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Speaker 1: independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best in economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and
Speaker 1: of course, on the Bloomberg. At the end of two
Speaker 1: thousand sixteen, a good time to look back on the
Speaker 1: year that was, and I had to two thousand seventeen.
Speaker 1: And we begin today with EM and A joining us
Speaker 1: now as Peter Taky's co head of M and A
Speaker 1: at City Group, and great to have you with us
Speaker 1: here in New York. Let's let's start with how you
Speaker 1: measure the health of the M and A marketplace. We'll
Speaker 1: look back on two thousand sixteen. How was it and
Speaker 1: how do you assess how good it was? We had
Speaker 1: a we had a very strong um. It wasn't as
Speaker 1: it wasn't as strong as twenty fifteen, which was which
Speaker 1: was a record. But we're down about from that level roughly, UM,
Speaker 1: but it's still second best, second best M M and
Speaker 1: A year since the financial crisis? What was leading it
Speaker 1: on sort of sector by by sector basis? Where did
Speaker 1: you see the most growth, the most movement. We saw
Speaker 1: an awful lot of movement in technology, awful lot of
Speaker 1: movement in the industrial space. It was a relatively a
Speaker 1: relatively light year for industrial M and A in and
Speaker 1: we saw a bounce back on that, and so those
Speaker 1: two sectors saw significant increases. We saw a little bit
Speaker 1: less in the way of telecoms, for instance, in a
Speaker 1: little bit less relative to pharma than we had in
Speaker 1: in the prior year. What what is driving it at
Speaker 1: this point? Is it complimentarity, is it? Is it something else?
Speaker 1: How are these companies coming together? I think I think
Speaker 1: and and Tom Keene made this point a little earlier
Speaker 1: this morning. I think the focus now is much more
Speaker 1: on on strategic combinations and what I would call intelligent dealmaking. UM,
Speaker 1: it's a it's a challenging world environment, it's a risky
Speaker 1: world environment. In that environment, I think the investors have
Speaker 1: become more discerning as to what types of transactions really
Speaker 1: makes sense. There was a period of time from sort
Speaker 1: of eleven to halfway through fifteen, where pretty much em
Speaker 1: Andy any M and A activity was greeted with applause
Speaker 1: from the investor community. And that has definitely become what
Speaker 1: I would call it's returned to the norm in terms
Speaker 1: of in terms of the types of responsiveness that the
Speaker 1: investors have, and they've become more thoughtful about what's a
Speaker 1: good deal and what's not a good deal. How are
Speaker 1: your clients, How are people who are weighing mergers dealing
Speaker 1: with the uncertainty? I think about how in the I
Speaker 1: P O space there's been a tendency here here to
Speaker 1: sort of stop and wait, perhaps wait out whatever uncertainty
Speaker 1: there there is. Are you seeing that in the M
Speaker 1: and A space as well? What are clients saying to you?
Speaker 1: I think I think that the there's going to be
Speaker 1: a bit of a pause perhaps, uh in certain sectors
Speaker 1: that are gonna be potentially very impacted by UM, by
Speaker 1: their new administration and some of the changes that have
Speaker 1: been at least vocalized H An example is healthcare UM.
Speaker 1: I think there's there's been enough noise around the Affordable
Speaker 1: Care Act that that we might see a bit of
Speaker 1: a pause within that space as as companies try to
Speaker 1: figure out what the policies really are. UM, there has
Speaker 1: been an awful lot of talk, but not an awful
Speaker 1: lot of of really concrete policy making. And of course
Speaker 1: that's still is subject to a congressional process, which is
Speaker 1: which is difficult to day. How much does does regulation
Speaker 1: tend to change from from term to term? You have
Speaker 1: staff appointments in the Justice Department, for instance, you have
Speaker 1: people who are our career public servants. Do do the
Speaker 1: do the metrics by which they gauge judge these deals
Speaker 1: change every four years? That's a good question. UM. I
Speaker 1: don't think the metrics change. I think there can definitely
Speaker 1: be UM leanings in terms of the way that the
Speaker 1: way a particular administration or a particular a particular official
Speaker 1: interprets that data. We have definitely seen in the last
Speaker 1: couple of years, UM. Which is interesting, is it it
Speaker 1: certainly wasn't necessarily representative of the full eight years of
Speaker 1: the prior administration. UM. We've seen in the last couple
Speaker 1: of years that there has been a more hawkish tone
Speaker 1: coming out of the regulators in terms of their reaction
Speaker 1: to transactions. UM. Whether or not that will change dramatically
Speaker 1: or whether it will change slowly. I think it's difficult
Speaker 1: to It's difficult to call, but I would argue that
Speaker 1: there's likely to be changed, and I think we're going
Speaker 1: to see an environment which, again, UM, I can only
Speaker 1: respond to what our president elects commentary has been. There
Speaker 1: seems to be a bias towards towards a slightly looser
Speaker 1: regulatory environment. And what if you heard from him about
Speaker 1: deal making? It talks. He talks about that deal making
Speaker 1: a lot. It sort of in sort of grand terms,
Speaker 1: in large terms, but with your kind of deal making.
Speaker 1: Was there a lot of rhetoric about it, a lot
Speaker 1: of clarity about what his policy positions would be. The
Speaker 1: answer is not much. UM. I think I think we've
Speaker 1: heard some things from from the President elect that definitely
Speaker 1: will affect deal making. UM. Stimulus spending UM makes It
Speaker 1: makes a difference to how economy, how companies feel about
Speaker 1: the broad economic environment. Regulation makes a difference as to
Speaker 1: their optimism or lack of optimism around whether deals get done.
