Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene with
Speaker 1: David Gura. Daily we bring you insight from the best
Speaker 1: of economics, finance, investment, and international relations. Find Bloomberg Surveillance
Speaker 1: on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course,
Speaker 1: on the Bloomberg Gabrielle Santos, as I mentioned, is here
Speaker 1: with this from GPM Funds. She's the chief global strategist
Speaker 1: and we're happy to have her here. She's drinking hot
Speaker 1: coffee because the Holy East Coast is free. I was
Speaker 1: noticing that hockey season Tom Keene has wandered in the
Speaker 1: studio and his Montreal Canadians jersey. Um, he's he's ready
Speaker 1: for hockey season. Uh. When you look at uh, the
Speaker 1: markets have been down, up, down, but not going rocketing
Speaker 1: higher as they have been as we get deeper and
Speaker 1: deeper into tax reform. Is that because people are holding
Speaker 1: their breath at this point? Or has sentiment kind of turned?
Speaker 1: This was a discussion that we were having on Bloomberg
Speaker 1: Television yesterday and what did you miss? Um? Has sentiment turned?
Speaker 1: Are we now thinking maybe it won't pass until you've
Speaker 1: got to start pricing that in or is it too early.
Speaker 1: So I think that one of the first questions is
Speaker 1: is corporate tax reform priceton already we would say I
Speaker 1: not really know. Um that the rally we've seen so
Speaker 1: far this year has been much more about the trends,
Speaker 1: the good global trends we're seeing in terms of growth
Speaker 1: and earnings as well as stability and energy as well
Speaker 1: as the dollar, rather than some huge expectation of corporate
Speaker 1: tax reform happening. So I don't think it's on an
Speaker 1: unwind of expectations around tax or anything like that. It
Speaker 1: could be something just innocuous, like investors wanting to take
Speaker 1: a little bit of profit off the table, right, especially
Speaker 1: receptors that how done super well this year, like technology,
Speaker 1: which is the sector for example, that was down yesterday,
Speaker 1: rather than something really really bad. I'm also when a
Speaker 1: lot is going to get wrapped up in December, we
Speaker 1: have tax reform will either pass or won't get could
Speaker 1: get delayed. But you've got the possibility of a government shutdown,
Speaker 1: and you get the dead ceiling which will be attached
Speaker 1: to that even if it's not solved. And it's the
Speaker 1: end of the year and it's been a heck of
Speaker 1: a year. So are people actually going to invest in December?
Speaker 1: Are we going to start seeing people get cautious and
Speaker 1: say I'm gonna do that and I'm gonna take the
Speaker 1: month off. I'm not sure. I think it depends on
Speaker 1: where you've been so far this year. If if you've
Speaker 1: been in the market the entire year, maybe you do
Speaker 1: kind of trimmed down a little bit. Your your position
Speaker 1: has probably gone a little bit too big. By now
Speaker 1: right we're up fift percent. But for those investors that
Speaker 1: still haven't participated in the market, and there are actually
Speaker 1: a lot of them, maybe there is still a desire
Speaker 1: to get in the market. And we talked about selling
Speaker 1: May and go away, and Mike, your question is dead on.
Speaker 1: I mean, sell you know, before Thanksgiving and run run.
Speaker 1: Let's come back to that in a minute. Good morning.
Speaker 1: If you want Bloomberg surveillance in institutions people that are behind,
Speaker 1: is there a level of panic this year that I
Speaker 1: need to catch up in six weeks. I've never bought
Speaker 1: that song and dance, but it's always there to people
Speaker 1: actually do that. For institutional clients, I would say, especially
Speaker 1: when it comes to equities, that they've been pretty well
Speaker 1: positioned going into the year. What makes me think much
Speaker 1: more about people wanting to actually chase or participate in
Speaker 1: this performance is much more in the individual level, where
Speaker 1: so many investors for the last eight nine years have
Speaker 1: still not participated in the rally. So I think there's
Speaker 1: this sense of, oh my gosh, I'm not participating in
Speaker 1: this enthusiasm rally. The way this works is as on
Speaker 1: the West Side two nights ago, and I walked in
Speaker 1: the Apple store because I walked by it and there
Speaker 1: was the iPhone X and I held it my hand. Wow,
Speaker 1: wow Wow. So do I come out the triple leverage
Speaker 1: all cash fun and like you know, double margin Apple
Speaker 1: to get myself to January to December? Idea? The problem
Speaker 1: is is going to take every penny you made this
Speaker 1: year to buy an iphoned Doug cass is going in
Speaker 1: Florida top of market right there. Tom, We're starting to hear.
