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 we
Speaker 1: have with us Marianna Moscato and Kenneth Rogoff and really
Speaker 1: talk about this economic moment that we are in into
Speaker 1: this autumn and into two thousand nineteen, and so much
Speaker 1: of that economic moment is this linkage of economics into finance,
Speaker 1: and is the banking and finance system. We had Mr
Speaker 1: Ackerman on earlier talking so much rationalizing out ten years
Speaker 1: and we've seen what Deutsche Bank has done in many
Speaker 1: other troubled banks. Is well, ken, what a gap between
Speaker 1: US banking and European banking did you expect to see
Speaker 1: that five years ago, seven years ago, ten years ago. Well,
Speaker 1: the banking system so much bigger in Europe as part
Speaker 1: of the problem, so that's made it harder for them
Speaker 1: to deal with They depend on the banking system more,
Speaker 1: but also the Balkanized regulate regulation, so they would do
Speaker 1: the stress tests in Europe. The Italians would stress test
Speaker 1: the Italian banks, the French would stress test. The French
Speaker 1: banks didn't even talk to each other, even though the
Speaker 1: loans were interconnected. They're changing that, they put the c
Speaker 1: B in charge of it, but it's still having trouble
Speaker 1: really forcefully taking the reins. So the European banks, that
Speaker 1: was a big part of why the recovery was so slow. Again, um,
Speaker 1: what what does it mean? So the recovery was so slow,
Speaker 1: But we're central banks right to do that? Or should
Speaker 1: they have done something else? If you look at inequality
Speaker 1: and maybe you know some of the stems of populism
Speaker 1: is do central banks and what they did? I mean,
Speaker 1: I I find that hard to see. I mean, I mean,
Speaker 1: cutting interest rates is usually considered redistributing from people who
Speaker 1: have money to people who are borrowing. So I think
Speaker 1: the central banks, frankly, I would have been more radical.
Speaker 1: I think I wrote a paper in December two thousand
Speaker 1: eight h for which I took a lot of criticism,
Speaker 1: saying inflation is not the lesser is not the greater evil?
Speaker 1: Right now you should worry about something much worse. So
Speaker 1: actually I think they were a little cautious. Uh and
Speaker 1: reluctant to be more creative in their use of instruments.
Speaker 1: But of course fiscal policy could have done more, but
Speaker 1: politically in Europe that wasn't easy. I advocated writing down
Speaker 1: the debts in the periphery countries and I think that
Speaker 1: would have been a good investment for Germany and for France.
Speaker 1: Didn't happen, Marianna, do you agree with that absolutely? And
Speaker 1: I mean I think that the key problem right now
Speaker 1: is that the source of the key if you want fact,
Speaker 1: is that led to the crisis. Things like private debt,
Speaker 1: private debt, not public debt, private debt being out of hand.
Speaker 1: The ratio of private debt to disposable income in the
Speaker 1: UK is back at record levels. We also have record
Speaker 1: level hoarding in the industrial sector. We have record level
Speaker 1: financialization um in industry, so increasing amount of profits just
Speaker 1: being used to boost share prices, stock options, surprise, surprise,
Speaker 1: executive pay so over three trillion dollars having been spent
Speaker 1: on share buybacks in the fortune companies. All these problems
Speaker 1: are actually getting worse. We have not reformed the fundamental system.
Speaker 1: And you can create all the money you want through KWI,
Speaker 1: but if you aren't also creating opportunities in the real
Speaker 1: economy that money to send up back in the bank.
Speaker 1: I want to go back to the banks as well.
Speaker 1: And this goes back to when Hyak won the Nobel
Speaker 1: Prize and the other guy, Myrtle, wouldnt even get up
Speaker 1: on stage. It was so controversial. And can you nail
Speaker 1: this in your latest Project Syndicate piece on how we
Speaker 1: didn't clear the grease problem? Why are we afraid Mariana
Speaker 1: to clear markets? Why are we afraid? Why are we
Speaker 1: so tentative about clearing the grease problem. We're clearing the
Speaker 1: banking problem. What's where did the fear come from? The
Speaker 1: timidity in your record? But the problem is how you
Speaker 1: define the grease problem. I mean, let me just talk
Speaker 1: about Italy for a minute, which is much worse than grease.
Speaker 1: If Italy goes bust, we're going to see Italy has
Speaker 1: had a lower deficit than Germany for the last twenty years.