Speaker 1: And taxation can make a significant difference in terms of
Speaker 1: both the cost of capital and UH and the ability
Speaker 1: to pullut. What do clients do amid the political noise
Speaker 1: that follows the announcement of these these big deals. I
Speaker 1: think if the big agribusiness deals, for instance, and Christmas,
Speaker 1: that's what I'm doing today. There you go, That's what
Speaker 1: what client is doing here. But how do they filter
Speaker 1: that out? How do your clients pay much attention to
Speaker 1: sort of that or is the focus much more here
Speaker 1: on on the regulatory side? Do you mean, how how
Speaker 1: are the companies reacting to exactly the political noise or
Speaker 1: political Yeah, well, I think I think a company, uh,
Speaker 1: particularly we're talking about large companies that are affected by
Speaker 1: the political environment. They're not blind to it and uh,
Speaker 1: and they need to be thoughtful about a political reaction
Speaker 1: and whether or not that can make a difference to
Speaker 1: the rest of their business. But I would argue that
Speaker 1: that most of that thinking goes in prior to the
Speaker 1: announcement of the transaction, um as opposed to the follow
Speaker 1: through hopefully should be the execution around a well thought
Speaker 1: out strategy that was developed prior to the announcement of
Speaker 1: the transaction. Let me mind the global nous of your title,
Speaker 1: your head of co heead of Global Deals. We we've
Speaker 1: heard so much from our colleage Jeff McCracken and others
Speaker 1: about Chinese interest in getting into mergers and acquisitions around
Speaker 1: the world. What's been motivating that? What motivates China's interest
Speaker 1: here to to merge with companies outside Well, I think
Speaker 1: there's I think there's a couple of things. Um. The
Speaker 1: Chinese have definitely been much more aggressive about about deal
Speaker 1: making on a cross border basis. UM. I think that's
Speaker 1: driven by a desire to access technology. It's a driven
Speaker 1: by a desire to access commodities. UH, it's a driven
Speaker 1: in some cases by a desire potentially to offshore capital. UM.
Speaker 1: I think those motivations, they can be difficult to discern.
Speaker 1: The fact is that in certain in certain sensitive areas,
Speaker 1: I think the Chinese companies, in particularly state owned companies,
Speaker 1: have started to hit some roadblocks in terms of their
Speaker 1: ability to execute on that strategy. And therefore there's perhaps
Speaker 1: some more some more caution around around the level of activity.
Speaker 1: Peter teg with us, we've been talking about the cards
Speaker 1: you are dealt. Does a guy like you care about
Speaker 1: interest rates or is that just the myth that that
Speaker 1: there's so much money slashing around that on a day
Speaker 1: to day basis combination people are actually immune to interest
Speaker 1: rate dynamics. I I think the short answer is we're
Speaker 1: not paying much attention to it right now. Now I've
Speaker 1: been I've been doing this for long enough to certainly
Speaker 1: have seen environments where it mattered a great deal. But
Speaker 1: I would say we're nowhere near that. We're nowhere near that.
Speaker 1: Right this week we've been modeling well. One one I
Speaker 1: think it's Craig Bishop with o RBC Capital Markets made
Speaker 1: very clear nothing happened till the ten year prince three percent.
Speaker 1: He says, that's sort of a huge emotional hurdle or
Speaker 1: nowhere near that. Yeah, I'm not sure I'm prepared to
Speaker 1: put a number on it, but I I certainly would
Speaker 1: tell you that a twenty five basis point rise in rates,
Speaker 1: or for that matter of fifty basis point right or
Speaker 1: seventy basis point rise, I would actually argue that that
Speaker 1: arise indicates optimism, and optimism might be a good thing.
Speaker 1: David Garrl please make a note to Mr Carbett, who
Speaker 1: I'm sure listening, that we did not put a number
Speaker 1: on industrates this morning. It was very good off. Uh.
Speaker 1: You know when when you look at uh just sort
Speaker 1: of the we hear a lot about mergers in the
Speaker 1: energy space. Is that going to be a ripe sector
Speaker 1: for opportunity in two thousand seventeen. Do you think it's
Speaker 1: a good question the the energy sector M. We've looked
Speaker 1: at two different types of when we think about the
Speaker 1: energy sector. I think we need to bifurcated. I think
Speaker 1: there's the upstream space, which tends to be the very
Speaker 1: what people think of when they think about energy. There
Speaker 1: has been a huge amount of activity in the midstream space,
Speaker 1: the infrastructure around energy um, which has has really been
Speaker 1: quite constant over the last the last several years, particularly
Speaker 1: around the master limited partnership sector. But on the upstream side, UH,
Speaker 1: the volatility in the underlying crude price has made it
Speaker 1: very difficult to cross the trade um. When buyers and
Speaker 1: sellers disagree or at least have a lack of congruity
Speaker 1: in terms of what the outlook for the crude prices,
Speaker 1: it can be quite difficult to get those two buy
Speaker 1: those two sides too to come together on price. I
Speaker 1: was talking Peter about synergy and paradigm because you really
Speaker 1: represent the antithesis of this M and a jargon malarkey
Speaker 1: it's out there, you stud I mean, first of all,
Speaker 1: we just heard in our New York weather report it's
Speaker 1: cold in New York. Might I point out we have
Speaker 1: a guy, we have a guy in here from Ithaca,
Speaker 1: New York, a guy in here from Clinton, New York,
Speaker 1: and a guy in here from Rochester. These New York
Speaker 1: City people, Peter, they have no clue cold can get it?