Speaker 1: It's interesting because you're talking about all these people who
Speaker 1: haven't participated, and of course the old saws once retail
Speaker 1: comes in, it's over. But you're starting to see some
Speaker 1: of the pros talk about not necessarily a correction or
Speaker 1: anything like that, but that maybe we're gonna top out
Speaker 1: for a little while. I noted, uh, and I have
Speaker 1: the I brought the story in here somewhere, and I
Speaker 1: can't find it right now. But people are looking at
Speaker 1: high yield and how it's kind of rolled over, and
Speaker 1: they say that's a sign that the stock market is
Speaker 1: going to start coming to an end as well. Are
Speaker 1: you seeing any of those tea leaves that you're starting
Speaker 1: to say, hey, maybe there's something to look at here
Speaker 1: coming to an end? No, I mean, it's always about
Speaker 1: the kind of earnings growth we're seeing, which is still
Speaker 1: incredibly solid even pre any sort of corporate tax reform implementation,
Speaker 1: which is which is really a great sign um, and
Speaker 1: that's really the fundamental driver of the market, right, So
Speaker 1: as long as the economy keeps growing, earnings keep growing,
Speaker 1: the market should continue to grind higher. But I do
Speaker 1: think that we should be expecting some sort of correction,
Speaker 1: absolutely right. The average going back to would be to
Speaker 1: have a ten percent correction every single year, and the
Speaker 1: maximum we've had this year has been three percent. So
Speaker 1: definitely a correction would be very possible. Probabilities high, but
Speaker 1: we don't think this is the end of what we
Speaker 1: think is a much more secular ble market. Do you think,
Speaker 1: because it's been so long that if we did get
Speaker 1: a correction, it could be magnified by fear. You know,
Speaker 1: people who've seen nothing but stocks go up for a
Speaker 1: long time start to get nervous and and pull back
Speaker 1: more than the otherwise would. Or the pro is going
Speaker 1: to come in and save us and say O time
Speaker 1: to buy. Well, we'll do our best. But I do
Speaker 1: think that sentiment is has improved a lot this year.
Speaker 1: I think whenever we got to pull back last year,
Speaker 1: the year before even there was this feeling that maybe
Speaker 1: there's a recession around the corner, maybe there's something I
Speaker 1: should be worried about with emerging markets. So the pullbacks
Speaker 1: felt very, very rapid and fearful. Uh. And where we
Speaker 1: are today is much better comfort with the global economy
Speaker 1: with stability, and so I actually think that sentiments is
Speaker 1: a little bit better this time around going into any
Speaker 1: sort of altility as I'm going to protect you from
Speaker 1: the general Council. I know, Mr Diamond Hanks on everywhere
Speaker 1: you say, can you buy the banks here? The financial
Speaker 1: sector is one of our favorite sectors along with technology.
Speaker 1: So there's a laundry list to tell me about the
Speaker 1: Mike McKee wants to know about the yield curve. All right,
Speaker 1: so we've got for the financial sector. We've got a
Speaker 1: growing economy, so credit growth should continue being decently good.
Speaker 1: Number two, we do believe that the yield curve is
Speaker 1: going to stop flattening at this incessant rate we've been
Speaker 1: seeing for the past couple of weeks, which has been
Speaker 1: a little bit of a headwind here in the short
Speaker 1: term UM. And then lastly, there is this underlying current
Speaker 1: of smarter regulation that I don't know is getting necessarily
Speaker 1: the due amount of air time, which help our pros.
Speaker 1: Here two tends of vanilla curve. Which curve do you
Speaker 1: look at to gauge financial forecasting? We look at the
Speaker 1: two tens. You look at the two tends to decide
Speaker 1: what Bank of America is doing, or bank or whatever.
Speaker 1: We look at it as as an indication of what's
Speaker 1: happening with the yield curve. UM, and what we have
Speaker 1: been seeing for the past couple of weeks is a
Speaker 1: very what to us seems like a very surprising flattening
Speaker 1: of the yield curve. Now, we don't think that this
Speaker 1: is all of a sudden going to go to a
Speaker 1: completely flat or even inverted yield curve. As I was saying,
Speaker 1: we do think that this is due for a pause
Speaker 1: and a bit of a reversal here before we let
Speaker 1: you go very quickly, new FED coming in next year,
Speaker 1: causing you to think about anything differently. Not at the moment.
Speaker 1: We do think we'll continue with the kind of pace
Speaker 1: we've seen. This year should look pretty similar unless we
Speaker 1: get some sort of overheating in the economy or big
Speaker 1: tarn and inflation, which we don't expect. Um if we
Speaker 1: don't three rate hikes, continuing to wind down the balance sheet.
Speaker 1: I've got a wonderful email that just came in that
Speaker 1: disagrees with you. And this is the debate over earnings
Speaker 1: driven market versus valuation driving market. That's a great nuance.
Speaker 1: You have to come back and we have to talk
Speaker 1: about and this has been an earnings driven market though
Speaker 1: this this year. This should be a great conversation, Michael.
Speaker 1: We get gabriel As Santos with Douglas Cass, put us
Speaker 1: a differing view, put it down for a couple of hours,
Speaker 1: and we'll duck Cass and Gabriel a scientists together would
Speaker 1: be smart, smart, smart they live in two different worlds.
