Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane
Speaker 1: jay Ley. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. This
Speaker 1: is without question the interview of the day. And I
Speaker 1: should say Arthur and immense, immense honor Arthur Lovitt, who
Speaker 1: you know how he comes on, Chairman of the former
Speaker 1: chairman of the SEC. Arthur Lovitt leveled the playing field
Speaker 1: for the individual investor and the vicinity of the seventies
Speaker 1: and into the nineteen eighties. And he did it with
Speaker 1: John Poke. Arthur, you wrote the foreword for the Clash
Speaker 1: of the Cult investment versus Speculation. For John Bogel, he
Speaker 1: changed how all of us think of money, didn't he? Yes,
Speaker 1: he did. He was a real master in terms of
Speaker 1: understanding the costs of money, something frequently overlooked by investors,
Speaker 1: particularly with respect too mutual funds. Those fees that are
Speaker 1: upfront and seems so minute, are so massive in terms
Speaker 1: of their implication of loss or gain. And Bogel was
Speaker 1: the one who pioneered that from his beloved home in
Speaker 1: Lake Placid, New York. Uh he wrote about accounting standards
Speaker 1: and fought fearlessly for stronger accounting standards so that investors
Speaker 1: could understand the implications of one funds costs over another. So, Arthur,
Speaker 1: obviously you know just a you've had such a wonderful
Speaker 1: long term relationship with Mr Boga. What do you think
Speaker 1: his lasting legacy will be for the individual investor in
Speaker 1: the marketplace? I think, above all else h he has
Speaker 1: taught the last vast array of individual investors the true
Speaker 1: costs of their investments. How minute changes and fees have
Speaker 1: massive implications in terms of loss or gain. And I
Speaker 1: think even today, the knowledgeable investor gravitates towards uh the
Speaker 1: Vanguard fund formula of the lowest possible costs. And I
Speaker 1: think that the vast number of sophisticated, knowledgeable investors understand that,
Speaker 1: and that accounts for the extraordinary success of Vanguard funds.
Speaker 1: It was ironical that Jack, because he spoke so openly
Speaker 1: and fearlessly and not necessarily with discretion, was pushed from
Speaker 1: the management of Vanguard Funds and operated solely out of
Speaker 1: his home both here and both in the East Coast
Speaker 1: end up in Lake Placid. So you know, it's it's amazing, Arthur.
Speaker 1: If we think about it today, it's almost common knowledge
Speaker 1: or accepted knowledge about index funds and ets tied to
Speaker 1: index funds and minimizing fees. But when you go back
Speaker 1: and you take a look at Mr Bogel's career, it
Speaker 1: was so radical in the mid seventies what his thinking was.
Speaker 1: He came from the traditional mutual fund business, Wellington one
Speaker 1: of the big bohemus still today about the traditional muti
Speaker 1: fund business. But it really wasn't in the mid seventies
Speaker 1: early seventies when he brought this concept of indexing and
Speaker 1: focusing on costs. It really was radical back then, wasn't it.
Speaker 1: It was radical because the vast majority of investors like
Speaker 1: to pick and choose among the array of stocks available
Speaker 1: to them, and it took an index fund, which really
Speaker 1: mimic the market as a whole, to be sold as
Speaker 1: a single unit, and a huge number of investors have
Speaker 1: gravitated towards that and have come to understand the implications
Speaker 1: of fees as critical in terms of whether they win
Speaker 1: or lose in the market. Yeah, it's just h yeah,
Speaker 1: you're right, you're exactly right. It's just amazing kind of
Speaker 1: how that evolved and kind of where we are today
Speaker 1: and some of your more recent conversations with him, UM,
Speaker 1: what were his thoughts about where he thinks invest will
Speaker 1: go should go, the role of the individual investor, the
Speaker 1: role of the hedge fund. How did he kind of
Speaker 1: envision how maybe individual investing what will trend going forward.
Speaker 1: I think that he hoped and believed that the individual
Speaker 1: investor would take over more of the control of how
Speaker 1: they invest using funds rather than picking and choosing stocks.
Speaker 1: I think he had he had such a firm belief in,
Speaker 1: uh mimicking the market as a whole rather than trying
Speaker 1: to pick stock A or sell stock B. And I
Speaker 1: think he felt that with the growth of Vanguard and
Speaker 1: the success of Vanguard and the embrace of other funds
Speaker 1: in the same concept, the market was going to continue
Speaker 1: to move in that direction and that passive and nesting
Speaker 1: was going to overtake and really beat out individual stock picking.
