WEBVTT - Surveillance: The Phillips Curve Is Still In Play, Posen Says 0:00:00.080 --> 0:00:12.960 Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane 0:00:13.480 --> 0:00:17.560 jay Ley. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:34.760 Bloomberg dot Com, and of course on the Bloomberg. This 0:00:34.840 --> 0:00:38.280 is without question the interview of the day. And I 0:00:38.320 --> 0:00:42.600 should say Arthur and immense, immense honor Arthur Lovitt, who 0:00:42.600 --> 0:00:44.720 you know how he comes on, Chairman of the former 0:00:44.800 --> 0:00:48.560 chairman of the SEC. Arthur Lovitt leveled the playing field 0:00:48.560 --> 0:00:52.120 for the individual investor and the vicinity of the seventies 0:00:52.200 --> 0:00:55.240 and into the nineteen eighties. And he did it with 0:00:55.360 --> 0:00:59.280 John Poke. Arthur, you wrote the foreword for the Clash 0:00:59.440 --> 0:01:04.600 of the Cult investment versus Speculation. For John Bogel, he 0:01:04.840 --> 0:01:08.520 changed how all of us think of money, didn't he? Yes, 0:01:08.600 --> 0:01:13.560 he did. He was a real master in terms of 0:01:14.440 --> 0:01:21.319 understanding the costs of money, something frequently overlooked by investors, 0:01:21.400 --> 0:01:26.680 particularly with respect too mutual funds. Those fees that are 0:01:26.800 --> 0:01:31.520 upfront and seems so minute, are so massive in terms 0:01:31.560 --> 0:01:35.840 of their implication of loss or gain. And Bogel was 0:01:35.880 --> 0:01:39.520 the one who pioneered that from his beloved home in 0:01:39.640 --> 0:01:45.200 Lake Placid, New York. Uh he wrote about accounting standards 0:01:45.280 --> 0:01:51.680 and fought fearlessly for stronger accounting standards so that investors 0:01:51.680 --> 0:02:00.680 could understand the implications of one funds costs over another. So, Arthur, 0:02:00.960 --> 0:02:04.560 obviously you know just a you've had such a wonderful 0:02:04.600 --> 0:02:07.840 long term relationship with Mr Boga. What do you think 0:02:07.880 --> 0:02:12.400 his lasting legacy will be for the individual investor in 0:02:12.440 --> 0:02:20.320 the marketplace? I think, above all else h he has 0:02:20.440 --> 0:02:28.480 taught the last vast array of individual investors the true 0:02:28.600 --> 0:02:35.080 costs of their investments. How minute changes and fees have 0:02:36.080 --> 0:02:41.560 massive implications in terms of loss or gain. And I 0:02:41.600 --> 0:02:49.200 think even today, the knowledgeable investor gravitates towards uh the 0:02:49.480 --> 0:02:56.920 Vanguard fund formula of the lowest possible costs. And I 0:02:57.080 --> 0:03:05.639 think that the vast number of sophisticated, knowledgeable investors understand that, 0:03:05.760 --> 0:03:11.160 and that accounts for the extraordinary success of Vanguard funds. 0:03:11.240 --> 0:03:18.240 It was ironical that Jack, because he spoke so openly 0:03:18.360 --> 0:03:24.519 and fearlessly and not necessarily with discretion, was pushed from 0:03:24.560 --> 0:03:30.440 the management of Vanguard Funds and operated solely out of 0:03:30.480 --> 0:03:35.520 his home both here and both in the East Coast 0:03:35.640 --> 0:03:39.040 end up in Lake Placid. So you know, it's it's amazing, Arthur. 0:03:39.200 --> 0:03:42.720 If we think about it today, it's almost common knowledge 0:03:42.800 --> 0:03:46.200 or accepted knowledge about index funds and ets tied to 0:03:46.280 --> 0:03:49.160 index funds and minimizing fees. But when you go back 0:03:49.160 --> 0:03:52.040 and you take a look at Mr Bogel's career, it 0:03:52.160 --> 0:03:55.400 was so radical in the mid seventies what his thinking was. 0:03:55.480 --> 0:03:59.800 He came from the traditional mutual fund business, Wellington one 0:03:59.800 --> 0:04:02.320 of the big bohemus still today about the traditional muti 0:04:02.400 --> 0:04:05.280 fund business. But it really wasn't in the mid seventies 0:04:05.320 --> 0:04:08.440 early seventies when he brought this concept of indexing and 0:04:08.480 --> 0:04:12.040 focusing on costs. It really was radical back then, wasn't it. 0:04:12.040 --> 0:04:15.720 It was radical