Speaker 1: Thank you Mr Cass for that observation, well researched. Joining
Speaker 1: sound Stephen Ratner with will advise, that's what should point
Speaker 1: out that he manages the four one k of Michael Bloomberg,
Speaker 1: who has a modest amount to do with this seven
Speaker 1: hundred dollars a year and as far oh one k. Well,
Speaker 1: they wanted to they wanted to adjust that this is
Speaker 1: a limited liability corporation. I guess the limited partnership. Well,
Speaker 1: this is a subject of not inconsequential interest. We'll have
Speaker 1: to see how the rights are, but it's not out
Speaker 1: of the question. We don't want to talk about Michael's money,
Speaker 1: but it does matter to a lot of people who
Speaker 1: are not small businesses. Well, the whole thing is is
Speaker 1: a little bit crazy because they're going to have to
Speaker 1: try to write these rules and somehow distinguished between all
Speaker 1: the hedge funds, all the private equity guys, all the
Speaker 1: people UH present company included, perhaps who could just simply
Speaker 1: turn ourselves into a pass through to be eat the system.
Speaker 1: I want to back up, you were the cars are, etcetera.
Speaker 1: I know you hate that phrase. I don't care. You
Speaker 1: were the cars are, and you had to herd cats
Speaker 1: across many institutions in Washington. If you were the texts are. Now,
Speaker 1: given your tangible, real world experience in the trenches of
Speaker 1: the Beltway, what would you do is texts are? Well?
Speaker 1: For first of all, I was able to succeed is
Speaker 1: cars are because I didn't have to deal with Congress.
Speaker 1: Taxes you have to go to Congress. But let's assume,
Speaker 1: let's assume you don't look. There's no doubt that the
Speaker 1: tax code is riddled with problems. The corporate side of
Speaker 1: the tax code creates all the wrong incentives, all kinds
Speaker 1: of distancentives to invest here, to locate here. You would
Speaker 1: certainly change that. Around the personal side, there's a certain
Speaker 1: number of deductions, uh, certain of loophole's. You know, the
Speaker 1: six Tax Act did a pretty good job, still amazingly enough,
Speaker 1: of cleaning out the worst of the shelters. So I
Speaker 1: would I would eliminate a bunch of individual deductions. I
Speaker 1: would fix the corporate tax code. I would try to
Speaker 1: lower rates, but I would do it on a deficit
Speaker 1: neutral basis. And I knew I knew you were going
Speaker 1: knew I was going to say, I've seen a single article,
Speaker 1: Tax Policy Center, Joint Tax all the other experts on this.
Speaker 1: That's a pipe dream to be deficit neutral, right, Why
Speaker 1: is that a pipe dree I'm asking you. I'm asking you. No, Look,
Speaker 1: it's not a pipe dream. It's easy enough to do.
Speaker 1: You just have to not cut some taxes as much.
Speaker 1: And and the problem is that the deficit has been
Speaker 1: going is going up at the moment on the order
Speaker 1: of the say very round numbers a hundred billion dollars
Speaker 1: a year. We're on the wrong end of the expansionary cycle.
Speaker 1: This is not a time for a stimulative tax cut.
Speaker 1: It's just not in here. Yeah, I want to follow
Speaker 1: on that because obviously you spent all your time looking
Speaker 1: at financial markets. What's the danger that we see interest
Speaker 1: rates rise more than they should because you've raised the
Speaker 1: deficits significantly, and then you run into a problem where
Speaker 1: you're working against yourself. Well, well, by definition, interest rates
Speaker 1: full rise more than the otherwise would have. It has to.
Speaker 1: It's just math. But what the but what the sort
Speaker 1: of uh conservatives for lack of a better word, want
Speaker 1: you know want in fact is a tighter fed policy
Speaker 1: and a lucio fiscal policy that that was the recipe
Speaker 1: back in the Reagan years, and it's the recipe again today.
Speaker 1: I don't particularly see the argument for piling on more
Speaker 1: debt that we're going to leave to our kids. Okay,
Speaker 1: but within that tandem to review, they want a bigger deficit.
Speaker 1: What do you mean by tighter FED policy? They want
Speaker 1: more rate hikes, they want a more restrictive monetary policy. Sure.
Speaker 1: I mean, if you look at the tailor rule and
Speaker 1: what low rate don it's low rate Janet, low rate Donald,
Speaker 1: it's but Janet is leaving and Donald absolutely is a
Speaker 1: low rate guy. But I didn't say I didn't say Donald.
Speaker 1: I said the conservatives, the traditional sort of fairly hard
Speaker 1: right conservatives. They hated the Quei. They want that gone
Speaker 1: and done. They think rate should have gone up sooner,
Speaker 1: keeven Kevin Warsh. They have power in Steve Ratner's Washington
Speaker 1: to the conservatives of know. What's what's so interesting is
Speaker 1: that the president made his choice and uh and I
Speaker 1: wrote a p about it, one of the one much
Speaker 1: to my happy surprise, he actually picked the right guy,
Speaker 1: and he made it. He took a stand against Mike Pence,
Speaker 1: who wanted John Taylor, against the traditional conservatives who wanted
Speaker 1: uh John Kevin Worsher, John Taylor type, and he picked
Speaker 1: someone who's, you know, not that different from Janet Yellen
Speaker 1: and that's great. Well, where do they go from here?