Speaker 1: Italy's problem was not the deficit. Italy's debt to GDP
Speaker 1: is completely out of the roof. But why not because
Speaker 1: it was spending too much? But it wasn't. Both the
Speaker 1: private sector and the public sector were quite inertial. They
Speaker 1: had all sorts of parasitic relationships between them. There was
Speaker 1: lack of investment by key Italian industrial players like Fiat. Interestingly,
Speaker 1: when Fiat came here, Obama, in a moment of confidence, said,
Speaker 1: you know Chrysler, which was bailed out by the U. S.
Speaker 1: Government because we didn't just build out the banks, we
Speaker 1: also build that industry. He said, you have to invest
Speaker 1: in this country and hybrid technology if you want Chrysler.
Speaker 1: So Makiona, who passed away, who was a great uh entrepreneur,
Speaker 1: he said, fine, we will. But in Italy they didn't.
Speaker 1: In Italy, the relationship between public and private has been
Speaker 1: extremely problematic, and the public sector hasn't invested. Is Italy
Speaker 1: gonna be can in the fourth edition of this Time
Speaker 1: is different? I mean, is that where we're heading This
Speaker 1: is going to be like the Spain of sixteenth century?
Speaker 1: Could be? I mean, I think as long as real
Speaker 1: interest rates stay this low, will simply see a country that,
Speaker 1: as Marianna describes as a lot of corruption, is not
Speaker 1: highly functional, isn't growing at the rate that it could.
Speaker 1: I might add that Italy suffered a lot from China.
Speaker 1: They competed in a lot of spheres with China. It's
Speaker 1: part of why they didn't do well. But if real
Speaker 1: interest rates were to rise, I don't expect that, but
Speaker 1: I'm not going to say it could never happen. Then
Speaker 1: suddenly funding their deaths, that would be very want to
Speaker 1: fancy jump in here on your Italy please, I think
Speaker 1: this is important. Yeah, But does it all depend on Marianna.
Speaker 1: It depends on whether you know the markets maybe are
Speaker 1: too short termism. Is they just want to know from
Speaker 1: the populous leaders whether they will stick to the rules
Speaker 1: or not. Is that the wrong thing for the market
Speaker 1: to be focusing on the market should be fundamentally worried
Speaker 1: that you cannot have a monetary union with the level
Speaker 1: of skewed so different levels of competitiveness that we currently
Speaker 1: have in Europe. So instead of obsessing that everyone has
Speaker 1: to fit the three rule right the fiscal compact, what
Speaker 1: really we should be doing in Europe if we are
Speaker 1: going to have you know, cohesion, is to learn lessons
Speaker 1: from each other. So the kind of investments, again in
Speaker 1: both the private and the public sector, that had been
Speaker 1: made in Northern Europe. And I'm thinking also of the
Speaker 1: type of financial system that we have, for example in Germany,
Speaker 1: where you have patient, long term finance enabling, for example,
Speaker 1: the steel sector in Germany to really transform itself along
Speaker 1: the whole entity event, the green transformation of the country.
Speaker 1: We don't have that in Southern Europe. We have consumption
Speaker 1: led growth, we have you know there there just isn't
Speaker 1: that level of ambition, vision, national plan. We have a
Speaker 1: financial system which is actually quite short term. It's just
Speaker 1: like it is in the Anglo saccent world. But we mean,
Speaker 1: the opportunity for Europe right now is to think about
Speaker 1: itself as a hub of innovation. Think of itself of
Speaker 1: how does it actually differ from China, How does it
Speaker 1: differ also from the U S and terms for example
Speaker 1: of the stakeholder governance model in northern Europe. That could
Speaker 1: because I would just say and sort of seconding what
Speaker 1: Marianna said, but maybe emphasizing the fact the euro was
Speaker 1: just the mother of all mistakes here. They certainly shut
Speaker 1: a broad grease and uh, it'llly if they didn't weren't
Speaker 1: on the Euro Okay, they wouldn't be Sweden suddenly. But
Speaker 1: they've been able to deal more easily. They need more time,
Speaker 1: they have a lot of adjustments. Marianna described it very eloquently,
Speaker 1: but it's very hard to do with in the system.
Speaker 1: It's not just the fiscal deficits, it's the monitor to
Speaker 1: do it for four hours here and what I think
Speaker 1: for instant and I want to do is get it
Speaker 1: back to the theme and particularly folks, what we've see
Speaker 1: in America is of a guilded age and of what
Speaker 1: we've seen politically with President Trump as well. Is there
Speaker 1: a persistency to this guilded age? Can there be a
Speaker 1: persistency to the politics and the culture that Donald Trump represents?
