Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Leye. We bring you insight from the best in economics, finance,
Speaker 1: investment and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Ready.
Speaker 1: Please to say, a friend of this program and an
Speaker 1: old friend of mine, Danny Blanche Flack enjoyed us now
Speaker 1: Dartmouth College, professor of Economics and former member of the
Speaker 1: MPC at the Bank of England. Danny, your thoughts as
Speaker 1: we switched from seven to to six three at the
Speaker 1: b o E. Well that's really quite a surprise. So
Speaker 1: if you're Andy Haldane, you have to explain to me
Speaker 1: and to other connentators why last month and the month
Speaker 1: before you voted against a rate rise and since then
Speaker 1: the data of all worth, every piece of data that exists,
Speaker 1: has got worse. So the question simply is did you
Speaker 1: make a mistake then are you making a mistake now?
Speaker 1: Of both um, the answer clearly is that the economy
Speaker 1: is flowing. Industrial production figures got a pretty bad no
Speaker 1: way it grows at all, Brexit them having a major
Speaker 1: impact on investment so I'm haven't had chance. That's obviously
Speaker 1: a decision has just can't. But this is completely astonishing.
Speaker 1: And how you to possibly vote for a rate wise
Speaker 1: in these circumstances seems to me to be a major puzzle.
Speaker 1: Um And I asked this question, and I'm happy for
Speaker 1: anybody to call in and tell me. Tell me any
Speaker 1: data in the real world that actually sustains a claim
Speaker 1: that you should raise rates. There is none well, especially
Speaker 1: in the Indian Kingdom at the moment, Danniel. For our
Speaker 1: listeners that might not be familiar with the members of
Speaker 1: the Monetary Politicy Committee at the Bank of England, the
Speaker 1: two individuals that have been hiking or at least voting
Speaker 1: for great hike at the b O A Michael Saunders
Speaker 1: formerly of City Group, Ian McCafferty. These are the hawks
Speaker 1: on the Bank of England. We expect those two to
Speaker 1: pop up. Andy Haldane is not just the chief economist, Danny,
Speaker 1: He's been the chief due what's going on there when
Speaker 1: he wandered he made a very strange, strange speech the
Speaker 1: other day which had really nothing to do with Monty policy.
Speaker 1: I mean, I'm finding it pretty hard to understand. I mean,
Speaker 1: especially because of the bank failures in its forecast, to
Speaker 1: forecast wage growth, to forecast productivity. I'm trying to find
Speaker 1: where it says the reason that he voted for this rise,
Speaker 1: and I'm really afraid I'm struggling to see it. Um.
Speaker 1: Maybe maybe others can see, but I don't quite understand
Speaker 1: why he's changed his position. Um. I think it's a
Speaker 1: pretty embarrassing change because there's the question that everybody should
Speaker 1: ask him. Blasfere would like to ask you a single question,
Speaker 1: what data in the world A has been there and
Speaker 1: B has changed since he voted against one a month ago,
Speaker 1: And the answer is there is none. Just to bring
Speaker 1: got to jump in. Danny gotta say good morning to
Speaker 1: my car anchor, Tom Kane. I'm good money to you, Tom.
Speaker 1: The Bank of England, the consensus is that they slow
Speaker 1: down in the first quarter is temporary. That it's temporary. David,
Speaker 1: you've pushed against us to great criticism. The conservators love
Speaker 1: to go after you because you're doom and gloom and
Speaker 1: there's no economic growth for a spot spout. There wasn't
Speaker 1: even in the United States or substantial economic growth. But
Speaker 1: we are not seeing the blanche flower industry wages go up,
Speaker 1: and and I'm fascinated the United Kingdom, how you raise
Speaker 1: raids into flat or even negative real wages. Does that
Speaker 1: ever happen in monetary theory. No, So we've just kind
Speaker 1: of studied on it. The real wages today in the
Speaker 1: UK are six and a half percent below what they
Speaker 1: were in two thousand and eight, and the study has
Speaker 1: been done showing this is the worst performance of real
Speaker 1: wages in two hundred ten years of which we have data.
Speaker 1: So so basically the I've just found the paragraph it's
Speaker 1: a wing and a prayer. Um, everything's really bad. But honestly, boss, honestly, honestly, honestly,
Speaker 1: it's going to get better. It was erratic as due
Speaker 1: to the weather, it's due to who knows what sounds like,
Speaker 1: sounds like review, you know it's going to get better
Speaker 1: from ver erratic. Sorry, So let's make this a little
Speaker 1: bit more broader, Danny, that just seems to be willingness
Speaker 1: a month central bankers right now to get away from
Speaker 1: emergency policy settings. Let's be clear, they're at about fifty
Speaker 1: basis points at the Bank of England. The ECB is
Speaker 1: a negative forty basis points. Quite clearly, we don't have
Speaker 1: an economic situation that warrants an emergency policy setting on
Speaker 1: a global basis, Danny, So what are they doing and
Speaker 1: what do you think has really made them maybe a
Speaker 1: little bit more nervous about the future. Well, I don't know.