Speaker 1: Do you think? Do they continue with traditional um, well
Speaker 1: known kinds of people or do they put a Trump
Speaker 1: agenda in there into the Fed? I don't, I don't know.
Speaker 1: You know, sometimes it becomes like Noah's Ark, where if
Speaker 1: you give one faction somebody, then you have to give
Speaker 1: the other faction somebody to exactly that's exactly you need
Speaker 1: a Republican um. So we'll see where it goes. But
Speaker 1: the chairman, as you know, uh, the last time a
Speaker 1: chairman was outvoted was Bill Miller in seventy something or another.
Speaker 1: I was actually covering it back then. So the chairman
Speaker 1: wheel is enormous power, enormous influence. Don't you hate it? Tom?
Speaker 1: And he knows more about reporting than we do. I
Speaker 1: don't know more, but I did it for a good while.
Speaker 1: William Miller is a lot of people. But this is
Speaker 1: that brings up a good point, Steve. Right now, the
Speaker 1: collective memory of Washington is about one election ago. They
Speaker 1: really don't have a memory of vulgar. They don't have
Speaker 1: a memory that nobody. They don't have a memory of
Speaker 1: mckchesley Martin. I mean, there's there's really no historical memory
Speaker 1: that is that that is true on tax reform, What
Speaker 1: should we look for next? We've had the Senate trot
Speaker 1: out what are you looking for into the weekend of
Speaker 1: the Sunday talk shows and then into the holiday season.
Speaker 1: I'm not sure too well. They certainly hope to pass
Speaker 1: something in the holiday season. I look at what we're
Speaker 1: obviously looking for is to see uh in individual senators
Speaker 1: and then the Republicans who are in the bluer states
Speaker 1: where there are state and local tax deduction issues there
Speaker 1: that Peter called Peter King has made his position clear,
Speaker 1: But to why watch these swing voters, because it's gonna
Speaker 1: be like healthcare, We're gonna have to they're gonna have
Speaker 1: to be counting votes, and they're gonna have to be
Speaker 1: counting votes in the House this time as well as
Speaker 1: the Senate. The House wasn't so hard for them last time.
Speaker 1: But there are a number of Republicans. Some people say
Speaker 1: it's twenty, some thirty, some thirty some forty. We don't
Speaker 1: know who who could well be influenced by the salt issue.
Speaker 1: And then on the Senate side, it's, you know, it's
Speaker 1: a bit of a director set. You've got you've got
Speaker 1: to you've got to assemble fifty and if you and
Speaker 1: if one drops out, you've got to find another one
Speaker 1: and put in their place. So the trade off between
Speaker 1: the estate tax and the other kinds of things, Corker
Speaker 1: and his deficit concerns, they're gonna have to try to
Speaker 1: juggle all that and come up with fifty votes. And
Speaker 1: that's what we're gonna be watching. Well, since you come
Speaker 1: from both worlds political and financial, um, do you think
Speaker 1: that this is uh going to be a situation where
Speaker 1: Republicans are so desperate for a win it won't matter
Speaker 1: what's in the bill, They'll just pass something. I think
Speaker 1: if we're up to the White House, that would be
Speaker 1: the case. And probably even the leadership they are desperate
Speaker 1: for a bill because if they don't get this bill done,
Speaker 1: and perhaps if they don't get this bill done this year,
Speaker 1: then they could end up going to the eighteen elections
Speaker 1: with nothing, and that is something that terrifies the leadership.
Speaker 1: The rank and file. They have to worry about their
Speaker 1: own skins. They're not worried so much about the party
Speaker 1: because I let me say one last thing. The Virginia
Speaker 1: results and all the other results that happened that day
Speaker 1: could be a watershed here because it was a message
Speaker 1: and it may well influence a number of Republicans who
Speaker 1: are on the edge as to whether vote for another
Speaker 1: program that, by the time it's over, in my prediction,
Speaker 1: will be as unpopular as their healthcare play. And Steve,
Speaker 1: this is the distrust that Mike brought up on passers
Speaker 1: at the beginning. Mike and Steve, have you got nothing
Speaker 1: to do this weekend? Out in East Hampton South, there's
Speaker 1: a thirty million dollar unit, and the headline here and
Speaker 1: thirty million dollars is it's two thousand eight square feet,
Speaker 1: uh two bedroom to bath. So the headline here is
Speaker 1: it's on three point six acres, which is how you
Speaker 1: get out to thirty million dollars. Rob Urban has a
Speaker 1: phenomenal Bloomberg story how they're already game in the system.
Speaker 1: They're gonna turn vacation homes into investment properties to get
Speaker 1: around the legislation. Our audience believes the fancy guys like
Speaker 1: you and others are going to gain the system. Why
Speaker 1: will that not happen? Uh, it will happen, and it
Speaker 1: always happens. And the problem with this tax bill is
Speaker 1: that in some ways it makes it more complicated than
Speaker 1: less because of the past. Through is because of all
Speaker 1: these rules, and if you really genuinely wanted to reform
Speaker 1: the tax code, you'd get rid of a lot of
Speaker 1: this stuff that allows people to game the system. But
Speaker 1: they're not doing that. Mike, this property says you. Actually
Speaker 1: it's idyllic. It's an idyllic property. Well, I read that.