Speaker 1: I hope not. But I mean I think in terms
Speaker 1: of the economy, a lot of what we're seeing is
Speaker 1: possibly sustainable. Uh there, Larry Summers sort of said we're
Speaker 1: in secular stagnation. I argued, no, we after a financial crisis,
Speaker 1: you have this long period of slow growth. It can
Speaker 1: take a to ten years to recover. There are some
Speaker 1: of these trends and demographics and productivity, etcetera. But some
Speaker 1: of what you were seeing was the financial crisis, probably
Speaker 1: at least half of it. And there's ketch up. So no,
Speaker 1: I think, uh, you know, knock on wood, it could
Speaker 1: go well for a while. In your index, there's no
Speaker 1: Donald Trump I was surprised by that. Why not, why
Speaker 1: didn't you write about President Trump in this movement that
Speaker 1: we see in America. I think I do mention that
Speaker 1: he's well. First of all, he's very unique. I bet
Speaker 1: you didn't know that, in the sense that he's the
Speaker 1: first U S president to really attack those institutions in
Speaker 1: the US which have been key for US competitiveness. The
Speaker 1: first thing he did, literally the first month in office,
Speaker 1: he went after ARPA, which is a sister organization of DARPA,
Speaker 1: but in the Department of Energy. DARPA, as you know,
Speaker 1: was key to founding the Internet and has been a
Speaker 1: key source of innovation, including of the serie UM in
Speaker 1: all our phones UM. In fact, everything in our phone
Speaker 1: is basically funded by the US government, Internet, GPS, SERI,
Speaker 1: touch screen. And he went after those organizations. And that's
Speaker 1: it's quite interesting because you know, China actually learned from
Speaker 1: the lessons of Silicon Valley, right, So China today is
Speaker 1: investing massively through different types of state actors alongside private
Speaker 1: actors UM and what I think will be the next
Speaker 1: big thing, which is the green revolution UM. And they
Speaker 1: wouldn't have been able to do that without the patient finance,
Speaker 1: for example of the China Development Bank UM different. They're
Speaker 1: increasing are in D spending by overcent in the last
Speaker 1: ten years. And so the US kind of talks Jefferson
Speaker 1: but as Hamilton's but like that, but China acts and
Speaker 1: talks Hamilton's but um Trump is dismantling the Hamiltonsian legacy.
Speaker 1: And I'm not talking about the musical. I'm talking about
Speaker 1: the real, you know, active strategic investments of the U
Speaker 1: S government which have been fundamental to the Internet revolution.
Speaker 1: Now Tottech, biot tech and clean love. That Tesla would
Speaker 1: not have existed without the US government. The last word
Speaker 1: of Mariana, which is appropriate Kendroga, thank you so much
Speaker 1: for joining us. I'm gonna put two books here, folks.
Speaker 1: I really can't say these are two really different books.
Speaker 1: A cursive cash now in it's fifteen printing. This is
Speaker 1: a brave book, to say the least on the cash economy,
Speaker 1: and also a negative interest rates and also as well,
Speaker 1: this must read the value of everything you agree, you disagree,
Speaker 1: you want to scream at, or you love her to death,
Speaker 1: Masaccado with the economic history you need to know. Always
Speaker 1: good to speak with James Rumor Jim Romor on commodities,
Speaker 1: on weather, But of course, with Hurricane Florence upon the
Speaker 1: nation and particularly in the southeast, it's good to catch
Speaker 1: up with Jim Rumor. Jim, what's your believability on the
Speaker 1: track of this hurricane. You've followed Elno, you've followed global
Speaker 1: temperature in oceans forever. Is this a run of the
Speaker 1: male hurricane ores or something different? Well? Thanks Tom, sorry
Speaker 1: miss you on TV or this morning. It's really being
Speaker 1: affected by um just a combination of a weekending lawn
Speaker 1: and warm Atlantic temperatures. Right now, we still feel overall
Speaker 1: though the hurricane season is gonna be weaker than normal
Speaker 1: for the Gulf Coast and also for Florida. That's good
Speaker 1: the orange juice crop. And also it won't have an
Speaker 1: effect on the on the energy markets. Well, I understand
Speaker 1: it won't have an effect on the energy markets, but
Speaker 1: it does on shipping as well. Let's start with square
Speaker 1: one in your history on this is great and I
Speaker 1: assume al Nino, but is a Pacific thing? Did did
Speaker 1: those things affect the Atlantic Ocean? Well, they certainly do.
Speaker 1: You know, we don't have an Almenia right now. The
Speaker 1: ocean temperature is off the coast at Peru are actually
Speaker 1: very cool and that's reducing sheer right now in the Atlantic.
Speaker 1: And the reason we're seeing flora's as strong as it is.
