Speaker 1: Who you put your trust in matters. Investors have put
Speaker 1: their trust and independent registered investment advisors to the two
Speaker 1: and four trillion dollars. Why learn more and find your
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 I want to bring hi
Speaker 1: Jim more now he's head of Investment Solutions at himphon.
Speaker 1: A great pleasure to have you here in the studio
Speaker 1: with us this morning than it has been thanking. Let's
Speaker 1: let me start with stuff. It's been a while. You're
Speaker 1: arguably the most important person and PIMCO, because of our listeners,
Speaker 1: can't retire. That's that's it, David. I don't even interrupt,
Speaker 1: but let me make clear a it's been a while
Speaker 1: and you're the most important person of PIMCO. There you go,
Speaker 1: and we're gonna get into that in just a moment.
Speaker 1: But let me let me start where we were, where
Speaker 1: we were with Matt Miller here just a moment ago,
Speaker 1: and if not talking about that the effects of that
Speaker 1: attack in specific, just the general sense of uncertainty that
Speaker 1: this UH leads to or continues here that we have
Speaker 1: these three attacks yesterday, there is a sense of instability
Speaker 1: and and and and a fractious Europe at this point.
Speaker 1: What is this study? Your outlook the events that we
Speaker 1: saw yesterday? You know, you know our view was was
Speaker 1: re really expected to see more Volatilian markets going forward
Speaker 1: post election, And I think this plays into it. The
Speaker 1: geopolitical risk and in this system is very large, how
Speaker 1: various UH governments react to it, how populous is react
Speaker 1: to it, and um, what it does for growth, what
Speaker 1: it does for markets UH will unfold over the next
Speaker 1: next few years. You look at market reaction, you also
Speaker 1: wonder if there's just something harder to quit ify there
Speaker 1: when you look at just optimism, investor optimism something like
Speaker 1: that when you have when you have events like this,
Speaker 1: maybe an effect that's harder to measure just based on
Speaker 1: market reaction. Sure, I mean, I think a lot of
Speaker 1: this is is yet to be determined in terms of
Speaker 1: where it goes. But you know, we're coming off an
Speaker 1: era where with the FED being very accognative really pulling
Speaker 1: forward returns over time, which you know creates some potential
Speaker 1: issues going forward over the longer term for retirees and
Speaker 1: their ability to say for retirement is is comm indicating
Speaker 1: eighty three years old and then eighty five years old?
Speaker 1: Is our actual assumption, our our life expectancy rather at
Speaker 1: a nobody's ready, let's get to the basics. What's your
Speaker 1: new assumption of actual return? That that number that we
Speaker 1: can use to model out your world of retirement. Well,
Speaker 1: if you look at where the the agg is now,
Speaker 1: you're talking about a U old of a little under
Speaker 1: two and a half percent for for bonds. In our
Speaker 1: view on stocks is maybe at two two and a
Speaker 1: half percent above that, So if you look at a
Speaker 1: sixty forty portfolio, you're somewhere under four percent. And that
Speaker 1: really creates a long term problem when you've got systems
Speaker 1: that were designing the seventies and eighties in an error
Speaker 1: where eight percent returns were achieving. Eight percent returns are achievable,
Speaker 1: and yet I'm looking at a great bull market in
Speaker 1: another double digit year eleven percent for equities? Am I
Speaker 1: running on fumes actual? I mean, how do you balance
Speaker 1: the gloom of the numbers you just gave us. With
Speaker 1: the reality of return, many people are seeing well, you know, Tom,
Speaker 1: I think you know, the reality is that people are
Speaker 1: gonna have to live save longer as they live longer.
Speaker 1: If you look at the demographic data, life expectancy goes
Speaker 1: up about one point five one point six years for
Speaker 1: every decade. When we last revisited social Security normal retirement
Speaker 1: age in three, so thirty three years ago. Um, you know,
Speaker 1: life expectancy has gone up about five years since then.
Speaker 1: So you know, fundamentally it's time to rethink about system
Speaker 1: design and I'd call in the new administration to think
Speaker 1: about entitlement reform is a very important piece of the
Speaker 1: retirement puzzle. Puzzle you say, save longer as we as
Speaker 1: we live longer. Put that into the context of the
Speaker 1: central banking news that you mentioned here a few a
Speaker 1: few moments ago. There has been a difficulty or a
Speaker 1: lack of willingness ability to save here in recent years,
Speaker 1: how are people grappling with that need to say more? Well,
Speaker 1: you know they have, they have been saving more. If
Speaker 1: you look at the savings data, it has gone up,
Speaker 1: which is which is in some sense a little bit
Speaker 1: counterintuitive considering we're a third of the way through the
Speaker 1: baby boom or hitting what we would normally think of
Speaker 1: his retirement years, so we still have another decade of
Speaker 1: the baby boom retiring. Yet if you look at labor
Speaker 1: force participation for those over fifty five, it's creeping up.