Speaker 1: I'm I'm reading this through. They say, we're they don't
Speaker 1: think there are benefits of waiting for additional information. That
Speaker 1: seems I mean, I think the obvious argument is that
Speaker 1: bankers want rates to be higher. They obviously realized that
Speaker 1: at some point they're they're going to need to cut
Speaker 1: them again. But this is this is this is the
Speaker 1: economics of making up things as you go along, and
Speaker 1: you raise rates and that's gonna because you worry about
Speaker 1: a recession. But by raising rates, you cause the recession.
Speaker 1: I mean that that's the reality. Um. I mean, if
Speaker 1: you if you look at what they said, there is
Speaker 1: absolutely nothing in what they say. They say, honestly, it's
Speaker 1: all going to get better, And we don't believe anything
Speaker 1: in the real world. We just know that things are
Speaker 1: fine and we can raise rates. Well that's just gibberish.
Speaker 1: Nothing in the data whatsoever to sustain that. Quickly here, professor,
Speaker 1: we've got to move on to important topics. But what
Speaker 1: what is the catalyst for central banks to cave in
Speaker 1: given this difficult data? How do they how do they
Speaker 1: get there and safe face? Well, obviously I think you're
Speaker 1: asking the wrong person. I mean, it has to be
Speaker 1: based on a forecast. It has to be that as
Speaker 1: unemployment moves to the lower everything in the past is
Speaker 1: going to generate for you wage growth and that's inflation.
Speaker 1: And you care about information, so you want to get
Speaker 1: your risk out here. Okay, first, but they've been saying
Speaker 1: that for the last ten years. We haven't seen any
Speaker 1: of that. It's complete misunderstanding of the labor market. Papers
Speaker 1: says exactly that. So I just think this is you know,
Speaker 1: these people are just very pulsing because they've they're stuck
Speaker 1: in the nineties seventies. No, no, FIFA is stuck in
Speaker 1: the nine seventies. And now for our global audience, we
Speaker 1: go to the important topic of the game. Professor Blanche Flower,
Speaker 1: would you explain why Gareth Bale is not playing for
Speaker 1: the United Kingdom in the World Cup. I mean, Wales
Speaker 1: can't even score against the Republic of Ireland, they're thrown out.
Speaker 1: Wouldn't England have a better chance against Germany and belgiumir
Speaker 1: in a couple of days if Gareth Bale was playing
Speaker 1: for them and not this this view of the nineties
Speaker 1: seventies of Wales or Scotland, the two Brits on this
Speaker 1: cool We'll find it extremely hard to explain why all
Speaker 1: four countries played together in the Olympics but in soccer
Speaker 1: they don't. So clearly having a bigger pool to pull
Speaker 1: from is better. But England ly speech tunis yet my
Speaker 1: team ain't there, just like the America. I want to
Speaker 1: ask a really important question and it's going to give
Speaker 1: Tom a little bit of an insight to the competitive
Speaker 1: nature of the United Kingdom. Um does the Welsh Danny
Speaker 1: Blanche Flyer support England when they play Panama this weekend? Uh? Well,
Speaker 1: Cardig didn't. Do you hear the hesitation? Hesitations are? Do
Speaker 1: you hear that? You love how that works? The rest
Speaker 1: of the world thinks we're friends. This is not how
Speaker 1: it works. Are you really going to root for Panama
Speaker 1: this weekend? Professor, No, I can't watch it. I just
Speaker 1: learned a lot. You know, folks, your work in here,
Speaker 1: and I'll tell you I just learned a lot about
Speaker 1: this disunited I'm so competitive, Professor Blanche Flower goal away,
Speaker 1: thank you so much. He's with Darkness College and ever John,
Speaker 1: I am learning so much about this idiocy. Isn't it ridiculous?
Speaker 1: Said Everyone outside the UK looks in and thinks it's
Speaker 1: a United Kingdom. I mean, when it comes to sport,
Speaker 1: it couldn't be more at this united And am I
Speaker 1: right if he said correctly that in the Olympics you're
Speaker 1: all in it together, but not Yeah, team g B,
Speaker 1: team Great Britain. But when it comes to when it
Speaker 1: comes to football, Michael Barr didn't know this until like
Speaker 1: a week ago. Ferrell, that's like the Olympics for the US,
Speaker 1: We're all in until it comes to Vane just David
Speaker 1: Blanche Flower pause. He will not support English? Can we go?
