WEBVTT - Surveillance: Fed's Kaplan Advocates For Taking No Action 0:00:00.080 --> 0:00:13.040 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 0:00:13.480 --> 0:00:17.560 Jay Lee. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:35.400 Bloomberg dot Com, and of course on the Bloomberg. Why 0:00:35.400 --> 0:00:38.680 don't you get to free of beamish right now? On China, well, 0:00:38.760 --> 0:00:42.680 let's do that. She joins us from Pantheon and Economics. Freya, 0:00:43.520 --> 0:00:46.400 the Apple story looks like a China story. Is that 0:00:46.400 --> 0:00:49.360 the read across? Can I read across from Apple into 0:00:49.440 --> 0:00:52.320 China sort of consumer weakness or is it? Or is 0:00:52.360 --> 0:00:54.440 the Apple story just idiot syn critic it's got the 0:00:54.480 --> 0:00:59.520 wrong product or the wrong price point or whatever it is. No, 0:00:59.680 --> 0:01:03.120 I think this is a pretty kind of macroeconomic story here, 0:01:03.160 --> 0:01:05.480 although apples, so you can sort of you can read 0:01:05.480 --> 0:01:09.440 across in the opposite direction as well. But in this case, actually, 0:01:09.480 --> 0:01:13.440 all through last year, the headline retail sales um year 0:01:13.520 --> 0:01:17.280 over year prints were coming in a little bit quite 0:01:17.360 --> 0:01:20.960 significantly stronger than what the underlying data was telling us. 0:01:20.959 --> 0:01:24.280 And even those headline prints were deteriorating the way they 0:01:24.319 --> 0:01:27.679 have the way they published the data in China, you 0:01:27.760 --> 0:01:31.479 get the the underlying levels data, and that doesn't always 0:01:31.520 --> 0:01:33.520 match up with what you see flashing up with the 0:01:33.640 --> 0:01:37.320 year of a year kind of headline prints because supposedly 0:01:37.319 --> 0:01:42.920 those headlines are are adjusted for stampling distortions which occur 0:01:43.040 --> 0:01:45.400 because firms fall in and out of the of the sample. 0:01:45.480 --> 0:01:47.520 So if you have UM a lot of kind of 0:01:47.560 --> 0:01:50.640 smaller firms because it only includes the larger farms, if 0:01:50.680 --> 0:01:53.800 you have a lot of firms transitioning towards smaller firms 0:01:53.800 --> 0:01:56.960 because their revenue is is falling, then you get this 0:01:57.000 --> 0:02:00.840 big drop in the underlying value that the level of 0:02:01.160 --> 0:02:04.200 retail sales values. But you can extrapolate from that UM 0:02:04.280 --> 0:02:07.000 if you have that quantity of firms that are that 0:02:07.040 --> 0:02:09.200 are falling out of the sample, that there is a 0:02:09.240 --> 0:02:12.280 great deal of underlying weakness that wasn't really being reported 0:02:12.320 --> 0:02:15.120 in the in their headline figures there. So that's certainly 0:02:15.200 --> 0:02:20.000 from from the kind of the sales data was was there. 0:02:20.280 --> 0:02:23.120 When did the Chinese authorities respond? We saw a little 0:02:23.120 --> 0:02:27.160 step forward today increasing the number of banks that are 0:02:27.160 --> 0:02:30.840 eligible for the reserve requirements cuts. They can lend a 0:02:30.880 --> 0:02:32.960 little bit more money into the real economy. Do we 0:02:33.040 --> 0:02:38.760 get a bazooker from the Chinese authorities. I don't think 0:02:38.760 --> 0:02:41.240 we get a bazooker, because they still are very much 0:02:41.280 --> 0:02:45.320 up against um a new constraints that they haven't had previously. 