Speaker 1: And um, what's really gonna happen is you're going to
Speaker 1: have people pushing out retirement a year or maybe two years.
Speaker 1: And in order to make that equation, I balance, but
Speaker 1: is it the issue? We've got to run the break
Speaker 1: here and come back. Not only are we gonna push
Speaker 1: out retirement a year or two, I'll give you that,
Speaker 1: but really, what we're gonna do a shift to part
Speaker 1: time retirees out forever. I mean, I gotta cast it
Speaker 1: out back here. But girl wants me, he wants me
Speaker 1: part time right now. But I mean, is it going
Speaker 1: to be part time retirement America? I think that that's
Speaker 1: that's right. You're going to see more people taking on
Speaker 1: part time work. And what are normal notions of employment
Speaker 1: and full employment really mean are going to change? You know,
Speaker 1: I get in debates with walking foils, our economist and
Speaker 1: economists on the street thinking about have we reached full employment.
Speaker 1: But look at the spread between the U six and
Speaker 1: the U three and it's still is stubborn. Well, him,
Speaker 1: weren't with us with Pimco? Always good discussion on retirement
Speaker 1: when you and PIMCO and you go to all your
Speaker 1: meetings and you go to Washington, and that is there
Speaker 1: any mood of our worthy politicians to further incentivize our
Speaker 1: ability to suck money away? I haven't seen. I mean,
Speaker 1: the debates were deficient of this. Isn't that like priority
Speaker 1: one in your world? Provide incentives? Yeah? And in my
Speaker 1: world it is. I think. I think the issue is
Speaker 1: we drastically need to increase savings rates in this country
Speaker 1: if people are expecting to retire at historical arms for retirement,
Speaker 1: and um, you know, the government's capied twin a rock
Speaker 1: and a hard place in terms of the need for
Speaker 1: some amount of control over budgets and people's desire to say,
Speaker 1: help me here with this. I tuck away more money.
Speaker 1: And you know I don't cheat, I don't do anything irresponsible.
Speaker 1: The government gets paid eventually, right, eventually? Okay, then what's
Speaker 1: the debate? I mean, you know, if if I borrowed
Speaker 1: twenty bucks from David get to buy a martini. He
Speaker 1: may not get paid back. The government's gonna get paid right, Yeah,
Speaker 1: Kanos would say it's the rate of time preference. And
Speaker 1: I think one of the things you see in Washington
Speaker 1: is huge debates about the rate of time preference in
Speaker 1: terms of what public policy should be. If if people
Speaker 1: are talking infrastructure increasing debts to fund growth, that's indicating,
Speaker 1: you know, effectively a higher discount rate than those folks
Speaker 1: who are basically worried about, you know, running much tighter
Speaker 1: fiscal standards than we've than we've seen, or or um
Speaker 1: that may be necessary. There is again talk of entitlement reform.
Speaker 1: Is it anything more than lip service? You think? Are
Speaker 1: there any indications to you that we could have a
Speaker 1: Congress that now with majority of publican majority in both
Speaker 1: houses and a Republican present, we could get some movement
Speaker 1: on this. You know, a friend of mine, in response
Speaker 1: to something I wrote a few years ago about social security,
Speaker 1: had a one line quip and response which was that
Speaker 1: which gets deferred gets compounded, And and you know, I
Speaker 1: think that is is is a large problem in the process.
Speaker 1: If you think about the incentives of those people in
Speaker 1: Washington who are in the debate. They have a two
Speaker 1: year window, a four year window or six year window
Speaker 1: when you're looking at problems they're going to manifest themselves
Speaker 1: over decades. Uh. You know, people quote the Trustees report
Speaker 1: and saying that we essentially run out of money around
Speaker 1: two thousand thirty three, But it's actually worse than that
Speaker 1: because that money isn't segregated and the point where outflows
Speaker 1: exceed inflows is really going to happen to towards the
Speaker 1: back end of this incoming administration. What's the biggest concern
Speaker 1: for pension funds that you hear about. What are they
Speaker 1: most worried about? Uh, it depends if you're if you're
Speaker 1: talking corporate pension plans who have been in a regime
Speaker 1: of having to really mark to market for the last decade,
Speaker 1: they're hoping interest rates go up to close that that
Speaker 1: that deficit. If you're talking public plans, which by and
Speaker 1: large use a actual discount rate seven and a half
Speaker 1: or eight percent their crops, and the difficult problem they
Speaker 1: have is trying to get a seven and a half
Speaker 1: to eight percent return, and that I think is a
Speaker 1: very very large problem which is going to manifest itself
Speaker 1: more in the next decade in terms of the pressure
Speaker 1: puts on public satirefinance. Is a dividend growth equity a
Speaker 1: yield equivalent. I think a growth equity has some yield
Speaker 1: component um to it. The the issue is understanding what
Speaker 1: drives the volatility I mean um over the long run.
