:14:49.680 Thank you so much. It's three below in the Hamilton 0:14:49.840 --> 0:15:08.000 College right now. Thank you so much. Jeffrey Rosenberg is 0:15:08.000 --> 0:15:11.120 out of Carnegie. Melody brings a serious quat chop to 0:15:11.200 --> 0:15:14.000 the whole idea of strategy. Jeffrey, let me give you 0:15:14.000 --> 0:15:17.160 the Friday open question. What will you write about for 0:15:17.240 --> 0:15:23.800 consumption Monday morning. Well, the consumption outlook is being bolstered 0:15:23.920 --> 0:15:29.640 Tom by rising wages. The most important driver of consumption 0:15:29.800 --> 0:15:32.480 is real income growth. Then what you've seen is wage 0:15:32.480 --> 0:15:38.840 inflation accelerating faster than inflation, and so that's the fundamental 0:15:38.880 --> 0:15:41.960 support for the consumption outlook. The fundamental chart I had 0:15:42.000 --> 0:15:43.880 earlier this week was a ten year yield with a 0:15:43.920 --> 0:15:46.880 Trump reflection. And we go on two sixty. Now I 0:15:46.960 --> 0:15:50.440 get that there are three vectors, Jeffrey Rosenberg. One is okay, 0:15:50.440 --> 0:15:52.840 this is great, and then we roll over to where 0:15:52.840 --> 0:15:56.200 we were before in some way or it's a jump condition, 0:15:56.720 --> 0:16:00.080 and we level out here or were we jump as 0:16:00.160 --> 0:16:04.000 we have and then we build upon this out our 0:16:04.120 --> 0:16:07.400 year or two. Where are you? Where's black Rock? Well, 0:16:07.440 --> 0:16:09.960 you know we're more in the optimistic camp that we 0:16:10.000 --> 0:16:13.120 can build on this, and it's a outlook in two 0:16:13.160 --> 0:16:15.760 thousand and seventeen for rising rates. That doesn't mean that 0:16:15.800 --> 0:16:19.080 it's going to go in one direction. I don't mean 0:16:19.120 --> 0:16:26.280 a boy band reference there. Uh sorry, it's a Friday, Um, Jeffrey, 0:16:26.440 --> 0:16:32.360 you're absolutely perfect. Oh I've heard it. How many times? 0:16:32.360 --> 0:16:39.600 Have I heard it at home? Five times? I think 0:16:40.680 --> 0:16:42.200 I mean what I meant to say. That doesn't It 0:16:42.240 --> 0:16:44.920 doesn't mean it's going to go in a straight line upward. 0:16:44.960 --> 0:16:48.400 There's gonna be uh pullbacks, and most importantly, you know 0:16:48.480 --> 0:16:51.640 there's there's some challenges. Tom. The most important thing you 0:16:51.680 --> 0:16:54.800 said in the opening where all those currencies are related 0:16:54.840 --> 0:16:58.280 to China, the Asian currency declines that you're talking about 0:16:58.280 --> 0:17:01.960 are really because the Chinese currente's declining. It's it's one 0:17:02.000 --> 0:17:04.920 of the downside risks. We have to to consider the 0:17:05.040 --> 0:17:06.879 front page of the Wall Street Journal this morning. I 0:17:06.880 --> 0:17:09.959 think everybody knows the story. But when we have an 0:17:10.000 --> 0:17:13.200 optimistic outlook, as we do for two thousand seventeen, we 0:17:13.200 --> 0:17:15.159 we it's not saying it's going to go in a 0:17:15.200 --> 0:17:17.560 straight line, and that the risks aren't going to show up. 0:17:17.600 --> 0:17:19.840 That can push yields lower if some of these concerns 0:17:19.880 --> 0:17:25.399 come back, But overall, the growth outlook is is going 0:17:25.440 --> 0:17:28.400 to be pushing rates higher. We think in seventeen if 0:17:28.400 --> 0:17:30.399 it feels like ancient history now, but if we go 0:17:30.480 --> 0:17:33.080 back to January and February, all the trouble that we 0:17:33.119 --> 0:17:36.040 saw with China and its reserves and the currency that 0:17:36.160 --> 0:17:37.919 subside as we moved on