0:02:45.400 --> 0:02:47.959 I'm one of those being the environmental constraints. So the 0:02:48.080 --> 0:02:52.320 kind of the industrial the old guard polluting industrial companies, 0:02:52.360 --> 0:02:55.200 they can't really they can't just ratchet up production there 0:02:55.240 --> 0:02:57.560 anymore because it's such a political issue to have to 0:02:57.600 --> 0:03:00.560 have clean air with these new environmental targets in place 0:03:00.600 --> 0:03:03.280 as well. UM, and those old guard firms that are 0:03:03.320 --> 0:03:05.600 the kind of the way in which that the authorities 0:03:05.600 --> 0:03:08.400 have been used to driving the economy. UM. They're also 0:03:08.440 --> 0:03:11.480 the over indebted firms as well, so they're they're cognizant 0:03:11.520 --> 0:03:14.760 of the kind of the the longer term outlook UM. 0:03:14.800 --> 0:03:17.000 And on top of that, we also have the to 0:03:17.080 --> 0:03:20.720 realize that China's current account surpluses has dissolved into into 0:03:20.800 --> 0:03:23.520 nothingness UM as a percentage of GDP it was it 0:03:23.560 --> 0:03:26.160 was kind of nowhere UM. And that means that they 0:03:26.240 --> 0:03:29.720 have limited space for for a fiscal kind of just 0:03:29.760 --> 0:03:31.600 at the limited timing. Guy, let me bring up this chart. 0:03:31.639 --> 0:03:34.560 I love this chart, folks. This is log China growth, 0:03:34.600 --> 0:03:37.440 and all you gotta know is a volatility of years 0:03:37.440 --> 0:03:42.280 ago the crisis obviously in the smoothness in the rollover 0:03:42.520 --> 0:03:45.280 in their GDP growth that we've seen in the last 0:03:45.280 --> 0:03:48.320 two or three even four years as well. What is 0:03:48.360 --> 0:03:52.120 the mood like on the ground in China away from 0:03:52.160 --> 0:03:55.800 the macro babble, away from the apple babble, what's the 0:03:55.920 --> 0:04:02.240 domestic economy and mood like right now? Freya Well, I 0:04:02.280 --> 0:04:06.000 think actually these kind of the lack of volatility that 0:04:06.080 --> 0:04:09.120 is quite kind of perplexing in the context of Chinese 0:04:09.240 --> 0:04:12.720 UM Chinese the listed data and also the kind of 0:04:12.760 --> 0:04:15.960 the price movements that we've seen PPI over the last 0:04:15.960 --> 0:04:19.320 few years that doesn't really reflect things that are going 0:04:19.320 --> 0:04:21.000 on on the ground. And actually you can tell that 0:04:21.080 --> 0:04:24.240 even from the from the data that the authorities published. 0:04:24.279 --> 0:04:26.400 If you look at the nominal GDP growth and then 0:04:26.440 --> 0:04:29.560 you kind of extrapolate what real GDP growth would be 0:04:30.080 --> 0:04:32.440 by compiling your own deflated then you do get a 0:04:32.440 --> 0:04:35.280 lot more volatility than than what is showing up in 0:04:35.279 --> 0:04:38.120 in the in the the kind of official headlines there. 0:04:38.120 --> 0:04:40.440 So I think actually that it's it's a lot weaker 0:04:40.440 --> 0:04:43.680 than we're saying wonderful for beams and short orders. Thank 0:04:43.720 --> 0:05:00.280 you so much for joining us some p I want 0:05:00.279 --> 0:05:01.920 to focus on Apple in the here and now I'm 0:05:01.920 --> 0:05:07.960 bringing wonderful wile lists and communications equipment analyst Walter, how 0:05:08.040 --> 0:05:11.960 didn't they see this coming? I mean, this is a 0:05:12.080 --> 0:05:15.479 huge miss in China. You know, Tim Cook did make 0:05:15.560 --> 0:05:18.599 reference to subsidies and upgrade rates and things like that 0:05:18.680 --> 0:05:21.320 and developed markets, and and that's certainly been an issue 0:05:21.520 --> 0:05:23.760 for a number of years, but there's really no evidence 0:05:24.279 --> 0:05:27.800 in the market about a this type of change in 0:05:27.880 --> 0:05:30.559 terms of subsidies and upgrade rates. So this is really, 0:05:31.200 --> 0:05:33.960 I think, primarily on the back of China, and it's 0:05:34.000 --> 0:05:36.719 a massive mess. So you're talking about consumers that just 0:05:36.839 --> 0:05:38.560 either can afford the phones. I mean, there could be 0:05:38.600 --> 0:05:41.640 some market share losses that are going on there, but 0:05:41.800 --> 0:05:44.200 really I think it's it's a it's a clear sign 0:05:44.240 --> 0:05:47.440 that there's major economic issues going on in China right now, Walter. 