Speaker 1: You know, solid dividends, solid growth in the final companies
Speaker 1: is a source of return and a source of income. However,
Speaker 1: um there's nothing bounding it to keep volatility in check.
Speaker 1: And the other thing when you think about a pension
Speaker 1: plan with a demographic wave of running through it is
Speaker 1: you have an increasing draw on that plan, and so
Speaker 1: your ability to tolerate down drafts becomes more and more limited.
Speaker 1: If target the whole target concept, the marketed idea of
Speaker 1: target portfolios, is that something you can theoretically get behind
Speaker 1: or are they a marketing gimmick? Now I think there
Speaker 1: there's value to it. I think that the crux of
Speaker 1: the difficulty is understanding the design. Are you designing on
Speaker 1: the four one K side? You know some sort of
Speaker 1: accumulation vehicle. Are you're actually thinking about a vehicle that
Speaker 1: that transfers to a position to limit risk sufficiently uh
Speaker 1: to bussition a retire you to actually have meaningful draw
Speaker 1: down without huge down draft risk. Fascinating. We could, I
Speaker 1: could go. You gotta show up more often. I will.
Speaker 1: I mean, you know, please Jim Moore with PIMCO on
Speaker 1: our lack of retirement. I mean, David, I'm going to
Speaker 1: be sitting here forever. David Gura's back. Scarlett Fu is
Speaker 1: with us. She was a good it's a very very
Speaker 1: successful audition. We've done that that for David Gurrow, we think,
Speaker 1: and Tom Keene with you worldwide, stay with us. This
Speaker 1: is gloom. Why don't you bring in our steam gast
Speaker 1: Bible formats joins us now in the studio. He has
Speaker 1: Vice Chier of Kissinger associate. It's great to have you
Speaker 1: here on the heels of a trip to China, and
Speaker 1: maybe we can return to what Michael Barr was talking
Speaker 1: about a few moments ago, that is the return of
Speaker 1: that underwater at drown, the Chinese returning it to the U.
Speaker 1: S what do you make of the incident itself? The
Speaker 1: Chinese saying that has been greatly overblown. It did take
Speaker 1: on some import here over these last few days. I
Speaker 1: think the Chinese has been very wise in trying to
Speaker 1: lower tensions with the United States, particularly during this transition period.
Speaker 1: They don't want any big confrontational issues while the Trump
Speaker 1: team is assembling uh it's secretaries and its national security
Speaker 1: advisors and others, And I think that's probably right. They
Speaker 1: want to wait and see what Trump's policies are. They
Speaker 1: don't want to give them any pretext for taking a
Speaker 1: very tough line against China, at least rhetorically. At this point.
Speaker 1: It's not an easy decision for China because there is
Speaker 1: strong nationalistic pressure in China to take tough action. But
Speaker 1: I think the wisdom of Chinese authorities is prevailing and
Speaker 1: they did the right thing. How many people told Bob
Speaker 1: Hormant's to get or not get a Twitter account? How
Speaker 1: many the table when Hormats considered entering the modern age
Speaker 1: from the quill Well I started a couple of years ago.
Speaker 1: It's it's been very interesting all the twitters you get.
Speaker 1: You got a very good reaction from this from from
Speaker 1: the show, continued show, continuously good reactions and very good comments.
Speaker 1: So I always pay a lot of twitters when I
Speaker 1: and I love how you do real Bob Hormant's, we
Speaker 1: should tell China that we don't want the drone they
Speaker 1: stole back, hyphen let them keep it exclamation point. They
Speaker 1: didn't teach this the toughs, did they. No, I don't
Speaker 1: know where that came from. Came from the President elect
Speaker 1: of the United States. I don't I know who said it,
Speaker 1: but I don't understand where the thought came from. It
Speaker 1: doesn't didn't seem to explain to our a political audience
Speaker 1: the ramifications of the words stole or the word let
Speaker 1: them keep it. Well. I would say that it would
Speaker 1: be very wise for President Electromp to say nothing about
Speaker 1: China at this point. He ought to form his team
Speaker 1: of advisors his cabinet, and they ought to develop a
Speaker 1: strategy visa of each China that makes sense in the
Speaker 1: long term. We've got to deal with the Chinese, who
Speaker 1: may not like everything they do or say. But China
Speaker 1: is a major power, and you simply cannot deal with
Speaker 1: them through Twitter. To me, it is demeaning if they
Speaker 1: were to do the same thing to us. Would be
Speaker 1: very unhappy for us to treat China in the same
Speaker 1: way with twitters back and forth. Makes China, David, you
Speaker 1: can have the whole next block. That's why Prosadic Cornell
Speaker 1: is pretty good. Prosade a scathing piece and project syndicate
Speaker 1: on China in the President elect over the weekend. You
Speaker 1: were just in China. How do they respond in your
Speaker 1: conversations to the President elect. Well, they're very puzzled at
Speaker 1: what his real policies are going to be. They've made
Speaker 1: a very clear point of saying they're not going to
Speaker 1: overreact at the moment. On the other hand, they see
Speaker 1: what he said and heard what he said during the campaign.