Speaker 1: Hamilton's College nothing, They have no clue. What they just
Speaker 1: you know, in Clinton, New York, there's there's winter, late
Speaker 1: winter in the fourth of July. And that's all there is.
Speaker 1: There's to it. You spoke at Hamilton College at while back,
Speaker 1: and I mean I mean as seriously, and that you
Speaker 1: represent an M and A. We just go out talk
Speaker 1: to the client. No financial energy engineering, none of the
Speaker 1: bladder of M and A. You learn that tending bar
Speaker 1: in London. What did you learn tending bar in London
Speaker 1: that you drag over to Corbett's M and A shop?
Speaker 1: I think, I'm I think tending bar in London is
Speaker 1: a good lesson both in work ethic and in talking
Speaker 1: to people, um and listening. That's what you do as
Speaker 1: a bar tender, presides figure out whether to use olives
Speaker 1: or lemon. Right, Well, yeah, and the bar I worked
Speaker 1: in that no one was ordering anything that had olives
Speaker 1: or lemons, And let me ask you about bearing them.
Speaker 1: You probably want to talk to any any companies in specific.
Speaker 1: Let's let let let me introduce the latest news here
Speaker 1: about Yahoo and Verizon. Just ask you how companies approach
Speaker 1: something like that. When you when you're mid deal and
Speaker 1: you have a big eventuality like that, how how did
Speaker 1: the parties to that deal broke or some sort of
Speaker 1: agreement or figure out what to do next. Here we
Speaker 1: have a Verizon dealing with the fact that Yahoo announced
Speaker 1: a one billion uses. Information was compromised back in two
Speaker 1: thousand and thirteen. So I imagine the impulse at this
Speaker 1: point is to find out why it took so long
Speaker 1: for for a company to find that out. But how
Speaker 1: do companies reevaluate a deal like that mid stream? Obviously
Speaker 1: there's gonna be uh, there's gonna be a deep dive
Speaker 1: done in terms of in terms of the substance of it.
Speaker 1: What's what are the facts? Um? What are the fact
Speaker 1: mean for the relative value? What is to the contractual agreement?
Speaker 1: Tell you that you have to do um, it's it's
Speaker 1: it's going to be entirely facts and circumstances specific but
Speaker 1: obviously a whole lot of people are gonna be working
Speaker 1: very very hard to to try to turn a and
Speaker 1: unexpected and undesirable fact pattern and translate that into the
Speaker 1: realities of a transaction that's already out there. UH. The
Speaker 1: discount rate at which the present value of an investment's
Speaker 1: future cash flow equals the cost of investment when the
Speaker 1: I are are of an investment is greater than the
Speaker 1: required return Peter Tag makes a paycheck. That's the definition
Speaker 1: off the Bloomberg. Is Mr Trump gonna raise I r
Speaker 1: are for Global Wall Street? For Global Wall Street, I
Speaker 1: guess there's a question about what is what is Mr
Speaker 1: Trump going to do? UH? In terms of the overall
Speaker 1: the overall economy? I think a combination of stimulus, a
Speaker 1: little less regulation and UH and lower tax rates certainly,
Speaker 1: certainly to the extent that all three of those can argue,
Speaker 1: can arguably be a net benefit to our clients. One
Speaker 1: would hope that that translates through to net benefits. To
Speaker 1: make this more sophisticated and to get you into a
Speaker 1: bigger set of troubles At Citigroup, Villain Bowder in his
Speaker 1: economic team believes in lower terminal values. Trump is pushing
Speaker 1: against that with a reflation. Are you managing for this year,
Speaker 1: next year, five years out based on Bowder's lower terminal
Speaker 1: values or can you see truly a paradigm shift. I'm
Speaker 1: talking against myself here, a paradigm shift towards a higher
Speaker 1: I R R well UH reflation UM and the extent
Speaker 1: to which that translates through, certainly in the near term
Speaker 1: to UH, to higher growth and a higher top line
Speaker 1: is is a net positive. Of course, inflation eventually catches
Speaker 1: up to you and it starts moving through costs as well. UM. Ultimately,
Speaker 1: I think terminal values are a function of what do
Speaker 1: you see your discount rate at and a lower tax rate,
Speaker 1: for example, is got to be agree with you with
Speaker 1: the one off of a tax rate and the structural change,
Speaker 1: But you just nailed it. Guys like you in Industrial
Speaker 1: America work in a nominal rate space. They sort of
Speaker 1: like inflation. Unlike everybody listening to this program, it's got
Speaker 1: a uh frankly dealing in inflation adjusted space. I think
Speaker 1: as I say, I think inflation aff inflation eventually gets
Speaker 1: to both the costs and the top line UM. I
Speaker 1: think how that translates to value is going to be
Speaker 1: specific to an industry. You know, whether we're talking about
Speaker 1: technology or whether we're talking about the old rust belt economy,
Speaker 1: it's a different ends. This has been great, Peter take
Speaker 1: Thank you so much. It's three below in the Hamilton
Speaker 1: College right now. Thank you so much. Jeffrey Rosenberg is
Speaker 1: out of Carnegie. Melody brings a serious quat chop to
Speaker 1: the whole idea of strategy. Jeffrey, let me give you
Speaker 1: the Friday open question. What will you write about for
Speaker 1: consumption Monday morning. Well, the consumption outlook is being bolstered
Speaker 1: Tom by rising wages. The most important driver of consumption
Speaker 1: is real income growth. Then what you've seen is wage
Speaker 1: inflation accelerating faster than inflation, and so that's the fundamental
Speaker 1: support for the consumption outlook. The fundamental chart I had
Speaker 1: earlier this week was a ten year yield with a
Speaker 1: Trump reflection. And we go on two sixty. Now I
Speaker 1: get that there are three vectors, Jeffrey Rosenberg. One is okay,
Speaker 1: this is great, and then we roll over to where
Speaker 1: we were before in some way or it's a jump condition,
Speaker 1: and we level out here or were we jump as
Speaker 1: we have and then we build upon this out our
Speaker 1: year or two. Where are you? Where's black Rock? Well,
Speaker 1: you know we're more in the optimistic camp that we
Speaker 1: can build on this, and it's a outlook in two
Speaker 1: thousand and seventeen for rising rates. That doesn't mean that
Speaker 1: it's going to go in one direction. I don't mean
Speaker 1: a boy band reference there. Uh sorry, it's a Friday, Um, Jeffrey,
Speaker 1: you're absolutely perfect. Oh I've heard it. How many times?