Speaker 1: Bloomberg headline, Flower, thank you. We need to draw your
Speaker 1: attention to Forbes magazine a number of days ago with
Speaker 1: a lengthy article on how Secretary of Commerce Wilbur Ross
Speaker 1: has trying to extricate himself from his investments as he
Speaker 1: joined the Trump administration. Now in conversation with our David Weston,
Speaker 1: here is Secretary Ross Bloomberg Television. As we talked with
Speaker 1: the man at the center of the United States trade policy.
Speaker 1: Secretary of Commerce Wilbur Ross coming to us today from
Speaker 1: Select USA Investment Summit in Washington. Thank you very much,
Speaker 1: Mr Secretary for being with us, well, thank you for
Speaker 1: having me. H. We all have been focusing in part
Speaker 1: on what the central bankers have been saying over the
Speaker 1: ECB meetings in Europe, and I'm sure you have been
Speaker 1: as well. And j Pal, the Fed chair, actually talked
Speaker 1: yesterday about the extent to which he's seeing businesses really
Speaker 1: looking at the trade tensions, frictions, even perhaps incipient war.
Speaker 1: Listen to what he had to say. I'm sure you
Speaker 1: know what it was, but listen to what he had
Speaker 1: to say. We have a very wide, wide range of
Speaker 1: context in the business world in the United States and
Speaker 1: around the world, and as we talk to them, uh,
Speaker 1: they continually and increasingly expressed concern over trade developments. Those
Speaker 1: concerns seem to be rising for the first time. We're
Speaker 1: hearing about decisions to postpone investment, postpone hiring so much
Speaker 1: a secondary You heard what he had to say. He
Speaker 1: is seeing really postponement of decisions to invest. One of
Speaker 1: the things that's been a priority for this administration. Are
Speaker 1: you seeing that now? I'm here at select USA, which
Speaker 1: is our big annual foreign direct Investment conference. We have
Speaker 1: over three thousand delegates here from sixties six foreign countries,
Speaker 1: and they are all here because they're interested in increasing
Speaker 1: their investment in the United States. And I believe over
Speaker 1: the next couple of days we will have some very
Speaker 1: big announcements to make about new transactions that these folks
Speaker 1: are entering into. So I don't think that that's true
Speaker 1: that there's some big change. I think the media have
Speaker 1: been very negative on the Trump administration. They pick out
Speaker 1: some little companies somewhere, then they say, oh, my goodness, uh,
Speaker 1: this guy is having troubles, and they extrapolate that into
Speaker 1: the whole country. Okay, fair enough, Mr. Second, Let's take
Speaker 1: one that's not a little company. Let's take Daimler, which
Speaker 1: is a big company that this this morning said because
Speaker 1: of the issues with China, they're taking down their profitiment
Speaker 1: and that, as you probably know, the stock price went
Speaker 1: down and took the stock six sounded round with it
Speaker 1: and actually took SMP futures with that with it. That's
Speaker 1: not a small company, sir, No, it's not. But I
Speaker 1: don't hear what we've done that hurt them. Well, what
Speaker 1: it is is the position in position by China of
Speaker 1: tariffs in response to what we've done on exporting SUVs
Speaker 1: from South Carolina to China, and that was in direct
Speaker 1: response to the actions we've taken, oh the Retalia and short. Well,
Speaker 1: naturally there's going to be some retaliation by the foreign company,
Speaker 1: but countries and they will try to pick out politically
Speaker 1: sensitive areas to deal with. But at the end of
Speaker 1: the day, we are a net importer, not a net exporter.
Speaker 1: And that means a very fundamental truth. Take China, they
Speaker 1: sell us around a half a billion, half a trillion
Speaker 1: dollars a year of goods. We only sell them around
Speaker 1: a hundred and fifty billion. That means once they put tariffs,
Speaker 1: if it went that far on the whole hundred and fifty,
Speaker 1: they have nothing more that they can do. We could
Speaker 1: go theoretically all the way up to the five hundred.
Speaker 1: That's not a very easy game for them to play.