Speaker 1: Arthur Levitt, thank you so very much for you know,
Speaker 1: giving us your perspective on the life in the impact
Speaker 1: of John Bobel, founder of Vanguard Group. UM. You know,
Speaker 1: obviously revolutionary figure in the world of individual investing. We
Speaker 1: wrap up the earning season on Wall Street with Morgan Stanley.
Speaker 1: Those numbers are imminent when they drop across the Bloomberg
Speaker 1: will bring you some of the headlines and some of
Speaker 1: the commentary once the earnings called starts a little bit
Speaker 1: later this morning. So worldwide, you've got to say, the
Speaker 1: recession fears of December to some investors at least already
Speaker 1: feeling like a distant memory. We've had the C suite
Speaker 1: on Wall Street speaking pretty optimistically about nineteen, seeing few
Speaker 1: signs of an imminent turned down. So what's ahead for
Speaker 1: this market? Jane Foley joining US Rabba bankhead of ex
Speaker 1: Strategy and senior currency analyst. We have faded much of
Speaker 1: December already, Jane, before the data has validated that move,
Speaker 1: especially over in China and in Asia as well. Your
Speaker 1: thoughts on that, well, to be honest, I still think
Speaker 1: that December really didn't mark a change in market sentiment.
Speaker 1: The market really did take on board that the slower
Speaker 1: slowing global growth, particularly with respect to the US economy.
Speaker 1: But I think as we've moved into January, I think
Speaker 1: the market is beginning to focus more on what that
Speaker 1: has meant for Europe. And what we've seen, of course
Speaker 1: is slower data from Germany. We've seen a talk of
Speaker 1: even a technical recession in Germany at the end of
Speaker 1: last year. That may not happen. The indication that we
Speaker 1: got from the German authorities is that we what we
Speaker 1: saw in the second half of last year, we're just
Speaker 1: very moderate next to no growth, and hence we have
Speaker 1: the sparring match, if you like, in Eurodonna with the
Speaker 1: fundamentals of both of those major currencies haven't deteriorated. So
Speaker 1: what's driving europe dollar? What are the dominant forces they're
Speaker 1: going to drive that currency pair over the several the
Speaker 1: next several months. Jane, you know, I think it's a
Speaker 1: it's another sisters competition. I think it's it has been
Speaker 1: for quite some times, some weeks at least, pretty easy
Speaker 1: to put together a deteriorated version of fundamentals for the
Speaker 1: dollar in terms of slower growth, concerns over fed policy, etcetera.
Speaker 1: But I think over the next few weeks and the
Speaker 1: market really does need to come to terms of what
Speaker 1: does that mean for the ECB, what doesn't that mean
Speaker 1: for European growth? And we do have an ECB policy
Speaker 1: meeting coming over the next week or or two, and
Speaker 1: that's going to be important because you know, the the
Speaker 1: ECB have signal that they maybe I can interest rates
Speaker 1: potentially in December. That's what they allowed the market to
Speaker 1: believe last time around. But since then the market has
Speaker 1: been thinking, well, you know what, they're going to have
Speaker 1: to throw liquidity at Europe. There's going to be potentially teltos, etcetera.
Speaker 1: So I think the market needs to reconcile its outlook
Speaker 1: for the the ECB in terms of the guidance that
Speaker 1: is officially out there. Jen It's interesting to me that
Speaker 1: on the fom C, on the Federal Reserve, the most
Speaker 1: hawk is representative of the fm C, Esther George, has
Speaker 1: backed away from an imminent interest rate hike rate hikes
Speaker 1: anytime soon, Yet one of the most hawk ish members
Speaker 1: of the European Central banks have been louton Schlager is
Speaker 1: still talking about rate hikes at the e c B.