because the vast majority of investors like 0:04:15.880 --> 0:04:20.080 to pick and choose among the array of stocks available 0:04:20.160 --> 0:04:23.480 to them, and it took an index fund, which really 0:04:24.080 --> 0:04:26.839 mimic the market as a whole, to be sold as 0:04:27.600 --> 0:04:32.560 a single unit, and a huge number of investors have 0:04:32.720 --> 0:04:37.960 gravitated towards that and have come to understand the implications 0:04:38.080 --> 0:04:43.680 of fees as critical in terms of whether they win 0:04:43.800 --> 0:04:47.520 or lose in the market. Yeah, it's just h yeah, 0:04:47.520 --> 0:04:49.479 you're right, you're exactly right. It's just amazing kind of 0:04:49.520 --> 0:04:52.760 how that evolved and kind of where we are today 0:04:52.880 --> 0:04:56.560 and some of your more recent conversations with him, UM, 0:04:56.640 --> 0:05:00.400 what were his thoughts about where he thinks invest will 0:05:00.440 --> 0:05:03.080 go should go, the role of the individual investor, the 0:05:03.160 --> 0:05:05.359 role of the hedge fund. How did he kind of 0:05:05.480 --> 0:05:09.159 envision how maybe individual investing what will trend going forward. 0:05:09.720 --> 0:05:16.279 I think that he hoped and believed that the individual 0:05:16.320 --> 0:05:20.480 investor would take over more of the control of how 0:05:20.560 --> 0:05:28.120 they invest using funds rather than picking and choosing stocks. 0:05:28.960 --> 0:05:33.520 I think he had he had such a firm belief in, 0:05:34.360 --> 0:05:38.880 uh mimicking the market as a whole rather than trying 0:05:38.920 --> 0:05:43.560 to pick stock A or sell stock B. And I 0:05:43.600 --> 0:05:46.960 think he felt that with the growth of Vanguard and 0:05:47.000 --> 0:05:52.239 the success of Vanguard and the embrace of other funds 0:05:52.240 --> 0:05:56.440 in the same concept, the market was going to continue 0:05:56.480 --> 0:06:00.320 to move in that direction and that passive and nesting 0:06:00.560 --> 0:06:07.640 was going to overtake and really beat out individual stock picking. 0:06:08.839 --> 0:06:11.480 Arthur Levitt, thank you so very much for you know, 0:06:11.640 --> 0:06:14.960 giving us your perspective on the life in the impact 0:06:15.000 --> 0:06:18.840 of John Bobel, founder of Vanguard Group. UM. You know, 0:06:18.839 --> 0:06:38.200 obviously revolutionary figure in the world of individual investing. We 0:06:38.240 --> 0:06:41.040 wrap up the earning season on Wall Street with Morgan Stanley. 0:06:41.080 --> 0:06:43.920 Those numbers are imminent when they drop across the Bloomberg 0:06:44.120 --> 0:06:46.000 will bring you some of the headlines and some of 0:06:46.000 --> 0:06:48.520 the commentary once the earnings called starts a little bit 0:06:48.560 --> 0:06:51.560 later this morning. So worldwide, you've got to say, the 0:06:51.600 --> 0:06:54.880 recession fears of December to some investors at least already 0:06:54.880 --> 0:06:57.960 feeling like a distant memory. We've had the C suite 0:06:58.000 --> 0:07:01.960 on Wall Street speaking pretty optimistically about nineteen, seeing few 0:07:01.960 --> 0:07:04.919 signs of an imminent turned down. So what's ahead for 0:07:05.000 --> 0:07:07.920 this market? Jane Foley joining US Rabba bankhead of ex 0:07:08.000 --> 0:07:11.760 Strategy and senior currency analyst. We have faded much of 0:07:11.800 --> 0:07:15.960 December already, Jane, before the data has validated that move, 0:07:16.120 --> 0:07:18.800 especially over in China and in Asia as well. Your 0:07:18.800 --> 0:07:22.800 thoughts on that, well, to be honest, I still think 0:07:22.840 --> 0:07:26.080 that December really didn't mark a change in market sentiment. 0:07:26.120 --> 0:07:28.080 The market really did take on board that the slower 0:07:28.480 --> 0:07:31.680 slowing global growth, particularly with respect to the US economy. 