Speaker 1: And it's similar ratios with the other countries. That's what
Speaker 1: President Trump means when he says that if it really
Speaker 1: does get to be a big war, we have many
Speaker 1: more bullets than any of these other countries right when
Speaker 1: it comes to tariffs, But there are other ways obviously
Speaker 1: of hurting imports non tariff barriers. And in the last
Speaker 1: stambout of China, actually what they specifically said was quantitative
Speaker 1: and qualitative so that terrifs are not the only way
Speaker 1: that they can retaliate. No, it's true, and it's nor
Speaker 1: are they the only way that we can retaliate. The
Speaker 1: truth is that China, Europe, a lot of other big
Speaker 1: countries have been using non tariff trade barriers for a
Speaker 1: long long time. They put on weird standards that it's
Speaker 1: impossible for American products to meet. They put in all
Speaker 1: sorts of elaborate and non science based restrictions. For example,
Speaker 1: some of these countries keep complaining, oh, we can import
Speaker 1: US beef because of mad cow disease. Well, do you
Speaker 1: think mad cow disease is really rampant in the US?
Speaker 1: I have been heard a report a bit in years. Similarly,
Speaker 1: some countries say, well, we can't import your chickens because
Speaker 1: of asion flew. Whence the last time you heard a
Speaker 1: case of asion flew in the United States. It's all nonsense.
Speaker 1: The truth is that they've been very protectionists. We have
Speaker 1: been very close to free market, and now that we're
Speaker 1: trying to defend ourselves against their bad practices, they're screaming
Speaker 1: and yelling. Well, they've been spoiled for many, many years
Speaker 1: and that game is over. And Mr Second, I really
Speaker 1: think there's no one who knows about the situation who
Speaker 1: would deny that China has been protectionists in all sorts
Speaker 1: of different ways. I don't think anyone would take issue
Speaker 1: with that in the media or otherwise. At the same time,
Speaker 1: what happens when there's a tension between on the one hand,
Speaker 1: growth and jobs, which was what the President's first order
Speaker 1: of business was tension between that on the one hand,
Speaker 1: and getting fairness and reciprocity. If you have to choose
Speaker 1: between the two, which you either have less trade and
Speaker 1: less growth and have it be fairer and more reciprocal, well,
Speaker 1: we wanted to be fairer and more reciprocal. Reciprocity is
Speaker 1: an important keynote to our trade policy. The question is
Speaker 1: how do you get there? And the only way we're
Speaker 1: gonna get foreign countries to lower their inordinate barriers is
Speaker 1: by making it more painful for them to continue those
Speaker 1: practices than to get rid of them. That's what this
Speaker 1: is all about. This is about an endgame that really
Speaker 1: is free, fair and reciprocal trade. It's not about trying
Speaker 1: to make money out of tariffs. So that's not really
Speaker 1: the endgame here at all. But we need something to
Speaker 1: induce changes in their behavior, and it's already happening and
Speaker 1: seal and aluminum. Once we put our tariffs on, suddenly
Speaker 1: you're up is taking safeguard measures all over the place
Speaker 1: to protect their border. They weren't doing that before we
Speaker 1: put the tariffs on. Japan had never had a trade
Speaker 1: enforcement group in matting their big government agency. Now they
Speaker 1: have the twenty person trade enforcement group. We're going to
Speaker 1: fix the problem of protectionism around the world, and we're
Speaker 1: going to fix it by making it more painful for
Speaker 1: those countries to do bad practices than to do the
Speaker 1: right thing, which is to lower the trade barriers and
Speaker 1: lower their tower and once againistrict. I don't think anyone
Speaker 1: would quibble with that as a goal, a laudatory goal.
Speaker 1: The question is, though, how much pain are we willing
Speaker 1: to suffer in order to get that done? Because the
Speaker 1: pain goes both ways, and for example, Deutsche Bank is
Speaker 1: out with estimates that in fact, a trade war actually
Speaker 1: could take three tents off of GDP growth. If you
Speaker 1: knew today that that was the price you had to pay,
Speaker 1: would be willing to pay it in order to get
Speaker 1: to reciprocal trade. Well, it's very hard to make an
Speaker 1: omelet if you don't break some eggs, and so we
Speaker 1: really have to. We have no choice but to change
Speaker 1: the way that these other Benese can in countries using
Speaker 1: unfair trade practices against us. We have to do it.
Speaker 1: It's unfortunate that it wasn't done at an earlier point
Speaker 1: in time. Would have been a lot simpler, a lot easier,
Speaker 1: and a lot less painful. But it's really important that
Speaker 1: we do it because we're talking about our future and
Speaker 1: that is more important than the growth goal, because, I mean,
Speaker 1: the Republicans came up with the President put forward a
Speaker 1: tax plan that really was growing GDP nicely. Are you
Speaker 1: getting a fair amount of that back in order to
Speaker 1: get to the reciprocal world that you want? But we
Speaker 1: don't think so. And uh, we think that you will
Speaker 1: continue to see very strong employment. The biggest problem most
Speaker 1: American companies have now is finding enough qualified labor to
Speaker 1: do the expansions that they're putting forward. That's why you're
Speaker 1: seeing all of these apprenticeship programs, all of these joint
Speaker 1: programs with local community colleges. Finding workers is the biggest
Speaker 1: problem right now for American industry, not anything else. Because
Speaker 1: we've cut the regulations, released those shackles. We've cut both
Speaker 1: individual and corporate taxes, making America a wonderful destination for
Speaker 1: foreign investment and direct US And that's why we have
Speaker 1: here at Select USA Summit, well but three thousand attendees.