Speaker 1: Why is that still happening on the Government Council of
Speaker 1: the European Central Bank? Why are they still having this
Speaker 1: discussion Because nobody I speak to believes that the ECB
Speaker 1: can deliver a rate hike against the backdrop that the
Speaker 1: European economy has right now. I think one of the
Speaker 1: reasons for that is is to do with normalization. If
Speaker 1: we if we look at the level of interest rates
Speaker 1: in the US to be, it is no wonder that
Speaker 1: they want to normalize. They want to pull back at
Speaker 1: some ammunition. If they do hike interest rates, then surely
Speaker 1: they will be having to do it. What it's sort
Speaker 1: of easy in liquidity on the other hand, so some
Speaker 1: people are talking about an interestrate maybe, but Telto's on
Speaker 1: the other hand, and and this very interesting scenario, very
Speaker 1: interesting situation, and again this is one that I think
Speaker 1: the market really does need clarity on. Certainly, it does
Speaker 1: seem from a just a geological point, I feel difficult
Speaker 1: to understand why the ECB could be. I can interstrate
Speaker 1: when you have Germany slowing the way it has done
Speaker 1: in losing momentum, and it's not just Germany. We've seen
Speaker 1: weaker data from large countries in Europe such as Italy, etcetera.
Speaker 1: And if at the same time you have the U
Speaker 1: S sloan and China slowan, so it does seem perhaps
Speaker 1: at this junction not particularly logical for the ECB two
Speaker 1: pushing ahead with an interstrate hike until you look at
Speaker 1: the level of the rates and you begin to understand
Speaker 1: that they do want some normalization. Well, consumer spending expects
Speaker 1: expected to accelerate over the coming week because our chief
Speaker 1: Brexit correspondent is going to travel from London over to Switzerland.
Speaker 1: So as he progresses through the continent, I imagine consumer
Speaker 1: spending is going to get a lift top of there.
Speaker 1: You're there some have you made it? I've made it
Speaker 1: here Victorious Street. It was very difficult to put here
Speaker 1: from the green is. You know, you look at the
Speaker 1: Jane Fawley currency transfer station at UM at Heathrow. It's
Speaker 1: amazing what she picks up on that, you know, on
Speaker 1: a currency conversion. Someone's making a lot of money at Heathrow,
Speaker 1: aren't they. Jane smitten money there as well. Jane. Seriously,
Speaker 1: what happens to the sterling euro relationship of actual day
Speaker 1: to day transactions if Brexit actually brexits? Well, you know,
Speaker 1: once again, it's it's very difficult I think for real corporates.
Speaker 1: I think a lot of people who have been able
Speaker 1: to remain on the sidelines have remained on the sidelines.
Speaker 1: But you know, there comes a time where real corporates,
Speaker 1: real businesses have to hedge and they have to get
Speaker 1: reinvolved and it becomes extremely difficult for them. So I
Speaker 1: think over the next couple of weeks, clearly it's going
Speaker 1: to be really really crucial. A lot of people in
Speaker 1: the market, and we see this in the price are
Speaker 1: betting that there will be some delay, that the heartbreaks
Speaker 1: that will not happen. But of course, as it stands,
Speaker 1: legally the UK is heading for heartbreaks on maybe the
Speaker 1: twenty nine, and I think for investors to remain confident
Speaker 1: that that isn't going to happen, there needs to be
Speaker 1: some change. There needs to be some legislation in place.
Speaker 1: But but on a you know, I think of rubble
Speaker 1: bank and I understand their speculation, and there's a currency,
Speaker 1: what's that you're going to do? What's polished a lot
Speaker 1: are you going to do? I get that, But in
Speaker 1: the commercial business of hedging business transactions, what actually happens
Speaker 1: between pound, sterling and euro when all of this happens, well,
Speaker 1: you know again, and we can go back to our
Speaker 1: customers and they are asking us of the have been
Speaker 1: asking us that question for a while. There are a
Speaker 1: lot of board protection, but a lot of them will have,
Speaker 1: you know, the some of the protection that they will
Speaker 1: have learned out, we'll start to will start to fall
Speaker 1: off the books after after March. So they do need
Speaker 1: to be very considerate in terms of what is going
Speaker 1: to happen for in exchange. But to be fair to them,
Speaker 1: you know what, investments can look at the probability and think, well,
Speaker 1: you know what, there's a good chance that there could
Speaker 1: be a delay. We'll take an oppositions. Accordingly, businesses don't
Speaker 1: have that luxury. They have to prepare for heartbreakit because
Speaker 1: that is what legally is potentially going to happen. And
Speaker 1: this puts them in a really quite difficult position. They
Speaker 1: have to spend that money to make those preparations, and that,
Speaker 1: to be honest, I think is the first consideration the
Speaker 1: foreign exchange. It is just a complication for them. Jane
Speaker 1: Greater to catch up with you, janet Folio their Rabbi
Speaker 1: Bankhead of Effect Strategy, senior currency Analysts, Gerard Cassidy with
Speaker 1: us with RBC Capital Marcus Gerard, what's the history in
Speaker 1: other cycles where there are trading missus? Is there an
Speaker 1: understanding in the C suite that you bounce back or
Speaker 1: do you make a media it changes to the business plan.
