WEBVTT - It's Been Difficult to Get Inflation to Move, Soss Says 0:00:09.720 --> 0:00:12.880 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene with 0:00:13.600 --> 0:00:16.560 David Gura. Daily we bring you insight from the best 0:00:16.560 --> 0:00:22.239 of economics, finance, investment, and international relations. Find Bloomberg Surveillance 0:00:22.320 --> 0:00:27.000 on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course 0:00:27.320 --> 0:00:35.519 on the Bloomberg. It is always a celebration using on 0:00:35.560 --> 0:00:37.839 a thirty day basis, maybe a little longer they than 0:00:37.880 --> 0:00:41.599 Gideon Rose of Foreign Affairs Magazine. I will state it directly. 0:00:42.320 --> 0:00:45.199 It's so good, you know, not only the obligatory modern 0:00:45.240 --> 0:00:49.800 digital copy. Excuse me, you have to pay up Gideon 0:00:49.880 --> 0:00:53.280 for the thick paper copy as well, with a beautiful, big, 0:00:53.320 --> 0:00:56.320 readable fund which is the article as you look at 0:00:56.360 --> 0:00:59.560 the deep State, as you look at Trump in our allies, 0:00:59.680 --> 0:01:01.960 which the article that's stuck out for you. So we 0:01:02.000 --> 0:01:05.560 have a great piece by a professor at d C 0:01:05.760 --> 0:01:10.360 Law School, um that is basically saying the problem with 0:01:10.400 --> 0:01:12.560 Trump in the deep state is not the deep state, 0:01:12.720 --> 0:01:16.240 it's just the state. Just like the administration's attacks on 0:01:16.360 --> 0:01:19.640 fake news, their problems aren't on fake news, it's just news. 0:01:20.040 --> 0:01:23.240 So their problems are this is an administration that doesn't 0:01:23.280 --> 0:01:27.160 really believe in governing the country or running the administrators. 0:01:27.160 --> 0:01:30.520 President doesn't believe much in running the US government, and 0:01:30.600 --> 0:01:35.959 the government is essentially uh returning the favor by resisting, 0:01:36.440 --> 0:01:41.080 and the the gap between a system set up to 0:01:41.200 --> 0:01:44.000 run the country run the government actively intervened for the 0:01:44.000 --> 0:01:46.560 public behalf is now being run by somebody who has 0:01:46.600 --> 0:01:49.040 us not just a separate agenda, but no real interest 0:01:49.160 --> 0:01:53.040 in the broader apparatus, and that is creating problems. But 0:01:53.240 --> 0:01:56.520 the fact is he got elected by a large body 0:01:56.560 --> 0:02:02.000 of people who don't want traditional politics. Do we want 0:02:02.120 --> 0:02:05.840 traditional foreign affairs? Well, so this is basically the kind 0:02:05.840 --> 0:02:08.880 of look I this ties in Trump and bregs it, right, 0:02:08.919 --> 0:02:12.320 So what's happening and bregsit. If you get elected on 0:02:12.360 --> 0:02:16.760 a stupid but popular program that doesn't really have a 0:02:16.840 --> 0:02:20.000 practical component to it, then when you get into office, 0:02:20.040 --> 0:02:21.680 you have to figure out what to do to live 0:02:21.760 --> 0:02:24.160 up to your promise. Right. That's what the problem with 0:02:24.240 --> 0:02:26.600 Brexit right now is they got stuck with an agenda 0:02:26.680 --> 0:02:27.959 and now have to figure out how to make that 0:02:28.000 --> 0:02:30.360 agenda work when nobody actually wants it to work or 0:02:30.360 --> 0:02:32.800 thinks it should work, except the people who voted for 0:02:33.000 --> 0:02:35.200 the people in power. Having to implement it, don't believe it. 0:02:35.440 --> 0:02:37.079 So now you have the same thing to a certain 0:02:37.080 --> 0:02:39.280 extent in the US in which the president got elected 0:02:39.280 --> 0:02:43.000 on a populist, nationalist agenda that he actually still obviously 0:02:43.080 --> 0:02:45.640 feels beholden to those constituents, as we saw from the 0:02:45.680 --> 0:02:49.400 Charlottesville type stuff. Um, and yet that's not really a 0:02:49.480 --> 0:02:52.919 possible agenda for governing the country. And so what happens 0:02:52.960 --> 0:02:57.680 when the campaign reality meets the governing reality is something 0:02:57.720 --> 0:03:00.960 that basically nobody knows. That's why we're in this weird 0:03:01.040 --> 0:03:03.800 state now