Speaker 1: We have sixties six countries represented here. That's fifteen more
Speaker 1: countries than we had a year ago. We have Cabinet
Speaker 1: secretaries here, We've got fourteen ambassadors, US ambassadors to foreign countries.
Speaker 1: This is a real turnout, and we will be making
Speaker 1: some announcements about new foreign direct investment into the US.
Speaker 1: That's the real world, not the whiners who have criticized
Speaker 1: every single thing that the President has done. They said
Speaker 1: he'd never get a tax bill through, Well he did.
Speaker 1: Then they said, well, it won't do any good for
Speaker 1: the economy, that will only help rich people. Well, unemployment
Speaker 1: is that record lows um corporate enthusiasm, corporate optimism relatively
Speaker 1: all time highs, small business optimism, low unemployment overall, very
Speaker 1: low unemployment for women, very low unemployment for African Americans,
Speaker 1: very low unemployment for Hispanics. So anybody with thinks the
Speaker 1: economy is being wrecked simply doesn't know what they're talking about. No, Joe,
Speaker 1: please only us understanding. I was not suggesting all the
Speaker 1: economy is being wrecked. The question is is there a
Speaker 1: price being paid? Let me ask a specific question that's
Speaker 1: come up in the trade context, and that is the
Speaker 1: ZTE situation. I know that we're negotiations last night up
Speaker 1: in Capitol Hill. Do you believe that there would be
Speaker 1: a compromise that will allow ZT to continue to do
Speaker 1: business the United States? Well, there may very well be.
Speaker 1: The President and Secretary Minuchtion and I met with a
Speaker 1: bunch of Republican congressional leaders yesterday and that was one
Speaker 1: of the many topics that we covered. I think the
Speaker 1: important thing is to modify z TES behavior from what
Speaker 1: it was before. We have now taken over two billion
Speaker 1: dollars and finds out of them. For the first time ever,
Speaker 1: we've had the ability to implant into a country company
Speaker 1: that had violated sanctions our code of our Code of
Speaker 1: Export Control and we have unfettered access to the company
Speaker 1: in order to monitor it. If there are any further violations,
Speaker 1: we will shut them down just as we did before,
Speaker 1: and we have the power to do that. Okay. Finally,
Speaker 1: Mssion Secretary, there's been this issue about short selling some
Speaker 1: shares in a shipping company. I don't want to go
Speaker 1: into the details of that. Frankly, I'm not sure I
Speaker 1: fully understand them, but you've certainly had to talk about
Speaker 1: them plenty. I have a more general question. Many of
Speaker 1: us were surprised in fact that senior government officials are
Speaker 1: involved in short selling or derivatives of any sort. For example,
Speaker 1: here at Blueboard, we're not allowed to do that. In retrospect,
Speaker 1: given what you've been put through, would it be a
Speaker 1: better policy or rule to just say senior government officials
Speaker 1: shouldn't be engaged in things like short selling at all. Now,
Speaker 1: this is not what you would call a typical short sale.
Speaker 1: What happened some shares in one company we're not physically
Speaker 1: in my possession, and there was a whole process I
Speaker 1: had to go through to get them into possession so
Speaker 1: I could sell them. I had begun selling those shares
Speaker 1: the ones that I did have possession of months before.
Speaker 1: So when I learned about the new shares, wanted to
Speaker 1: close out that holding. What happened to be a company
Speaker 1: called Navigator, And it was when the shares were delivered
Speaker 1: to me my own shares, I used them to substitute.
Speaker 1: So there was no profit or loss on the so
Speaker 1: called short sale. It was simply a means of implementing
Speaker 1: a transaction, and then I had no gain or loss
Speaker 1: by change in the market. Please understand, there was nothing
Speaker 1: in my question. It's just anything improper had been done
Speaker 1: or anything that gotten gains, nothing like that. I'm actually
Speaker 1: asking a more basic question, sort of a concession to
Speaker 1: the shortness of life as it were. I mean, I'm
Speaker 1: sure it wasn't pleasant for you to even have to
Speaker 1: explain all this, wouldn't it just be better just have
Speaker 1: a simple rule that said, senior gard officials don't participate
Speaker 1: in thing like short telling. Well, this is not a
Speaker 1: typical short sale. A typical short sale is you borrowed
Speaker 1: stock that you do not own. You sell the borrowed stock,
Speaker 1: putting up collateral for it, and then when the stock
Speaker 1: goes down, you cover it and make a profit. That
Speaker 1: simply is not what happened here. I do think that
Speaker 1: that kind of short sale is not a good thing
Speaker 1: for government officials to do. But this is simply a
Speaker 1: technical means of complying with the delivery rules of the
Speaker 1: New York stock exchanged. I didn't gain or lose regardless
Speaker 1: of what the stock did after I entered into the transaction,
Speaker 1: whereas in a short sale, if the stock went down,
Speaker 1: I would profit. If the stock went up, I would lose.