Speaker 1: I think Tom, what you do is you anticipate that
Speaker 1: there will be some bouncing back or normality. We all
Speaker 1: know the fourth quarter was quite unusual in terms of
Speaker 1: the volatility. You might recall Tom, in the month of December,
Speaker 1: we didn't see a single junk bond underwritten, or high
Speaker 1: yield bonds as they call him today, but we didn't
Speaker 1: see a single issue underwritten, and so this shows you
Speaker 1: the severity of the downturn in Fick. So I don't
Speaker 1: think there's no knee knee jerk reaction yet, but if
Speaker 1: these trends continued through six months, that's when you have
Speaker 1: to dust those issues. John Farrell, you've been all over this.
Speaker 1: You absolutely nailed the idea of junk bonds being quiet
Speaker 1: in December, John Farrell, has there been any indication on
Speaker 1: your property that yield yield, real yield, that things have
Speaker 1: bounced back. Well, the good news is the primary market
Speaker 1: has reopened. But Gerard, I think that the issue for
Speaker 1: high yield is that it was a story not just
Speaker 1: through the fourth culta, it was a story through the
Speaker 1: whole year. We had this very soft supply story, and
Speaker 1: as you know, Jarard, it was made up by the
Speaker 1: left loan, the leverage finance business for some of these
Speaker 1: banks that did actually really well with the exception of
Speaker 1: the last quarter. So jaredds we look out. I'm wondering
Speaker 1: that you expecting the high yield supply to still be
Speaker 1: pretty low and will be made up in the way
Speaker 1: it was made up last year with some really solid
Speaker 1: leverage loan issuance. It's really gonna come down to the
Speaker 1: cost of raising this capital and you put your thumb
Speaker 1: on it when you compare it to the leverage loan
Speaker 1: versus the junk bomb market. And so if the yields
Speaker 1: and the junk bomb market are attractive, companies could tap
Speaker 1: that rather than going into the leverage loan market. We
Speaker 1: did see withdrawals. You know, et f s and mutual
Speaker 1: funds are big owners of these leverage loans now, and
Speaker 1: the fund outflows in the fourth quarter were quite pronounced,
Speaker 1: so the demand on the leverage loan side may not
Speaker 1: be there as well. So I would suggest that it's
Speaker 1: going to come down to the cost of raising the money,
Speaker 1: and if it's more attractive and junk bond land, that's
Speaker 1: where they will go the good news, Jared. If you
Speaker 1: look at the likes of Golment Sacks answer that mana
Speaker 1: Morkan standing this morning. The one beat that I can
Speaker 1: see is on investment banking revenue. The investment banks, the
Speaker 1: M and A, in fact the Vanilla retail banking last
Speaker 1: quarters still seem to do okay. Jerrard, I totally agree
Speaker 1: with you, especially in the Morgan Stanley numbers. When you
Speaker 1: look at the three components of investment banking, which is
Speaker 1: equity underwriting, dead underwriting and advisory. Advisory was very strong
Speaker 1: way as the other two were under expectations. And that
Speaker 1: was across the board from all of the investment banks.
Speaker 1: Are they a bank? I mean I asked this about
Speaker 1: Golden Sex as well. All this discussion you're having with
Speaker 1: John Farroll, it doesn't sound like they're a bank. Are
Speaker 1: they a bank? Tom? Is a really interesting question because
Speaker 1: you know, prior to the crisis, clearly they were not.
Speaker 1: But because of the crisis they had to become bank
Speaker 1: holding companies. They might remember because the funding this was
Speaker 1: before they FED opening up the window to everybody, including
Speaker 1: General Electrication might recall. But to be able to access
Speaker 1: the FED window, these two companies were forced to become
Speaker 1: bank holding company and they signed a document that had
Speaker 1: the Hotel California clause in it, which said you can
Speaker 1: never leave once you come in. And so as a
Speaker 1: result of these guys are permanently going to be bank
Speaker 1: holding companies. Gerald the winner of earning season so far.