in which nobody actually knows what's going on, 0:03:03.880 --> 0:03:07.280 because we've never seen anything like this. The exactly the 0:03:07.400 --> 0:03:11.200 degree of political this is the first time ever. Kind 0:03:11.200 --> 0:03:15.080 of stuff cannot be exaggerated, even as the economy seems 0:03:15.080 --> 0:03:17.880 stable and normal and markets are going up and everything 0:03:17.919 --> 0:03:20.160 has come So it really is a kind of where 0:03:20.160 --> 0:03:23.640 you're looking determines how freaked out you are but getting 0:03:23.680 --> 0:03:26.120 at the same time, you know, Donald Trump, your president 0:03:26.120 --> 0:03:29.200 was elected on a very clear agenda of policy, right healthcare, 0:03:29.600 --> 0:03:33.040 tax reform, and infrastructure. When is he going to focus 0:03:33.400 --> 0:03:36.200 on the actual policy that he can get through Congress? See, 0:03:36.240 --> 0:03:39.960 I don't actually think he was elected on those policy agendas. 0:03:40.040 --> 0:03:43.040 He never actually set out real policies on those things. 0:03:43.040 --> 0:03:46.200 They were urges, they were emotions. Infrastructure was I'm going 0:03:46.240 --> 0:03:47.960 to do something for the public. He doesn't actually care 0:03:48.000 --> 0:03:49.640 about infrastructure, else he would have turned to it. And 0:03:50.280 --> 0:03:52.720 even on some of the policy issues like healthcare, as 0:03:52.760 --> 0:03:55.800 we saw, there was a negative thing. We don't like Obamacare, 0:03:55.800 --> 0:03:58.440 but there was no actual positive program, which is why 0:03:58.480 --> 0:04:02.920 they had no actual health care legislation to put in place. 0:04:03.120 --> 0:04:05.440 I don't think they're going to get any significant legislation 0:04:05.800 --> 0:04:09.280 going forward. It's possible, but the same problems that bedeviled 0:04:09.320 --> 0:04:12.480 them with a real agenda and putting together a sort 0:04:12.480 --> 0:04:15.960 of bipartisan or even a single Republican agenda on major 0:04:16.000 --> 0:04:18.680 issues is going to continue to bedevil them throughout the fall. 0:04:19.800 --> 0:04:21.400 I know we've also is on radio, who does he 0:04:21.440 --> 0:04:23.440 listen to? Who does the president? First of all, does 0:04:23.480 --> 0:04:27.200 the president listen to anyone? At this point, Well, that 0:04:27.240 --> 0:04:29.960 sort of depends on who you talk to. Nobody actually knows, 0:04:30.760 --> 0:04:34.000 because what you tend to see is the president talking 0:04:34.000 --> 0:04:36.719 to lots of people and then changing his line to 0:04:36.760 --> 0:04:39.159 a certain extent depending on who he's talked to, and 0:04:39.200 --> 0:04:42.080 then finally bending to some reality, but then going back 0:04:42.120 --> 0:04:44.080 to what he was saying before. At this point, we 0:04:44.120 --> 0:04:46.560 do not know who the president listens to. You mentioned 0:04:46.560 --> 0:04:49.640 that you've said this many times that you know to 0:04:49.760 --> 0:04:54.960 use the cliche foggy about him is significantly understaffed right now, 0:04:55.040 --> 0:04:57.360 How does it actually play out? What does it mean 0:04:57.880 --> 0:05:02.440 for Secretary Tillerson? The there aren't the Richard Hasses beneath 0:05:02.839 --> 0:05:08.279 that can provide wisdom. What I've heard is that, um, look, 0:05:08.320 --> 0:05:11.440 the Secretary of State usually has two different jobs. There's 0:05:11.480 --> 0:05:13.800 managing the President and running U as far you know, 0:05:13.880 --> 0:05:16.440 running running the White House and the administration's foreign policy 0:05:16.440 --> 0:05:19.480 and working up there's also managing the building and the 0:05:19.520 --> 0:05:23.359 State Department and the organistration administration and running that. Uh 0:05:23.520 --> 0:05:26.680 I've heard essentially the Tillerson is focused almost entirely on 0:05:27.240 --> 0:05:29.960 the White House and the President and keeping things sensible 0:05:30.000 --> 0:05:32.760 on policy, and that the he's not paying much attention 0:05:32.800 --> 0:05:35.400 to the State Department. And the things they've said about 0:05:35.400 --> 0:05:38.080 the State Department, the