0:05:48.320 --> 0:05:51.000 Are our economists are saying it's much more a China 0:05:51.080 --> 0:05:54.680 economic issue? Are John Butler Blumberg Intelligence? I asked him 0:05:54.720 --> 0:05:56.920 the question. Let me ask you the same question as 0:05:56.960 --> 0:06:00.440 you mentioned the price of the phone in America, vast 0:06:00.480 --> 0:06:04.400 majority of people buy a monthly plan iPhone. Do they 0:06:04.440 --> 0:06:06.720 do that in China? Or do they have to come 0:06:06.800 --> 0:06:09.920 up with X number seven, eight hundred nine hundred dollars 0:06:10.000 --> 0:06:12.640 to buy the toy? I mean, I think it's unique 0:06:12.640 --> 0:06:14.599 in the US in terms of the payment plans and 0:06:14.600 --> 0:06:16.760 how long we've haund. There's some other developed markets that 0:06:16.880 --> 0:06:19.800 that have have adjusted to that. But in in in 0:06:19.839 --> 0:06:22.680 some of these other prepaid markets, you're expected to come 0:06:22.760 --> 0:06:26.240 up with um with a lot of money, right, But 0:06:26.279 --> 0:06:29.040 there's also trade ins right. And Cook talked about trade 0:06:29.040 --> 0:06:31.760 ins um yesterday as a way to offset this in 0:06:31.880 --> 0:06:34.360 his in his note to investors. But again that is 0:06:34.400 --> 0:06:36.960 not a new thing. Operators have offered trade in so 0:06:37.400 --> 0:06:40.320 that's not like that's going to change the market. The 0:06:40.360 --> 0:06:43.440 issue is, you know, people in China, I just don't 0:06:43.520 --> 0:06:45.560 have the money to pay for it for these phones, 0:06:45.600 --> 0:06:47.840 and to a much greater extent this year than any 0:06:47.839 --> 0:06:51.280 prior year. John Templeton, Sir John would say, shares are 0:06:51.320 --> 0:06:54.640 on sale today. Does Walter pisk load the boat here 0:06:54.720 --> 0:06:57.640 on a some of the parts analysis? Are you gonna 0:06:57.640 --> 0:07:01.080 wait for the debris to clear? At a hundred forty 0:07:01.160 --> 0:07:03.960 three dollars? The free cash flow yield is now ten percent, 0:07:04.400 --> 0:07:06.520 So and it's not like you have a company that's 0:07:06.560 --> 0:07:08.600 not gonna do anything without money. They're gonna use that 0:07:08.720 --> 0:07:12.000 free cash flow and the existing hundred and thirty billion 0:07:12.080 --> 0:07:14.640 of net cash that they have to buy the stock back. 0:07:14.760 --> 0:07:17.000 So even so, we had this before tom where where 0:07:17.360 --> 0:07:20.680 the company wasn't generating growth and net income, but they 0:07:21.040 --> 0:07:23.680 create they created the appearance of earnings growth by buying 0:07:23.720 --> 0:07:25.720 the stock back, And that's exactly what's gonna happen this 0:07:25.840 --> 0:07:28.520 year net income. You're not gonna have revenue growth this year. 0:07:28.840 --> 0:07:30.800 Your net income might be down because there's gonna be 0:07:30.880 --> 0:07:32.640 some margin pressure. There has to be when you have 0:07:32.760 --> 0:07:35.560 this much of a revenue um you know, offload. But 0:07:35.640 --> 0:07:38.200 you're gonna show some earnings growth, you know, relative to 0:07:38.240 --> 0:07:41.800 the market. And at a ten percent yield and discount 0:07:41.840 --> 0:07:44.640 to the overall market, I think it's a good value 0:07:44.680 --> 0:07:47.360 idea still at this level. So what's the multiple that 0:07:47.480 --> 0:07:48.800 this is going to try it out? Well, so what's 0:07:48.800 --> 0:07:52.360 the basic assumption for you? So right now is trading 0:07:52.400 --> 0:07:54.880 at this kind of in the market's like fourteen and 0:07:54.880 --> 0:07:56.520 a half time something like that. I mean, I think 0:07:56.560 --> 0:07:59.120 if they can return to growth. Even if you ripped 0:07:59.200 --> 0:08:01.680 China out of your numbers, it's still a company that 0:08:01.720 --> 0:08:04.040 could return to top line growth in the second half 0:08:04.080 --> 0:08:07.280 of the year, generating decent earnings growth. So if you're 0:08:07.280 --> 0:08:09.160 at parody with the market, that that can get you 0:08:09.200 --> 0:08:11.400 to two hundred bucks a share or one, which is 0:08:11.440 --> 0:08:13.440 our target. This is a cash machine. We always talk 0:08:13.440 --> 0:08:16.200 about the gross margins over Apple, but at thirty percent, 0:08:16.240 --> 0:08:17.960 I think that's the low end of the guidance range 0:08:18.000 --> 0:08:20.720 as well. Walter, have you got any basic assumptions and 0:08:20.880 --> 0:08:22.640 how have they changed in the last twenty four hours? 