0:07:31.760 --> 0:07:34.080 But I think as we've moved into January, I think 0:07:34.080 --> 0:07:36.480 the market is beginning to focus more on what that 0:07:36.560 --> 0:07:38.480 has meant for Europe. And what we've seen, of course 0:07:38.560 --> 0:07:42.240 is slower data from Germany. We've seen a talk of 0:07:42.280 --> 0:07:45.160 even a technical recession in Germany at the end of 0:07:46.040 --> 0:07:48.960 last year. That may not happen. The indication that we 0:07:49.040 --> 0:07:50.960 got from the German authorities is that we what we 0:07:51.000 --> 0:07:52.960 saw in the second half of last year, we're just 0:07:53.320 --> 0:07:56.800 very moderate next to no growth, and hence we have 0:07:56.920 --> 0:07:59.840 the sparring match, if you like, in Eurodonna with the 0:08:00.000 --> 0:08:03.800 fundamentals of both of those major currencies haven't deteriorated. So 0:08:03.920 --> 0:08:06.720 what's driving europe dollar? What are the dominant forces they're 0:08:06.720 --> 0:08:09.360 going to drive that currency pair over the several the 0:08:09.440 --> 0:08:12.440 next several months. Jane, you know, I think it's a 0:08:12.440 --> 0:08:15.000 it's another sisters competition. I think it's it has been 0:08:15.000 --> 0:08:17.760 for quite some times, some weeks at least, pretty easy 0:08:17.800 --> 0:08:21.800 to put together a deteriorated version of fundamentals for the 0:08:21.840 --> 0:08:25.400 dollar in terms of slower growth, concerns over fed policy, etcetera. 0:08:25.480 --> 0:08:27.800 But I think over the next few weeks and the 0:08:27.800 --> 0:08:29.760 market really does need to come to terms of what 0:08:29.840 --> 0:08:31.400 does that mean for the ECB, what doesn't that mean 0:08:31.440 --> 0:08:33.840 for European growth? And we do have an ECB policy 0:08:33.880 --> 0:08:37.160 meeting coming over the next week or or two, and 0:08:37.360 --> 0:08:39.800 that's going to be important because you know, the the 0:08:39.840 --> 0:08:42.840 ECB have signal that they maybe I can interest rates 0:08:42.880 --> 0:08:45.400 potentially in December. That's what they allowed the market to 0:08:45.400 --> 0:08:48.320 believe last time around. But since then the market has 0:08:48.360 --> 0:08:50.000 been thinking, well, you know what, they're going to have 0:08:50.160 --> 0:08:54.680 to throw liquidity at Europe. There's going to be potentially teltos, etcetera. 0:08:54.760 --> 0:08:57.800 So I think the market needs to reconcile its outlook 0:08:57.920 --> 0:09:02.360 for the the ECB in terms of the guidance that 0:09:02.520 --> 0:09:05.080 is officially out there. Jen It's interesting to me that 0:09:05.120 --> 0:09:07.200 on the fom C, on the Federal Reserve, the most 0:09:07.200 --> 0:09:10.440 hawk is representative of the fm C, Esther George, has 0:09:10.480 --> 0:09:13.920 backed away from an imminent interest rate hike rate hikes 0:09:13.960 --> 0:09:16.640 anytime soon, Yet one of the most hawk ish members 0:09:16.840 --> 0:09:19.679 of the European Central banks have been louton Schlager is 0:09:19.720 --> 0:09:21.800 still talking about rate hikes at the e c B. 0:09:22.640 --> 0:09:24.760 Why is that still happening on the Government Council of 0:09:24.760 --> 0:09:27.000 the European Central Bank? Why are they still having this 0:09:27.080 --> 0:09:30.760 discussion Because nobody I speak to believes that the ECB 0:09:31.000 --> 0:09:34.440 can deliver a rate hike against the backdrop that the 0:09:34.480 --> 0:09:37.720 European economy has right now. I think one of the 0:09:37.720 --> 0:09:40.160 reasons for that is is to do with normalization. If 0:09:40.160 --> 0:09:42.160 we if we look at the level of interest rates 0:09:42.200 --> 0:09:44.240 in the US to be, it is no wonder that 0:09:44.280 --> 0:09:46.320 they want to normalize. They want to pull back at 0:09:46.360 --> 0:09:50.840 some ammunition. If they do hike interest rates, then surely 0:09:50.880 --> 0:09:53.520 they will be having to do it. What it's sort 0:09:53.520 --> 0:09:55.520 of easy in liquidity on the other hand, so some 0:09:55.559 --> 0:09:58.679 people are talking about an interestrate maybe, but Telto's on 0:09:58.679 --> 0:10:02.960 the other hand, and and this very interesting scenario, very 0:10:02.960 --> 0:10:05.719 interesting situation, and again this is one that I think 0:10:05.720 --> 0:10:09.720 the market really does need clarity on. Certainly, it does 0:10:09.800 --> 0:10:12.840 seem from a just a geological point, I feel difficult 0:10:12.840 --> 0:10:15.280 to understand why the ECB could be. I can interstrate 0:10:15.559 --> 0:10:18.440 when you have Germany slowing the way it has done 0:10:18.800 --> 0:10:21.920 in losing momentum, and it's not just Germany. We've seen 0:10:21.920 --> 0:10:26.640 weaker data from large countries in Europe such as Italy, etcetera. 