Speaker 1: When I read the Senate bill last night. My first
Speaker 1: thought was I should incorporate as a limited partnership or
Speaker 1: limited liability corporation and buy a house through the corporation
Speaker 1: because the state and local tax deduction remains for companies
Speaker 1: even though individuals losing. So, I mean, you can see
Speaker 1: the route to gaming this just laid out. We're trying
Speaker 1: to give you perspective on some of these events, including
Speaker 1: tax reform now, and really get away from the cliches
Speaker 1: that are out there. You can do that with Stephen
Speaker 1: Ratner will It Advisors, Michael, When you start us off, well,
Speaker 1: I was going to ask him a non tax question
Speaker 1: because I noted the story, and and you had Harvard
Speaker 1: football coach on yesterday to Murphy, there's a possibility of
Speaker 1: a seven way tie in the eight team IVY League
Speaker 1: in football this year for first place. There's only one
Speaker 1: team that's winless at the bottom of the conference that
Speaker 1: cannot possibly tie Brown University. Now Brown University graduates. Stephen
Speaker 1: Ratner is with you've done your homework. You know when
Speaker 1: I was at Brown, we were pretty much winless. The
Speaker 1: only team that was worse was Columbia, And so I
Speaker 1: guess we're right back where we started from. Tom Tom,
Speaker 1: and I well, Columbia three and two started from they
Speaker 1: have they have turned things around. We were doing college
Speaker 1: football today since we we thought we would. We get
Speaker 1: your contribution in there. Thank you for sharing um the
Speaker 1: the The distinguished journalist John Hartwood from The New York
Speaker 1: Times and a competitor of ours, did an interview yesterday
Speaker 1: with Gary Kohne in which Gary Cohne suggested that the
Speaker 1: tax reform plan will be a perfect example of trickle
Speaker 1: down economics. By helping the rich and businesses, it will
Speaker 1: mean higher pay for the average worker. From what you've seen,
Speaker 1: do you think there's any truth to that, well, you know, look,
Speaker 1: there's a little bit of truth to it. But it's
Speaker 1: now been hotly debated or relitigated within the economics community
Speaker 1: for the last few weeks, as you guys have undoubtedly
Speaker 1: followed and saw on it, and I think by far
Speaker 1: the better argument is that the is that the share
Speaker 1: of any kind of corporate tax cut that would actually
Speaker 1: go to the workers versus go to the capitalists like
Speaker 1: myself is very small. This idea that it's going to
Speaker 1: raise family incomes by four thousand dollars, and all this,
Speaker 1: I think has been has been thoroughly and completely proven
Speaker 1: to be ridiculous. So does it Who gets something out
Speaker 1: of this? Obviously there's a lot in there for Donald
Speaker 1: Trump and his family, but who else? Owners of capital
Speaker 1: get a lot out of this? And if you want
Speaker 1: to know why the stock market is up seventeen percent
Speaker 1: or wherever it is at the moment for the year,
Speaker 1: a lot of this obviously, and part of why it's
Speaker 1: been week the last few days as anticipation of a
Speaker 1: significant corporate rate cut that would flow right down directly
Speaker 1: to the EPs line, ray share prices and those of
Speaker 1: us who own shares, which is a relatively small fraction
Speaker 1: of the country would be a good bit better off.
Speaker 1: The debate I find extraordinary, and it is to me
Speaker 1: a debate of a plutocracy. Are we a national plutocracy?
Speaker 1: It's interesting, I think, and this is gonna sound very partisan,
Speaker 1: but I think the Republicans have managed to operate as
Speaker 1: a plutocracy while pretending that they are something else that
Speaker 1: there for the middle class, that they want to help
Speaker 1: the average American, they want to help the forgotten Trump voter, whatever.
Speaker 1: But as we saw in healthcare, people didn't ultimately buy it.
Speaker 1: And I think in the case of tax reform, as
Speaker 1: this unfolds, as you get more and more dispassionate and
Speaker 1: now you know nonpartisan analyses from Tax Policy Center and
Speaker 1: Committee for Responsible Federal Budget and people like that, I
Speaker 1: think that the public will figure out that there is
Speaker 1: nothing in this tax plan for them of any consequence.
Speaker 1: Greg Ville leads is the Zack Seos today with the
Speaker 1: basic idea after Virginia that Republicans are in panic, and
Speaker 1: there's levels of panic that I understand. Virginia's its own demographics.
Speaker 1: Can you extrapolate political Virginia to the rest of the
Speaker 1: Republican nation, Well, I think there's two. I think there's
Speaker 1: two implications that I mentioned. First, as I said earlier,
Speaker 1: I think they are in panic. I think Virginia is
Speaker 1: not unique, it's a it's actually a purple state. It's
Speaker 1: very reflective of the country, and I think this is
Speaker 1: what happened there, I think is scary to many Republican legislators,
Speaker 1: and I think it is going to lead them to
Speaker 1: be more careful and how how blindly they simply follow
Speaker 1: these silly policies. And then secondly, yes, the House of
Speaker 1: Representatives is jerrymannerd. We all know that. But there have
Speaker 1: been studies done that if the Democrats get say a
Speaker 1: three percent higher votes share than the Republicans, they could
Speaker 1: take the House. And right now, if you look at
Speaker 1: the polls, the public is giving the Democrats a much
Speaker 1: higher votes share than that. So I think there is
Speaker 1: I think there's a better than fifty fifty chance at
Speaker 1: the House flips, and if the House flips, the game changes.