Speaker 1: He was going to find them a currency manipulator. He
Speaker 1: was going to go after them on a variety of
Speaker 1: trade issues, and he dumping cases, countervailing duty cases. Uh,
Speaker 1: negative views on Chinese investment. Uh. There are issues with China,
Speaker 1: to be sure, but the way to deal with the
Speaker 1: Chinese is not to confront them overtly, particularly not through Twitter.
Speaker 1: It's to have serious conversations. He ought to wait, have
Speaker 1: his experts meet with the Chinese experts. If he has views,
Speaker 1: if he has concerns, he has complaints, put them to
Speaker 1: the Chinese quietly, clearly, but quietly, and not on confrontation publicly.
Speaker 1: I don't think I've ever seen you wound up like that.
Speaker 1: You should tweet out today change your handle to the
Speaker 1: real Bob Hormetts. A few moments ago you were talking
Speaker 1: about what amounts to a good relationship between China US.
Speaker 1: It doesn't take place on on Twitter. When you look
Speaker 1: at the team that Donald Trump has begun to assemble
Speaker 1: here with the Governor of Iowa Terry Branstead as the ambassador,
Speaker 1: what sense are you getting about policy from that? In
Speaker 1: other ways, we had the rhetoric on the campaign trail.
Speaker 1: From that we moved to policy. Are we getting a
Speaker 1: clear sense of the shape that that is going to take?
Speaker 1: Not really. I think Terry Brandstead is a good pick
Speaker 1: for ambassador. He knows chigin paying person shin Ping quite well.
Speaker 1: He knows China well. Um, the new Secretary of State Killerson,
Speaker 1: I'm sure knows China well. But you really have to
Speaker 1: make policy towards China at the top. You need to
Speaker 1: have a strategy. It can't just be ad hoc individual decisions.
Speaker 1: And he needs to have a team of China experts.
Speaker 1: I don't know who they are. If he has them,
Speaker 1: they need to sit down and spend some time thinking
Speaker 1: about not just what they say on a given day,
Speaker 1: but the implications of what they say over a couple
Speaker 1: of year period and what the long term relationship is.
Speaker 1: If they want to take a tough view on a
Speaker 1: on a set of issues, they ought to have a
Speaker 1: clear way of working out a solution with the Chinese.
Speaker 1: Simply confronting the Chinese is not going to get anywhere
Speaker 1: because the Chinese have their own nationalistic pressures and they
Speaker 1: will hit back. It's not Burundi, this is China, this
Speaker 1: is the Middle Kingdom. This is a big country. We're
Speaker 1: gonna have to work with them because virtually nothing is
Speaker 1: going to happen internationally for the good, certainly unless the
Speaker 1: United States finds a way of working with China in
Speaker 1: a constructive fashion. Confrontation is not an answer to anything.
Speaker 1: To be disruptive financially and disruptive politically and from a
Speaker 1: security point of view. How hard is it to maintain
Speaker 1: these two focuses, one of national security the other on
Speaker 1: economics for a government. Well, we've been able to do
Speaker 1: it reasonably well. The economic part of the relationship with
Speaker 1: China has evolved. I think China is somewhat more nationalistic
Speaker 1: economically as are we. So we're gonna have to figure
Speaker 1: out a way of working with them By pulling out
Speaker 1: of t p P. We give China a lot of
Speaker 1: latitude to draw up the rules of trade, particularly in
Speaker 1: the Asia Pacific region. They really don't think, and a
Speaker 1: lot of our allies now don't think we have very
Speaker 1: much staying power in the region. From a political and
Speaker 1: national security point of view, we've had closer mill with
Speaker 1: the called mill mill relations military to military relations. There
Speaker 1: are ways of working with the Chinese on South China
Speaker 1: see and other things, but it takes a lot of
Speaker 1: work and a lot of meetings at various levels over
Speaker 1: a period of time. Not one shot statements by the
Speaker 1: president day particulated by Twitter. You keep going back to
Speaker 1: that at Messador har Mats You're wonderful book The Price
Speaker 1: of Liberty, the first sentence, the final chapter. I love this.
Speaker 1: Henry Kissinger has written that quote America's journey through international
Speaker 1: politics has been a triumph of faith over experience. What
Speaker 1: is Donald Trump's faith? Well, I don't know. At this point.
Speaker 1: He seems to think that he can take very tough
Speaker 1: lines against the Chinese and the Chinese will somehow do
Speaker 1: what he asked them for. Putin phil Yes, yes, but yes,
Speaker 1: it's it's seeming a much different view of Putin than
Speaker 1: he does of President hire Jim paying Um. He's he's
Speaker 1: talking very negatively about China, very positively. So it's a
Speaker 1: bluster of say Theodore Roosevelt. But I'm not comparing him
Speaker 1: to President Roosevelt. But the your study of the diplomacy
Speaker 1: of bluster, which I think we can all agree, including
Speaker 1: Trump supporters, there's a lot of that here. How does
Speaker 1: that play in the modern age? It doesn't play very well.