Speaker 1: When we have an alninia and warm Eastern Pacific temperatures,
Speaker 1: things tend to really die out. This storm I think's
Speaker 1: gonna be moving further south from something we call it
Speaker 1: fugi wah wah affect. Helena out in the Atlantic's gonna
Speaker 1: o curve this thing down towards the South Carolina coast. Yeah,
Speaker 1: flooding will be really detrimental. A lot of equities could
Speaker 1: be affected by this more than commodities are. Our Rob
Speaker 1: Caroline was very good on that as well. John. As
Speaker 1: I type here, I've got to type in the search
Speaker 1: engine of the crack Bloomberg surveillance search engine the Fujiwara effect. Okay,
Speaker 1: I'm up to speed here. And that's like to two
Speaker 1: hurricanes or tight foods together, right, Jim, that's right. Well, Actually,
Speaker 1: my new weekly report called Climate Telligence Report and on
Speaker 1: my on my website really talks about this in a
Speaker 1: blog this morning. Uh, this has happened quite a bit
Speaker 1: and and models tend to be wrong. So because of
Speaker 1: this Felena. We're gonna see this thing hug the coast,
Speaker 1: go down to South Carolina coast. Stocks such as A
Speaker 1: Generic Holdings, which is a a generator company. Generator is
Speaker 1: probably be the biggest lift as well as home deep.
Speaker 1: I was gonna say, what's on deep effect here, and
Speaker 1: the answer is it's got to be huge and demonstrable.
Speaker 1: That's right. In two days you received uh four or
Speaker 1: five percent return, which takes you know, several years again
Speaker 1: a T bill obviously, you know. So there are a
Speaker 1: lot of stocks out there are being affected more than
Speaker 1: the commodity markets right now. Let's go back right now
Speaker 1: to general commodities, GYM. We've seen an abundance of soybeans.
Speaker 1: We've got tariffs this that what is your perspective on
Speaker 1: the front loading of commodity purchases before these tariffs set in? Well,
Speaker 1: you know, demand that's certainly slacking me off. We're gonna
Speaker 1: have the largest soybing crop in history, so we're gonna
Speaker 1: see just all this farmers selling, I mean, beans are
Speaker 1: the lowest they've been in many years. We've been bearrassed
Speaker 1: all summer. The one market I thought would do better,
Speaker 1: which did well during June and July was wheat. We've
Speaker 1: had global weather problems and much of Europe and Austrial
Speaker 1: Australian Canada. So I think you're seeing the wheat market
Speaker 1: outperformed soybeans because of potential for demand. Leader for weeks.
Speaker 1: What's your number one car right now? Except plywood in
Speaker 1: the southeast. Some of the equities actually, uh, some of
Speaker 1: the I think, Um, I'm still pretty bears soybeans. I
Speaker 1: think that the sugar actually has a chance to break out.
Speaker 1: With droughts in India, we've had everybody bears the sugar market.
Speaker 1: Now we're seeing rule production actually come down, so that's
Speaker 1: a trade. I think we will go up eventually. And
Speaker 1: I'm still kind of barrassed. Jim Romer, thank you so much.
Speaker 1: We are now going to speak to the grizzled Steven
Speaker 1: A of Federated about what we have wrought through the day.
Speaker 1: From Kenneth Rogoff and Marianna Masacado. Steve as one of
Speaker 1: the great themes here which affects every listener, certainly in America,
Speaker 1: if not worldwide. And I want to go back on
Speaker 1: eight books right now you can buy for fifteen hundred
Speaker 1: dollars hardback Benjamin Graham David Dodd on Railroad Security Analysis,
Speaker 1: a book that changed everything about investment. And you got
Speaker 1: a copy of that book. I've got to copy that book.
Speaker 1: I didn't pay fifteen hundred dollars for it. What what
Speaker 1: I want to say? Steve is Ken Rogoff not once,
Speaker 1: not twice, but three times talked about monopoly among American companies,
Speaker 1: and particularly technology company. Are you buying blue chips in
Speaker 1: a time of monopoly? You know, these these tech there's
Speaker 1: nothing like a monopoly, Tommy, because they have pricing power.
Speaker 1: And these tech companies are, in fact, the new monopolies,
Speaker 1: aren't They really they have enormous pricing power, but they
Speaker 1: haven't really used it. They've they've reinvested it, if you will,
Speaker 1: and they keep lowering prices on it, run it around
Speaker 1: the economy. Um. So they've been benign monopolies in some ways. Okay,
Speaker 1: this is brilliant, their benign monopolies. Let's say let's pick
Speaker 1: up good morning. Mr Bezos were thrilled that you listen
Speaker 1: to Bloomberg surveillance. But Jeff Bezos has been benign. He
Speaker 1: would certainly say that, and as entourage would say that.
