Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim
Speaker 1: Fox along with my co host Lisa Bramowitz. Each day
Speaker 1: we bring you the most important, noteworthy, and useful interviews
Speaker 1: for you and your money, whether you're at the grocery
Speaker 1: store or the trading floor. Find the Bloomberg p m
Speaker 1: L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com.
Speaker 1: We are broadcasting live from PJAM headquarters in Newark, New Jersey,
Speaker 1: a lovely glass lead certified building in the heart of Newark.
Speaker 1: And right now we want to turn our focus to
Speaker 1: technology and the ways that it's disrupting a whole host
Speaker 1: of different industries, as well as how people can invest
Speaker 1: in it. And we're joined, I'm happy to say, with
Speaker 1: time or Hyatt, he has chief strategy officer for p
Speaker 1: jim Um. I came in and I saw this beautiful
Speaker 1: glossy magazine, The Technology Frontier. What is the point of
Speaker 1: what it it? Sort of do you want to convey
Speaker 1: to people by giving a sense that we are on
Speaker 1: the cusp of a technology frontier? You know, I think
Speaker 1: at least at the moment, technology is sort of at
Speaker 1: peak hype, but it's really around a narrow set of stocks.
Speaker 1: You know, we've talked a lot about them over the
Speaker 1: last two weeks with the volatility, but what we wanted
Speaker 1: to convey was that for long term investors, the technology
Speaker 1: opportunity has actually moved beyond just the fangs and silicon
Speaker 1: value venture capital opportunities, and it's really about the technology
Speaker 1: uses now where the next wave of investment opportunities will
Speaker 1: be created. How will companies and everything from the media
Speaker 1: sector to payments to transportation, how will they use technology
Speaker 1: and how will they embed technology in their in their processes,
Speaker 1: And that's where the next wave of winners and losers
Speaker 1: will be created. Now. This Technology Frontier white paper is
Speaker 1: part of a series of white papers talking about megatrends
Speaker 1: and they're going to be winners and they're going to
Speaker 1: be losers. And you outline some of those and I'm
Speaker 1: wondering if you could just go through them, particularly when
Speaker 1: it comes to the losers, because it gets pretty specific.
Speaker 1: I was surprised that, for example, transit hubs are perhaps
Speaker 1: going to be losers in the technology revolution. Well, then
Speaker 1: one of the key things we point out is don't
Speaker 1: just go after the winners, and we should talk a
Speaker 1: little bit about how you sort of see who the
Speaker 1: technology winners are, but there's also real obsolescence risk in portfolios.
Speaker 1: And the pace at which technology is changing is unprecedented,
Speaker 1: which means that those risks are happening really quickly. So
Speaker 1: one good example is in New York, where the price
Speaker 1: of a taxi medallion has gone down from what one
Speaker 1: point two million at the peak to kind of thousand now,
Speaker 1: really rapid disruption. And one example we have that's coming
Speaker 1: around the corner is in the automobile industry. So you
Speaker 1: have electrification at the one hand, and on the second,
Speaker 1: you have automation kind of vehicles that will kind of
Speaker 1: be autonomous, and we think that will be pretty disruptive.
Speaker 1: I mean, one example, in addition to the one you
Speaker 1: mentioned was parking spaces. We have hundreds of thousands of
Speaker 1: prime real estate that is devoted to parking spaces and garages.
Speaker 1: And in a world where you will have autonomous vehicles
Speaker 1: and you'll have people sharing rides much more, there's just
Speaker 1: a massive opportunity for how that will be repurposed and
Speaker 1: how flexible our garages to be repurposed for new realistic users.
Speaker 1: So how does one invest in that? Uh, you work
Speaker 1: with your real estate asset managers and really understand that
Speaker 1: technology again is not just about equities. It's not just
Speaker 1: about Silicon Valley venture capitalists. But you can access technology
Speaker 1: through real estate, through infrastructure, through fixed income. It really
Speaker 1: is pervasive. So it's really working with the entire team
Speaker 1: of asset managers, your in house experts, and making investment
Speaker 1: decisions that straddled the entire portfolio. I just limited to
Speaker 1: this tiny niche of just the formal technology sector. You
Speaker 1: also make a point of contrasting the digital adoption rate
Speaker 1: of various countries and say that it is not necessarily
Speaker 1: geared towards g d P per capita. Explain that a
Speaker 1: little bit. So one of the things we see is
Speaker 1: in the productivity data. You don't see rapid increases in productivity,
Speaker 1: even the many of our personal lives are improved by
Speaker 1: all the apps we now have. And we think the
Speaker 1: real secret to that mystery is a lag technology in
Speaker 1: the ninety nineties when you have the PC revolution and
Speaker 1: now again will lack the obvious near term gains that
Speaker 1: we see in our daily lives by ten years in
Speaker 1: terms of when it's reflected in the GDP and productivity data.