Speaker 1: I mean, if you want to be tough, then as
Speaker 1: as clearly does, then there's room for being tough, but
Speaker 1: you need to have a strategy behind it, and you
Speaker 1: need to have some kind of dialogue with the Chinese
Speaker 1: to assert your view and come up with the kind
Speaker 1: of answers that you want. And it cannot be they
Speaker 1: do everything we asked them to do. They're not in
Speaker 1: that mode anymore. They're not a weak country. They have
Speaker 1: their own national interests. We have to figure out some
Speaker 1: way of of achieving our goals, but the Chinese have
Speaker 1: to get something out of the deal. It's not going
Speaker 1: to be a one sided thing. And he's got to
Speaker 1: think these things through before he he does them, because
Speaker 1: the consequences of a confrontation with China, between the US
Speaker 1: and China, but also for a lot of the other
Speaker 1: friends and allies in the region, that would be catastrophic.
Speaker 1: They don't want to be in the middle of a
Speaker 1: confrontation between Beijing and Washington. We've we've seen the establishment
Speaker 1: of a regular dialogue between China the U S. The
Speaker 1: Strategic Economic Dialogue happening I think every two years, every
Speaker 1: every year, every year now changing location every every every year. UM.
Speaker 1: If that disappears, what is the form here for for
Speaker 1: conversations between these these twogether? We still presumably would have
Speaker 1: summit meetings between our two presidents periodically. We have APEC meetings.
Speaker 1: China and the US are both members of APEX. There
Speaker 1: are other groups, UH, the S and need S. Reg
Speaker 1: Economic dialogue that you mentioned is a very useful vehicle.
Speaker 1: I think their ways of improving and I used to
Speaker 1: go to them on a regular basis. They're useful because
Speaker 1: they're a multitude of issues between the United States and China.
Speaker 1: We've made progress on environmental issues, as I say, on
Speaker 1: mill mill issues, military and military issues, there actually has
Speaker 1: been some progress. There are other issues that we still
Speaker 1: need to make progress on intellectual property protection, trade, secrets, protection,
Speaker 1: a number of other things. And there are a number
Speaker 1: of geopolitical issues. They're going to be there a rising power. Traditionally,
Speaker 1: rising powers and existing powers have issues that need be resolved.
Speaker 1: So we're gonna have to get to it in a
Speaker 1: serious way. And and by say but when I say serious,
Speaker 1: I mean the leaders are gonna have to sit down
Speaker 1: and try to work these things out. And Trump is
Speaker 1: gonna have to understand the Chinese a lot more than
Speaker 1: he does, and understand they have nationalistic pressures too. They
Speaker 1: may not be a democracy, but they have very strong
Speaker 1: public opinion and they have very strong national interests, as
Speaker 1: do we. The question is how do we work out
Speaker 1: in a national interests in a constructive way. In these
Speaker 1: last few minutes we have here, Let's turn to Europe.
Speaker 1: The events we saw yesterday on the heels of the
Speaker 1: referenum in Italy, on the heels of the the referenum
Speaker 1: in the United Kingdom. Let's look ahead the two thousand
Speaker 1: seventeen in your sense of how that fractiousness continues, how
Speaker 1: it begins to prepare itself. What do you see happening
Speaker 1: these referend uh, the Ramsey referend on restructuring the Italian
Speaker 1: Senate and bregs. It illustrate that in Europe they have
Speaker 1: the same sorts of nationalistic pressures, anti international pressures, economic
Speaker 1: zine of phobia, anti immigration pressures that a number of
Speaker 1: other countries do, including the United States. I think what's
Speaker 1: troublesome about Europe is the whole vision of the whole
Speaker 1: what they call European Project start out as a political
Speaker 1: objective to pull Europe together politically and man economically. It's
Speaker 1: become much more technical now, and I think it has
Speaker 1: to be restored in a way that the irage European
Speaker 1: citizen understands it and benefits from it. It's gotten too technical,
Speaker 1: it's gotten away from the kind of popular support that
Speaker 1: it needs to sustain itself. Ambassador, thank you so much,
Speaker 1: Bob Horman. It's very generous of your time this morning.
Speaker 1: He's with Kissinger Associates, and of course, as a former
Speaker 1: under Secretary of State for the President. President, maybe it's
Speaker 1: the last time we're to say that we're really getting
Speaker 1: Oh no, let we get into January. There. 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: at find your independent Advisor dot com. John Vale with
Speaker 1: us with Niko, as we look at uh Japan, but
Speaker 1: much more at the Trump reflation. We've had a number
Speaker 1: of interviews where we go, okay, the tenure yields at
Speaker 1: two point five seven, where does it behavioral change? And
Speaker 1: it maybe three and maybe two point nine and maybe
Speaker 1: three per three. I can't get a handle on it.