Speaker 1: My situation was one where I was totally indifferent as
Speaker 1: to the subsequent price of the stock and us it
Speaker 1: happens the stock is now at a higher level than
Speaker 1: it was when I sold it. Anyway, Okay, fair enough,
Speaker 1: I think I do understand. I really want to thank
Speaker 1: you for taking a time, Mr Secretary. I know you
Speaker 1: want to get back to your investment summit there in Washington.
Speaker 1: It's good if you to spend time with this, as
Speaker 1: Wilber Ross, US Commerce Secretary. Well from David Weston with
Speaker 1: the Secretary of Commerce and now joining us from Vienna
Speaker 1: gentleman who has been a great supporter of the program.
Speaker 1: Is classic, the Commanding Heights and the original the prize.
Speaker 1: In a way underestimated, and I urge all of you
Speaker 1: to dive into it, the quest energy security and the
Speaker 1: remaking of all of this. Daniel Jurgen joins us right now.
Speaker 1: Dr You're wonderful to have you with us with ol
Speaker 1: Peck in Vienna and to take a title of one
Speaker 1: of your chapters in the quest. Is there a breaking
Speaker 1: of the bargain at OPEC? Are the pressures so great
Speaker 1: in the cartel that that cartel bargain will be broken? No?
Speaker 1: I don't think so. I mean the feeling. I think
Speaker 1: the sense here is that it's been expanded. And the
Speaker 1: phrase that people are using we've used as the Vienna
Speaker 1: Alliance because the key factor is that this isn't just
Speaker 1: the old band of OPEC, but it's also Russia in
Speaker 1: particular and other non Opeque countries that came together, you know,
Speaker 1: after the price collapse, to stabilize the price and get
Speaker 1: invested going. What's interesting that the tom tom just to
Speaker 1: say please is interesting. I was reflecting with that one
Speaker 1: of the biggest beneficiaries of this has been, uh, the
Speaker 1: United States in terms of the recovery of the do
Speaker 1: bestic us oil industry. What is the fair price of
Speaker 1: a barrel of oil right now, Well, I think that's
Speaker 1: a for thousands of years almost philosophers have been arguing
Speaker 1: about that, at least thousands of pages according to the books. Yes,
Speaker 1: but I think you know what one was hearing here,
Speaker 1: you know, as the people saying it was sort of
Speaker 1: fifty five to seventy was described by a couple of
Speaker 1: people as the fairway that would uh assure sufficient investment
Speaker 1: and without impact on uh, you know, the overall economy
Speaker 1: in fact, acting as a stimulus to what an interesting
Speaker 1: thing that came out is you know how much manufacturing
Speaker 1: companies around the world uh depend upon the market, the
Speaker 1: energy markets for their equipment. So you know, I you know,
Speaker 1: probably at another time could be another fair way. But
Speaker 1: you can remember before the oil price collapsed in it
Speaker 1: was set a under dollars a barrel was good for
Speaker 1: consumers and producers. So it's a those goal posts shift, Okay.
Speaker 1: One of the things shifting, Dr Jurgen is the immigration
Speaker 1: debate in Germany and of course the immediacy of the
Speaker 1: cultural and immigration debate in America. You're commanding heights maybe
Speaker 1: does not take on immigration in our history of immigration directly,
Speaker 1: but it permeates all of your classic book, The Commanding Heights.
Speaker 1: Daniel Jurgen on the newness of this immigration debate or
Speaker 1: is it something that we're simply revisiting across our history. Well,
Speaker 1: it's certainly be imperious. There was a Chinese Exclusion Act
Speaker 1: a century ago, um, but for the most part in
Speaker 1: the nineteenth century it was open. It was very much
Speaker 1: open borders. Um. But obviously, you know now it's such
Speaker 1: a divisive issue in the United States and in Germany.