lack of staffing, the budget cuts, 0:05:38.120 --> 0:05:41.679 the reorganization are scaring the crap out of everybody. Uh So, 0:05:42.040 --> 0:05:45.480 the State Department essentially is entirely the calmed uh and 0:05:45.520 --> 0:05:48.479 the lack of policy advice of people. There's no lack 0:05:48.520 --> 0:05:51.120 of people who could supply policy advice. The problem is 0:05:51.160 --> 0:05:53.000 that the people in the White House making the decisions 0:05:53.080 --> 0:05:56.799 don't well, the top person doesn't seem to care about 0:05:56.800 --> 0:05:59.800 that kind of policy advice. Getting do we understand if 0:06:00.080 --> 0:06:02.120 and Trump is losing a little bit of popularity with 0:06:02.160 --> 0:06:05.000 his base and actually if he does, does he change 0:06:05.000 --> 0:06:06.520 does that explain a little bit of what we saw 0:06:06.520 --> 0:06:09.080 in Charlottesville. Well, so this gets to this question of 0:06:09.120 --> 0:06:12.279 sort of a chipping point. Right. Clearly, the poll figures 0:06:12.279 --> 0:06:15.320 have dropped, but they've dropped minuscule le. They've dropped, you know, 0:06:15.360 --> 0:06:17.920 a point or two a month on the and the 0:06:18.000 --> 0:06:21.560 average in aggregate. And the question is if that continues 0:06:21.640 --> 0:06:23.960 going down from the high the low forties to the 0:06:24.000 --> 0:06:26.120 high thirties where it is now, If it continues to 0:06:26.120 --> 0:06:29.880 go from the low high thirties to the low thirties, 0:06:29.920 --> 0:06:32.880 at what point does the base become a sort of 0:06:32.960 --> 0:06:36.280 albatross rather than a source of support. And we just 0:06:36.440 --> 0:06:39.920 we're not there yet. Things have held, but another few 0:06:39.960 --> 0:06:44.039 months we may be in a different situation. I look, Giddan, 0:06:45.360 --> 0:06:47.839 where we are and I think it comes back to 0:06:47.880 --> 0:06:52.000 the base of its story. We're talking, particularly after Charlottesville, 0:06:52.040 --> 0:06:56.840 about nationalists. Forget about supremacies. It's not really foreign affairs, 0:06:56.880 --> 0:07:01.240 but the sense of nationalism. Where is the new conservative 0:07:01.360 --> 0:07:07.040 nationalism that is that is constructive? Well, this is actually 0:07:07.040 --> 0:07:09.160 the great question, and I think we're going to be 0:07:09.320 --> 0:07:11.640 looking more at this in years to come. There are 0:07:11.680 --> 0:07:15.240 some actual legitimate thinkers on the right, people like you've 0:07:15.240 --> 0:07:18.040 all live in or your m Hazzoni or elsewhere, or 0:07:18.040 --> 0:07:20.720 people like Basbis who are trying to think about what 0:07:21.120 --> 0:07:24.800 a positive and constructive civic nationalist agenda could be that 0:07:24.880 --> 0:07:29.080 ties the country together. But that isn't necessarily uh a 0:07:29.160 --> 0:07:32.000 nationalism directed against somebody, Right, the question is how do 0:07:32.000 --> 0:07:34.680 you have an inclusive nationalism. The problem with so much 0:07:34.680 --> 0:07:37.200 of the agenda of the administration is that it seems 0:07:37.240 --> 0:07:42.120 designed to provide communal solidarity for its team by creating 0:07:42.200 --> 0:07:45.000 an opponent or an enemy, whether it's Korea, whether it's 0:07:45.000 --> 0:07:48.160 illegal immigrants, whether it's Mexicans, whether it's god knows what. 0:07:48.760 --> 0:07:53.920 And the real challenge for civic nationalism in the you know, 0:07:54.720 --> 0:07:57.120 twenty one century is to figure out how you can 0:07:57.160 --> 0:07:59.720 get the benefits of tying your community together, how you 0:07:59.720 --> 0:08:02.760 can have social solidarity and a constructive sense of purpose, 0:08:03.040 --> 0:08:06.080 but in a way that is inclusive and that plays 0:08:06.120 --> 0:08:10.480 well with other groups, rather than having your solidarity generated 0:08:10.560 --> 0:08:13.760 simply by opposition in hatred of something else. And that's 0:08:13.760 --> 0:08:16.320 what we're still groping for. What is the positive American 0:08:16.360 --> 0:08:19.560 program that can lead the world, uh and lead the 0:08:19.560 --> 0:08:23.320 country rather than divide things. Francy Laqua in London. Francy, 0:08:23.360 --> 0:08:26.040 and we're now going to go to the smartest article 0:08:26.160 --> 0:08:28.920 I have seen in the last I'm saying seventy two hours, 0:08:28.960 --> 0:08:32.200 maybe it's four days. Was counting with Gideon Rose. He's 0:08:32.960 --> 0:08:35.800 the editor in chief of Foreign Affairs magazine. Another triumph 0:08:35.880 --> 0:08:41.440 of issue, unthoughtful discussion in different views, the power of 0:08:41.480 --> 0:08:45.920 Foreign Affairs, the many different views across the political spectrum. 