to Brexit in the U 0:17:37.960 --> 0:17:41.480 s president presidential election, all of that. But what is 0:17:41.480 --> 0:17:43.840 your outlook for the Chinese currency going forward in the 0:17:43.840 --> 0:17:45.760 new year. Could we have a reprisal of what we 0:17:45.800 --> 0:17:49.480 saw almost a year ago today? Well, you know, I 0:17:49.520 --> 0:17:54.120 don't have to forecast it, um, we're saying it right now. 0:17:54.560 --> 0:17:56.679 If you look at some of what's going on in 0:17:56.800 --> 0:17:59.200 terms of the inner bank lending rates, the Hong Kong 0:17:59.240 --> 0:18:02.000 overnight rates, what's going on in just in terms of 0:18:02.080 --> 0:18:05.880 the currency levels itself, you see a very similar pattern 0:18:06.280 --> 0:18:09.119 to the pressures that we saw a year ago. I 0:18:09.119 --> 0:18:11.560 don't think there's nearly the same degree of focus on 0:18:11.600 --> 0:18:15.840 it because we're focused on the growth story and there's 0:18:15.880 --> 0:18:19.960 two ways of kind of interpret interpreting the currency moves. 0:18:20.080 --> 0:18:25.600 One is, excuse me, from the positive side of the 0:18:25.680 --> 0:18:30.120 growth and this is dollar strength as opposed to Chinese weakness. 0:18:30.160 --> 0:18:35.280 Remember last year it was about commodity prices and credit concerns, 0:18:35.560 --> 0:18:38.120 and you don't have those concerns at the same time. 0:18:38.200 --> 0:18:41.800 Right our commodity story is much more stable, uh to positive. 0:18:42.160 --> 0:18:44.639 So one of the things that's easing some of the 0:18:44.680 --> 0:18:48.840 concerns from a macro perspective is maybe this is us 0:18:49.000 --> 0:18:53.120 growth lead and therefore that can be overwhelming or more 0:18:53.160 --> 0:18:57.240 positive to the negative side. Seth masters at Bernstein, Jeff 0:18:57.320 --> 0:19:00.959 Rosenberg gave a beautiful dissertation this more earning of the 0:19:01.040 --> 0:19:06.720 conflict between higher yields, meaning a yield pick up, and 0:19:06.800 --> 0:19:11.159 you can extrapolate it over to equities versus price decline, 0:19:12.119 --> 0:19:15.320 which will be to our advantage in the first quarter 0:19:15.359 --> 0:19:21.040 of next year. Are we advantaged by rising yields overcoming 0:19:21.119 --> 0:19:25.720 price decline or will we be disadvantaged? Well, I think 0:19:26.040 --> 0:19:28.000 it goes back to what I was saying before. There's 0:19:28.040 --> 0:19:30.919 there's there's sort of good increases in interest rates, and 0:19:30.960 --> 0:19:33.600 then there can be bad increases in interest rates. And 0:19:33.680 --> 0:19:37.000 clearly as we see the equity market reaction to the 0:19:37.160 --> 0:19:41.320 to the shock upward in in an interest rates. This 0:19:41.400 --> 0:19:45.400 is from the good perspective because it's driven by growth 0:19:45.720 --> 0:19:48.359 and inflationary expectations. One of the ways in which we 0:19:48.440 --> 0:19:51.760 see that in the bond market is the breakdown between 0:19:52.200 --> 0:19:57.439 increases and interest rates, between inflation expectations and increases in 0:19:57.440 --> 0:20:00.560 interest rates from what are called real interest rating races. 0:20:00.720 --> 0:20:04.440 Real interesting great increases can be bad in the sense 0:20:04.520 --> 0:20:07.480 that they tighten financial conditions. They put a lot of 0:20:07.520 --> 0:20:11.679 pressure on currencies. Inflationary increases. Now, we've gotta be careful here, Tom, 0:20:11.720 --> 0:20:14.520 because we're talking about a good form of inflation. When 0:20:14.520 --> 0:20:19.680 inflation expectations are going from deflationary concerns to inflationary concerns. 