Speaker 1: When when as an investor do you start taking that
Speaker 1: into account? Look, this is, this is you know, this
Speaker 1: is we need an hour for this, and it's a
Speaker 1: very complicated. It's very complicated work. It's very complicated. We've
Speaker 1: studied this bullmarket endlessly and I could argue both sides
Speaker 1: of it, but yeah, we take it into account. We're
Speaker 1: being cautious, we're being careful. We're not plunging into into
Speaker 1: deep water. Thank you guys, fun as always, great Mike,
Speaker 1: what did you take out of it? I mean, to me,
Speaker 1: it's it's I don't know. I still don't understand how
Speaker 1: they get this done before twelve three? You I just
Speaker 1: can't get there, can you? Um? Well, I think the
Speaker 1: argument is that they're so desperate to get something done
Speaker 1: that they will make compromises they might not otherwise make.
Speaker 1: The biggest one you gotta try to figure out how
Speaker 1: they're gonna do is the state and local tax deduction.
Speaker 1: Because the Republicans in the House in California, New Jersey,
Speaker 1: New York states like that, they can't vote for it
Speaker 1: or I mean, they're signing their own political death ward.
Speaker 1: So how do you compromise on that and then make
Speaker 1: up the differences of the money that you lose? How
Speaker 1: I go to Mr Rattlers comment on one point five
Speaker 1: trillion dollar whole, and then you even go from there,
Speaker 1: I mean, how do they how do they get there?
Speaker 1: They've gotten there in the last twenty four hours. I
Speaker 1: believe they modeled out something at one point four or
Speaker 1: five trillion or something. Sure that will change by the
Speaker 1: time we end the show today. Michael McKeon for David,
Speaker 1: I'm Tim Keene and to be honest on a November, cold,
Speaker 1: November morning, Michael, it's too late to be the book
Speaker 1: of the year, but this is without question the lead
Speaker 1: candidate to be my book of next summer. How Global
Speaker 1: Currencies Work, Past, Present, in future. A gentleman of named
Speaker 1: Harold James at Princeton University just says this could be
Speaker 1: the new standard. This is the book that everyone on
Speaker 1: Global Wall Street will be reading in two thousand eighteen. Mike,
Speaker 1: you will go on an airplane and up in fancy class.
Speaker 1: There will be one, two and three copies of this
Speaker 1: for needed airplane reading. I can Green, mel and T
Speaker 1: two How Global Currencies Work Berry Iken Green joins us,
Speaker 1: the esteemed historian from Berkeley Berry. How does this book
Speaker 1: differ from exorbitant Privilege? How does it differ from your
Speaker 1: classics Golden Fetters and globalizing capital? Uh? Thank you for
Speaker 1: bringing it to your your audiences. Attempt and Tom it
Speaker 1: differs in two ways. Number one, it is more systematic
Speaker 1: about the evidence, so the book is full of facts
Speaker 1: and figures, new ones, both historic and current, about the
Speaker 1: roles of the dollar and its rivals. And number two
Speaker 1: are views of the future have changed, so we're more
Speaker 1: optimistic about the Euro. I think people have been too
Speaker 1: pessimistic about the prospects of the Euro as a global currency.
Speaker 1: On the other hand, were more guarded or cautious about
Speaker 1: the Chinese. Friendly and b Your book has a cover
Speaker 1: of an E. Howard watch company, Boston, Massachusetts. I'm going
Speaker 1: to say an ancient movement of of a pocket watch.
Speaker 1: Is it a well running Swiss watch system? Does the
Speaker 1: system work well? The system is still ticking. Um, I
Speaker 1: think uh, we have to worry about the stability of
Speaker 1: the mechanism. Um. Things could go wrong to undermine confidence
Speaker 1: in the dollar, from another debt ceiling embrolio to UH
Speaker 1: foreign policy problems between the US and its allies. I
Speaker 1: do think the Euro has put the worst behind it,
Speaker 1: but the Chinese still have big challenges in terms of
Speaker 1: currency internationalization that they have insolved, and how the world
Speaker 1: will cope with three with multiple global currencies. Only time
Speaker 1: will tell how being how has the world been coping
Speaker 1: so far? I mean, the Chinese got into the to
Speaker 1: the SDR basket at the i m F last year,
Speaker 1: doesn't seem to have made a whole lot of difference.
Speaker 1: As near as I can tell. The amount of men
Speaker 1: be traded UM has gone down over the last year.