Speaker 1: But then there's a point, and the bargaining he has
Speaker 1: with his public is we never get to that pricing
Speaker 1: power point. Yeah, and I think most people think his
Speaker 1: model is such that he's not going to get there.
Speaker 1: I don't know. I mean, I I've been told, like,
Speaker 1: we had the PPI number this morning and a little
Speaker 1: surprising to people, a little lower. But what I keep
Speaker 1: emphasizing is you've got some price pressure in the economy
Speaker 1: on the wage side, but you've got these benign monopolies,
Speaker 1: if you will, the salesforce, dot COM's or whatever, providing
Speaker 1: companies with the tools to improve productivity in ways that
Speaker 1: aren't always measured. And on the other side, you've got
Speaker 1: Jeff Bezos up there on a hill loock with a
Speaker 1: gatling gun looking for volunteers to raise prices. And so
Speaker 1: we're not getting the kind of late so called late
Speaker 1: cycle inflationary impulse that we should be getting. Is dampening
Speaker 1: think and that's what's extending this cycle. It's so there's
Speaker 1: a benefit to all of us. Really. Okay, So this
Speaker 1: goes to yesterday's bombshell with Numura cutting out Tesla and
Speaker 1: using this word investible. And I said to someone, I said,
Speaker 1: in America. We don't say a Graham dot word, which
Speaker 1: was speculation. It's like an American to use the word speculation.
Speaker 1: Has this market, Steve Off, become more of a speculation
Speaker 1: because of some of these larger macro trends. I don't
Speaker 1: think so, Tom. I mean, you can buy and buy
Speaker 1: and own with comfort today, right, I mean, look at
Speaker 1: the the evaluation on the overall market has actually gone
Speaker 1: down in the last twelve months. We're trading here around
Speaker 1: seventeen times this year's earnings, seventeen times this year's Make
Speaker 1: America Great Again earnings. Yeah, that's not that's not in
Speaker 1: excessive at all. And and if you start looking at stocks,
Speaker 1: individual stocks, I mean there's a whole lot on my
Speaker 1: bio list they're trading at ten to twelve times earning.
Speaker 1: So this is some names or sectors. All the financial
Speaker 1: stocks are dirt cheap right now. JP Morgan's one that
Speaker 1: we like. As you know, the energy stocks are completely
Speaker 1: on their back talk John John Krinsky was talking up
Speaker 1: Schlumbers the other day. The industrials are loaded. You know,
Speaker 1: load a mid tea means even Apple, as much as
Speaker 1: it's had a nice, very nice run, it's trading out
Speaker 1: sixteen times. Let me rip up the scripture then, because
Speaker 1: two days ago we began the theme around a wonderful
Speaker 1: interview that said Apple is under owned by institutions. They
Speaker 1: did not mention federated, but people you know long only
Speaker 1: by side institutions, and those people that are behind Steve
Speaker 1: Off have to catch up, and by definition they have
Speaker 1: to acquire Apple, Microsoft and the Amazon and the others.
Speaker 1: Do you buy that idea that Apple has a wind
Speaker 1: behind it just because everybody's got a gunpoint by it.
Speaker 1: Maybe I don't necessarily that they're Certainly it's not over
Speaker 1: owned in that sense, although it is over on Tom
Speaker 1: in a way that the big flows in the last
Speaker 1: seven years have been to the passive funds, and that's
Speaker 1: partly been the wind behind the apples price rose, right
Speaker 1: so and the money flown in passes this year upside
Speaker 1: in Apple Tshu are right, it's been up. It's heavily
Speaker 1: owned by the country because a lot of them are
Speaker 1: in these passive funds. I don't think you could say
Speaker 1: it's under own within this with an equity is the
Speaker 1: surprise within the four accounting statements? What are you most
Speaker 1: focused on now? And to take away shareholder equity. What
Speaker 1: are you most focused on an income statement, balance sheet
Speaker 1: and cash flow statement? Well, we always are looking at
Speaker 1: balance sheets, Tom, because you know, you don't want to
Speaker 1: get yourself in a situation um with a dangerous level
Speaker 1: of leverage. I actually balance sheets are generally in good shape.