0:08:46.760 --> 0:08:52.280 Gideon Jeff Greenfield in Politico has just wrote the best 0:08:52.400 --> 0:08:56.000 article I've seen on what happens if we don't know 0:08:56.040 --> 0:09:00.000 our history. It is just profound, alludes to the president, 0:09:00.000 --> 0:09:02.440 and it talks about Earl Butts, which is a name 0:09:02.480 --> 0:09:06.559 from another time and place. Um, the former Secutor of 0:09:06.559 --> 0:09:10.800 Agriculture were resigned in disgrace. How dumb are we Gideon 0:09:10.920 --> 0:09:13.960 Rose day to day away from the PhDs and the 0:09:14.000 --> 0:09:18.640 fancy experts, How dumb are we on our international relations? 0:09:19.280 --> 0:09:21.480 It's not so much that we're dumb. I think that 0:09:21.840 --> 0:09:26.880 most people are concerned with and follow carefully the things 0:09:26.920 --> 0:09:28.920 that matter to them in their daily lives, and they 0:09:28.920 --> 0:09:31.280 have a good sense of that. And most people are 0:09:31.320 --> 0:09:34.920 not directly involved in foreign policy and foreign affairs. One 0:09:34.960 --> 0:09:37.400 of the privileges of being the world's hedgem on the 0:09:37.480 --> 0:09:41.200 leading power is that our actions affect others more than 0:09:41.240 --> 0:09:43.400 their actions affect us. So it's kind of rational for 0:09:43.440 --> 0:09:46.880 Americans not to pay all that much attention. Unfortunately, they 0:09:47.200 --> 0:09:50.720 what the problem is not their ignorance or lack of 0:09:51.000 --> 0:09:54.640 knowledge or lack of concern. It's that the things they 0:09:54.720 --> 0:09:58.640 know that aren't necessarily true right and um, the this 0:09:58.760 --> 0:10:05.640 administration right now is increasingly becoming losing all credibility. It's 0:10:05.679 --> 0:10:10.080 it's becoming either a pariah or laughing stock. And the 0:10:10.200 --> 0:10:13.320 question that we're now facing is what is connected to 0:10:13.400 --> 0:10:16.920 what the great question of the day. We're learning tons 0:10:16.960 --> 0:10:20.520 of things right now about how the world works. The economy, 0:10:20.559 --> 0:10:23.640 for example, and markets seem disconnected from politics. We're now 0:10:23.679 --> 0:10:27.040 having a wonderful test in that, uh we we heard 0:10:27.120 --> 0:10:31.400 during the Obama administration during the red line with Syria crisis, 0:10:31.400 --> 0:10:34.080 if you remember, that was all this talk about, oh 0:10:34.120 --> 0:10:36.880 my god, the terrible negative consequences that are going to 0:10:36.960 --> 0:10:40.439 flow from the president not living up to his word. Right. So, 0:10:40.920 --> 0:10:45.320 critics of the Obama administration legitimately and appropriately slammed Obama 0:10:45.400 --> 0:10:48.360 for making a red line promise on Syria and then 0:10:48.400 --> 0:10:51.080 not living up to it. Right, And that was supposedly 0:10:51.160 --> 0:10:55.199 something that caused other powers elsewhere to uh take advantage 0:10:55.200 --> 0:10:57.840 of the US do other kinds of things. Academic experts 0:10:57.840 --> 0:11:00.240 in credibility said, no, you know that's actually not true. 0:11:00.240 --> 0:11:04.400 Credibility isn't universal. People don't actually look at everything in 0:11:04.440 --> 0:11:06.520 regard to the last thing you said and and and 0:11:06.559 --> 0:11:09.160 evaluate that. And I think we're seeing that play out now. 0:11:09.480 --> 0:11:12.480 The administration has no credibility. The pro rather, the president 0:11:12.520 --> 0:11:14.960 has no credibility, and even his advisors are seen as 0:11:14.960 --> 0:11:18.800 people trying to control him rather than actually speak independently. 