0:08:22.720 --> 0:08:26.080 Just on the margins. I mean, whenever you pull in 0:08:26.920 --> 0:08:29.120 revenue from a high margin product like that and you 0:08:29.200 --> 0:08:31.840 can't transfer your expenses, that's a company that spent a 0:08:31.920 --> 0:08:33.640 ton on has spent a ton on R and D 0:08:33.760 --> 0:08:36.000 with a lot of not many new products to show 0:08:36.080 --> 0:08:37.839 for it. You have to take your margins in. You 0:08:38.240 --> 0:08:40.559 just have to do in. Thirty percent is still a 0:08:40.679 --> 0:08:44.640 great number relative to other consumer electronic companies, but you 0:08:44.760 --> 0:08:47.480 have to pull in the gross margin. I think going forward, 0:08:47.880 --> 0:08:51.040 until you see some signs of stabilization and iPhone revenue, 0:08:51.160 --> 0:08:53.280 there's going to be some big complaints about the communication 0:08:53.320 --> 0:08:55.120 from this company over the last couple of months. World, 0:08:55.160 --> 0:08:57.559 So first it was a change of the communication of 0:08:57.640 --> 0:09:01.320 the guidance, and now it's the change of the items overrule. 0:09:01.360 --> 0:09:03.360 They told us they wouldn't give us the unit numbers 0:09:03.880 --> 0:09:06.120 and not to worry about that because things would still 0:09:06.160 --> 0:09:09.160 be okay. Are you scratching your head somewhat about what 0:09:09.280 --> 0:09:10.959 you've heard from this company over the last couple of 0:09:11.040 --> 0:09:14.280 months to something not add up to you? I mean, look, 0:09:14.280 --> 0:09:16.080 I think it's just a lack of experience of never 0:09:16.160 --> 0:09:18.600 having to deal with this type of a revenue missed before. Right, 0:09:18.640 --> 0:09:21.360 they haven't been through this and and you know whatever, 0:09:21.480 --> 0:09:24.439 more than a decade. Uh. It just doesn't also look 0:09:24.520 --> 0:09:28.040 good though, that sixty days or so ago you told 0:09:28.080 --> 0:09:31.200 people you're not going to report iPhone units and then surprise, surprise, 0:09:31.320 --> 0:09:33.160 it comes out that you're gonna miss your iPhone unit 0:09:33.240 --> 0:09:35.520 number by like more than ten million people. It just 0:09:35.760 --> 0:09:38.360 it doesn't look good. How do you respond then, is 0:09:38.520 --> 0:09:41.840 you know, a frontline cell side analyst to the idea 0:09:41.960 --> 0:09:46.640 that Tim Cook is reacting to President Trump's trade war? 0:09:46.840 --> 0:09:50.160 I mean that's not even your strategic three five or 0:09:50.240 --> 0:09:53.040 one week business plan. I mean the fact is Mr 0:09:53.160 --> 0:09:58.080 Trump has upset the trade in revenue generating Apple cart 0:09:58.160 --> 0:10:02.360 with American China, right It's possible to view it that way. 0:10:02.360 --> 0:10:04.240 I would look at it the opposite way, which is 0:10:05.240 --> 0:10:08.719 Apple is showing you the tough position that China is 0:10:08.800 --> 0:10:11.880 in right now, so that gives our president a tremendous 0:10:11.880 --> 0:10:14.280 amount of power in any trade war negotiation that he's 0:10:14.280 --> 0:10:16.720 going to have going forward. I'm not sure that Apple's 0:10:16.800 --> 0:10:19.480 miss is a result of the trade ward's reflective of 0:10:19.520 --> 0:10:23.280 what's going on. It may have been enhanced more, you know, 0:10:23.400 --> 0:10:27.040 in the recent weeks, but if anything, that's just showing 0:10:27.080 --> 0:10:29.520 you the position that child in right now. Do you 0:10:29.559 --> 0:10:32.160 have a meeting with Tim Cook at three pm this afternoon? 