Speaker 1: Have I heard it at home? Five times? I think
Speaker 1: I mean what I meant to say. That doesn't It
Speaker 1: doesn't mean it's going to go in a straight line upward.
Speaker 1: There's gonna be uh pullbacks, and most importantly, you know
Speaker 1: there's there's some challenges. Tom. The most important thing you
Speaker 1: said in the opening where all those currencies are related
Speaker 1: to China, the Asian currency declines that you're talking about
Speaker 1: are really because the Chinese currente's declining. It's it's one
Speaker 1: of the downside risks. We have to to consider the
Speaker 1: front page of the Wall Street Journal this morning. I
Speaker 1: think everybody knows the story. But when we have an
Speaker 1: optimistic outlook, as we do for two thousand seventeen, we
Speaker 1: we it's not saying it's going to go in a
Speaker 1: straight line, and that the risks aren't going to show up.
Speaker 1: That can push yields lower if some of these concerns
Speaker 1: come back, But overall, the growth outlook is is going
Speaker 1: to be pushing rates higher. We think in seventeen if
Speaker 1: it feels like ancient history now, but if we go
Speaker 1: back to January and February, all the trouble that we
Speaker 1: saw with China and its reserves and the currency that
Speaker 1: subside as we moved on to Brexit in the U
Speaker 1: s president presidential election, all of that. But what is
Speaker 1: your outlook for the Chinese currency going forward in the
Speaker 1: new year. Could we have a reprisal of what we
Speaker 1: saw almost a year ago today? Well, you know, I
Speaker 1: don't have to forecast it, um, we're saying it right now.
Speaker 1: If you look at some of what's going on in
Speaker 1: terms of the inner bank lending rates, the Hong Kong
Speaker 1: overnight rates, what's going on in just in terms of
Speaker 1: the currency levels itself, you see a very similar pattern
Speaker 1: to the pressures that we saw a year ago. I
Speaker 1: don't think there's nearly the same degree of focus on
Speaker 1: it because we're focused on the growth story and there's
Speaker 1: two ways of kind of interpret interpreting the currency moves.
Speaker 1: One is, excuse me, from the positive side of the
Speaker 1: growth and this is dollar strength as opposed to Chinese weakness.
Speaker 1: Remember last year it was about commodity prices and credit concerns,
Speaker 1: and you don't have those concerns at the same time.
Speaker 1: Right our commodity story is much more stable, uh to positive.
Speaker 1: So one of the things that's easing some of the
Speaker 1: concerns from a macro perspective is maybe this is us
Speaker 1: growth lead and therefore that can be overwhelming or more
Speaker 1: positive to the negative side. Seth masters at Bernstein, Jeff
Speaker 1: Rosenberg gave a beautiful dissertation this more earning of the
Speaker 1: conflict between higher yields, meaning a yield pick up, and
Speaker 1: you can extrapolate it over to equities versus price decline,
Speaker 1: which will be to our advantage in the first quarter
Speaker 1: of next year. Are we advantaged by rising yields overcoming
Speaker 1: price decline or will we be disadvantaged? Well, I think
Speaker 1: it goes back to what I was saying before. There's
Speaker 1: there's there's sort of good increases in interest rates, and
Speaker 1: then there can be bad increases in interest rates. And
Speaker 1: clearly as we see the equity market reaction to the
Speaker 1: to the shock upward in in an interest rates. This
Speaker 1: is from the good perspective because it's driven by growth
Speaker 1: and inflationary expectations. One of the ways in which we
Speaker 1: see that in the bond market is the breakdown between
Speaker 1: increases and interest rates, between inflation expectations and increases in
Speaker 1: interest rates from what are called real interest rating races.
Speaker 1: Real interesting great increases can be bad in the sense
Speaker 1: that they tighten financial conditions. They put a lot of
Speaker 1: pressure on currencies. Inflationary increases. Now, we've gotta be careful here, Tom,
Speaker 1: because we're talking about a good form of inflation. When
Speaker 1: inflation expectations are going from deflationary concerns to inflationary concerns.
Speaker 1: That's where I think we are in the first quarter.