Speaker 1: So you add a point, which is what we try
Speaker 1: to show with the Digital Adoption Index, where six of
Speaker 1: the world is still offline. When the rest of the world,
Speaker 1: when the broadest set of emerging markets also adopts kind
Speaker 1: of wireless and internet technologies, you'll see another rise in
Speaker 1: productivity that still hasn't been captured. And we talk a
Speaker 1: lot in the report about that wave of opportunities that's
Speaker 1: yet to come, and it goes way beyond China into
Speaker 1: many other emerging markets that are less well traversed by investors.
Speaker 1: I have to wonder where the developed world versus the
Speaker 1: developing world will stack up with the sort of race
Speaker 1: to technological improvement, because there's sort of a belief that
Speaker 1: when they're already is infrastructure in place, it's harder to
Speaker 1: refurbish it and bring it up to the modern standard.
Speaker 1: So in some less developed areas, you're seeing the increase
Speaker 1: in technology come up much faster, and they're actually much
Speaker 1: more capable of adopting to some of the newer concepts
Speaker 1: and technologies out there. Do you think that the developed
Speaker 1: world will lag behind in a way that perhaps people
Speaker 1: are not expecting. It's a great question. I think one
Speaker 1: of the features of this current wave of technological changes
Speaker 1: has really gone global, so you've had already because of
Speaker 1: global supply chains, this reverse innovation where ideas are coming
Speaker 1: from India. Okay, and yeah, back to the US and
Speaker 1: Europe where you have China, for example, now being a
Speaker 1: leader in certain parts of AI and facial technology, and
Speaker 1: the speed at which code travels, the speed in which
Speaker 1: you can innovate in another country is very different from
Speaker 1: old fashioned foreign direct investment where you had to move
Speaker 1: a bunch of people to an emerging market. So we
Speaker 1: absolutely see techno oology innovations coming from more places, more
Speaker 1: quickly than in any previous wave of technological change. Absolutely.
Speaker 1: Do you see that the way companies are organized financially
Speaker 1: is old fashioned? And the reason I asked it is
Speaker 1: because you say in the report that companies that invest
Speaker 1: in research and development, those are the wants to pay
Speaker 1: attention to. But research and development is not considered an
Speaker 1: asset on the balance sheet, it's a cost. Is there
Speaker 1: going to be some way to change that? I think
Speaker 1: it will be quite critical for winning companies. So we
Speaker 1: talked about obsolescen stress. But the other side of this
Speaker 1: way investors is what are the alpha seeking opportunities by
Speaker 1: gliding to the winners. The winner takes all companies that
Speaker 1: already achieve scale. And I think having a chief financial
Speaker 1: officer who sees how the investments in technology R and
Speaker 1: D and development rather than just sort of maintaining what's
Speaker 1: there is key. Having a senior chief technology officer who's
Speaker 1: part of the senior leadership team investing in technology R
Speaker 1: and D, doing technology driven M and A. That'll what
Speaker 1: will drive future winners in this sector. Are there specific
Speaker 1: companies that you think are going to be winners that
Speaker 1: are not recognized widely as the future winners? I think
Speaker 1: beyond the big obvious names, it will really be about
Speaker 1: looking at the next sectors. And I think the sectors
Speaker 1: that we focused on as the next wave is the
Speaker 1: payment sector, uh, and then definitely the automobile sector. I
Speaker 1: think much further down the path would be sectors at
Speaker 1: construction and healthcare where there's a huge room for technology improvement,
Speaker 1: but it's still ways off. And when you mentioned technology
Speaker 1: and that healthcare sector, do you think that the government
Speaker 1: is going to spur that or is it currently making
Speaker 1: it more difficult give you that thirty seconds. I think
Speaker 1: it's both the public and private sector. We've all gone
Speaker 1: to a doctor and seeing that they don't have their
Speaker 1: records from our last visit to another doctor. There's just
Speaker 1: huge opportunities for technology across both the public and private sectors.