0:10:32.200 --> 0:10:35.360 Are you going to be in that meeting? Walter Um? 0:10:35.640 --> 0:10:39.199 They have ruined our abilities to situate at Manchester City 0:10:39.440 --> 0:10:48.440 Liverpool match today unfortunately, maybe they'll use Liverpool billion from 0:10:48.520 --> 0:10:51.559 Mr Head. What's the bt I G analyst and of 0:10:51.640 --> 0:10:53.880 course Liverpool fan as well. Well. It's it great to 0:10:53.920 --> 0:11:11.400 catch you, how with the business right now are Michael 0:11:11.480 --> 0:11:14.840 McKee with Robert Chaplan of Dallas. Thank you very much 0:11:14.880 --> 0:11:17.640 and good morning to our audience worldwide. On Bloomberg television 0:11:17.679 --> 0:11:21.400 and radio. Thank you for joining us. Happy, I'm not 0:11:21.480 --> 0:11:23.120 sure you look at the red on the screen there, 0:11:23.160 --> 0:11:25.400 I'm not sure how happy it is for investors. So 0:11:25.520 --> 0:11:28.199 I gotta start. There's only one question that matters to 0:11:28.280 --> 0:11:30.960 the markets. Has the correction but long enough, deep enough, 0:11:31.040 --> 0:11:34.400 severe enough that the FED has to react? Well? Uh, 0:11:35.760 --> 0:11:38.000 let me let me answer it this way. There's three 0:11:38.120 --> 0:11:40.880 big issues that I see reflected in the markets and 0:11:40.960 --> 0:11:43.400 are consistent with what I'm seeing in the economy and 0:11:43.480 --> 0:11:49.880 discussion of the context. Global growth decelerating um, interest sensitive 0:11:49.920 --> 0:11:55.040 and economically sensitive industries are showing weakness, and financial conditions 0:11:55.360 --> 0:11:58.319 have tightened. Uh, I mean credit spreads of widen. And 0:11:58.440 --> 0:12:02.280 I think those three issues, I'm sure affecting the markets, 0:12:02.360 --> 0:12:06.640 but they're also affecting my thinking about monetary policy. And uh, 0:12:07.600 --> 0:12:10.640 it's gonna take some time to see the depth and 0:12:10.800 --> 0:12:13.800 breadth of those three issues. But do you think the 0:12:14.360 --> 0:12:18.240 FED should go on hold for now? My own view 0:12:18.400 --> 0:12:22.040 is we should not take any further action on interest 0:12:22.160 --> 0:12:25.400 rates until these issues are resolved, for better or for worse. 0:12:25.880 --> 0:12:28.440 So I would be an advocate of taking no action. 0:12:29.120 --> 0:12:31.360 And you know, for example, in the first couple of 0:12:31.440 --> 0:12:34.080 quarters of this year. If you ask me my base case, 0:12:34.160 --> 0:12:36.240 my base case would be take no action at all. 0:12:36.640 --> 0:12:40.040 That could change if things improve. But my own view 0:12:40.160 --> 0:12:43.280 right now is we should be patient and give some 0:12:43.480 --> 0:12:46.200 time to this for the economy and to watch how 0:12:46.280 --> 0:12:48.520 this situation unfolds. What do you think the markets know 0:12:48.720 --> 0:12:51.360 something the Fed hasn't seen in terms of what's going 0:12:51.400 --> 0:12:54.719 to unfold this year? Uh, I don't know about that. 0:12:54.880 --> 0:12:58.599 I think we've been watching this very very carefully. I 0:12:58.720 --> 0:13:01.240 watched the markets very careful. Others that the FED watched 0:13:01.280 --> 0:13:04.719 this carefully. I think we've been trying to balance very 0:13:04.800 --> 0:13:10.240 tight labor market, strong consumer UH and trying to meet 0:13:10.240 --> 0:13:12.800 our dual mandate. But I think uh, I think it's 0:13:12.920 --> 0:13:16.160 critical in the job I'm in that you will pay 0:13:16.320 --> 0:13:18.559 very close attention to what the markets are saying. But 0:13:19.559 --> 0:13:22.080 it's important in that in what they tell us about 0:13:22.120 --> 0:13:24.480 what's going on in the economy. And also some of 0:13:24.559 --> 0:13:28.880 these market forces, including financial conditions, can spill over and 0:13:29.080 --> 0:13:32.559 tighten UH the economy and cause growth to slow, and 0:13:32.679 --> 0:13:35.000 it's critical that we are very attuned to it. Well, 0:13:35.040 --> 0:13:37.960 do you see that happening now? I think I think 0:13:38.400 --> 0:13:41.640 it may be happening now. Yes, I mean, credit spreads 0:13:41.880 --> 0:13:45.360 since October have widened pretty substantially. Haven't had a high 0:13:45.440 --> 0:13:48.520 yield issue UH for the last number of weeks, very 0:13:48.559 --> 0:13:51.360 little issuance, And I think it's suggests lack of access. 