0:10:27.200 --> 0:10:29.120 And if at the same time you have the U 0:10:29.200 --> 0:10:32.760 S sloan and China slowan, so it does seem perhaps 0:10:32.840 --> 0:10:35.920 at this junction not particularly logical for the ECB two 0:10:36.120 --> 0:10:39.480 pushing ahead with an interstrate hike until you look at 0:10:39.480 --> 0:10:41.360 the level of the rates and you begin to understand 0:10:41.360 --> 0:10:44.920 that they do want some normalization. Well, consumer spending expects 0:10:45.000 --> 0:10:47.400 expected to accelerate over the coming week because our chief 0:10:47.480 --> 0:10:51.920 Brexit correspondent is going to travel from London over to Switzerland. 0:10:52.040 --> 0:10:55.520 So as he progresses through the continent, I imagine consumer 0:10:55.559 --> 0:10:57.440 spending is going to get a lift top of there. 0:10:58.480 --> 0:11:00.520 You're there some have you made it? I've made it 0:11:00.600 --> 0:11:03.880 here Victorious Street. It was very difficult to put here 0:11:03.920 --> 0:11:06.520 from the green is. You know, you look at the 0:11:06.600 --> 0:11:11.079 Jane Fawley currency transfer station at UM at Heathrow. It's 0:11:11.080 --> 0:11:14.120 amazing what she picks up on that, you know, on 0:11:14.240 --> 0:11:17.360 a currency conversion. Someone's making a lot of money at Heathrow, 0:11:17.360 --> 0:11:21.360 aren't they. Jane smitten money there as well. Jane. Seriously, 0:11:21.480 --> 0:11:26.199 what happens to the sterling euro relationship of actual day 0:11:26.240 --> 0:11:32.319 to day transactions if Brexit actually brexits? Well, you know, 0:11:32.440 --> 0:11:37.160 once again, it's it's very difficult I think for real corporates. 0:11:37.160 --> 0:11:39.080 I think a lot of people who have been able 0:11:39.160 --> 0:11:42.199 to remain on the sidelines have remained on the sidelines. 0:11:42.240 --> 0:11:45.120 But you know, there comes a time where real corporates, 0:11:45.160 --> 0:11:48.000 real businesses have to hedge and they have to get 0:11:48.080 --> 0:11:51.719 reinvolved and it becomes extremely difficult for them. So I 0:11:51.840 --> 0:11:53.920 think over the next couple of weeks, clearly it's going 0:11:54.000 --> 0:11:56.120 to be really really crucial. A lot of people in 0:11:56.200 --> 0:11:58.240 the market, and we see this in the price are 0:11:58.320 --> 0:12:01.760 betting that there will be some delay, that the heartbreaks 0:12:01.760 --> 0:12:03.800 that will not happen. But of course, as it stands, 0:12:04.080 --> 0:12:07.000 legally the UK is heading for heartbreaks on maybe the 0:12:07.040 --> 0:12:10.400 twenty nine, and I think for investors to remain confident 0:12:10.480 --> 0:12:12.400 that that isn't going to happen, there needs to be 0:12:12.520 --> 0:12:14.560 some change. There needs to be some legislation in place. 0:12:14.760 --> 0:12:16.480 But but on a you know, I think of rubble 0:12:16.520 --> 0:12:19.040 bank and I understand their speculation, and there's a currency, 0:12:19.080 --> 0:12:21.360 what's that you're going to do? What's polished a lot 0:12:21.360 --> 0:12:23.120 are you going to do? I get that, But in 0:12:23.240 --> 0:12:29.000 the commercial business of hedging business transactions, what actually happens 0:12:29.040 --> 0:12:34.320 between pound, sterling and euro when all of this happens, well, 0:12:34.640 --> 0:12:36.880 you know again, and we can go back to our 0:12:36.960 --> 0:12:38.760 customers and they are asking us of the have been 0:12:38.800 --> 0:12:41.480 asking us that question for a while. There are a 0:12:41.480 --> 0:12:44.439 lot of board protection, but a lot of them will have, 0:12:44.800 --> 0:12:46.199 you know, the some of the protection that they will 0:12:46.200 --> 