Speaker 1: For Japan negative rates up to seven years, the tenure
Speaker 1: yield is point zero seven one. I think that's point
Speaker 1: one percent rounded up. Is there a tip point where
Speaker 1: yields go up, where things change in Japan due to
Speaker 1: the Trump reflation? Or are are yields so low and
Speaker 1: distorted you can't even say that, well, they are distorted.
Speaker 1: Their controlled. It's called yield curve control for a reason.
Speaker 1: The Bank of Japan owns a great majority of these securities,
Speaker 1: and it can sort of control what the price is um,
Speaker 1: and they're controlling it right now and a little bit
Speaker 1: below yeah, zero point one percent and um, they don't
Speaker 1: have to buy too many securities right now to keep
Speaker 1: it there because people have had pretty low expectations for
Speaker 1: inflation going forward. But with this Trump reflation, there's definitely
Speaker 1: a change in the mood there. The press conference last
Speaker 1: night for Corona after the Bank of Japan meeting, UH
Speaker 1: did indicate that he's UH tolerat, tolerating perhaps thoughts of
Speaker 1: increasing the target in the coming months. And we just
Speaker 1: had our quarterly meeting for our Global Investment Committee yesterday
Speaker 1: and we were very non consensus and predicting a twenty
Speaker 1: basis point hike in that target UH in the second
Speaker 1: quarter and another twenty basis points in the fourth quarter.
Speaker 1: David Gurrow, from my hundredth birthday, that forty year bond
Speaker 1: you bought me in Japan since Mr Trump was elected,
Speaker 1: it's on sale. It's going from down. Even with all
Speaker 1: the distortions there, there is price erosion in Japan. You
Speaker 1: just gotta go out a lifetime to see it. How
Speaker 1: much has has the landscape changed for Japan since the
Speaker 1: election that we had here on the eighth of November
Speaker 1: has as the economic landscape changed markedly as a result
Speaker 1: of the result of that election. Well, they were very
Speaker 1: worried before, and they really were not close to Trump,
Speaker 1: and it was looking kind of dicey for them for
Speaker 1: a while. But the weakness the end and Abbey's very
Speaker 1: proactive stance and and flying here to meet him has
Speaker 1: really changed the mood a lot, and a lot of
Speaker 1: people are thinking that Trump is actually good for Japan,
Speaker 1: not only for security, and that you know, of course
Speaker 1: he's not going to and his and his generals and
Speaker 1: his cabinet are not going to give up the Japan
Speaker 1: security alliance. Um. And yes, the weekend has just really
Speaker 1: been a tremendous help to sentiment in Japan. So uh,
Speaker 1: it's it's looking good for Japan right now. Remind us
Speaker 1: what what came out of that that period of introspection
Speaker 1: when the Bank of Japan was going to take stock
Speaker 1: of what they've done reevaluate policy. What changed as a
Speaker 1: result of that. Well, Um, they've been very very worried,
Speaker 1: as have all central banks, about some sort of taper tantrum,
Speaker 1: and they're also worried about what happens when they start
Speaker 1: to taper their et F purchases. I know Tom has
Speaker 1: not been a big fan of the e t F purchases.
Speaker 1: It is a big it's very un orthodox policy. But
Speaker 1: we actually in our meeting yesterday expected uh the b
Speaker 1: o J to taper it's e t F purchases in
Speaker 1: the second quarter as well, and that's very non consensus.
Speaker 1: But we're very positive on the stock market. We expected
Speaker 1: to be up, you know, six or seven percent by
Speaker 1: next June. And the Bank of Japan just doesn't need
Speaker 1: to be buying e t s. I mean, originally it
Speaker 1: was buying e t s two increase risk appetite and
Speaker 1: to show confidence in the economy, and they just won't
Speaker 1: need to do that. So there might be a big
Speaker 1: bit of a hiccup as that gets priced into the market.
Speaker 1: But we think that, yeah, the market can go up
Speaker 1: despite this tapering. Plus understand that the rational behind what
Speaker 1: is that sort of an outsider call at this point again,
Speaker 1: you mentioned looking at yield curve targeting and and and
Speaker 1: some changes to that here in the next few courts.
Speaker 1: What's led you to to make that forecast? What's just
Speaker 1: optimism basically on the economy. We think the economy is
Speaker 1: going to do better than consensus, and that consensus is
Speaker 1: actually moving up as we speak. We think with the
Speaker 1: weaker yen and higher oil prices that the CPI will
Speaker 1: be definitely going up, not maybe to two very soon,
Speaker 1: but maybe by the end of the year it could
Speaker 1: be approaching that. And the Bank of Japan is just
Speaker 1: probably going to be a bit of under pressure too
Speaker 1: from the U. S. Treasury and other countries about not
Speaker 1: letting the end get two weak. We still think it's
Speaker 1: gonna go to one twenty three by June um. But
Speaker 1: and even the Obbe administration doesn't want the end too weak.