0:11:19.160 --> 0:11:23.280 But the question of whether that affects anything real, why 0:11:23.400 --> 0:11:27.120 really in policy is something we've never seen before, right, 0:11:27.120 --> 0:11:28.840 But getting you could argue that this is why we 0:11:28.840 --> 0:11:30.720 have elections. Right, It's not up to me or Tom 0:11:30.800 --> 0:11:33.000 or anyone else to look at foreign policy. We elect 0:11:33.040 --> 0:11:35.760 people that know best and actually, you know, try and 0:11:35.840 --> 0:11:39.439 protect our our interests. If the president cannot do this 0:11:39.480 --> 0:11:42.720 is how does the GOP or the Republican Party keep 0:11:42.760 --> 0:11:46.559 that in line? Well, that's that's what we're watching, right, 0:11:46.600 --> 0:11:48.960 And you're right, this is ultimately a political thing. The 0:11:49.000 --> 0:11:52.160 American people, just like the British people chose Brexit, the 0:11:52.200 --> 0:11:55.880 American people chose Donald Trump in a free, unfair election, 0:11:56.080 --> 0:11:59.199 and uh, they're now getting the consequences. And the ultimate 0:11:59.240 --> 0:12:01.480 remedy will be a political one, right, in the sense 0:12:01.559 --> 0:12:04.520 that the administration has an agenda or it doesn't, It 0:12:04.559 --> 0:12:07.880 has a legislative track record or it doesn't. And eventually 0:12:07.840 --> 0:12:10.280 there will be new elections, both at the congressional level 0:12:10.360 --> 0:12:13.240 for Congress and then the presidential level, and life will 0:12:13.240 --> 0:12:16.280 go on. The American system will hold. This is not Venezuela. 0:12:16.480 --> 0:12:18.600 We don't just have Donald Trump. We have Donald Trump 0:12:18.679 --> 0:12:22.640 and James Madison. So we do have a constructive framework 0:12:22.800 --> 0:12:25.360 in which to keep politics going. The question is what 0:12:25.480 --> 0:12:28.120 the policy substance of that will be. And what you're 0:12:28.120 --> 0:12:31.000 saying with the Republicans. Nobody knows. And I would point out, 0:12:31.000 --> 0:12:34.400 as you mentioned Venezuela, one reason Foreign Affairs gets it done, 0:12:34.400 --> 0:12:36.960 a ship and O'Neil on Mexico and some of the 0:12:37.040 --> 0:12:40.080 challenges of Latin America as well. Gideon Rose, thank you 0:12:40.160 --> 0:12:43.240 so much for starting this one's issue of Foreign Affairs 0:12:43.240 --> 0:12:48.920 with Bloomberg surveillance. Bonus round, folks, it's uncommonly September thicker. 0:12:48.960 --> 0:12:52.000 It's got It's like it's like Hell or Vogue or 0:12:52.000 --> 0:12:57.640 Harper's Bizarre. It's it's it's it's it's that September autumnal 0:12:57.720 --> 0:13:04.719 issue fran scene. That's just thicker. No, no, not the 0:13:04.760 --> 0:13:07.080 swims No, no, We're not going to go there, Mr Tucker. 0:13:07.440 --> 0:13:11.640 It's not the swimsuit issue. It's like for Foreign Affairs 0:13:11.720 --> 0:13:15.640 is like Harper's Bazarre in September. They do more. And 0:13:15.720 --> 0:13:31.120 he was Gideon Rose, thank you, Neil sauce Ware. This 0:13:31.320 --> 0:13:35.520 was never boring and provided incredible perspective for its important perspective. 0:13:35.559 --> 0:13:38.319 In August of two thousand uh seven, and you know 0:13:38.400 --> 0:13:40.960 we have done this before, but in the tenth anniversary 0:13:41.040 --> 0:13:44.040 here of where we are in the in the trenches 0:13:44.080 --> 0:13:47.000 of credits, we see economics. You came up with this 0:13:47.080 --> 0:13:51.360 idea of ring fence. What are we ring fencing today? 0:13:51.559 --> 0:13:54.280 Is it the balance sheets of the central bank? Or 0:13:54.280 --> 0:13:59.520 are we ring fencing disinflation? Are we ring fencing the 0:13:59.600 --> 0:14:04.400 desire or investment by corporations? What is it? I think 0:14:04.400 --> 0:14:11.000 the answer is volatility. The most volatile financial instruments, Let's 0:14:11.000 --> 0:14:14.240 say in the US financial markets would include mortgages. Well, 0:14:14.400 --> 0:14:17.200 the Federal Reserve owns a fair amount of them. There 0:14:17.200 --> 0:14:20.560 at the threshold of reducing that holding. But while they 0:14:20.600 --> 0:14:24.960 were holding it, obviously that took volatility out of the 0:14:25.000 --> 0:14:29.360 markets and sequestered it, so to speak. Similarly with a 0:14:29.480 --> 0:14:36.240 longer term coupon holdings, bond holdings of treasuries in Europe, 0:14:36.680 --> 0:14:40.800 the peripheral debt, the corporate debt that the ECB has 0:14:40.840 --> 0:14:45.240 put onto its balance sheet in Japan, similar kinds of developments. 