0:12:48.600 have learned out, we'll start to will start to fall 0:12:48.600 --> 0:12:51.880 off the books after after March. So they do need 0:12:51.960 --> 0:12:56.200 to be very considerate in terms of what is going 0:12:56.240 --> 0:12:58.920 to happen for in exchange. But to be fair to them, 0:12:59.320 --> 0:13:04.120 you know what, investments can look at the probability and think, well, 0:13:04.160 --> 0:13:05.680 you know what, there's a good chance that there could 0:13:05.679 --> 0:13:08.920 be a delay. We'll take an oppositions. Accordingly, businesses don't 0:13:08.960 --> 0:13:12.400 have that luxury. They have to prepare for heartbreakit because 0:13:12.440 --> 0:13:15.800 that is what legally is potentially going to happen. And 0:13:15.920 --> 0:13:18.120 this puts them in a really quite difficult position. They 0:13:18.160 --> 0:13:21.079 have to spend that money to make those preparations, and that, 0:13:21.280 --> 0:13:23.520 to be honest, I think is the first consideration the 0:13:23.600 --> 0:13:28.040 foreign exchange. It is just a complication for them. Jane 0:13:28.080 --> 0:13:30.720 Greater to catch up with you, janet Folio their Rabbi 0:13:30.760 --> 0:13:48.199 Bankhead of Effect Strategy, senior currency Analysts, Gerard Cassidy with 0:13:48.440 --> 0:13:51.719 us with RBC Capital Marcus Gerard, what's the history in 0:13:51.880 --> 0:13:55.640 other cycles where there are trading missus? Is there an 0:13:55.760 --> 0:13:59.000 understanding in the C suite that you bounce back or 0:13:59.040 --> 0:14:01.640 do you make a media it changes to the business plan. 0:14:02.480 --> 0:14:05.319 I think Tom, what you do is you anticipate that 0:14:05.480 --> 0:14:09.280 there will be some bouncing back or normality. We all 0:14:09.360 --> 0:14:12.679 know the fourth quarter was quite unusual in terms of 0:14:12.760 --> 0:14:15.960 the volatility. You might recall Tom, in the month of December, 0:14:16.440 --> 0:14:19.520 we didn't see a single junk bond underwritten, or high 0:14:19.600 --> 0:14:21.600 yield bonds as they call him today, but we didn't 0:14:21.600 --> 0:14:24.640 see a single issue underwritten, and so this shows you 0:14:24.720 --> 0:14:27.560 the severity of the downturn in Fick. So I don't 0:14:27.560 --> 0:14:30.920 think there's no knee knee jerk reaction yet, but if 0:14:31.000 --> 0:14:34.160 these trends continued through six months, that's when you have 0:14:34.240 --> 0:14:37.000 to dust those issues. John Farrell, you've been all over this. 0:14:37.120 --> 0:14:40.520 You absolutely nailed the idea of junk bonds being quiet 0:14:40.600 --> 0:14:43.520 in December, John Farrell, has there been any indication on 0:14:43.640 --> 0:14:46.160 your property that yield yield, real yield, that things have 0:14:46.240 --> 0:14:48.120 bounced back. Well, the good news is the primary market 0:14:48.160 --> 0:14:50.240 has reopened. But Gerard, I think that the issue for 0:14:50.360 --> 0:14:52.040 high yield is that it was a story not just 0:14:52.160 --> 0:14:54.200 through the fourth culta, it was a story through the 0:14:54.240 --> 0:14:57.360 whole year. We had this very soft supply story, and 0:14:57.400 --> 0:14:59.520 as you know, Jarard, it was made up by the 0:14:59.680 --> 0:15:02.120 left loan, the leverage finance business for some of these 0:15:02.160 --> 0:15:04.720 banks that did actually really well with the exception of 0:15:04.760 --> 0:15:08.240 the last quarter. So jaredds we look out. I'm wondering 0:15:08.280 --> 0:15:11.240 that you expecting the high yield supply to still be 0:15:11.360 --> 0:15:13.680 pretty low and will be made up in the way 0:15:13.720 --> 0:15:16.840 it was made up last year with some really solid 0:15:16.920 --> 0:15:20.120 leverage loan issuance. It's really gonna come down to the 0:15:20.280 --> 0:15:23.120 cost of raising this capital and you put your thumb 0:15:23.160 --> 0:15:25.520 on it when you compare it to the leverage loan 0:15:25.720 --> 0:15:28.960 versus the junk bomb market. And so if the yields 0:15:29.000 --> 0:15:32.120 and the junk bomb market are attractive, companies could tap 0:15:32.240 --> 0:15:34.840 that rather than