Speaker 1: If we get too far ahead in terms of inflation,
Speaker 1: that will be something that we will have to worry
Speaker 1: about it. That's not in our outlook for the first
Speaker 1: part of two seventeen. Really for most of two seventeen,
Speaker 1: this is reflationary outlook, where reflation is good for the economy,
Speaker 1: it's good for financial markets. What did you make of
Speaker 1: of of Yllen's commentary on the potential for for fiscal
Speaker 1: She did speak about fiscal stimulus, if only briefly. She
Speaker 1: was asked about and she said that she's of her colleagues,
Speaker 1: noted her colleagues noted at the at the meeting, what
Speaker 1: did you make what she had to say, Well, she's
Speaker 1: in a very difficult position, and the SET has put
Speaker 1: itself in a very difficult position by having moved to
Speaker 1: a greater form of transparency. This is something unique, and
Speaker 1: it's going to be the first time that the FED
Speaker 1: finds itself in a position of publicly writing down its
Speaker 1: forecast for economic growth in an environment where fiscal policy
Speaker 1: is taking the mantle of leadership. This is about what
Speaker 1: kind of expectations do we have on the impact of
Speaker 1: these fiscal policies on our growth outook. The most remarkable
Speaker 1: thing about the FMC meeting in December is that they
Speaker 1: basically said there was no impact. If you look at
Speaker 1: the SEP statement of Economic projections with regards to economic forecast,
Speaker 1: virtually no change out for the long run. That is
Speaker 1: a remarkable statement. It will be very hard if this
Speaker 1: really big and important fundamental fiscal reform package that the
Speaker 1: incoming administration is talking about comes to pass, they're going
Speaker 1: to have to adjust those growth forecasts. So I think
Speaker 1: that's going to be the focal point of the markets throughout. Agree.
Speaker 1: But Jeffrey, by definition this is an ex post institution.
Speaker 1: There's no way they can get out in front of legislation.
Speaker 1: I don't see that in any of our history. They
Speaker 1: can't get out in front of the legislation. But once
Speaker 1: the legislation is out, and it's going to be out early, right,
Speaker 1: this isn't the two thousand, eighteen or nineteen program. This
Speaker 1: is the first year new administration economic program. There's going
Speaker 1: to have to be some kind of The markets are
Speaker 1: telling you that. Private economies, they're telling you that, and
Speaker 1: so they're going to have to opine on. It's going
Speaker 1: to put them in an awkward position because it's going
Speaker 1: to be public and it's going to be transparent this
Speaker 1: time around. But nevertheless it's affecting the growth outlook. Obviously,
Speaker 1: today in December, it's too speculative, it's too uncertain. We
Speaker 1: don't know. That's fine, but at some point we are
Speaker 1: going to know. It's going to be in the legislative language.
Speaker 1: So we're going to have to have more clarity as
Speaker 1: to what we think it's impact is from our Central
Speaker 1: Bank on the prospects for growth and therefore for the
Speaker 1: path of monetary policy. Jeffrey Rosenberg with US black Rock.
Speaker 1: As we look at the linkages of strategies here, Jeffrey,
Speaker 1: are we correlated? What I've noticed sort of in the
Speaker 1: pulsing last three four days X Yellen is some things
Speaker 1: are correlated and then two hours later they drift away
Speaker 1: and other things come to bear. What do you see
Speaker 1: on the Bloomberg screen. Yeah, it is actually one of
Speaker 1: our themes in our black Rock investment outlook that the
Speaker 1: correlations that we've expected to see both across debt versus equity,
Speaker 1: across em and currencies e M and commodities, a lot
Speaker 1: of those correlations have displayed less certainty, less reliability than
Speaker 1: than we've we've come to expect. I think on the
Speaker 1: big one for investors portfolios, which is which is debt
Speaker 1: and equity. We we've seen this a number of times.
Speaker 1: This is when particularly bonds are going much higher, and
Speaker 1: the fear that's driving them higher is not the most
Speaker 1: recent move, not not the post election move. We saw
Speaker 1: this earlier in September when rate moves were happening, and
Speaker 1: it was causing some concern on equities. Bonds are going
Speaker 1: down and stocks are going down at the same time.
Speaker 1: We've seen a couple of episodes. Obviously two thirteen s
Speaker 1: taper tantrum was it was a big example of that,
Speaker 1: and this example of how putting portfolios together of stocks
Speaker 1: and bonds. As we transition away from quantitative easing, it
Speaker 1: gets more challenging. I mean, you say, we're transitioning away
Speaker 1: from quantitative easing, are we? Oh? Absolutely, And it's important
Speaker 1: to take the global perspective rate increase. Oh no, no, no, Tom,
Speaker 1: it's not about the rate increases. Look at what the
Speaker 1: Bank of Japan did. Look at what the e c
Speaker 1: B signaled in terms of moving ever so slightly. I agree,
Speaker 1: it's it's it's a bond geek here. So you know,
Speaker 1: we're looking at the at the very small moves. But
Speaker 1: yet if you go back to the Bank of Japan,
Speaker 1: it wasn't small. They abandoned negative interest rate policy, they
Speaker 1: recognized the limits to monetary policy. In the e c
Speaker 1: B s case, they down shifted the size. Yes, they
Speaker 1: extended the timing, but they down shifted the size. And
Speaker 1: in the FEDS case in the US. Something for two
Speaker 1: thousand seventeen that's going to get back on the radar
Speaker 1: screen is what do they do about the size of
Speaker 1: the balance sheet? And that's going to be a big
Speaker 1: market story in two seventeen. We've kind of ignored the
Speaker 1: reinvestment policy, but they said, once we get on with
Speaker 1: increasing rates, and what they told us yesterday or two
Speaker 1: days ago was we're going to be increasing the pace
Speaker 1: to three hikes a year. Now people are gonna start asking, well,
Speaker 1: you told us once you get on with normalization. The
Speaker 1: next phase is going to be normalization. Normalization is about
Speaker 1: moving even further away from quantitative easy. Jeffrey, you've written
Speaker 1: about the potential populism. I asked you about how Janet
Speaker 1: Yellen and her colleagues are wrestling with the prospects of
Speaker 1: an infrastructure spending package. Did she miss an opportunity do
Speaker 1: you think at the news conference this week to talk
Speaker 1: about what could be a huge white here on the
Speaker 1: economy when you look at the potential for for tariffs,
Speaker 1: for instance, Well, it's not clear that the news conference
Speaker 1: discussing the monetary policy decision of the FOMC is the
Speaker 1: right form for that Now, interestingly, which is went on
Speaker 1: the calendar is on Monday, She's going to be getting
Speaker 1: a commencement speech, So it may be that the commencement
Speaker 1: speeches the avenue through which she decides to address some
Speaker 1: of these bigger issues. Now, the topic at the commencement
Speaker 1: speech is not the infrastructure and the fiscal stimulats, but
Speaker 1: rather its jobs. So it's not clear that will necessarily
Speaker 1: be the title, but but that may be a better
Speaker 1: forum for a more expansive discussion on some of those issues.