Speaker 1: There's some areas that are weak, but generally corporate balance
Speaker 1: sheets are pretty good. We look at cash flows because
Speaker 1: we think cash flow is really dry value and that
Speaker 1: for us is a big driver of our whole process
Speaker 1: on investing. And the cash flows to us look very
Speaker 1: very good, and the quality of earnings there for to
Speaker 1: us looks really solid across many sectors in the economy
Speaker 1: right now. The question I can ask you what I
Speaker 1: would ask and carry up at Pioneer and other value
Speaker 1: investors is cash. There's a huge pressure a mutual funds
Speaker 1: to be invested. There's usually do you have a do
Speaker 1: you have a maximum cash you can hold? By perspectus,
Speaker 1: most of our perspects don't don't do that. I mean
Speaker 1: we we we acknowledge that many of our investors, particularly
Speaker 1: we work with investor visors, they like to do their
Speaker 1: own allocating, so they prefer we're fully invested. We tell people.
Speaker 1: We will endeavor to be fully invested usually, but we've
Speaker 1: never We're not big at federated at you know, locking
Speaker 1: down our portfolio managers and not allowing them to use cash.
Speaker 1: We're very opportunistic in our portfolio approach, so we sometimes
Speaker 1: will hold ten cash in portfolio because we don't see
Speaker 1: any particular values at the moment. What are you lightening
Speaker 1: up on now as you find opportunities in banking and
Speaker 1: energy well at the margin? Uh let me let me
Speaker 1: rephrase us in a more delicate manner. Did you sell
Speaker 1: all your Amazon yesterday? No? How did you exactly? What
Speaker 1: are you like? It's one reason we like the market. Tom,
Speaker 1: we're lighting up on bonds more than we are one
Speaker 1: Christ up yield down and you just can't own him here. Yeah, yeah,
Speaker 1: we're we're max underweight right now on bonds, and you know,
Speaker 1: it's one reason we like the markets. You think the
Speaker 1: text stocks that have led to us still look fundamentally good.
Speaker 1: I think they probably do for a little bit of
Speaker 1: a pause, but I wouldn't guess a big pull back
Speaker 1: and the rest of it could play catch up. How
Speaker 1: to buy and hold? Do? I mean? I mean within
Speaker 1: the long term more conservative movement of a five year
Speaker 1: old a seven year older even Dare I say buy
Speaker 1: and hold? Is that a dangerous strategy? Now? Do you
Speaker 1: have to be more nimble? I think you've got a
Speaker 1: little be a little more nimble, Tom. But you know,
Speaker 1: one reason our performance has been decent is that we've
Speaker 1: we've tried to hold turnover to reasonable levels. But just
Speaker 1: buy and hold is a little bit naive. The world
Speaker 1: keeps changing. There's all these disruptors out there. You want
Speaker 1: to try to stay on top of them. And you've
Speaker 1: got to make sure the companies you aren't being disrupted.
Speaker 1: So it's not just as simple as buy and all.
Speaker 1: And let me go to my pet project, which is rebalancing.
Speaker 1: Everyone knows I'm not a big fan of. You know.
Speaker 1: The consultants come in and we've gotta deal with this
Speaker 1: every day. We need a fee rebalance every X number
Speaker 1: of months quarters. Soon they're gonna be rebalance, rebalance on Thursday.
Speaker 1: It's rebalanced Thursday. Rebalance is a good way to lose winners,
Speaker 1: isn't it. Yeah, you've got to let your winners run.
Speaker 1: I mean, unless you think you're smarter than everybody's all
Speaker 1: the time. I mean the reason they're up is usually
Speaker 1: because something good has happened. So we try to let
Speaker 1: our winners run at certain levels. Maybe the risk exposure
Speaker 1: gets to be too much, but you know we're not
Speaker 1: big on you know, daily rebalancing. Uh oh, this has
Speaker 1: been a clinic Steva, thank you so much. I love
Speaker 1: doing this. Folks. You have you know, a given interview
Speaker 1: in this case with Ken Rogoff and Marianna Masicado and
Speaker 1: and if someone in the capabilities of Mr Author Federated
Speaker 1: Investors come into really further home that conversation is a
Speaker 1: great steve with Federated investors with us on the equity markets.
Speaker 1: Joining us today is Bill Dudley, the recently retired President
Speaker 1: of the New York Federal Reserve and truly a man
Speaker 1: who was in the middle of the crisis. Good morning, Bill.
Speaker 1: You came to the Fed in two thousand seven, so
Speaker 1: you were there for the crash. You were on the
Speaker 1: market's desk, and then they made you president in two
Speaker 1: thousand nine and you had to clean it all up.