0:20:19.840 --> 0:20:21.800 That's where I think we are in the first quarter. 0:20:22.320 --> 0:20:24.880 If we get too far ahead in terms of inflation, 0:20:24.920 --> 0:20:26.600 that will be something that we will have to worry 0:20:26.600 --> 0:20:28.840 about it. That's not in our outlook for the first 0:20:28.840 --> 0:20:31.520 part of two seventeen. Really for most of two seventeen, 0:20:31.560 --> 0:20:36.600 this is reflationary outlook, where reflation is good for the economy, 0:20:36.600 --> 0:20:39.680 it's good for financial markets. What did you make of 0:20:39.680 --> 0:20:42.760 of of Yllen's commentary on the potential for for fiscal 0:20:43.200 --> 0:20:45.480 She did speak about fiscal stimulus, if only briefly. She 0:20:45.560 --> 0:20:47.520 was asked about and she said that she's of her colleagues, 0:20:47.920 --> 0:20:50.680 noted her colleagues noted at the at the meeting, what 0:20:50.760 --> 0:20:53.520 did you make what she had to say, Well, she's 0:20:53.560 --> 0:20:56.400 in a very difficult position, and the SET has put 0:20:56.440 --> 0:21:00.320 itself in a very difficult position by having moved to 0:21:00.480 --> 0:21:05.280 a greater form of transparency. This is something unique, and 0:21:05.320 --> 0:21:07.040 it's going to be the first time that the FED 0:21:07.119 --> 0:21:10.880 finds itself in a position of publicly writing down its 0:21:10.920 --> 0:21:15.760 forecast for economic growth in an environment where fiscal policy 0:21:15.960 --> 0:21:19.080 is taking the mantle of leadership. This is about what 0:21:19.200 --> 0:21:22.520 kind of expectations do we have on the impact of 0:21:22.520 --> 0:21:25.320 these fiscal policies on our growth outook. The most remarkable 0:21:25.359 --> 0:21:29.680 thing about the FMC meeting in December is that they 0:21:29.760 --> 0:21:32.439 basically said there was no impact. If you look at 0:21:32.480 --> 0:21:37.320 the SEP statement of Economic projections with regards to economic forecast, 0:21:37.600 --> 0:21:42.320 virtually no change out for the long run. That is 0:21:42.359 --> 0:21:45.920 a remarkable statement. It will be very hard if this 0:21:46.600 --> 0:21:52.639 really big and important fundamental fiscal reform package that the 0:21:52.680 --> 0:21:55.520 incoming administration is talking about comes to pass, they're going 0:21:55.560 --> 0:21:59.360 to have to adjust those growth forecasts. So I think 0:21:59.440 --> 0:22:04.480 that's going to be the focal point of the markets throughout. Agree. 0:22:04.520 --> 0:22:07.560 But Jeffrey, by definition this is an ex post institution. 0:22:07.800 --> 0:22:10.440 There's no way they can get out in front of legislation. 0:22:11.200 --> 0:22:13.919 I don't see that in any of our history. They 0:22:14.000 --> 0:22:16.960 can't get out in front of the legislation. But once 0:22:17.000 --> 0:22:20.120 the legislation is out, and it's going to be out early, right, 0:22:20.160 --> 0:22:22.840 this isn't the two thousand, eighteen or nineteen program. This 0:22:22.920 --> 0:22:26.880 is the first year new administration economic program. There's going 0:22:26.920 --> 0:22:29.680 to have to be some kind of The markets are 0:22:29.720 --> 0:22:32.480 telling you that. Private economies, they're telling you that, and 0:22:32.520 --> 0:22:34.399 so they're going to have to opine on. It's going 0:22:34.440 --> 0:22:36.560 to put them in an awkward position because it's going 0:22:36.600 --> 0:22:39.159 to be public and it's going to be transparent this 0:22:39.200 --> 0:22:43.760 time around. But nevertheless it's affecting the growth outlook. Obviously, 0:22:43.840 --> 0:22:47.959