Speaker 1: I mean, for instance, one reason why they sort of
Speaker 1: cooled off on their really super aggressive policy was that
Speaker 1: the end was so weak that UH voters were getting
Speaker 1: unhappy with the food price inflation. And so yes, it
Speaker 1: all makes sense that they start to calm down a bit.
Speaker 1: There's a range. I mean, what you said, this is
Speaker 1: very quickly, it's one fifty feasible? Is that even feasible
Speaker 1: in the room If the two peaks twenty years ago,
Speaker 1: If the Fed keeps raising rates uh, you know quarterly
Speaker 1: going forward, and the Bank of Japan is super aggressive
Speaker 1: in its policy, yes, it's possible and I don't think
Speaker 1: anybody wants that to happen to even Japan. I don't
Speaker 1: think that so they should they should probably have to
Speaker 1: my pleasure down bringing Michael Dart, a chief economist and
Speaker 1: market strategy m k M Holdings, joining us now. Michael,
Speaker 1: great to have you with us. Thanks so much for
Speaker 1: having me on. Let's start with the news of the day.
Speaker 1: As Tom was mentioned just a few moments ago, we
Speaker 1: have seen the markets doingmarkably well, a bit of resilience
Speaker 1: here in light of what we saw yesterday across Europe.
Speaker 1: What do you make of that? I used the word
Speaker 1: inured and that's perhaps, uh, not the word I should
Speaker 1: have used, and implies that we're sort of used to it,
Speaker 1: and I don't. I don't mean to say that we
Speaker 1: have become used to attacks like the ones we saw yesterday.
Speaker 1: But what do you think explains the resilience we've seen today? Well,
Speaker 1: it's always hard to to, you know, to know what
Speaker 1: is driving the market over you know, period of hours
Speaker 1: or for days, but I think in general it Since
Speaker 1: the US election result, there is optimism in the US
Speaker 1: that policies could change in a pro growth manner, probably
Speaker 1: mainly due to deregulation and maybe secondarily to corporate tax reform.
Speaker 1: And so the dollar has been rallying. Growth expectations have
Speaker 1: been rising, business confidence has been rising. Um in Japan
Speaker 1: in the Euro Area are getting you know, weaker currencies
Speaker 1: as a as a consequence in those markets are after
Speaker 1: underperforming severely, are starting to bounce back over the course
Speaker 1: of the last few weeks. Michael, you're confident here that
Speaker 1: in making the soup of Trump and omics, the recipe
Speaker 1: has been figured out. In other words, you mentioned the
Speaker 1: tax reform profitt for tax cuts, tax reform, regulatory reform,
Speaker 1: infrastructure spending. Do it Do we have a sense of
Speaker 1: what the right allocation ingredients is going to be here?
Speaker 1: And how worrisome is it to you if we don't
Speaker 1: get the balance right? Well, it's a great question. I mean,
Speaker 1: I think we know what the proposals are. Um, you know,
Speaker 1: but there's a bit of a wrinkle called the U.
Speaker 1: S Senate. So the legislation does have to clear the
Speaker 1: US Senate to become law, at least in a permanent
Speaker 1: fashion for tax cuts, and you know, we'll see what
Speaker 1: can get through. The other wrinkle is the Federal Reserve,
Speaker 1: I mean Fed chair Yelling has essentially said, this is
Speaker 1: really not the proper time in the business cycle for
Speaker 1: a big demand side fiscal push, meaning anything that looks
Speaker 1: like it's going to expand the fiscal deficit and a
Speaker 1: significant way the FED would likely have to lean against
Speaker 1: with tighter monetary policy than would otherwise be the case.
Speaker 1: She's given this message on several occasions. I'm not sure
Speaker 1: that Congress is hearing it. Michael, give us an update.
Speaker 1: I've seen more chit chat in the last ten days
Speaker 1: on David Laidler. Nut Vixel Vixell appeared on the show
Speaker 1: last week. Folks nut Vixel M two M three in
Speaker 1: our circulation of money in reserves? Where are we in
Speaker 1: the land of David Laidler? Okay, well, Tom's is my
Speaker 1: favorite subject. As you know that. Um, let's start with
Speaker 1: the let's start with some of the money supply data,
Speaker 1: because it's a little confusing right now. So the monetary
Speaker 1: base in the US, which the FEED has direct control over,
Speaker 1: actually has been declining on a year to year basis.