Speaker 1: So let's go back to that time period two thousand
Speaker 1: seven to two thousand eight. First, Uh, when did you
Speaker 1: first realize that we were not dealing with issues of
Speaker 1: individual institutions, but as system wide crisis. You know, pretty
Speaker 1: early on Mike, because I could see that the housing
Speaker 1: bubble was basically very vulnerable to being broke burst, and
Speaker 1: if it did burst, it was going to put a
Speaker 1: lot of pressure, especially on the non banking part of
Speaker 1: the financial system, so securities firms, finance companies, UH, mortgage
Speaker 1: banks UH. And so what we saw is just a
Speaker 1: very big increase in stress on the financial system, and
Speaker 1: starting in two thousand and seven, but mostly in two
Speaker 1: thousand and eight, things started to break. And unfortunately, the
Speaker 1: regulatory regime that we had in place them was pretty
Speaker 1: well suited to handling bank problems, but not very well
Speaker 1: stud to handling non bank problems, and non bank problems
Speaker 1: were where the problems turned up first. They'll take me
Speaker 1: inside the market's room. During that period, I've spoken to
Speaker 1: people who were on the market's desk that worked for
Speaker 1: you who said they were just dumbfounded watching fedwire the
Speaker 1: bank transfer system as the money just flowed out. Well,
Speaker 1: I think that what happened was that there was a
Speaker 1: tremendous loss of confidence in financial markets, and when confidence
Speaker 1: is lost, it's very hard to bring it back. And
Speaker 1: that's why the federies really had to take extraordinary steps,
Speaker 1: not just in terms of intervening to prevent catastrophic failures
Speaker 1: of firms that might take down the entire financial system,
Speaker 1: but also to support markets so people could continue to
Speaker 1: borrow and lend, because at the end of the day,
Speaker 1: it's the flow of credit that supports the economy, supports households,
Speaker 1: supports businesses. So the FED had to take some extraordinary steps. Now,
Speaker 1: the good news is we're probably a lot better place
Speaker 1: today than we were then. The banking system is a
Speaker 1: lot stronger, a lot more capital and liquidity, but there's
Speaker 1: still some some risk. Some of the powers that the
Speaker 1: FED has to intervene in crisis have actually been trimmed
Speaker 1: back by Congress. Uh Emerging risk may arise in new areas,
Speaker 1: uh it to extent that you regulate the banking system
Speaker 1: uh More, you're probably gonna push more activity out into
Speaker 1: the non bank sector. So that's something that we need
Speaker 1: to keep our eye on in the future. What was
Speaker 1: the scariest moment for you. I think the scariest moment
Speaker 1: was really the week after Lehman failed and financial markets
Speaker 1: completely melted down, both in terms of you know, the
Speaker 1: willingness of people to buy commercial paper from highly rated companies. Uh,
Speaker 1: and uh, you know the unwillingness of people just to
Speaker 1: transact with one other's essentially a huge flight to liquidity.
Speaker 1: People were holding liquidity and you know, the market function
Speaker 1: basically just broke down. Did it shock you after working
Speaker 1: at Golden Sacks for years that they almost went to
Speaker 1: Not really? I mean the investment banks were pretty vulnerable
Speaker 1: in the sense that they had they were very leveraged.
Speaker 1: They didn't have a lot of capital. Uh, they were
Speaker 1: dependent on short term wholesale funding to finance some long term,
Speaker 1: hard to value a liquid assets, and so when the
Speaker 1: funding started to run, that put all investment banks, including
Speaker 1: Goldman Sacks in in harm's way. Now, the good news
Speaker 1: was that making Goldman Sacks and Morgan Stanley bank holding
Speaker 1: companies uh, having them go out and raise private capital
Speaker 1: right after Lehman failed did reassure people in the markets
Speaker 1: that these were viable companies with viable business models. But
Speaker 1: it was a close call for some of the investment banks. Well,
Speaker 1: there's still an argument ten years on whether Lehman could
Speaker 1: have or should have been saved, which maybe two different
Speaker 1: questions how would you answer those, Well, I think it's
Speaker 1: people exaggerate house important. It was one way or the other.
Speaker 1: You know, the financial crisis was going to get worse
Speaker 1: regardless because the housing sector was collapsing and housing prices
Speaker 1: were going down. So even if Lehman somehow had been saved,
Speaker 1: other bad things would have happened until Congress passed the
Speaker 1: TARP legislation, which brought forth a lot of money that
Speaker 1: could be used to recapitalize the bagging system. If Lehman
Speaker 1: hadn't failed, it would have been harder to get Congress
Speaker 1: to move and so other bad things would happen. It
Speaker 1: would have been a different path, but I don't think
Speaker 1: it would have been a better path in terms of
Speaker 1: how the financial crisis would have paid played out. You
Speaker 1: mentioned some of the regulatory changes that have taken place
Speaker 1: for good and for bad. Are we fighting the last
Speaker 1: war or do we have a regulatory system that can
Speaker 1: cope with maybe whatever comes up in the banking system now? Well,
Speaker 1: I think there's always a risk that you fight the
Speaker 1: last war, right because you learned the sources of vulnerability
Speaker 1: of caused by the last period of stress. So like
Speaker 1: money market fund reform, Central clearing of over the counter rivers.