0:14:45.720 --> 0:14:48.000 It's one of the forces I think that has given 0:14:48.760 --> 0:14:52.360 rise to give the change your language, that has made 0:14:52.360 --> 0:14:54.840 a change of tense. It's given rise to the fall 0:14:54.880 --> 0:14:58.240 of volatility, I mean, the full of volatility is there. 0:14:58.720 --> 0:15:01.160 There seems to be a clearing call, whether in England 0:15:01.240 --> 0:15:06.040 or in the United States worldwide for further investment is 0:15:06.120 --> 0:15:08.680 one of the reasons why we're not getting investment, why 0:15:08.760 --> 0:15:12.200 things are dampened, why we're a lack of volatility, is 0:15:12.240 --> 0:15:14.880 just too much stuff out there. I mean, that's that's 0:15:14.880 --> 0:15:17.960 been a cliche that you and I have avoided for decades. 0:15:18.000 --> 0:15:21.840 But are we in an age of oversupply? Oh? I 0:15:22.200 --> 0:15:25.120 think the evidence with respect to how difficult it is 0:15:25.160 --> 0:15:29.000 to get inflation to move is suggestive of that. You know, 0:15:29.200 --> 0:15:31.720 when there was a time when monitorists told us that 0:15:31.760 --> 0:15:36.040 inflation came from large central bank balance sheets, Well we've 0:15:36.120 --> 0:15:38.680 but we've been doing that for quite some time, and 0:15:38.720 --> 0:15:42.320 the evidence is that the inflation hasn't manifested itself. Then 0:15:42.760 --> 0:15:44.720 there were others who told us, well, if you get 0:15:44.760 --> 0:15:47.640 to near full employment, you're going to get inflation. Well, 0:15:49.160 --> 0:15:51.840 unemployment rates have been falling in the US for quite 0:15:51.880 --> 0:15:55.440 some time to relatively low levels, Similarly in the UK, 0:15:55.680 --> 0:16:00.280 similarly in Japan, remarkably in Japan, even in kind natal 0:16:00.320 --> 0:16:04.840 Europe unemployment at least and now down down to single digits. 0:16:04.880 --> 0:16:08.680 And there's no evidence in particular of of wage pressures anywhere. 0:16:09.400 --> 0:16:13.360 But but you know, you think about the technological change 0:16:13.400 --> 0:16:19.120 that was fracking for example, and yes we have more 0:16:19.160 --> 0:16:21.920 oil supply at any price than we used to have. 0:16:22.520 --> 0:16:24.720 That's a good thing, not a bad thing. Let's come 0:16:24.720 --> 0:16:26.360 back with Neil Sauce. Are gonna run of the time 0:16:26.360 --> 0:16:28.200 here and I went Fenstine to dive into the next 0:16:28.240 --> 0:16:30.600 block with us as well. For instance, you really wonder 0:16:30.640 --> 0:16:32.800 about the ring fence. What is the ring fence fend 0:16:32.840 --> 0:16:36.120 scene of Brexit? What is Prime Minister May trying to 0:16:36.200 --> 0:16:39.240 ring fence right now? Well, it's unclear at this moment. 0:16:39.320 --> 0:16:41.320 We have a lot of business leaders tom that have 0:16:41.440 --> 0:16:43.560 gone to see the Prime Minister saying please ring fence 0:16:43.720 --> 0:16:47.640 services financial services because they're so important. But as negotiation 0:16:47.760 --> 0:16:50.840 starts then for the moment we're not really clear on 0:16:50.920 --> 0:16:53.040 the rights also of your nationals living here. So it's 0:16:53.160 --> 0:16:56.000 very difficult to see, you know, her bargaining chips what 0:16:56.080 --> 0:16:58.880 they are and what she absolutely wants to preserve for 0:16:58.960 --> 0:17:00.760 the moment. We don't have an answer for that yet. 0:17:00.760 --> 0:17:03.560 But it's a very good question. Deal. One quick question. 0:17:03.840 --> 0:17:08.600 If I could the date calendar September twenty November one December, 0:17:09.320 --> 0:17:12.399 do you just assume a rate increase? Is that a 0:17:12.520 --> 0:17:16.480 dangerous assumption? Right now? I don't I don't think the 0:17:16.520 --> 0:17:21.280 market is expecting anything in September with respect to the rates. 