Speaker 1: It's a huge problem for Angelo and Merkel. Within that
Speaker 1: is the spirit of capitalism, which is you need population
Speaker 1: to make capitalism go. Would we be a better company
Speaker 1: was simply more immigrants allowing for greater population growth. Well,
Speaker 1: I think economists certainly say that that, Uh, one of
Speaker 1: the strengths of the US economy is immigration, and that
Speaker 1: increases the overall productivity of the economy. And you know,
Speaker 1: you can see and I mean we're you know, we're
Speaker 1: in a period now we're labored in many many markets
Speaker 1: are very tight. Let's see, dar Daniel, you're gonna thank
Speaker 1: you so much from Vienna today in the OPEC meetings.
Speaker 1: And I really can't say enough about his latest The
Speaker 1: quest really a wonderful book on the changes going on
Speaker 1: in some of which he's widely predicted within h the
Speaker 1: global economies. This is the interview of the day for
Speaker 1: Global Wall Street. No not about the trading errant Deutsche Bank.
Speaker 1: Thank you Sinali Basik for this. This is brilliant, brilliant
Speaker 1: work by mckenze Group on the state of corporate bonds.
Speaker 1: Susan Lunn joins us now with Mackenzie on this exceptionally
Speaker 1: important fifty page reports. Susan congratulations on advancing Reinhardt and
Speaker 1: rogue Off and that they said this time is different
Speaker 1: in all the focuses on government debt and instead we
Speaker 1: should look at private debt. And there's households on that,
Speaker 1: but there's corporate debt which just builds and builds. Are
Speaker 1: we reducing two thousand five and two thousand and six.
Speaker 1: Thank you for having in me. Well, it's true that
Speaker 1: corporate debt or debt of non financial companies has grown
Speaker 1: almost as much as government debt since the Financial crisis,
Speaker 1: and there's not been a lot of attention paid to this.
Speaker 1: So in this report we looked specifically at what's happening
Speaker 1: in the corporate bond markets. Which is that they've really
Speaker 1: taken off. As banks have retrenched, companies have turned to
Speaker 1: bond and they've tripled in size. We actually think this
Speaker 1: is a welcome diversification, but there are definitely signs of risk,
Speaker 1: and already defaults on corporate debt obligations are above thirty
Speaker 1: year average, and you think they could rise further. You've
Speaker 1: got folks, As always with mackenzie, the charts are stunning.
Speaker 1: There's the U S, there's Western Europe, and then there's
Speaker 1: what I'm gonna call Susan. The mystery of China, other
Speaker 1: developing economies and other advanced economies. Is there a transparency
Speaker 1: out there that was not there in two thousand six
Speaker 1: or is too much of your bar chart a mystery? Well,
Speaker 1: there is more transparency. This is why economists like myself
Speaker 1: have long said that bond markets are a good alternative
Speaker 1: to bank loan because their priced in the market. Credit
Speaker 1: ating agencies are out there raiding the bond, so there
Speaker 1: is more transparency. But as you noted, the growth has
Speaker 1: been in the United States, but also in Europe. In
Speaker 1: China has been staggering. So their corporate bond market went
Speaker 1: from virtually nothing ten years ago to two trillion dollars,
Speaker 1: one of the largest in the world today, and other
Speaker 1: emerging markets have been able to issue bonds as well.
Speaker 1: I mean, I can't say this enough, folks. Susan Lund
Speaker 1: with us A Mackenzie Group, and the title of the
Speaker 1: story of this essay is let me get it up here,
Speaker 1: hold on, I just lost it. Rising corporate debt parallel
Speaker 1: or promise And basically, Susan, every single executive on every
Speaker 1: single airline should be reading this thing. What Let me
Speaker 1: ask an open question, what in your thirties six page
Speaker 1: report is a number one message to chief financial officers
Speaker 1: burdened with the idea of should we do the next trunch?
Speaker 1: Should we do the next issuance? Yeah, the big messages
Speaker 1: that look, the market has probably crested, so it's tripled
Speaker 1: in size, but now we've got rising interest rates. And
Speaker 1: the analysis we've done in this report looks at how
Speaker 1: many companies have issued debt and in fact they're in
Speaker 1: a risky position to repay, and so we're likely to
Speaker 1: see some phone out in the market. Now. Long term,
Speaker 1: there's lots of potentials for further correct but short term
Speaker 1: we would expect defaults to continue to rise. And now
Speaker 1: Fox folks want surveillance with Tom Keane, Pim Fox and
Speaker 1: John Farrell where we get nerdy with you with Susan
Speaker 1: Lun of Mackensee Group. Okay, Susan, here's the reality, with
Speaker 1: a major shout out to David Goldman and his his
Speaker 1: classic work at Bank of America. If there's a trunch
Speaker 1: or a of issuances of a given nation or housing
Speaker 1: bond or corporate bond, everybody focuses on the garbage, which
Speaker 1: gets bad and gets worse. But the real problem is
Speaker 1: the senior quality loans that are priced at ninety eight
Speaker 1: or nineties six, and they moved down in crisis to
Speaker 1: are we in that same position again where the real
Speaker 1: risk is not the junk that's identified as junk, but
Speaker 1: the real risk is quality senior corporate paper that could
Speaker 1: see a price decline of equality down to eighty seven.