Speaker 1: We're down almost double digits on on the base, and
Speaker 1: so in order to hold short term interest rates up,
Speaker 1: the FET is having to to do some liquidity draining,
Speaker 1: even though it does not yet have a policy of
Speaker 1: of shing. We call that in monetary vix alien theory,
Speaker 1: that's called draining the swamp MR darkning, draining liquidity swamp um. Now,
Speaker 1: whether that's a problem for the business cycle really depends on,
Speaker 1: you know, the nature of the velocity of money. So
Speaker 1: one thing we're also observing is that other measures of
Speaker 1: money are doing okay, So M one, M two and
Speaker 1: the like. M two is rising nicely, yeah, and M
Speaker 1: M one is rising nicely. So if you look at
Speaker 1: the monetary base going back over a long long period
Speaker 1: of time essentially since we've had the said declines are
Speaker 1: year to year are pretty rare. But the ones that
Speaker 1: have been problematic have also been associated with declines in
Speaker 1: the broader money stuck M one, M two and the
Speaker 1: like that it's not happening now. And critically, if you
Speaker 1: look at the credit markets and inflation expectations, we started
Speaker 1: off the year in a very very precarious setting and
Speaker 1: that's really turned around. So that would fit with what
Speaker 1: I said about business confidence improving earlier, David to our
Speaker 1: audience globally, I don't give a damn what Michael Darter
Speaker 1: just talked about. I was just doing a job audition
Speaker 1: for Darter for Larry Cudlow. That's the only reason I
Speaker 1: did a David and said New Victoria, which I was
Speaker 1: pretty impressed with as well. Here, well, here we are
Speaker 1: at the end of two thousands sixteen, a few days
Speaker 1: to go until two thousand seventeen. How how firmly set
Speaker 1: out is your outlook at this point in terms of
Speaker 1: all the unscer do we have here about what policy
Speaker 1: could look like in the new year. How difficult is
Speaker 1: it to assemble an outlook for the new year? Well,
Speaker 1: I think we need to start with the question of
Speaker 1: you know what is uh, you know, what is growth
Speaker 1: potential in the US economy? And you know, that's simply
Speaker 1: the sum of the trend of productivity and working age
Speaker 1: population growth, and unfortunately over the last five or six
Speaker 1: years it's been quite weak. Now there's a lot of
Speaker 1: optimism that that could turn around with different policy reforms,
Speaker 1: but you know, I'm not sure how much traction we're
Speaker 1: really going to get there, And so you know, over
Speaker 1: any extended period of time, your growth rate is really
Speaker 1: going to be determined by those real forces productivity in
Speaker 1: working age population growth. The market seems very focused on
Speaker 1: the prospect prospects for corporate text reform and cuts and
Speaker 1: regulatory relief, not really paying much attention to trade protectionism, risks, clampdowns,
Speaker 1: and immigration. Those things would not help productive potential and
Speaker 1: economic efficiency. And so you know, one of the things
Speaker 1: that you know, that I've been concerned about, or at
Speaker 1: least that's in the back of my mind, is how
Speaker 1: this all settles out, um on a go forward basis.
Speaker 1: So I think, unfortunately, we're still going to be looking
Speaker 1: at growth rates during the you know, the rest of
Speaker 1: this business cycle expansion that are low by historical standard,
Speaker 1: for no other reason because of demographics. Is this a
Speaker 1: measured FED? I mean, if nominal GDP is going where
Speaker 1: you're saying, we see the Trump reflation including euro one
Speaker 1: h three seventy uh this morning, Michael Darda, if we
Speaker 1: reached escape velocity on nominal GDP and as the Trump
Speaker 1: reflation sustainable, well, you know, um, Tom, I think the
Speaker 1: FED is in a much better position now to raise
Speaker 1: rates several times next year than it was coming into
Speaker 1: this year last year in December when it raised rates
Speaker 1: and signaled for more to come. You know, the dot
Speaker 1: plot was really totally out of kilter with the credit
Speaker 1: markets and inflation expectations. Now that's completely reversed course. So
Speaker 1: is that a measured FED. Yeah, I would say that's
Speaker 1: a measured FED. I mean they want to be able
Speaker 1: to lift short term interest rates, UH in a gradual
Speaker 1: fashion in the business cycle will dictate whether they're able
Speaker 1: to do so. But you know, we're still going to
Speaker 1: be looking at at growth rates for all. Overall nominal
Speaker 1: growth that you know, by historical standards are are fairly low.
Speaker 1: So let's just work with some numbers. If growth potential
Speaker 1: is running at one to two, it's really been closer
Speaker 1: to one. But let's give ourselves from room one to two,
Speaker 1: and the feed is a two percent inflation target than
Speaker 1: three to four nominal is really, you know, all we
Speaker 1: can look forward to on a sustained basis. And in
Speaker 1: that environment, long rates are going to be relatively low
Speaker 1: and the FET's not going to have a ton of
Speaker 1: room to make short term interest rates up, meaning that
Speaker 1: three or four percent levels are probably not going to
Speaker 1: be seen during this business segment. Thanks for listening to
Speaker 1: the Bloomberg Surveillance Podcast. Subscribe and listen to interviews on iTunes, SoundCloud,
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