Speaker 1: You're right, Michael, that it's still a dollar centered, dollar
Speaker 1: centric world. That the Renman b has made negative progress,
Speaker 1: if you will, not only in terms of foreign exchange trading,
Speaker 1: but on every other metric of global currency nous. The
Speaker 1: Chinese haven't yet built deep in liquid markets. Uh. The
Speaker 1: overnight announcement about bank internationalization will help, but it won't
Speaker 1: solve that problem at a stroke. And they have a
Speaker 1: big problem in terms of stability. The market is volatile
Speaker 1: and confidence that people inevitably have questions about contract enforcement
Speaker 1: and rule of law in China. What do you think
Speaker 1: of the decision today by the Chinese to open up
Speaker 1: to the their financial system to outsiders. Is that going
Speaker 1: to materially change the use of their ENMNB or people
Speaker 1: still gonna want to just um convert because capital controls.
Speaker 1: You know, they can't trust the Chinese. You can put
Speaker 1: bring your money in, but you might not be able
Speaker 1: to bring it back out. I don't think it will
Speaker 1: materially change anything in the short run. It will take
Speaker 1: time for foreign banks to come in and purchase majority stakes.
Speaker 1: That fact will take more time to change the behavior
Speaker 1: of the banks and how they relate to the state
Speaker 1: and to state owned enterprises. So the experience of other
Speaker 1: countries has shown that foreign bank presence is a good thing.
Speaker 1: It's a stabilizing thing that helps with market liquidity and stability.
Speaker 1: But not overnight. Well then, um, how soon or you know,
Speaker 1: do we at all see the Chinese currency gain enough
Speaker 1: market share that we talked about it seriously as a
Speaker 1: third global reserve currency. If you asked me six or
Speaker 1: seven years ago when I put out that booking sort
Speaker 1: but and privilege, I would have probably hazarded the guests
Speaker 1: within within a decade. I'm more guarded now. I think
Speaker 1: it will take a generation before the Renman b begins
Speaker 1: to play the kind of global role that the dollar does.
Speaker 1: Arry I con agreed with us the professor of Berkeley,
Speaker 1: right down the hall from Brad DeLong, how global currencies
Speaker 1: work past present in future. How often do you run
Speaker 1: into Brad DeLong? Are you like two ships passing in
Speaker 1: the night. Are you having coffee every morning arguing with
Speaker 1: each other? No, we passed mainly in the hallway in
Speaker 1: the seminar room, but um Brad ducks into my office.
Speaker 1: That's not an argument. But it's so long, uh discussions.
Speaker 1: So that's really one of the pleasures of being academic.
Speaker 1: We have time and we have those colleagues. Interesting. Interesting
Speaker 1: Barry with the question that Mike head there on on
Speaker 1: what we're doing with the dollar? Where do we stand
Speaker 1: on our fiscal moment in this United States? You know
Speaker 1: Reagan deficit GDP. Now we're out paste depends you measure
Speaker 1: in folks, But we've piled on a lot of debt.
Speaker 1: Does that give pause to bury Ion Green? It gives
Speaker 1: me great pause. I'm not a believer that there is
Speaker 1: some threshold level of debt like GDP, after which you
Speaker 1: you reach a tipping point. But I do think we
Speaker 1: need to be worried about the longer term fiscal projections
Speaker 1: put out by the CBO and others, about social security liabilities,
Speaker 1: about state and local pension liabilities. So given that, given
Speaker 1: that we're in a near full employment economy, now is
Speaker 1: not the time to be cutting taxes and incurring another
Speaker 1: one five killion dollars of debt. There's a an argument
Speaker 1: made that that level um came by the book. This
Speaker 1: time it's different by Ken Rogoff and Company, that the
Speaker 1: US is serve exempt from that. We're we're the exception
Speaker 1: to the rule because there's economy like US and we
Speaker 1: have the world's reserve currency. Do you do you put
Speaker 1: much credence in that? Is that part of the reason
Speaker 1: you are less worried. I think we do have more
Speaker 1: room to run because we have this additional source of
Speaker 1: demand for our treasury bonds, which is foreign central banks
Speaker 1: and global investors, until we get to the point where
Speaker 1: that fan drives up in a confidence crisis. So we're
Speaker 1: not exempt from the eventual confidence crisis if if we
Speaker 1: court it. Very I can read with us as we celebrate,
Speaker 1: as he mentioned, a detailed book, a dense book, and
Speaker 1: I mean that in a good way, how global currencies
Speaker 1: work past president in future. To give you the idea
Speaker 1: of the scope and scale, Professor I Can Green and
Speaker 1: his team open with Angus Madison and Mr Kindleberger Charles
Speaker 1: Kindleberger of m I T, two of the giants of
Speaker 1: the history of all the stuff we talk about UH,
Speaker 1: and it's really just an immediate read as he goes
Speaker 1: from currency to currency prospects for the Renminbi, the role
Speaker 1: of currencies in foreign trade, which maybe Mike is something
Speaker 1: we can talk about. We are with very Green and
Speaker 1: Berkeley truly in celebration of our global currencies work, past, present,
Speaker 1: in future. Very unquantitative tightening your lecturing at Berkeley right now,
Speaker 1: what does that phrase mean? If we have a move
Speaker 1: from QA, are we going to something like quantitative tightening?