Speaker 1: I think it's Bank America. And I know it's been
Speaker 1: a big pick for you. Why did they have this
Speaker 1: business model that's going to do well in the year
Speaker 1: ahead compared to the Morgan Stanleys and Goldman Saxes of
Speaker 1: this world? Is it really interesting? Because when you take
Speaker 1: a look at as a percentage of total revenues, how
Speaker 1: much the traditional trading sales investment banking represents of total revenues,
Speaker 1: Morgan Stanley and Goldman Sacks are very high. Bank America
Speaker 1: is more diversified. So that universal bank model that Brian Morninghan,
Speaker 1: the CEO of Bank America, has been working on for
Speaker 1: ten years ever since the crisis, is finally now opening
Speaker 1: in stride. And boy, they really did John put up
Speaker 1: really good numbers yesterday. It's funny Sacks. Jerry Cassidy. Is
Speaker 1: this a pause? Is it just a one quarter pause?
Speaker 1: A blip? Um in terms of trading, I would say yes,
Speaker 1: I would. You're starting off better. Absolutely, Okay, kid, thank
Speaker 1: you so much. As the capital markets really a foundational
Speaker 1: guest of all we do at Bloomberg Surveillance. Tom, let's
Speaker 1: bring in Simon French show we pen More Gordon, chief economist,
Speaker 1: on the view for the global economy. And I want
Speaker 1: to start here in the United States, Simon, because if
Speaker 1: you take the commentary from the c suite on Wall Street,
Speaker 1: they're saying, this economy is looking good for nineteen. If
Speaker 1: you look at the data we're going to get initial
Speaker 1: jobless claims in about twenty eight minutes of real time
Speaker 1: indicator of the health of the US economy, it looks
Speaker 1: pretty good. Any reason to believe there are serious cracks
Speaker 1: out there, Simon, Well, the financial markets are telling us
Speaker 1: that there are cracks out there. There is a there's
Speaker 1: a breakdown, isn't there between where financial markets are starting
Speaker 1: to price the outlook for the economy and what the
Speaker 1: hard macro data is telling us. And at the moment,
Speaker 1: I think the macro dator tells us there were certainly
Speaker 1: getting a mean reversion movie here towards trend US growth,
Speaker 1: which I don't think many people would have been on
Speaker 1: your show in the last eighty months and say, look,
Speaker 1: it was sustainable for us the US economy to expand
Speaker 1: north of three percent year on year, So we are
Speaker 1: thinking some mean reversion. While I spoke about with Tom
Speaker 1: earlier on TV was the fact that the risk here
Speaker 1: is you undershoot to the downside as inventory start to
Speaker 1: de stock and some of the sentiment that were seeing
Speaker 1: in financial markets may translate onto main streets. Well, the
Speaker 1: risk also applies to Wall Street as well. Simon that
Speaker 1: you felt to draw a distinction between what is a
Speaker 1: deceleration back towards trend growth that and a potentially big
Speaker 1: cyclical turn that leads us into a recession. I think
Speaker 1: a lot of people have the last couple of months
Speaker 1: struggling to get their hands around which one we're experiencing
Speaker 1: right now? Which one do you think it is? Simon?
Speaker 1: So so I think there's mean reversion going on here.
Speaker 1: So so my own view, who is we'll see a
Speaker 1: lot of the stimulus from both a softening of the
Speaker 1: tone from central bankers around the world, the Chinese stimulus
Speaker 1: that is a repeat of the twenty program, and then
Speaker 1: also they pass through to consumers from lower energy prices
Speaker 1: will start kicking in the second half of nineteen, which
Speaker 1: means that people are gonna have to get used to
Speaker 1: some fairly difficult comps in the first half of nineteen,
Speaker 1: some soft macro data, but not draw a linear line
Speaker 1: downwards into the red simon. One of the hallmarks of
Speaker 1: our interview today on John Farrere. One of my other
Speaker 1: properties was with us was Mr Rattler of Deutsche Bank
Speaker 1: hugely optimistic within the gloom of Europe. As an economist,
Speaker 1: does the stock market go with a view of economics
Speaker 1: or is it a separate beast. It's a bit of
Speaker 1: separate beast. And I think we've we don't have to
Speaker 1: go back far in history to look at moments when
Speaker 1: you've had economists and actually strategists on your shows giving
Speaker 1: you the perspectives that are fundamentally decoupled. And the question
Speaker 1: is who wins that that race on the data and
Speaker 1: here and I think at the moment, what we're seeing
Speaker 1: is valuations across Europe and eleven times twenty nineteen earnings
Speaker 1: factoring in a fairly substantial recession, not just in the
Speaker 1: UK but also in mainland Europe. And I think that's
Speaker 1: overdoing it. Looked low trend growth in Europe of you know,
Speaker 1: between one point two to one point five percent means
Speaker 1: that a policy mistake could tip you into negative territory.