Speaker 1: How is your your positioning changed here? I won't say
Speaker 1: since the meeting, but surrounding the meeting? What what? What
Speaker 1: changes have you made here over the last week or
Speaker 1: so since the FMC met. Well, well, clearly, uh, this
Speaker 1: has been a big shift regards to the performance of
Speaker 1: interest rates along the maturity spectrum. The market going into
Speaker 1: the meeting, ourselves going into the meeting did not expect
Speaker 1: this communication. Now some may say it's an accidental communication,
Speaker 1: but it's the communication nevertheless, through the dots plot signaling
Speaker 1: three hikes rather than two hikes. So so the front
Speaker 1: end of the curve certainly is being born the brunt
Speaker 1: of that what of the curve is the perfect path
Speaker 1: for banking. I can't figure it out. Do they want
Speaker 1: to hide? Do they want to a much higher tenure
Speaker 1: yielding a peg two year? Do they want what's the
Speaker 1: perfect path? So so so the path for banking is
Speaker 1: one in which interest rates are rising. The curve is steepening,
Speaker 1: but the pace of the increase in interest rates is
Speaker 1: not so large as to bring about a whole other
Speaker 1: set of concerns. The concerns about, hey, we're moving too
Speaker 1: far too fast. This is negative for growth, it's negative
Speaker 1: for the stock market, it's negative for global growth because
Speaker 1: of its impact on the dollar. And you bring about
Speaker 1: some concerns again around financial conditions tightening. Jeffrey Rosenberg, you
Speaker 1: have been absolutely perfect. Thank you so much. Jeff Rosenberg
Speaker 1: with Black, thank you. Guys have a good who you
Speaker 1: put your trust in matters. Investors have put their trust
Speaker 1: in independent registered investment advisors to the two and of
Speaker 1: four trillion dollars. Why they see their roles to serve,
Speaker 1: not sell. That's why Charles Schwab is committed to the
Speaker 1: success over seven thousand independent financial advisors who passionately dedicate
Speaker 1: themselves to helping people achieve their financial goals. Learn more
Speaker 1: and find your independent advisor dot com. One of the
Speaker 1: great supporters of Bloombergunny Economy and Bloomberg Save Allence has
Speaker 1: been John Taylor, Stanford University. Uh. He is without question
Speaker 1: one of our great macro economists. Of course on rules
Speaker 1: and discretion. He has immense authority and leans towards tilts
Speaker 1: towards the advantages of rules, including his rule or the
Speaker 1: amendments of his rule, the Taylor Rule. David Gurry goes
Speaker 1: without saying that Mr Taylor's name is mentioned often across
Speaker 1: the Bloomberg pat pipe has in the last number of days. Uh,
Speaker 1: Professor Taylor. Wonderful to speak to you again. It's been way,
Speaker 1: way too long, Um, John Taylor. Your name is out there.
Speaker 1: It is always out there when we speak of chairman,
Speaker 1: vice chairman, governors of our Central Bank, the Federal Reserve System.
Speaker 1: Have you spoken with Mr Trump's transition team about their
Speaker 1: economics and if you've spoken directly with the President elect
Speaker 1: about a future job in Washington. There's always, as you saying,
Speaker 1: by the way, great to be back, Tom. There's always
Speaker 1: rumors about what's going on. And I've been interested in
Speaker 1: this subject for so long. I really want to see
Speaker 1: a ways which the FED can you improve get back
Speaker 1: to policies that I think work better in the past.
Speaker 1: That's what I'm talking about. And I think there's a
Speaker 1: there's a lot going on with policy. I'm positive about
Speaker 1: the possibility of tax reform, regulatory form, and there's last
Speaker 1: week I testified and the Congress about possibility of monetary reform.
Speaker 1: So it's it's it's good at this point, and I
Speaker 1: think I just want to keep talking about that. Have
Speaker 1: you testified at the Trump Tower or by telephone the
Speaker 1: Trump Tower it was? Now I'm talking about testimony and
Speaker 1: the House Financial Services Committee of the Monterrey Policy Committee,
Speaker 1: which is a public for anybody to listen and including
Speaker 1: people in the transition. Dr Taylor please comment on the
Speaker 1: news that Lawrence Cudlow, formerly with bear Stearns and for
Speaker 1: years visible and see NBC, that Larry Cudlow would be
Speaker 1: a chairman of the President's Council of Economic Advisors. I
Speaker 1: believe we go back to mc chesney Martin when there
Speaker 1: was a a c E A had as a non PhD.