Speaker 1: If we were about to see the FED and other
Speaker 1: central banks actively shrinking their balance sheets and selling securities
Speaker 1: they hold into the markets, then yes, I think we
Speaker 1: would worry about quantitative tidening, tightening and big negative impacts
Speaker 1: on securities markets. But the fact of the matter is
Speaker 1: there simply allowing UH securities to roll over, their roll
Speaker 1: off their portfolios as they mature, and they're not actively
Speaker 1: selling into the market. So I wouldn't I wouldn't at
Speaker 1: this point, And guess what Ben Bernanke says, Yeah, Um,
Speaker 1: there is still some concern though about you know, we
Speaker 1: saw rates come down when the FED was buying security,
Speaker 1: so why shouldn't rates go up? When they are no
Speaker 1: longer buying them, and to a certain extent probably uh
Speaker 1: selling them. Well, the FEDS stopped buying quite some time ago.
Speaker 1: Now they're you know, they're talking about balance sheet reduction. Uh.
Speaker 1: And the issue is are they going to do it
Speaker 1: actively or passively? And for all intents and purposes, the
Speaker 1: answer is passively, so you're not worried about rates moving
Speaker 1: higher or in a destabilizing manner. I don't think the
Speaker 1: FED would be the trigger for them moving higher. If
Speaker 1: there was news about the labor market, for example, in
Speaker 1: wage just began to take off, that would be a
Speaker 1: different story. But the FED would not be the trigger
Speaker 1: for them. Professor, we have models that we've all learned,
Speaker 1: and some like you have learned them better than and
Speaker 1: most everyone else. I'll go back to Hicks I s
Speaker 1: LM model just as one classic economic system maybe marshal
Speaker 1: of years ago. Did those models work now? Or is
Speaker 1: Barry Ike and Green's international system become so supple, so rapid,
Speaker 1: so fast that the traditional models just don't work. We
Speaker 1: really had a wake up call in two thousand seven,
Speaker 1: two and eight that the models work imperfectly. I would
Speaker 1: defend those old school models. Is pretty pretty much still
Speaker 1: the best thing going, but I would be reluctant to
Speaker 1: hang my hat on them. I think progress is being
Speaker 1: made through big data and computation and applying microeconomic data
Speaker 1: to macro economic questions. So that's a different kind of modeling.
Speaker 1: I'm wondering, Um, we were we were just talking about
Speaker 1: we were kidding, well kidding, but we're talking about Shohaio Tani,
Speaker 1: the Japanese baseball player. But I'm wondering it has been
Speaker 1: wondering about the end at this point. The President was
Speaker 1: just over there and he's talking with Shinzo Abi, and
Speaker 1: you know, it just seems like Japan is treading water. Um,
Speaker 1: they don't get any better, they don't get any worse. Uh,
Speaker 1: their personal you know, their per capita GDP gets a
Speaker 1: little bit better, so people remain relatively happy. And yet um,
Speaker 1: the end still is one of the most used currencies
Speaker 1: in the world, and is everybody's out of the dollar
Speaker 1: favorite haven. Does that continue over the long term we
Speaker 1: were talking about, you know what happens with the red
Speaker 1: nd B. Does the end continue to be play the
Speaker 1: role that it has played? If there ultimately is the
Speaker 1: um the Japanese debt crisis that some people have been
Speaker 1: betting on in that we don't make or trade for
Speaker 1: decades now, then the end falls out of favor. But
Speaker 1: I think if Japan continues to cruise along under the
Speaker 1: radar where they wrote decently given their demographics, where the
Speaker 1: central bank does begin to bring inflation up towards two,
Speaker 1: then I think the yen remains where it is not
Speaker 1: the leading global currency but one of the players. Very
Speaker 1: thank you so much, Professor Green. Folks out with the
Speaker 1: jewel with ar Nold, Bill and Olivia should do how
Speaker 1: global currencies work past present in future. There's two kind
Speaker 1: of Iken Green books. There's sort of a thicker wandering book,
Speaker 1: which are fabulous, they're all great books. And then there
Speaker 1: this is a new addition to that series of shorter
Speaker 1: dnser two hundred page jewels with an emphasis on the
Speaker 1: word denser and the reason. But read these if you
Speaker 1: learn something every three pages. It's written that tightly, and
Speaker 1: you see that. Michael mckeeon how global Currencies work. I
Speaker 1: hate Michael Barry, hate Berry. I can Green because instead
Speaker 1: of watching Lions Browns, I have to read How Global
Speaker 1: Currencies Work this weekend. Well, you can read the book
Speaker 1: because all you need is like a quarter just to
Speaker 1: see the lions. Did see the lions? And I can
Speaker 1: watch it with a sound off. Maybe I'll get through it.
Speaker 1: Berry Green, thank you so much how global currencies work.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
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Speaker 1: platform you prefer. I'm on Twitter at Tom Keene. David
Speaker 1: Gura is at David Gura. Before the podcast, you can
Speaker 1: always catch us worldwide. I'm Bloomberg Radio