0:17:22.200 --> 0:17:26.199 The markets expecting that September will begin the process of 0:17:26.280 --> 0:17:30.439 unwinding the Fed's balance sheet. Then thereafter you have a 0:17:30.880 --> 0:17:36.120 you know, quite a number of economic reports, including inflation reports, 0:17:36.240 --> 0:17:40.639 which will adjust the probability of an action in December. 0:17:40.720 --> 0:17:44.480 I think that's pretty much the open moment for this 0:17:44.560 --> 0:17:46.600 year that Bill Dudley and others at the FED have 0:17:46.720 --> 0:17:51.560 been alluding to, Neil, what happens to interest rates once 0:17:51.600 --> 0:17:54.360 they start normalizing. There's a line of thought saying that actually, 0:17:54.640 --> 0:17:58.120 because we're due a correction or you know, some kind 0:17:58.200 --> 0:18:01.880 of recession soon, then they need to either hurry up 0:18:02.200 --> 0:18:06.400 and high rates, or that they'll go further into negative Oh. 0:18:06.480 --> 0:18:10.040 I think that, uh, the structure of interest rates is 0:18:10.119 --> 0:18:12.760 likely to be much lower than in the past episodes 0:18:13.200 --> 0:18:16.719 for a long time yet into the future. Uh and uh. 0:18:16.800 --> 0:18:20.639 I think it's also the case that the central banks 0:18:20.720 --> 0:18:23.160 don't want to get too far out ahead with respect 0:18:23.200 --> 0:18:26.320 to interest rates. They don't want to provoke the need 0:18:26.400 --> 0:18:30.359 for a new easing cycle, and so their main adjustment 0:18:30.440 --> 0:18:33.640 is going to be the balance sheet over time. And 0:18:33.680 --> 0:18:36.359 I think it's quite remarkable that they haven't articulated a 0:18:36.480 --> 0:18:38.960 rationale for why they want to shrink their balance sheet, 0:18:39.240 --> 0:18:42.600 what harm has it done? But nonetheless they seem intent 0:18:42.720 --> 0:18:45.320 upon it here in the States. Of course, they've already 0:18:45.320 --> 0:18:49.800 said relatively soon for commencement. There's almost the universal expectation 0:18:49.880 --> 0:18:52.800 that draw from the e c B will speak to 0:18:52.880 --> 0:18:56.440 that at Jackson Hole and or announce it in the autumn. 0:18:57.119 --> 0:18:59.679 Uh So, I think it's the balance sheet that's going 0:18:59.760 --> 0:19:02.720 to be the main focus of this, and that gives 0:19:02.800 --> 0:19:04.760 rise to open questions about what does that due to 0:19:04.800 --> 0:19:08.520 the shape of the yield curve, what's priced in at 0:19:08.520 --> 0:19:11.520 the moment. Well, my own view is that, um well, 0:19:11.600 --> 0:19:14.800 let me say my own sense of the market's view 0:19:15.080 --> 0:19:18.960 is that balance sheet reduction will steep in the yiel curve. 0:19:19.000 --> 0:19:21.240 That is to say, longer term interest rates would tend 0:19:21.280 --> 0:19:25.200 to be under upward pressure. I'm not so sure that 0:19:25.200 --> 0:19:27.840 that's going to turn out to be the case. If 0:19:27.840 --> 0:19:32.359 you recall during the uh QE episodes in the past, 0:19:32.440 --> 0:19:35.640 interest rates actually tended to rise while the central bank 0:19:35.760 --> 0:19:39.400 was buying securities. We might get an episode here where 0:19:39.400 --> 0:19:41.480 interest rates would actually come down a bit as the 0:19:41.480 --> 0:19:45.480 FED is feeding the market these new security or refeeding 0:19:45.520 --> 0:19:49.120 the market these same securities, Sonia, What does it mean 0:19:49.200 --> 0:19:51.080 that the FED needs to watch out for? Is it 0:19:51.119 --> 0:19:53.840 in the communication? Do they need to have careful you know, 0:19:54.240 --> 0:19:56.720 telegrafication of this or how do they telegraph it to 0:19:56.720 --> 0:19:59.600 the market so that they don't freak out? Well, there 0:19:59.600 --> 0:20:03.280 are number of open questions that the Fed has not 0:20:03.400 --> 0:20:07.360 yet articulated anything about we have with respect to their 0:20:07.359 --> 0:20:10.480 interest rate expectations, for example, the so called dot plot, 0:20:10.920 --> 0:20:13.720 which tells you