Speaker 1: Lessons learned from the last crisis. Uh, it's hard to
Speaker 1: learn the lessons before you actually experienced their bad outcome.
Speaker 1: So I do worry about the non bank financial sector.
Speaker 1: A lot of credit in the United States is intermediate
Speaker 1: outside of the core banking system. UH. Now, the fact
Speaker 1: that some of the major are securitious firms are now
Speaker 1: regulated entities and subject to capital and liquidity requirements is good,
Speaker 1: But there's still a lot of activity that takes place
Speaker 1: not in the core banking system, and I worry about that.
Speaker 1: Out in Jackson Hole, I asked some of your former
Speaker 1: colleagues what the major legacy of the crisis was, and
Speaker 1: I thought Jim Bullard had one of the best answers.
Speaker 1: He said, it changed central banking forever. Well, I think
Speaker 1: what it did is it basically nderscore the importance of
Speaker 1: financial stability in the pursuit of the feds monetary policy goals.
Speaker 1: Without financial stability, you cannot achieve your inflation and employment objectives.
Speaker 1: And so financial stability now is a really core part
Speaker 1: of how the Federal Reserve thinks about its job and
Speaker 1: monetary policy. But how do you do that? You have
Speaker 1: one blunt instrument. Well, that's one of the challenges for
Speaker 1: the US. Frankly. Uh, the you know, in other countries
Speaker 1: have more ability to put in place what are called
Speaker 1: macropotential tools, like changing the loan to value ratio for
Speaker 1: mortgages or requiring people to put more money down when
Speaker 1: they when they buy a mortgage. Uh, we we have
Speaker 1: we we could in practice do the same thing in
Speaker 1: the US, but it's very, very difficult because the regulatory
Speaker 1: apparatus in the US is very uh, you know, uh atimistic.
Speaker 1: You know, we have state regulators, we have federal regulators,
Speaker 1: we have several federal regulators, So it's very hard to
Speaker 1: do things, uh, in a coordinated way on the macro
Speaker 1: predential side to deal with financial stability issues. Now, the
Speaker 1: good news is we do have the Financial Stability Oversych Council,
Speaker 1: and so in principle they could do things. But whether
Speaker 1: they'll actually be able to act in a timely way
Speaker 1: that remains an open question in my mind. Ray Dalio
Speaker 1: of Bridgewater was on just a few moments ago with
Speaker 1: us and he said, worried about the Seventh Inning, that
Speaker 1: maybe about two years from now we will see a
Speaker 1: recession and it will be a bad one because of
Speaker 1: the impact of the dollar on global markets and because
Speaker 1: of a lot of unfunded liabilities out there. From the
Speaker 1: comfortable perch of retirement, are you as worried as Ray
Speaker 1: is about what maybe coming down the pike? Well, I'm
Speaker 1: worried about a couple of things we wanted to obviously,
Speaker 1: trade policy to extent that we get into a trade
Speaker 1: war with China, that's not going to be have a
Speaker 1: good outcome. Uh. Number two, I'm worried about the fiscal
Speaker 1: sustainability of the the track that the US is on
Speaker 1: in terms of its budget and debt. You know, ending
Speaker 1: this cycle with a budget devosit of five percent of
Speaker 1: GDP is a pretty horrible performance. And of course, I
Speaker 1: think the fact that the global economy is still very
Speaker 1: dollarized a lot of people around the world to US dollars,
Speaker 1: and so it's the extent that something bad happens in
Speaker 1: the U s that will get communicated back to the
Speaker 1: rest of the world because we live in a dollarized
Speaker 1: global economy. Okay, you're retired. Where was your dot? I'm
Speaker 1: pretty close to the consensus. I was pretty close to
Speaker 1: the consensus. I think the FED is you know, continue
Speaker 1: to do, you know, the right thing, gradually removing accommodation.
Speaker 1: I'm very much aligned with the voice Chair Powell terms
Speaker 1: of the Montrey policy. Outlook alright. Bill Dudley, recently retired
Speaker 1: President of the Funeral Reserve Bank of New York. Thank
Speaker 1: you very much for joining us this morning on Bloomberg
Speaker 1: Radio and television worldwide. Thanks for listening to the Bloomberg
Speaker 1: Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,
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Speaker 1: Tom Keane before the podcast. You can always catch us worldwide.
Speaker 1: I'm bloom and Radio