Speaker 1: Time are higher. Thank you very much for being with us.
Speaker 1: The chief Strategy officer for JIM. We are broadcasting live
Speaker 1: from the PJYM headquarters in Newark and New Jersey. PIJIM
Speaker 1: is the global investment management business of Prudential Financial and Lisa,
Speaker 1: I know one topic that's always exciting to talk about
Speaker 1: real estate, real estate, and Kathy Marcus joins us now.
Speaker 1: Kathy Marcus is the global chief operating Officer and the
Speaker 1: head of US business for PJYM. Real Estate nearly seventy
Speaker 1: billion dollars in assets under management. Thank you very much
Speaker 1: for being with us, and thank you for having us here.
Speaker 1: Thank you and thank you for saying that real estate
Speaker 1: is exciting. It is it is. Everybody wants to talk
Speaker 1: about real estate, especially well, that's why we have you here. Um.
Speaker 1: I know that you know p JIM has a global outlook.
Speaker 1: You have properties all over the world, but let's start
Speaker 1: in the United States and maybe just to find pie
Speaker 1: Jim's strategy because you offer finance, you do financing for
Speaker 1: real estate, and you also own properties out it just
Speaker 1: give us a little hint of what your remit is.
Speaker 1: Sure UM well within PEDUM real estate UM specifically, as
Speaker 1: you mentioned, we have seventy billion dollars of assets under management,
Speaker 1: and that is primarily in the equity space, and it's
Speaker 1: all around the globe. We operate in US and Latin America,
Speaker 1: in Europe and an Asia. We invest in all the
Speaker 1: major property types office, apartment, retail, industrial, and then in
Speaker 1: others that might be considered a bit more niche, including
Speaker 1: senior housing, hotel, and self storage. So I want to
Speaker 1: talk about one of the biggest issues of this year,
Speaker 1: which is the concern that all of the money coming
Speaker 1: into the US and into the real estate market from
Speaker 1: China is slowing down because of the trade tensions, and
Speaker 1: that basically there's going to be a sort of deflation
Speaker 1: and valuations because of this exodus of foreign money. What
Speaker 1: have you seen on that front, So that is very
Speaker 1: true that about UM, the amount of Chinese investment in
Speaker 1: US real estate markets is down by about other investors,
Speaker 1: non US investors have UM come in to sort of
Speaker 1: fill that gap. And among those investors are investors from Singapore, Australia, UM,
Speaker 1: and Canada in particular. And in terms of you know,
Speaker 1: sort of the overall picture of investment in US real
Speaker 1: estate UM on behalf of non US investors UM. You know,
Speaker 1: there's a long term average that about nine percent investment
Speaker 1: in US real estate markets. It's coming from non US
Speaker 1: investors UM. And we're twelve so we're still you know,
Speaker 1: above the long term average. But UM. You know, investors
Speaker 1: from one particular country of China, clearly that has gone down.
Speaker 1: I think that that has UM that has manifest itself
Speaker 1: more in some markets than others. The Chinese favored certain
Speaker 1: markets New York, San Francisco, those types of what we
Speaker 1: would call a gateway market. UM. But there's still lots
Speaker 1: of other non US interest in in US real estate.
Speaker 1: One head win that some non US investors have been
Speaker 1: facing in US real estate is that the cost of
Speaker 1: hedging the US dollar has gone up, and that you
Speaker 1: have seen some evidence of UM. You know, certain investors
Speaker 1: who are more likely to hedge, German investors in particular,
Speaker 1: sometimes you've seen a little bit less activity from them.