0:13:52.040 --> 0:13:54.760 I think his history has showing us and shows me 0:13:55.320 --> 0:13:57.760 that when you see that kind of action, it tends 0:13:57.840 --> 0:14:00.520 to if it's prolonged, could lead to is slowing in 0:14:00.559 --> 0:14:03.840 the economy. At the Dallas Fed, we've we've got an 0:14:04.000 --> 0:14:07.240 estimate for GDP growth for two thousand nineteen that is 0:14:07.240 --> 0:14:10.560 a little below two percent. You've been hearing me say 0:14:10.640 --> 0:14:14.280 old during two thousand eighteen, while eighteen would be strong. 0:14:15.320 --> 0:14:17.880 We think fiscal stimulus, the effect of it will wane 0:14:18.480 --> 0:14:21.840 into two thousand nineteen, the impact of the FEDS rate 0:14:21.880 --> 0:14:25.680 increases will take hold. UH. And so we expected some 0:14:25.840 --> 0:14:28.120 slowing in the nineteen I think that's slowing is even 0:14:28.120 --> 0:14:30.880 a little greater than we had expected. So I'm watching 0:14:30.960 --> 0:14:33.800 this very very carefully. We changed your forecast at all. 0:14:34.120 --> 0:14:36.760 Our GDP forecast for next year's come down a little bit. 0:14:36.960 --> 0:14:39.800 We were still close to two and you've heard me 0:14:39.880 --> 0:14:43.080 say before, it's been our view that by we'd be 0:14:43.680 --> 0:14:46.520 trending back down to potential about one in three quarters. 0:14:46.920 --> 0:14:49.960 But our nineteen forecast is has come down a little bit, 0:14:50.280 --> 0:14:53.000 and it's been affected by some of these issues. I 0:14:53.120 --> 0:14:57.640 just talked about global growth decelerating economically sensitive industries and 0:14:57.760 --> 0:15:00.760 what we see going on with credits for ads and 0:15:01.160 --> 0:15:02.680 the shape of the yield curve is another thing I 0:15:02.760 --> 0:15:05.200 watched very very carefully, and all those things are affecting 0:15:05.200 --> 0:15:07.760 our forecast. Is Apple telling you anything about the state 0:15:07.800 --> 0:15:11.960 of the US, Chinese or global economy? You know, we've 0:15:12.040 --> 0:15:15.080 talked for some time, We've been seen and I hear 0:15:15.160 --> 0:15:18.200 from context for the last number of months that Chinese 0:15:18.280 --> 0:15:22.320 growth has been somewhat weaker. It's masked by the fact 0:15:22.480 --> 0:15:26.520 that they tend to use leverage, investment in state owned enterprises, 0:15:26.560 --> 0:15:29.200 investment in infrastructure to meet their six and a half 0:15:29.240 --> 0:15:32.200 percent goal. That but a lot of the indicators I'm 0:15:32.280 --> 0:15:35.240 hearing from businesses tell me that Chinese growth has been weaker. 0:15:35.600 --> 0:15:38.880 So it doesn't surprise me that we're seeing more indications 0:15:38.960 --> 0:15:42.760 about weaker Chinese growth, and the trade tensions probably have 0:15:42.920 --> 0:15:45.960 exacerbated that. Was Apple the tip of the spirit, the 0:15:46.000 --> 0:15:48.640 beginning of the iceberg above the water. Are we going 0:15:48.680 --> 0:15:51.960 to see more CEOs coming out with warnings like this. Uh. 0:15:52.680 --> 0:15:55.000 I'm not going to comment on any specific company, but 0:15:55.320 --> 0:15:57.120 but what I hear from I talked about thirty c 0:15:57.200 --> 0:15:59.240 e O s a month, and what I'm hearing from 0:15:59.280 --> 0:16:01.920 them is there and some weakness in China. So it 0:16:02.040 --> 0:16:06.320 doesn't surprise me, uh that you're gonna see some further weakness. 0:16:06.400 --> 0:16:09.120 And I've been saying for some time, I don't think 0:16:09.280 --> 0:16:14.600 China can indefinitely keep using leverage to grow GDP. And 0:16:14.760 --> 0:16:18.440 also they're very dependent on trade. Uh, and I'm sure 0:16:18.520 --> 0:16:21.120 these trade tensions have had some effect. And the one 0:16:21.240 --> 0:16:23.760 comment I'd make, why does it matter to us? And 0:16:23.800 --> 0:16:28.400 the reason I watch it so carefully about of SMP 0:16:28.560 --> 0:16:32.800 five revenues come from outside the United States, So China 0:16:32.880 --> 0:16:36.640 growth slowing, We're unlikely to be immune for that. We 0:16:36.760 --> 0:16:40.600 might be immune to it for a time, but not indefinitely. 