Speaker 1: Is that a debate worth having or is Mr Cudlow qualified? Well?
Speaker 1: Larry has been so outspoken in and good about taxtually
Speaker 1: form and regulatory re form, you know, good market based policies,
Speaker 1: and I think that's important to have someone like Larry.
Speaker 1: They're doing it so there's different ways for people to
Speaker 1: be qualified for things. But I think that's a really
Speaker 1: important aspect that he's he's been out there, he's he's
Speaker 1: got these strong principles and uh and you'll hear about
Speaker 1: those if he takes that job. I think Professor Taylor there,
Speaker 1: Tom was was saying he doesn't want to trade the
Speaker 1: palm trees for the potomac earlier and answer to your question,
Speaker 1: he did that with courage during and after nine eleven
Speaker 1: and deserved arrest out west. There you go, John Taylor,
Speaker 1: You know, I talking about Larry Cutler here. I wonder
Speaker 1: if if you could give us some sense of how
Speaker 1: he might shape that role if he does get the position.
Speaker 1: I think a lot of us know the term Council
Speaker 1: of Economic Advisors, have some familiarity with it. But what
Speaker 1: what power does that body within the White House have
Speaker 1: to shape economic policy? Well, first of all, it's it's
Speaker 1: in the law. Women Act created it, three member council,
Speaker 1: and it's had influenced in different ways over the years
Speaker 1: in Green Spain was the chair for a while, or
Speaker 1: the Burns was a chair for a while, and it's
Speaker 1: it's continued. There's more economists now in Washington there and
Speaker 1: there was back when it was set up in but
Speaker 1: it's still very important. It is important for it to
Speaker 1: have a good objective economic advice. It's not wedded to
Speaker 1: a particular whether it's labor or business. It's really talking
Speaker 1: about the good reasons to have a good economic policy.
Speaker 1: So it is important and the president listens. You mentioned
Speaker 1: that testimony that you gave before the Subcommittee on Monetary
Speaker 1: Policy and Trade for the Committee on Financial Services at
Speaker 1: the House. What what does a more transparent FED look
Speaker 1: like to you? We can talk about your rule and
Speaker 1: rules based fed FED reserve here in a minute, but
Speaker 1: how more transparent should this FED get? What would that
Speaker 1: transparency look like? Well, the main thing is for them
Speaker 1: to outline their strategy. Sometimes it's called rule, but strategy
Speaker 1: is a better word for setting the policy instrument the
Speaker 1: interest rate. They do some of that internally. They simulate
Speaker 1: and talk about policy rules, including the tailor rule, but
Speaker 1: others as well. So the main thing is to be
Speaker 1: transparent about that and that's really what some of the
Speaker 1: legislation is asking to do. It. The FEDS job to
Speaker 1: choose the strategy independent agency. But it is Professor and
Speaker 1: pleased to tell you that the acclaimed tailor function on
Speaker 1: the Bloomberg Professional Service now has an adjustment for policy inertia,
Speaker 1: which is row times of previous federate plus one minus
Speaker 1: row times John Taylor's Taylor estimate. This involves one, two, three, four, five, six, seven,
Speaker 1: plug ins wandering over to a Phelpsie and the RU
Speaker 1: minus unemployment on the right side of the equation. Professor
Speaker 1: Taylor will be holding him pop quiz in our next segment,
Speaker 1: David Gern Tom Keane with us John Taylor of Stanford University.
Speaker 1: Professor Taylor, I know David wants to get back to
Speaker 1: current events, but first I look at where we are,
Speaker 1: where Chare Yelling is, where Governor Carney is, and we
Speaker 1: fold into the world of John Taylor what we saw
Speaker 1: from the late Thomas Shelling of Harvard and Maryland. I
Speaker 1: go back to the Strategy of Conflict nineteen sixty Tom
Speaker 1: Shelling and the idea within his early part of that
Speaker 1: classic enforcement communication in strategic moves. Now the Taylor rule
Speaker 1: and monetary theory. Isn't the courage at Tom shelling head
Speaker 1: thinking about nuclear war. But when I look at enforcement
Speaker 1: communication in strategic moves, what can we learn on rules
Speaker 1: and discretion from UH Tom Shelling We can learn so
Speaker 1: much about the commitment and about the predictability and so
Speaker 1: you say what you're gonna do and follow through. Those
Speaker 1: are very important lessons for monetary policymakers. It helps monetary
Speaker 1: policy work more effectively. So I think it's important. It's
Speaker 1: I look Professor Taylor at UH. The theories that are
Speaker 1: out there now, and I would suggest from the media
Speaker 1: and from all of our listeners were almost exhausted by
Speaker 1: too much messaging is part of a shift away from
Speaker 1: discretion towards the tailor FED rules less communication. I think,
Speaker 1: what's the advantage of us having a strategy a rule.
Speaker 1: You don't have to keep talking about it all the
Speaker 1: time people begin to understand it. When Paul Wolker was
Speaker 1: at the FED, he would go to the Jackson Old
Speaker 1: meetings and wouldn't have to say much at all because
Speaker 1: people kind of knew the policy. So I think you're right, Tom,
Speaker 1: there's now there's so much talk it actually can reduce transparency,
Speaker 1: Professor Taylor. The phone rings at the top of Hoover Tower.