Speaker 1: I wonder if you could speak to the issue of
Speaker 1: the value of real estate located near, expansion of infrastructure projects,
Speaker 1: expansion of public parks, public venues such as the high
Speaker 1: Line in New York, and redevelopment areas. Because PJAM has
Speaker 1: been very active in almost twinning its investment thesis with
Speaker 1: those kinds of general improvements. Yes, that's been a real
Speaker 1: strategy of ours, and in particular around transit and transit
Speaker 1: oriented development, particularly in the multi family space in the US,
Speaker 1: has been something that we've been very focused on. And
Speaker 1: part of that has to do with who the renters
Speaker 1: are for those types of projects. And interestingly, if we
Speaker 1: had been talking about this ten or fifteen years ago,
Speaker 1: our prime renter for urban type apartments would have been
Speaker 1: all young people, and now you're really seeing much more
Speaker 1: of a barbell. There's lots of empty nesters and baby
Speaker 1: boomers who are renting in those types of projects too,
Speaker 1: And both of those populations they like transit. They like
Speaker 1: to be able to walk to their local coffee shop
Speaker 1: or walk to a movie, or walk to lots of restaurants,
Speaker 1: and they also both like a lot of amenities. They want, um,
Speaker 1: you know, a golf simulator, they might want a saltwater pool,
Speaker 1: and so a lot of the development which we've been
Speaker 1: involved with and others have as well, is really in
Speaker 1: this class A space and and that's really worked out
Speaker 1: quite well because of the demand in that space. But
Speaker 1: I think we all know that there's really almost a
Speaker 1: crisis of affordable housing in the US, and so you know,
Speaker 1: the fact that so much development has been in this
Speaker 1: class A space really means that there is an entire
Speaker 1: part of the population that is underserved in terms of apartments,
Speaker 1: and that's really something that we've been focusing on lately.
Speaker 1: That's interesting. Um, I want to I want to go there,
Speaker 1: actually because I was going to move to senior housing,
Speaker 1: but I want to hear how you're planning to serve
Speaker 1: that population given the fact that the actual material costs
Speaker 1: are increasing and labor costs are increasing, and it's just
Speaker 1: not that profitable to build housing that you can't sell
Speaker 1: for for higher prices. You are correct there, and and um,
Speaker 1: you know, construction costs have gone up precipitously in the
Speaker 1: past year in particular, So our strategy has really been
Speaker 1: um that we've been acquiring existing assets. In the past year,
Speaker 1: we've acquired about units of what we're calling workforce housing,
Speaker 1: and the strategy there is to acquire existing assets, but
Speaker 1: to do a little bit of upgrading and a little
Speaker 1: bit of renovating there. But the key to that strategy
Speaker 1: is to have the discipline not to over improve, because
Speaker 1: if you go in there and you spend so much
Speaker 1: money upgrading and you go into the granite countertops and
Speaker 1: all of the amenities, you've just defeated the whole purpose
Speaker 1: because now your target renters can no longer afford the project.
Speaker 1: So it's a fine balance between keeping it competitive within
Speaker 1: that workforce housing UM space. So what is workforce housing?
Speaker 1: We consider that to be essentially Class B type assets.
Speaker 1: They tend to be UM constructed in a garden style project,
Speaker 1: and they tend to be located in the southeast and southwest,
Speaker 1: where you have really sort of um uh, the phenomenon
Speaker 1: of it being affordable because of where it is and
Speaker 1: because of its age. The cycle in real estate has
Speaker 1: it been repealed, and our investors nervous about where they
Speaker 1: are in the cycle. We're clearly late in the cycle,
Speaker 1: and that's something that UM everyone is thinking about and
Speaker 1: talking about. And therefore some of the strategies that we've
Speaker 1: been focused on are really tailored to where we think
Speaker 1: we are in the cycle. And you know, we just
Speaker 1: talked about Class B apartments workforce housing. Senior housing is
Speaker 1: another example. And really the themes here are our strategies
Speaker 1: that are underscored by demographic or societal trends and things
Speaker 1: that we see coming that are not as um tied
Speaker 1: to the economic cycle. Although there's been a lot of
Speaker 1: investment in senior housing, and there was just a front
Speaker 1: page article in the Wall Street Journal talking about how, uh,
Speaker 1: a lot of seniors aren't going to senior housing so
Speaker 1: quickly because they're actually staying healthier for longer and being independent.
Speaker 1: How do you address that? It's true in terms of
Speaker 1: the um what we see in our in our properties
Speaker 1: is that the average age of the senior housing resident
Speaker 1: has gone up tremendously. UM. But there's still a demand
Speaker 1: and there's you know, what people refer to as a
Speaker 1: silver tsunami that's coming right and um, you know, the
Speaker 1: demographics show us that in the coming decade, three times
Speaker 1: as many people are going to turn seventy five as
Speaker 1: have in the prior decade. And so, you know, the
Speaker 1: current stock of senior housing in the US, two thirds
Speaker 1: of it is over fifteen years old, and so you
Speaker 1: can see that there is a need for more development there.