going into the leverage loan market. We 0:15:35.000 --> 0:15:37.800 did see withdrawals. You know, et f s and mutual 0:15:37.800 --> 0:15:40.360 funds are big owners of these leverage loans now, and 0:15:40.480 --> 0:15:43.440 the fund outflows in the fourth quarter were quite pronounced, 0:15:43.680 --> 0:15:45.800 so the demand on the leverage loan side may not 0:15:45.960 --> 0:15:48.280 be there as well. So I would suggest that it's 0:15:48.280 --> 0:15:50.520 going to come down to the cost of raising the money, 0:15:50.600 --> 0:15:53.280 and if it's more attractive and junk bond land, that's 0:15:53.280 --> 0:15:55.240 where they will go the good news, Jared. If you 0:15:55.240 --> 0:15:57.200 look at the likes of Golment Sacks answer that mana 0:15:57.240 --> 0:15:59.480 Morkan standing this morning. The one beat that I can 0:15:59.560 --> 0:16:03.960 see is on investment banking revenue. The investment banks, the 0:16:04.160 --> 0:16:07.240 M and A, in fact the Vanilla retail banking last 0:16:07.280 --> 0:16:10.920 quarters still seem to do okay. Jerrard, I totally agree 0:16:10.960 --> 0:16:13.280 with you, especially in the Morgan Stanley numbers. When you 0:16:13.360 --> 0:16:16.400 look at the three components of investment banking, which is 0:16:16.440 --> 0:16:21.880 equity underwriting, dead underwriting and advisory. Advisory was very strong 0:16:21.960 --> 0:16:24.680 way as the other two were under expectations. And that 0:16:24.840 --> 0:16:27.160 was across the board from all of the investment banks. 0:16:28.360 --> 0:16:30.680 Are they a bank? I mean I asked this about 0:16:30.720 --> 0:16:33.560 Golden Sex as well. All this discussion you're having with 0:16:33.680 --> 0:16:36.840 John Farroll, it doesn't sound like they're a bank. Are 0:16:36.920 --> 0:16:40.680 they a bank? Tom? Is a really interesting question because 0:16:41.000 --> 0:16:43.320 you know, prior to the crisis, clearly they were not. 0:16:43.480 --> 0:16:45.840 But because of the crisis they had to become bank 0:16:45.920 --> 0:16:49.880 holding companies. They might remember because the funding this was 0:16:50.000 --> 0:16:53.000 before they FED opening up the window to everybody, including 0:16:53.080 --> 0:16:56.560 General Electrication might recall. But to be able to access 0:16:56.600 --> 0:16:59.040 the FED window, these two companies were forced to become 0:16:59.080 --> 0:17:02.200 bank holding company and they signed a document that had 0:17:02.240 --> 0:17:05.119 the Hotel California clause in it, which said you can 0:17:05.200 --> 0:17:07.760 never leave once you come in. And so as a 0:17:07.840 --> 0:17:10.200 result of these guys are permanently going to be bank 0:17:10.240 --> 0:17:12.919 holding companies. Gerald the winner of earning season so far. 0:17:13.040 --> 0:17:14.879 I think it's Bank America. And I know it's been 0:17:14.920 --> 0:17:16.600 a big pick for you. Why did they have this 0:17:16.720 --> 0:17:19.080 business model that's going to do well in the year 0:17:19.119 --> 0:17:21.639 ahead compared to the Morgan Stanleys and Goldman Saxes of 0:17:21.680 --> 0:17:25.120 this world? Is it really interesting? Because when you take 0:17:25.160 --> 0:17:28.320 a look at as a percentage of total revenues, how 0:17:28.440 --> 0:17:35.040 much the traditional trading sales investment banking represents of total revenues, 0:17:35.080 --> 0:17:38.320 Morgan Stanley and Goldman Sacks are very high. Bank America 0:17:39.040 --> 0:17:43.640 is more diversified. So that universal bank model that Brian Morninghan, 0:17:43.720 --> 0:17:45.840 the CEO of Bank America, has been working on for 0:17:45.960 --> 0:17:49.080 ten years ever since the crisis, is finally now opening 0:17:49.160 --> 0:17:51.960 in stride. And boy, they really did John put up 0:17:52.000 --> 0:17:54.960 really good numbers yesterday. It's funny Sacks. Jerry Cassidy. Is 0:17:55.000 --> 0:17:57.240 this a pause? Is it just a one quarter pause? 