Speaker 1: But I do think given the expansion of early twenty
Speaker 1: eighteen was two and a half percent, you're just seeing
Speaker 1: those numbers weighing on the year on year comps. Well,
Speaker 1: the weighing on the year and your calves and the
Speaker 1: answers corporations adapt I mean, is the adaption in this slowdown,
Speaker 1: the adapting I should say, in this slowdown? Is it
Speaker 1: just simply cost cutting? Is that what you and pan
Speaker 1: mercy for not only for the United Kingdom but for
Speaker 1: America as well well. The sort of looks start with Europe.
Speaker 1: I mean, you're not seeing cost cutting front and center
Speaker 1: at the moment. Where where you are seeing is some
Speaker 1: caution over investment spending, meaning that you look at the
Speaker 1: caution over spare capacity. Spare capacity has been the big
Speaker 1: boom element for the global economy over the last six
Speaker 1: or seven years. We've been able to put the spare
Speaker 1: capacity there's been inactive back to work and that's workers
Speaker 1: that factories that is broadly now run its course, now,
Speaker 1: the last major economic area to use up its spare
Speaker 1: capacity was the euro zones. Of course, corporates need to
Speaker 1: start make decisions on whether they need to start bidding
Speaker 1: up wages or investing in what looks distinctly end of cycle.
Speaker 1: The US economy, though, is further down this route, and
Speaker 1: I think it's far more about the policy mistake coming
Speaker 1: out of the White House and the degree to which
Speaker 1: that passes through the consumer investor sentiment, that being the
Speaker 1: clinsurer as to whether we get a soft landing or
Speaker 1: something more maligned with someone. It seems to be this
Speaker 1: obsession and I'm not saying this is coming for you,
Speaker 1: but more broadly, there seems to be an obsession with
Speaker 1: a policy mistake in the United States. I'm looking at
Speaker 1: Europe right now. I'm seeing a total reluctance to do
Speaker 1: anything on the fiscal side, barely any capacity to do
Speaker 1: it in Southern Europe, and on the monetary policy side,
Speaker 1: an ECB that has not been able to get away
Speaker 1: from negative forty basis points on a depot rate. Now
Speaker 1: we're thinking about policy errors going into a late cycle story.
Speaker 1: I am way more worried about Europe than I am
Speaker 1: the United States. At least in the United States, there's
Speaker 1: no real side of funding stress. Even though we've seen
Speaker 1: the deaf sit explode, yields are still really low. So
Speaker 1: that's the fiscal position. You can worry about it if
Speaker 1: you like. Okay, we can have that debate separately. But
Speaker 1: the monetary policy position is a whole lot better than Europe.
Speaker 1: Europe looks weak on both fronts, and they don't have
Speaker 1: the growth either. Yes, so I think it's just two
Speaker 1: different potential policy mistakes going on here. Do see what
Speaker 1: I've described as a structural policy mistake in Europe where
Speaker 1: they haven't used period of exceptional monetary policy to repair
Speaker 1: or repair the structural rigidities but also complete monetary union.
Speaker 1: But then in the US it's a far more cyclical
Speaker 1: policy mistake where you see, you know, the protectionist moves
Speaker 1: that we're seeing starting to translate through to consumers and
Speaker 1: investor sentiment, which I think means they're very different beasts.