Speaker 1: I would agree with you. There are some markets that
Speaker 1: maybe got ahead of that um, you know, supply demand dynamic,
Speaker 1: but overall a very very compelling thesis. And peach and
Speaker 1: Real Estate has invested in senior housing for the past
Speaker 1: twenty years. It's something we've always liked, but the dynamic
Speaker 1: is more compelling now than ever. Kathy Marcus, thank you
Speaker 1: so much for being with us and talking about this
Speaker 1: issue that both PIM and I find fascinating, and that
Speaker 1: is real estate. Kathey Marcus, Global chief operating Officer and
Speaker 1: head of the US business at Peachim Real Estate. And
Speaker 1: Lisa Bram what's along with PIM Fox and this is
Speaker 1: Bloomberg Markets, Lisa, after the close of trading today, we
Speaker 1: will get the results from Apple, and who other than
Speaker 1: John Butler, our senior Telecom services and Equipment analysts for
Speaker 1: Bloomberg Intelligence. Who other than John Butler? Would we have
Speaker 1: to comment on it? Absolutely? Nobody? Exactly, all right, John Butler?
Speaker 1: What should investors look for in the commentary when Apple
Speaker 1: reports results? The first thing I would look for PIM
Speaker 1: is any commentary on the latest phones. So to me,
Speaker 1: this latest jen ration of phones or they're all based
Speaker 1: on the iPhone ten design. They're a bit of a
Speaker 1: feature upgrade. There's a lower, lower cost version of the
Speaker 1: iPhone tent out there, called the iPhone ten R x
Speaker 1: R as some people call it, and in my view,
Speaker 1: this sort of sets the stage for iPhone growth over
Speaker 1: the coming three to five years. So I want to
Speaker 1: hear how well those new devices are resonating with consumers.
Speaker 1: And you know, if you wind the clock back at
Speaker 1: your Tim Cook gave us some good color on how
Speaker 1: iPhone ten was doing. He made comments that it was
Speaker 1: the best selling phone in every week since it had
Speaker 1: been launched. I'd love to hear similar commentary like that
Speaker 1: this year. The other thing I'm focused on is services
Speaker 1: and what the growth outlook looks like for the services business.
Speaker 1: That's actually where I wanted to go because once upon
Speaker 1: a time, a long, long couple of months ago, uh
Speaker 1: and we were discussed saying how the supercycle in smartphones
Speaker 1: is definitely plateau ng if not declining. People who have
Speaker 1: a smartphone who want one, have one. Uh So the
Speaker 1: saturation point is pretty high. I'm just wondering, I mean,
Speaker 1: are people not focused on that anymore, or I do
Speaker 1: think that Apple is going to try to emphasize services
Speaker 1: and the revenue that they get from that over the
Speaker 1: iPhone sales. So Apple is doing two things. Number One,
Speaker 1: the iPhone has grown to really dominate the sales mix,
Speaker 1: so in a very good quarter at sixty percent of sales,
Speaker 1: in sort of the slower quarters, it's a little less
Speaker 1: than sixty percent, but it's a higher percentage revenue. They've
Speaker 1: been trying to grow that services business to diversify their
Speaker 1: overall mix and lessen the reliance on iPhone growth quarter
Speaker 1: and in quarter out, and it's been working well. My
Speaker 1: concern is that services don't continue to grow at thirty
Speaker 1: percent quarter and in quarter out either, and so I'll
Speaker 1: be looking very closely to see how services growth is doing,
Speaker 1: what's new, what might be on the drawing board there.
Speaker 1: And then on the iPhone side, I like what they're doing,
Speaker 1: which is they're shifting a reliance on driving high unit
Speaker 1: sales of iPhone to driving higher priced iPhone sales. So
Speaker 1: you know, revenue is a function of units and price.
Speaker 1: They're now focused on price night units. Two years ago,
Speaker 1: three years ago, it was all about unit sales and
Speaker 1: less about price. John Butler, is Apple on track to
Speaker 1: do a hundred billion and gross profit for the year.
Speaker 1: I can't comment on the specific numbers. The regulators would
Speaker 1: hang me for that, but um, they're doing well him
Speaker 1: you know him. Well, well, you can't tell me that
Speaker 1: that Apple revenue on an annual basis is over two
Speaker 1: hundred and fifty billion. Yes, they are, is a staggering number.
Speaker 1: It's incredible. This really is a very special company in
Speaker 1: many ways, and the iPhone really was an iconic device
Speaker 1: and it continues to sell well for them. Um, And
Speaker 1: you know the beauty of it is, you now have
Speaker 1: this huge installed base out there, and that's why they're
Speaker 1: focused on services. They want to monetize that installed base
Speaker 1: now that the overall category really has matured. We just
Speaker 1: got the latest numbers from I d C on Global
Speaker 1: on the global uh smartphone market, pardon me. And it
Speaker 1: really is a low single digit growth market overall, and
Speaker 1: so that affects Apple and every other vendor in the market.