0:17:57.480 --> 0:18:01.000 A blip? Um in terms of trading, I would say yes, 0:18:01.160 --> 0:18:05.400 I would. You're starting off better. Absolutely, Okay, kid, thank 0:18:05.400 --> 0:18:08.399 you so much. As the capital markets really a foundational 0:18:08.480 --> 0:18:24.680 guest of all we do at Bloomberg Surveillance. Tom, let's 0:18:24.680 --> 0:18:27.680 bring in Simon French show we pen More Gordon, chief economist, 0:18:27.800 --> 0:18:29.960 on the view for the global economy. And I want 0:18:30.000 --> 0:18:31.840 to start here in the United States, Simon, because if 0:18:31.880 --> 0:18:35.800 you take the commentary from the c suite on Wall Street, 0:18:36.359 --> 0:18:39.879 they're saying, this economy is looking good for nineteen. If 0:18:39.920 --> 0:18:41.359 you look at the data we're going to get initial 0:18:41.440 --> 0:18:43.560 jobless claims in about twenty eight minutes of real time 0:18:43.600 --> 0:18:46.240 indicator of the health of the US economy, it looks 0:18:46.280 --> 0:18:49.160 pretty good. Any reason to believe there are serious cracks 0:18:49.200 --> 0:18:53.080 out there, Simon, Well, the financial markets are telling us 0:18:53.160 --> 0:18:55.920 that there are cracks out there. There is a there's 0:18:55.920 --> 0:18:58.720 a breakdown, isn't there between where financial markets are starting 0:18:58.760 --> 0:19:01.280 to price the outlook for the economy and what the 0:19:01.359 --> 0:19:04.320 hard macro data is telling us. And at the moment, 0:19:04.480 --> 0:19:07.000 I think the macro dator tells us there were certainly 0:19:07.000 --> 0:19:11.080 getting a mean reversion movie here towards trend US growth, 0:19:11.200 --> 0:19:14.000 which I don't think many people would have been on 0:19:14.119 --> 0:19:16.880 your show in the last eighty months and say, look, 0:19:17.080 --> 0:19:20.000 it was sustainable for us the US economy to expand 0:19:20.119 --> 0:19:22.240 north of three percent year on year, So we are 0:19:22.320 --> 0:19:24.800 thinking some mean reversion. While I spoke about with Tom 0:19:24.880 --> 0:19:27.640 earlier on TV was the fact that the risk here 0:19:27.720 --> 0:19:30.440 is you undershoot to the downside as inventory start to 0:19:31.400 --> 0:19:33.960 de stock and some of the sentiment that were seeing 0:19:34.000 --> 0:19:36.639 in financial markets may translate onto main streets. Well, the 0:19:36.720 --> 0:19:39.520 risk also applies to Wall Street as well. Simon that 0:19:39.600 --> 0:19:41.600 you felt to draw a distinction between what is a 0:19:41.720 --> 0:19:46.480 deceleration back towards trend growth that and a potentially big 0:19:46.600 --> 0:19:49.160 cyclical turn that leads us into a recession. I think 0:19:49.160 --> 0:19:50.720 a lot of people have the last couple of months 0:19:50.760 --> 0:19:53.760 struggling to get their hands around which one we're experiencing 0:19:53.880 --> 0:19:55.439 right now? Which one do you think it is? Simon? 0:19:56.440 --> 0:19:58.640 So so I think there's mean reversion going on here. 0:19:58.680 --> 0:20:01.600 So so my own view, who is we'll see a 0:20:01.680 --> 0:20:05.040 lot of the stimulus from both a softening of the 0:20:05.160 --> 0:20:08.080 tone from central bankers around the world, the Chinese stimulus 0:20:08.200 --> 0:20:11.840 that is a repeat of the twenty program, and then 0:20:11.920 --> 0:20:14.800 also they pass through to consumers from lower energy prices 0:20:14.840 --> 0:20:18.080 will start kicking in the second half of nineteen, which 0:20:18.119 --> 0:20:20.159 means that people are gonna have to get used to 0:20:20.280 --> 0:20:24.119 some fairly difficult comps in the first half of nineteen, 0:20:24.280 --> 0:20:27.240 some soft macro data, but not draw a linear line 0:20:27.320 --> 0:20:30.680 downwards into the red simon. One of the hallmarks of 0:20:30.720 --> 0:20:32.840 our interview today on John Farrere. One of my other 0:20:32.920 --> 0:20:36.600 properties was with us was Mr Rattler of Deutsche Bank 0:20:36.920 --> 0:20:42.720 hugely optimistic within the gloom of Europe. As an economist, 0:20:43.320 --> 0:20:46.480 does the stock market go with a view of economics 0:20:46.640 --> 0:20:49.840 or is it a separate beast. It's a bit of 0:20:49.880 --> 0:20:51.920 separate beast. And I think we've we don't have to 0:20:52.000 --> 0:20:55.960 