where they think interest rates would eventually 0:20:13.760 --> 0:20:17.600 get to. They haven't articulated anything like that. With respect 0:20:17.640 --> 0:20:21.080 to what size balance sheet they expect to have down 0:20:21.080 --> 0:20:23.720 the road. They said they're gonna cut it. It's gonna 0:20:23.720 --> 0:20:26.760 be bigger than it used to be. But how far? Where? Who? 0:20:26.840 --> 0:20:29.800 Who buys this stuff? I mean, I've I brought this 0:20:29.920 --> 0:20:33.880 up with a Swiss gentleman from Credit Sweez yesterday writing 0:20:33.920 --> 0:20:36.560 trendship notes. The name excapes you right now. I'm so 0:20:36.600 --> 0:20:40.200 sorry for that, folks, But the basic ideal, Neil sauce it. 0:20:40.440 --> 0:20:44.200 If SNB has a lot of apple stock, I guess 0:20:44.240 --> 0:20:46.640 at some point we understand other people will buy it. 0:20:47.080 --> 0:20:51.280 Who buys the stuff on the US balance sheet when 0:20:51.280 --> 0:20:54.720 they decide to unload it. Yeah, and let's think about 0:20:54.760 --> 0:20:58.840 the scale of that, because in round numbers, they fed 0:20:59.800 --> 0:21:03.080 uh reduction of its holding of mortgages would more or 0:21:03.160 --> 0:21:06.439 less double the amount of mortgages available to the market, 0:21:07.080 --> 0:21:10.159 and the FEDS reduction of its treasury holdings would be 0:21:10.200 --> 0:21:13.879 sort of the equivalent of asking the market to absorb 0:21:14.320 --> 0:21:17.320 four years worth of budget deficits over the next three years. 0:21:17.320 --> 0:21:21.240 How does that, brilliant brilliantly said, how does that happen 0:21:21.359 --> 0:21:24.840 in reality? And the answers, we don't know, right, that's correct, 0:21:24.960 --> 0:21:27.240 And there are a lot of details about this with 0:21:27.320 --> 0:21:29.680 respect to what the FED will let go of and 0:21:30.560 --> 0:21:33.280 sequence and so forth, I mean, freensy and I think 0:21:33.280 --> 0:21:35.520 this is absolutely critical. And this is something we've heard 0:21:35.520 --> 0:21:38.400 from Robert Kaplan of the Dallas FED and James Buller 0:21:38.560 --> 0:21:43.600 St Louis. There's a huge mystery at every central bank 0:21:44.240 --> 0:21:48.520 of what happens when they when they hurt the switch, right, 0:21:48.560 --> 0:21:50.240 And this is something that of course the you know, 0:21:50.280 --> 0:21:53.639 the ECB is probably more at risk of even you know, 0:21:53.720 --> 0:21:56.160 compared to the FED. Is is we have an economy 0:21:56.160 --> 0:21:59.360 here that's quite fragile. What is the biggest common policy 0:21:59.400 --> 0:22:02.000 mistake at this point for the FED? Would it be 0:22:02.080 --> 0:22:05.080 to keep interest rates lower for longer or to rise 0:22:05.119 --> 0:22:07.800 too quickly? Oh. I think the evidence of the last 0:22:07.880 --> 0:22:10.800 fifteen twenty years is that no central bank has actually 0:22:10.840 --> 0:22:15.719 succeeded at exiting from zero interest rates and then not 0:22:15.800 --> 0:22:18.680 having to go back to it in that direction. So 0:22:18.840 --> 0:22:21.760 I don't think going too too slow is a risk here. 0:22:21.800 --> 0:22:25.200 I think the risky prospect would be if they went 0:22:25.240 --> 0:22:27.719 too fast. Do you worry more about the ECB than 0:22:27.760 --> 0:22:31.600 you do the FED? Are not? Really um I think 0:22:31.640 --> 0:22:34.679 the ECB has a special challenge in the sense that 0:22:34.720 --> 0:22:38.600 they're dealing with with a number of different sovereigns, whereas 0:22:38.600 --> 0:22:41.280 the US and has the advantage, if you will, it's 0:22:41.320 --> 0:22:45.080 dealing with only one. But I think the FED. I 0:22:45.119 --> 0:22:47.320 think the FED is more central in this respect than 0:22:47.320 --> 0:22:52.520 the ECB. Why are companies not investing? I don't think 0:22:52.520 --> 0:22:54.960 they need to. The profit share is doing just fine 0:22:55.000 --> 0:22:57.960 all by itself. We live in a time when the 0:22:59.160 --> 0:23:03.360 benefits of economic activity seemed to flood disproportionately to capital 0:23:04.400 --> 0:23:07.720 and and maybe that's the answer enough. Niel Sauce, thank 0:23:07.720 --> 0:23:09.960