Speaker 1: So I also remember once in upon a time we
Speaker 1: were talking about innovation out of Apple and the fear
Speaker 1: that Tim Cook couldn't replicate anything in the Steve Jobs
Speaker 1: era where it was constant innovation and disruption of the
Speaker 1: entire industry. If that's really the case, which it seems
Speaker 1: to be, if the iPhone really is going to be
Speaker 1: the main product of the company going forward, then is
Speaker 1: it overpriced given the fact that it might not be
Speaker 1: the growth story that it has been in the past. Well, again,
Speaker 1: it's morphing into more of a services and even a
Speaker 1: subscription story, if you is it valued as one again, Lisa,
Speaker 1: I hesitate to comment on valuation, um, but I think
Speaker 1: it reflects Apples still robust growth outlook. You know, the
Speaker 1: the iPhone this year, as old as the iPhone is,
Speaker 1: it's ten years old. iPhone revenue grew double digits last quarter.
Speaker 1: So you know they're finding you new and unique ways
Speaker 1: of growing that product line, which is buying them a
Speaker 1: lot of time to transition into other categories. And you
Speaker 1: know you alluded to other products, and they really have
Speaker 1: not had that. They haven't pulled the rabbit out of
Speaker 1: a hat again, as as I like to say, they
Speaker 1: did it with the iPad, they did it with the iPod,
Speaker 1: and they certainly did it with the iPhone. I'm not
Speaker 1: sure they have anything left there per se, But again,
Speaker 1: diversification is their friend there. So the iPods have done well, Uh,
Speaker 1: the home home pods will maybe do well there. So
Speaker 1: so we'll have to see what we'll have to say exactly,
Speaker 1: John Butler, we're gonna have to leave there. Thank you
Speaker 1: so much for being with us. John Butler, senior Telecom
Speaker 1: Services and Equipment analyst at Bloomberg Intelligence telling me and
Speaker 1: him how much we're gonna have to spend on our
Speaker 1: family iPhone budget. It is our pleasure to introduce Nathan Sheets,
Speaker 1: the chief economist for PEACH and Fixed Income. But he's
Speaker 1: so much more. Previously, he had a storied career at
Speaker 1: the U. S. Treasury and also for eighteen years served
Speaker 1: in a variety of positions with the Federal Reserve Board. Sir,
Speaker 1: thank you very much for being here, and thank you
Speaker 1: for having us. It's a pleasure to be here and
Speaker 1: welcome to PEACH. Well, we appreciate it. And know, just
Speaker 1: to put a little bit into context, I understand that
Speaker 1: the your dissertation, your doctoral dissertation, uh supervisor, one of
Speaker 1: them was one Stanley Fisher, and I'm wondering if you
Speaker 1: could comment first of all on the Federal reserves current policy.
Speaker 1: But put it into the context of our political back
Speaker 1: and forth with President Donald Trump, having said pretty clearly
Speaker 1: that he doesn't particularly favor the policy of raising interest
Speaker 1: rates that has been adopted by the Federal Reserve and
Speaker 1: Jerome Powell. As you said, having been trained by Stan Fisher,
Speaker 1: one learns quite a bit about the importance of institutions
Speaker 1: in thinking about economic policy. And certainly that's true now
Speaker 1: when we think about where the Federal Reserve is and
Speaker 1: some of the broader political pressures that the fedist feeling.