0:16:40.640 --> 0:16:44.400 It's likely to spill over into US growth. And that's 0:16:44.440 --> 0:16:47.680 what I'm watching very carefully. Okay, here college calling for 0:16:47.840 --> 0:16:51.360 a pause in a monetary policy action? What about the 0:16:51.480 --> 0:16:54.000 balance sheet? J Paul was pretty firm and saying it 0:16:54.160 --> 0:16:56.720 is news conference that that's going to keep running in 0:16:56.720 --> 0:16:59.440 the background. So there's a process for the balance sheet, 0:16:59.480 --> 0:17:01.760 which we it up and started in the fall of 0:17:01.800 --> 0:17:06.080 two thousand and seventeen. It's a it's a specific process 0:17:06.640 --> 0:17:11.200 where we let maturities laps. We're not selling securities, We're 0:17:11.240 --> 0:17:14.640 just not replacing maturities as they expire. My own view, 0:17:14.880 --> 0:17:17.680 and I've said this also to you several times, this 0:17:17.960 --> 0:17:24.480 is unprecedented. There's no textbook for exiting quantitative easing, UH 0:17:24.760 --> 0:17:27.600 and my own views. While there's a process in place, 0:17:27.720 --> 0:17:32.040 we should be very vigilant. I'm watching it very carefully 0:17:32.560 --> 0:17:37.000 and be very open if necessary to making adjustments in 0:17:37.119 --> 0:17:39.280 this balance sheet runoff if we need to. I'm not 0:17:39.440 --> 0:17:42.360 at that point yet, but I'm watching it very very carefully, 0:17:42.680 --> 0:17:45.600 and I think we should be very open minded about 0:17:46.200 --> 0:17:49.080 about making adjustments to that process if we need to, 0:17:49.359 --> 0:17:52.160 a lot of traders have been complaining in recent weeks 0:17:52.240 --> 0:17:55.400 that the balance sheet has caused the drying up of liquidity. 0:17:55.480 --> 0:17:57.159 Do you think that's fair or is it just a 0:17:57.240 --> 0:18:00.800 repricing of credit. There's a number of factors. I've spent 0:18:00.840 --> 0:18:03.959 about thirty years in the markets, as you know, UH, 0:18:04.200 --> 0:18:06.960 and and I watched very carefully, and we tracked trading 0:18:07.040 --> 0:18:09.280 volumes trading volumes today are lower than they were ten 0:18:09.359 --> 0:18:12.680 years ago. That's a part that was true even before 0:18:12.800 --> 0:18:15.240 the FEDS started to run off its balance sheet, and 0:18:15.440 --> 0:18:20.320 so um UH, the UH with a somewhat lack of 0:18:20.480 --> 0:18:24.400 liquidity in two way flows. My guess is the market's 0:18:24.440 --> 0:18:29.440 more sensitive to any reduction of central bank liquidity, and 0:18:29.560 --> 0:18:31.200 so it's just something we have to be aware of. 0:18:31.280 --> 0:18:34.199 But the point of there is I'm watching it very 0:18:34.320 --> 0:18:37.040 very carefully, and we ought to be very vigilant about 0:18:37.160 --> 0:18:40.520 monitoring this process. It's not been done before, and we 0:18:40.600 --> 0:18:44.679 should be learning from this process as unfolds. Well, how 0:18:44.720 --> 0:18:46.960 could you adjust the balance sheet runoff? I don't really 0:18:47.000 --> 0:18:49.920 want to speculate right now. We have we have a 0:18:50.080 --> 0:18:53.440 runoff rate between treasuries and mortgage backed securities about fifty 0:18:53.480 --> 0:18:56.080 billion dollars a month. UH. There are a number of 0:18:56.119 --> 0:18:59.680 things we could do in terms of caps or the pacing, 0:19:00.080 --> 0:19:01.960 but I don't I'm not there yet, and I don't 0:19:01.960 --> 0:19:04.360 even want to speculate on it other than to say 0:19:04.920 --> 0:19:07.560 we're watching it very very carefully, and I'm watching it 0:19:07.680 --> 0:19:09.200 very very carefully, and I think we ought to be 0:19:09.560 --> 0:19:11.960 You said we would go down to trend growth, maybe 0:19:12.280 --> 0:19:14.840 by the end of the year. But you also mentioned 0:19:14.960 --> 0:19:17.920 yield curve in version. Things