Speaker 1: Is that where the real risk is. That's one of
Speaker 1: the two big risks so UM and our analysis we
Speaker 1: find up of an overall corporate bonds and they do
Speaker 1: west or now triple b according to SMP, so it's
Speaker 1: just one notch above junk. So the average credit quality
Speaker 1: of the investment great issuers that you're pointing out has
Speaker 1: slowly gone down in this era of ultru low interest rates,
Speaker 1: and so economic shocks maybe from trade from other factors,
Speaker 1: could actually push those companies now down below the box.
Speaker 1: And by the way, the high yield bonds already are
Speaker 1: at record size is twillion dollars outstanding. You've got a
Speaker 1: chart on e M that's just stunning Exhibit ten for
Speaker 1: those you keeping score at home, and the delta here
Speaker 1: on share of issuers at high risk of default for Brazil, China,
Speaker 1: India is it's a jump condition over everybody else. When
Speaker 1: you see EM currency depreciation against strong dollar, can you
Speaker 1: overlay that with your debt study into some form of crisis,
Speaker 1: some form of reducts of well, definitely they're going to
Speaker 1: be losses in EM debt. So as we've shown, roughly
Speaker 1: a quarter of issuers in Brazil and China um have
Speaker 1: evena over interest payments of less than one and a half.
Speaker 1: Sorry for being so wonky, but those of you who
Speaker 1: understand interest coverage, it means that they can basically finance
Speaker 1: their debt today, but they've got very little cushion. So
Speaker 1: if their finances go south or if their currencies depreciate. Uh,
Speaker 1: they're in a lot of trouble. And that's today, that's
Speaker 1: before you know, the FED started raising interest rates. So
Speaker 1: we're seeing rates head up and it means a lot
Speaker 1: of these companies are not going to be able to
Speaker 1: afford this as debt matures. One of the things we
Speaker 1: documented this report is that over the next five years
Speaker 1: you're going to have somewhere between one point six trillion
Speaker 1: and two trillion dollars each year these corporate bonds come
Speaker 1: and do, and you'll have to rewrite the report because
Speaker 1: of Fox Disney Comcast from your distance and with great
Speaker 1: respect for mckensey group, their goal is not to model
Speaker 1: out the latest hot transaction. But how do you respond,
Speaker 1: Susan Lunnon when you see lex and the f T.
Speaker 1: I believe it was one or two bids ago at
Speaker 1: seventeen times ibata and I don't know where that number
Speaker 1: is now with the latest Disney the Disney um uh offer.
Speaker 1: But you know we're out of twenty times IBATA on
Speaker 1: a given m and a transaction. Does that denote silly
Speaker 1: season for mckensey Group. Well, look, there's a lot of
Speaker 1: pressure in the market. I don't want to predict the
Speaker 1: next crisis. The one thing I will say that gives
Speaker 1: me some ability to sleep at night over corporate debt. Please,
Speaker 1: you have not. I don't think this is two thousand
Speaker 1: and eight all over again, because in the mortgage crisis,
Speaker 1: those assets were securitized and then created into cdeos and
Speaker 1: CDEO squared, So there was a lot of assets built
Speaker 1: upon the underlying mortgage. You don't see that in the
Speaker 1: corporate bond market. So yes, some in the sters are
Speaker 1: gonna face mosses. Companies may be forced into bankruptcy. It'll
Speaker 1: be a real test for China. But I don't see
Speaker 1: the systemic risk and the interlinkages that you saw ten
Speaker 1: years ago. Susan Lun Congratulations to you and Richard Dobbs
Speaker 1: and the rest of McKenzie Global Institute. Folks. I'll put
Speaker 1: this out on Twitter Twitter and early sell it over
Speaker 1: the next couple of days. Rising Corporate Debt Parallel Promise
Speaker 1: thirty six brilliant page is well charted by McKinsey and Company.
Speaker 1: Just a tour to force on the state of our
Speaker 1: private debt. And this is said with great respect for
Speaker 1: the classic Ryan Heart and Roga. Thanks for listening to
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on
Speaker 1: Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm
Speaker 1: on Twitter at Tom Keane before the podcast. You can
Speaker 1: always catch us worldwide. I'm Bloomberg Radio