Speaker 1: So on the one hand, I think the Fed is
Speaker 1: is quite pleased with where the economy is today. The
Speaker 1: labor market is strong, the inflation rate is roughly at
Speaker 1: its two percent target. The Fed can say in a
Speaker 1: very convincing way that the economy is now performing in
Speaker 1: a way consistent with its dual mandate, and so I
Speaker 1: think that's very very encouraging for them going forward. I
Speaker 1: think they're reasonably optimistic about where we're headed. Uh. They're
Speaker 1: calling for a couple more rate hikes next year, and
Speaker 1: ultimately the Fed funds rate landing around three point four percent,
Speaker 1: a little bit above neutral. Uh. But the back and
Speaker 1: forth with President Trump that you mentioned adds a new dimension. Now,
Speaker 1: I believe fervently that the Federal Reserve is an independent
Speaker 1: central bank, and the FED is not going to explicitly
Speaker 1: change its policies, certainly not make them easier in response
Speaker 1: to political pressure. But by the same token, the FAT
Speaker 1: has to be aware of and respond to and incorporate
Speaker 1: in the broader social and political environment. And I think
Speaker 1: that means the FAD is going to have to be
Speaker 1: extra careful and explaining what it's doing and describing its path,
Speaker 1: and I think being particularly careful to not make it
Speaker 1: seem like they're responding to that political pressure, and that
Speaker 1: could cough any interesting dynamic. The other real complication for
Speaker 1: the FED is the trade war with China. Uh. People
Speaker 1: have been concerned, and we talked to people. I frankly,
Speaker 1: I am not getting a clear sense of how people
Speaker 1: are even pricing this. In This morning, President Trump tweeted
Speaker 1: just had along and very good conversation with President Jijan
Speaker 1: Ping of China. Talked about many subjects, heavy emphasis on trade.
Speaker 1: Also had to take a discussion with North Korea, basically
Speaker 1: indicating things were moving in a positive direction. But Black
Speaker 1: Black Rocks Larry at a conference this morning said he
Speaker 1: doesn't think that anything is going to stop a full
Speaker 1: blown trade war. Markets are up on President Trump's tweet,
Speaker 1: what do you think is the most likely outcome in
Speaker 1: and our markets fully pricing in the potential decline. So uh,
Speaker 1: my feeling is that this trade war is going to
Speaker 1: continue for a while. Having been engaged in some of
Speaker 1: this uh international diplomacy with China, I'm not seeing the
Speaker 1: markers or the indicators that would lead me to suggest
Speaker 1: that a agreement of any importance is anywhere in the offing.
Speaker 1: So my expectation is that on January one, the teariffs
Speaker 1: on the two hundred billion of Chinese imports are going
Speaker 1: to click up from temper cent to UH. Broadly speaking,
Speaker 1: I think President Trump feels that he's got a winning hand,
Speaker 1: partially for the reason at least that you indicate is
Speaker 1: that the signature, the imprint of this on the U.
Speaker 1: S economy so far has been fairly limited. Now, the
Speaker 1: latest correction inequity prices reflects a lot of things, and
Speaker 1: maybe trade war is part of it. But I think
Speaker 1: President Trump feels politically and economically he's in a good place.
Speaker 1: He's going to press this and he's looking for fundamental
Speaker 1: changes in the way that China does is right? Is
Speaker 1: he right that the U? S economy can withstand this
Speaker 1: and not be affected to too negatively? On the one
Speaker 1: he had, let me say that the economy, growth, investment
Speaker 1: have absorbed this sentiment, have absorbed this better than I
Speaker 1: would have expected so far. My second point is that
Speaker 1: we haven't seen how a trade war UH impacts a
Speaker 1: modern twenty first century economy. And there may be through
Speaker 1: the Internet and and access to information and flexible supply chains,
Speaker 1: there may be more xilience and flexibility in these supply
Speaker 1: chains than we thought. Nevertheless, there will be a choke point,
Speaker 1: and there will be a point where UH it's hitting investment,
Speaker 1: it's hitting the market's more profoundly, and maybe even starts
Speaker 1: moving into his politics. And at that point I think
Speaker 1: that he'll call and it's just likely to be at
Speaker 1: some point next year he'll have a summon with President She.
Speaker 1: He'll take up President She's offering and declared a grand
Speaker 1: victory for American capitalism ten seconds. Do you think the
Speaker 1: FED is going to make a pause here? I think
Speaker 1: the FAT is nicely threading the needle between being too
Speaker 1: restrictive and being too accommodative. There's always a risk, but
Speaker 1: I think the pal fat is on a very nice trajectory.
Speaker 1: Nathan sheates, Thank you so much for being with us.
Speaker 1: Truly a pleasure. Nathan. She's is chief economist for PGIM
Speaker 1: Fixed Income, joining us here at the PGIM headquarters beautiful
Speaker 1: building glass in downtown at Newark and Lisa bram Ways
Speaker 1: along with my co host and colleague Pim Fox, and
Speaker 1: this is Bloomberg Markets. Thanks for listening to the Bloomberg
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Speaker 1: I'm Pim Fox. I'm on Twitter at pim Fox. I'm
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