Speaker 1: And the reason why I think media attention focuses on
Speaker 1: the US angle is simply because the European problem is
Speaker 1: one that has been around for US for most of
Speaker 1: European monetary unions. So coming on for twenty years. It
Speaker 1: is quite difficult to get excited about a problem that
Speaker 1: has been known and has grown in magnitude over that period,
Speaker 1: rather than one that has appeared on the horizon and
Speaker 1: the a question marks over its sustainability. But the question
Speaker 1: that confronts investors is why do I want to allocate
Speaker 1: capital into a region that I continue to get burned
Speaker 1: every time I do it? Simon and I think, we
Speaker 1: sit here again, and the answer is I don't want
Speaker 1: to most of the investors that I speak to here
Speaker 1: in the United States. Is the attitude any different in Europe? Yes? So,
Speaker 1: so I think the answer in one word, evaluation. So
Speaker 1: you look at the best part of sixteen times earnings
Speaker 1: in the in the U S economy at eleven times
Speaker 1: earnings largely in Europe, and you say, is that evaluation
Speaker 1: mismach that I can take advantage of? Should the particularly
Speaker 1: the geopolitical events in the UK, but war wider in
Speaker 1: Europe star to or mayor eight during the course of
Speaker 1: the year. If you think that isn't Normally that p
Speaker 1: ranges around two and a half to three. So if
Speaker 1: you think that delta has grown too large, then it's
Speaker 1: it's simply a closing back to its its long term average,
Speaker 1: rather than you're off to the races on the basis
Speaker 1: of above trend growth the same inference. Thank you so
Speaker 1: much to the Paymrick Gordon today. It is a joy
Speaker 1: to wander over the next twenty seven minutes with Adam
Speaker 1: Posen of the Peterson Institute. There are fourteen to seventeen
Speaker 1: things we can talk about, including Dr pos is gonna
Speaker 1: solve Brexit for us, But in lieu of that we
Speaker 1: will talk to Adam posing about the economics of this moment.
Speaker 1: Adam Posen, is the Phillips curve still in play as
Speaker 1: an operative theory at the Echoes Building? Or is megden
Speaker 1: de Side told me yesterday, are we in just simply
Speaker 1: a state of dis equilibrium where it's every central bank
Speaker 1: for itself. Oh that's really good, Tom, thank you for
Speaker 1: having me Um. The answer is both, not, not one
Speaker 1: or the other. So the Phillips curve is definitely still
Speaker 1: in play. The widespread belief, including from my colleagues Olivia
Speaker 1: Blanchard and Joseph Ganyon and from the leadership at the Fair,
Speaker 1: is that it kicks in at some point, but that
Speaker 1: we are clearly experimenting with how low we can go
Speaker 1: before it kicks in, and how steep or accelerating it
Speaker 1: will be. And I frankly I commend Chair Chair Pal
Speaker 1: Vice Chair Clarinda Governor Brainerd everyone who's come out and
Speaker 1: said we can afford to risk it um, and particularly
Speaker 1: that they've been bringing out the fact that bankers like
Speaker 1: not to say, which is that you can have wage
Speaker 1: increases that can come at the expense of profits um
Speaker 1: that are not necessarily inflationary. The phrase how low can
Speaker 1: you go? Is so important, folks. And this goes back
Speaker 1: to the diversity within economics of using interest rates the
Speaker 1: nominal in the real rate down through negatives like the
Speaker 1: German two year now has been chronically negative dr pos
Speaker 1: and we can frame this is maybe Laurence Summer saying
Speaker 1: maybe not and someone like Marvin good Friend of the
Speaker 1: our conservative thoughts saying, use negative interest rates as a
Speaker 1: constructive tool. How are we doing in our negative interest
Speaker 1: rate experiment? Well, I think we have to keep re
Speaker 1: emphasizing that the negative interest rates Mr. Keen are mostly
Speaker 1: what the economy gives the central bank, not what the
Speaker 1: central bank gives the interest Yeah, that it's it is.
Speaker 1: And this is where I think Larry Summers made one
Speaker 1: of his biggest contributions. It is arguably a reflection of
Speaker 1: the low desire for investment, be at risk aversion after
Speaker 1: the crisis. Be its cyclical, although it's harder to believe
Speaker 1: at this point it could be cyclical or be it
Speaker 1: be be it that we need a negative rate just
Speaker 1: to keep the economy turning over. Now, this is a
Speaker 1: very disturbing thing and it gets you into all the
Speaker 1: issues of productivity. But from the central banks point of view,
Speaker 1: if they're not, if they're finding that, you get a recession.
Speaker 1: If you raise rates at this point, that's telling you
Speaker 1: something about the real economy. It's not telling you something
Speaker 1: about the central banks. So, Adam, I'm actually kind of
Speaker 1: amazed at how well the sterling has kind of held
Speaker 1: in there over the last week. Is you know, we've
Speaker 1: had some very unprecedented things happening in the House of Parliament.
Speaker 1: What do you think Theresa May can bring to the
Speaker 1: House of Commons on Monday that might support the sanguine
Speaker 1: outlooked at least the currency market seem to be forecasting well. Paul,
Speaker 1: I think here I'm not very different from a lot
Speaker 1: of what you all in Bloomberg. I've already been analyzing reporting.