Speaker 1: It is one Donald Trump calling from what I assume
Speaker 1: is a guilded phone on the floor of Trump Tower
Speaker 1: here in New York. He should ask me. John Shauvin
Speaker 1: has made sure that Professor Taylor will pick up a
Speaker 1: gilded phone. There you go in Stanford Palla Alto. He's
Speaker 1: got your number, he says, Professor Taylor. We have some
Speaker 1: office space for you in the Equals Building. We'd like
Speaker 1: you to sit at the head of the table. What
Speaker 1: do you say this kind of you know again, just
Speaker 1: answering Tom and you a little bit. What's important to
Speaker 1: me is a good monetary policy, and so I write
Speaker 1: about it, I talked about it. And there's always rumors
Speaker 1: like this and always questions like this. But you know, seriously,
Speaker 1: we have opportunities now I think that we hadn't had
Speaker 1: before for some of the reforms that would avoid some
Speaker 1: of the very serious problems we had in the Great
Speaker 1: Recession and slow recovery. And that's what I want to
Speaker 1: be focused on. Really. Well, if that's the case, let's
Speaker 1: go there. Have you advised the transition team or the
Speaker 1: President elect on appropriate names to be these governors, these
Speaker 1: empty seats of governors all of us. Professor Taylor can agree,
Speaker 1: that is most unfortunate. Yeah, I think they're going to
Speaker 1: go ahead and uh fill these positions, a lot of
Speaker 1: oak positions that have occurred because of the difficulty of
Speaker 1: confirmation in agreement. I hope that we get past that.
Speaker 1: I think there's a sort of reform on personnel and
Speaker 1: how the White House is going to work. But it's
Speaker 1: very important to do that. And uh, you know, the
Speaker 1: principles of Monterrey policy are are there. It's it's not science,
Speaker 1: but it's pretty well understood. Professor Taylor. I just want
Speaker 1: to tell you people are listening. Coast to Coast. Rachel
Speaker 1: from Lafya, Indiana emails in and says Professor Taylor is
Speaker 1: not telling you anything about his future. I just want
Speaker 1: you to know they're listening. Nick Coast to Coast, Professor
Speaker 1: David rules, rules based policy. That's what I'm saying. Talk
Speaker 1: about the path forward for reform here. You've testified, as
Speaker 1: you said on Capitol Hill. People are talking more about this.
Speaker 1: Do you see this as being at all collaborative between
Speaker 1: Fed policymakers and and Congress In other words, Would it
Speaker 1: be more palatable these reforms if there were if there
Speaker 1: were more of a dialogue, more conversation between the Fed
Speaker 1: and Capitol him. Absolutely, it's very important, and previous reforms
Speaker 1: were that way. Actually, it's not uncommon for the Fed
Speaker 1: to be resistant at the beginning, but then to say
Speaker 1: this makes sense and then work with the legislative language
Speaker 1: as something works. So I'm hopeful that will happen. I
Speaker 1: think it's it's a very important part of how these
Speaker 1: things get done. How have you amended and this is Fisher,
Speaker 1: Phelps and Taylor all combined together, ages ago, How do
Speaker 1: you amend Professor Taylor? Sticky wages and sticky prices? After
Speaker 1: our great distortion in the financial repression we've all enjoyed?
Speaker 1: Is the stickiness of those two important things? Is your
Speaker 1: interpretation of it changed? I think those kinds of rigidities,
Speaker 1: if you like, or institutional features are there. They change,
Speaker 1: and you know you've got prices set on The Internet
Speaker 1: goes very quickly. But but it's actually there's some commonalities.
Speaker 1: I just did a paper for this new Handbook of
Speaker 1: Macroeconomics that chased the development of these ideas, and they're
Speaker 1: hanging together quite well. Are they modified with the change
Speaker 1: in technology, But it's pretty remarkable how long they've been.
Speaker 1: They've been going long, stained power. So if I go
Speaker 1: to your to keep the shameless plug going, Professor Taylor,
Speaker 1: if I go to your Economics one blog and folks,
Speaker 1: I just sent out a World Cup in the Battle
Speaker 1: of Ideas Bruno Meyer, Harold James, and Jean Pierre Londe,
Speaker 1: which is a fabulous book. We interviewed Professor brune Meyer. Uh,
Speaker 1: Professor Taylor of Princeton on that that's a school in
Speaker 1: New Jersey. By the way, professor, but here you're flogging
Speaker 1: a two volume book. Now tell us about your new
Speaker 1: handbook of Macroeconomics. Well, it's great, there's lots of pages,
Speaker 1: is a total of step having seventy two contributors. It's
Speaker 1: really the state of thinking on macroeconomics. Uh, it's heavy
Speaker 1: going for lots of people. Are you're gonna warn about
Speaker 1: the map, that's for sure, But you know it's people
Speaker 1: like Ed Prescott and Larce Hansen and Marcus Brunemeyer for
Speaker 1: that matter, who have contributed a lot of time and
Speaker 1: effort to put forth what their view is of things
Speaker 1: that I think people be surprised. It's you know, there's
Speaker 1: been work going on before the crisis, since the crisis,
Speaker 1: and it's it's progress, real progress. We'll get it out.
Speaker 1: Thank you so much, Professor Taylor. Thank you so much
Speaker 1: for not answering our questions today. Taylor teaches, he teaches
Speaker 1: at Stanford University, and Frankie teaches all of us as well.
Speaker 1: I particularly enjoyed his comments on Mr Cudlum. I think
Speaker 1: that's sort of in the weekend sitgeist. If you would,
Speaker 1: thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on iTunes, SoundCloud, or whichever podcast platform
Speaker 1: you prefer. I'm out on Twitter at Tom Keene. David
Speaker 1: Gura is at David Gura. Before the podcast, you can
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