you're watching. Have your recession 0:19:18.040 --> 0:19:23.560 fears risen at all? Uh, I've I've note a number 0:19:23.600 --> 0:19:26.120 of things. First of all, the weakness and what I'm 0:19:26.160 --> 0:19:28.919 talking about tightening and credit conditions, I think I'm very 0:19:29.359 --> 0:19:32.920 I note in particular that the two year yield is 0:19:33.359 --> 0:19:37.000 is now below the one year yield, which tells me 0:19:37.280 --> 0:19:40.480 at least the market is saying that they expect some 0:19:40.600 --> 0:19:46.280 sluggishness in nineteen, but even more sluggishness in UH and UM, 0:19:46.680 --> 0:19:49.240 and obviously the ten year rate in the two sixties 0:19:49.320 --> 0:19:51.960 tells me the outlook for growth is very sluggish. So 0:19:52.040 --> 0:19:53.720 I think the main thing I take from all that 0:19:54.240 --> 0:19:57.719 is it's critical that we take the right action at 0:19:57.760 --> 0:20:00.800 the FED during this period. There's a very critical time. 0:20:01.200 --> 0:20:02.920 We need to be very vigilant, we need to be 0:20:03.040 --> 0:20:06.240 on our toes, and I think patients is a critical 0:20:06.400 --> 0:20:09.600 tool we should be using during this period. We can 0:20:09.680 --> 0:20:13.199 get this right. But normalizing monetary policy, by the way, 0:20:13.200 --> 0:20:15.160 it was never going to be easy. For those who 0:20:15.240 --> 0:20:18.600 thought that the process of normalization was going to be easy, 0:20:18.720 --> 0:20:22.160 it's not, and we were destined to go through periods 0:20:22.280 --> 0:20:25.600 like this, but it's critical that we handle this the 0:20:25.760 --> 0:20:28.919 right way. A lot of investors come on our shows 0:20:29.040 --> 0:20:31.960 and say, at this point the FED has gone too far. 0:20:32.320 --> 0:20:35.840 You've already tightened too much. Is there a possibility they're right? 0:20:36.520 --> 0:20:39.440 You will know in hindsight. My guess is that when 0:20:39.480 --> 0:20:41.600 we look back a year or two years from now, 0:20:41.800 --> 0:20:45.200 we'll talk less about the fact that we're at two 0:20:45.240 --> 0:20:47.080 and a quarter to two and a half percent today 0:20:47.119 --> 0:20:51.040 and more about what the FED does from here. Um. 0:20:51.840 --> 0:20:53.800 I think that I think what we do in two 0:20:53.880 --> 0:20:57.360 thousand nineteen will turn out to be more significant than 0:20:57.480 --> 0:21:00.399 whether two and acquarter to two and a half is 0:21:01.080 --> 0:21:04.399 too far. And I'll remind people at a two percent 0:21:04.440 --> 0:21:07.040 inflation rate means real interest rates or a quarter to 0:21:07.080 --> 0:21:12.840 a half. Also, uh, my own view has been up 0:21:12.880 --> 0:21:15.040 to a few months ago, the FED doesn't need to 0:21:15.080 --> 0:21:19.040 be stimulating the economy. We're still, in my view, mildly 0:21:19.160 --> 0:21:22.359 or very modestly stimulative. We're not restrictive here. So my 0:21:22.520 --> 0:21:24.840 guess is it's gonna matter much more on what we 0:21:25.000 --> 0:21:28.040 do from here than anything we've done up to now. 0:21:28.520 --> 0:21:30.760 We're talking with Robert Kaplan. He's the president of the 0:21:30.960 --> 0:21:34.120 Dallas Federal Reserve banquet joining us for a New year 0:21:34.320 --> 0:21:37.200 interview this morning. UH. You look at the w I 0:21:37.359 --> 0:21:40.760 r P function on the Bloomberg calculates interest rate probabilities, 0:21:41.200 --> 0:21:43.680 and basically the markets have priced out any move for 0:21:43.760 --> 0:21:46.840 two thousand nineteen. In fact, there's more likelihood of a 0:21:46.960 --> 0:21:49.760 cut before the end of the year than another rate increase. 0:21:49.960 --> 0:21:55.040 Is that fair assumption in the markets? Uh? Market market 0:21:55.160 --> 0:21:58.359 expectations can change on a dime, Sentiment can change. I 0:21:58.440 --> 0:22:01.200 can just tell you my own view, which is UH, 0:22:01.800 --> 0:22:04.439 I would advocate we shouldn't be taking any further action 0:22:04.880 --> 0:22:07.640