Speaker 1: I think it was just a lot of this was
Speaker 1: already priced in, and people perhaps a bit wishfully, but
Speaker 1: I think reasonably think that there's more chance of a
Speaker 1: good resolution and less chance of a hard breggsit no
Speaker 1: deal breggsit, so that's kept Sterling afloat um. What can
Speaker 1: may bring on Monday is very difficult. I think the
Speaker 1: ways we get out of this are either a people's vote,
Speaker 1: meaning a referendum directly on no deal breggsit versus remain,
Speaker 1: or basically make capitulates and she goes to um too,
Speaker 1: essentially Norway plus plus plus, which means in the EU
Speaker 1: and economic terms out in political terms. She won't do
Speaker 1: that because she cares too much about free movement, she's
Speaker 1: too anti immigration. She won't do that because the people
Speaker 1: in her party on the right wing won't support it.
Speaker 1: And she won't do that because Jeremy corbyin wants to
Speaker 1: create chaos. Whether it should be as a cross party
Speaker 1: vote in favor of suspension of Article fifty for the
Speaker 1: good of the country, but that's not going to happen.
Speaker 1: Do you expect the European Union to make any meaningful
Speaker 1: concessions to allow May to get some kind of deal
Speaker 1: through Parliament. As as my friend Jonathan Porteris is one
Speaker 1: of the leading British analysts of breggsit has said, you know,
Speaker 1: for the heart of hearing what the EU has said
Speaker 1: is you compromise on freedom of movement. We're happy to
Speaker 1: talk deal, but if you don't move any of your
Speaker 1: red lines, don't expect us to change anything. Um And
Speaker 1: so you know, there is are these rumors that they
Speaker 1: might sell out the Irish in some sense because the
Speaker 1: Irish backstop, which is a complicated issue, is very symbolic
Speaker 1: for the right wing of the Conservative Party. But in
Speaker 1: the end I don't think they will. And imposing this
Speaker 1: is so important where your work at the Bank of
Speaker 1: England and your expertise on Germanic society and the whole
Speaker 1: continental historical economic movement, all this is great, But the
Speaker 1: bottom line for Leave is in nostalgia for another time,
Speaker 1: maybe to rebuild the empire or to go back out
Speaker 1: into w t o say younger George Herbert Walker Bush
Speaker 1: get kind of stuff. How do you frame that nostalgia
Speaker 1: for two thousand thirty No, Tom, I think you've got
Speaker 1: your finger on it exactly. This is the fantasists. I mean,
Speaker 1: we saw this even from Neil Ferguson a couple of
Speaker 1: years ago, though he since recanted that we're gonna break
Speaker 1: up the EU and essentially and have you know, the
Speaker 1: northern essentially white conservative uh states all come together and
Speaker 1: we're gonna have a Hanseatic League and we're gonna do this,
Speaker 1: and then these fantasies. That's for some reason India or
Speaker 1: Australia would care more about trading of the UK at
Speaker 1: this point than with the rest of the EU, even
Speaker 1: if there wasn't resentment over the past uh uh colonialism.
Speaker 1: It's just stupid for those countries to think that way now.
Speaker 1: So it is an imperial fantasy. It is a right
Speaker 1: wing fantasy. But unfortunately Corbin and some on the left
Speaker 1: chair it because they have a different fantasy from the thirties,
Speaker 1: which is Stalinist socialism in one country. Let us continue,
Speaker 1: I'm posing with us wound up on Brexit and of course,
Speaker 1: working at the Peterson Institute, where he has put together
Speaker 1: a terrific team of people. He mentioned Dr Blanchard. I
Speaker 1: sighted an Olivier Blanchard chart from I think ten years
Speaker 1: ago in a A and one of our wonderful guests
Speaker 1: today was using it to show Brexit dynamics. This was
Speaker 1: on a log basis, So I don't know if we
Speaker 1: should do logarithms on radio. Maybe that won't work. Are
Speaker 1: you buying a snowshovel for this weekend and imposing I'm
Speaker 1: out on the Davos Tom like you, so you can
Speaker 1: shovel and I'm not wrong. I'm I'm in sunny Washington.
Speaker 1: You'll stay in sunny Washington where you hear there's snow,
Speaker 1: and yeah, the snow folks, seriously in Switzerland and Austria
Speaker 1: is record levels. Adam Post and thank you so much.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keane before
Speaker 1: the podcast. You can always catch us worldwide. I'm Bloomberg
Speaker 1: Radio