go back far in history to look at moments when 0:20:56.359 --> 0:21:00.720 you've had economists and actually strategists on your shows giving 0:21:00.800 --> 0:21:04.359 you the perspectives that are fundamentally decoupled. And the question 0:21:04.480 --> 0:21:07.240 is who wins that that race on the data and 0:21:07.440 --> 0:21:09.600 here and I think at the moment, what we're seeing 0:21:10.240 --> 0:21:14.640 is valuations across Europe and eleven times twenty nineteen earnings 0:21:14.760 --> 0:21:20.720 factoring in a fairly substantial recession, not just in the 0:21:20.920 --> 0:21:23.520 UK but also in mainland Europe. And I think that's 0:21:23.600 --> 0:21:26.600 overdoing it. Looked low trend growth in Europe of you know, 0:21:26.720 --> 0:21:30.160 between one point two to one point five percent means 0:21:30.240 --> 0:21:32.719 that a policy mistake could tip you into negative territory. 0:21:32.800 --> 0:21:36.320 But I do think given the expansion of early twenty 0:21:36.400 --> 0:21:38.359 eighteen was two and a half percent, you're just seeing 0:21:38.680 --> 0:21:42.480 those numbers weighing on the year on year comps. Well, 0:21:42.520 --> 0:21:44.720 the weighing on the year and your calves and the 0:21:44.800 --> 0:21:49.439 answers corporations adapt I mean, is the adaption in this slowdown, 0:21:49.720 --> 0:21:52.639 the adapting I should say, in this slowdown? Is it 0:21:52.760 --> 0:21:55.560 just simply cost cutting? Is that what you and pan 0:21:55.640 --> 0:21:58.159 mercy for not only for the United Kingdom but for 0:21:58.240 --> 0:22:02.560 America as well well. The sort of looks start with Europe. 0:22:02.640 --> 0:22:05.840 I mean, you're not seeing cost cutting front and center 0:22:05.880 --> 0:22:07.680 at the moment. Where where you are seeing is some 0:22:07.880 --> 0:22:13.040 caution over investment spending, meaning that you look at the 0:22:13.119 --> 0:22:16.240 caution over spare capacity. Spare capacity has been the big 0:22:16.400 --> 0:22:19.240 boom element for the global economy over the last six 0:22:19.359 --> 0:22:21.760 or seven years. We've been able to put the spare 0:22:21.800 --> 0:22:25.520 capacity there's been inactive back to work and that's workers 0:22:25.640 --> 0:22:29.760 that factories that is broadly now run its course, now, 0:22:29.840 --> 0:22:33.320 the last major economic area to use up its spare 0:22:33.320 --> 0:22:35.720 capacity was the euro zones. Of course, corporates need to 0:22:35.760 --> 0:22:38.359 start make decisions on whether they need to start bidding 0:22:38.400 --> 0:22:42.840 up wages or investing in what looks distinctly end of cycle. 0:22:43.160 --> 0:22:45.920 The US economy, though, is further down this route, and 0:22:45.960 --> 0:22:48.040 I think it's far more about the policy mistake coming 0:22:48.080 --> 0:22:50.200 out of the White House and the degree to which 0:22:50.280 --> 0:22:53.600 that passes through the consumer investor sentiment, that being the 0:22:53.840 --> 0:22:56.040 clinsurer as to whether we get a soft landing or 0:22:56.119 --> 0:22:57.960 something more maligned with someone. It seems to be this 0:22:58.040 --> 0:23:00.200 obsession and I'm not saying this is coming for you, 0:23:00.359 --> 0:23:02.280 but more broadly, there seems to be an obsession with 0:23:02.320 --> 0:23:04.639 a policy mistake in the United States. I'm looking at 0:23:04.680 --> 0:23:07.840 Europe right now. I'm seeing a total reluctance to do 0:23:08.040 --> 0:23:11.639 anything on the fiscal side, barely any capacity to do 0:23:11.720 --> 0:23:14.880 it in Southern Europe, and on the monetary policy side, 0:23:14.920 --> 0:23:17.119 an ECB that has not been able to get away 0:23:17.200 --> 0:23:20.800 from negative forty basis points on a depot rate. Now 0:23:20.920 --> 0:23:25.359 we're thinking about policy errors going into a late cycle story. 0:23:25.880 --> 0:23:28.040 I am way more worried about Europe than I am 0:23:28.119 --> 0:23:30.960 the United States. At least in the United States, there's 0:23:31.000 --> 0:23:33.480 no real side of funding stress. Even though we've seen 0:23:33.480 --> 0:23:36.000