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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Always

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Speaker 1: with Michael McKee. Daily we bring you insight from the

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Speaker 1: best in economics, finance, investment, and international relations. Find Bloomberg

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Speaker 1: Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course

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Speaker 1: on the Bloomberg. We could talk this morning for three

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Speaker 1: hours to Andrew Sentence. He was chief economist for British Airways.

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Speaker 1: He's been a member of the Monetary Policy Committee the

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Speaker 1: Bank of England. We could talk to him about Foreign

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Speaker 1: Secretary Johnson or the new Brexit Zar. I hate that phrase.

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Speaker 1: I gotta come up with something better, Mr Davis. But

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Speaker 1: let us start with the Bank of England Andrew Sentence.

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Speaker 1: The Governor Kearney show courage or resilience or bravery in

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Speaker 1: not cutting interest rates. Well, it's not a decision just

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Speaker 1: for Governor Carney. He spoke out a couple of weeks

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Speaker 1: ago and said he thought monetarizing might be needed. I

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Speaker 1: think the jury is out on that. I think the

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Speaker 1: MPC has taken the right decision. We need stability at

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Speaker 1: the moment in our economic policies here in the UK.

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Speaker 1: There's been so much turbulence on the political front. I

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Speaker 1: don't think now is the time for monetary policy or

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Speaker 1: economic policies to change. They should be stable, and so

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Speaker 1: I very much welcomed the fact that interest rates have

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Speaker 1: been on hold. There's one member of the MPC Leger

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Speaker 1: who voted for a count. He'd been hinting at that

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Speaker 1: for some time, but he was outvoted by the majority

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Speaker 1: of the committee. Yeah, and I want to mention Michael McKee.

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Speaker 1: Roger Boodle of Capital Economics nailed this a number of

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Speaker 1: days ago and surveillance looking for Carney to have some

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Speaker 1: strength here. Are you surprised, Andrew that is the only

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Speaker 1: one who voted for a cut this month. I am

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Speaker 1: a bit surprised, but I'm reassured. I think I think

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Speaker 1: you know, we've been We've seen some very fast moving

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Speaker 1: political events in the UK, and when things move fast,

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Speaker 1: there's a tendency for people to sort of chase the

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Speaker 1: action and to try and respond to fast moving events.

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Speaker 1: But we don't really have any evidence of what has

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Speaker 1: happened to the economy. I've been going around talking to

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Speaker 1: many business people. Their basic philosophy is keeping calm and

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Speaker 1: carrying on. You know, there are some deals that may

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Speaker 1: be being put on hold, there may be some movements

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Speaker 1: in the property market, but the bulk of manufacturing and

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Speaker 1: services activity in the UK is carrying on as normal.

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Speaker 1: So I think the job of the banking and is

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Speaker 1: to respond to real, hard dates and real evidence. We

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Speaker 1: won't have that. I don't think we'll even have that

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Speaker 1: as a next meeting. To be honest, we won't have

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Speaker 1: much data for July, so I think we need to

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Speaker 1: wait till the autumn before working out how the banking

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Speaker 1: in order to respond. Well, we've got the pound down

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Speaker 1: eleven percent basically since the Brexit vote, which should, in

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Speaker 1: theory bring us an inflation spike. Is the Bank of

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Speaker 1: England willing to look through the inflation spike and provide

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Speaker 1: stimulus anywhere? Because this is different from two thousand and

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Speaker 1: eight when Reverend King did that. Because there's a good

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Speaker 1: possibility we'll get some fiscal action this time, I would imagine, Yeah,

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Speaker 1: I think you're quite right. I think fiscal policy will

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Speaker 1: be looser now with the change of government than it

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Speaker 1: would otherwise have been. Hopefully that the government we use

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Speaker 1: that fiscal discretion in a sensible way. I don't think

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Speaker 1: it should be massively looser, but I think the previous

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Speaker 1: government had a lot of emphasis on long term projects

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Speaker 1: which weren't going to deliver any benefits to the UK

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Speaker 1: economy until about twenty thirty. Like HS two. There's some

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Speaker 1: smaller scale infrastructure projects could be quite helpful in the

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Speaker 1: current environment. And if the deficit of the presentative of

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Speaker 1: GDP goes up half for one because of that, that's

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Speaker 1: not a big big deal. So I think that the

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Speaker 1: job of the bank thing that they expended all their

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Speaker 1: ammunition in the financial crisis and we're down at NorthPoint

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Speaker 1: five percent interest rates. I think they should basically hold

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Speaker 1: fire and maintain a stabilizing role in the current environment.

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Speaker 1: Andrewsenten's one thing we're seeing here, Mike and I have

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Speaker 1: been talking about this the last couple of days is

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Speaker 1: the rate of change of negotiations. Mr Schreibel of Germany

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Speaker 1: looking for a faster tone of negotiations and others. What

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Speaker 1: will be the tact of the May government will well

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Speaker 1: Prime Minister May and her team try to move quickly

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Speaker 1: with Europe. I think they will want to move cautiously.

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Speaker 1: You know, this has been a big shock in the UK.

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Speaker 1: This is not what people were expecting. Civil service. Government

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Speaker 1: ministers were not prepared for this and they are having

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Speaker 1: to climatize themselves to the new situation. I think in

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Speaker 1: those circumstances I wouldn't be surprised until if it wasn't

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Speaker 1: until early next year that we really got negotiations getting underway.

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Speaker 1: I think the new government under Theresa May, which I

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Speaker 1: had strongly support, needs a bit of time to put

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Speaker 1: together its plans. I think how European partners need to

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Speaker 1: respect that. I think, you know, a six month or

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Speaker 1: so period where we work out what our strategy is

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Speaker 1: will be good for the UK and good for Europe.

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Speaker 1: We're talking with Andrew Sentence, former member of the Bank

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Speaker 1: of England's Sponetary Policy Committee, now that the Bank of

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Speaker 1: England has decided to remain on hold for at least

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Speaker 1: another month, suggesting maybe they will ease in August, and

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Speaker 1: a curious as to what Mark Carney might do because

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Speaker 1: the minutes we just got from the last Monetary Policy

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Speaker 1: Committee meetings suggest they discussed a variety of easing options,

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Speaker 1: additional qui or director lending. What do you think they

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Speaker 1: were just a straight cut first off? Well, I'm not

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Speaker 1: sure they should do anything until the autumn. I think

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Speaker 1: the problem that the MPC has is it's a committee

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Speaker 1: that's very much driven by economic data and evidence, and

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Speaker 1: even when they get to August, they won't have a

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Speaker 1: lot of evidence about how the economy has responded. The

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Speaker 1: Friendom decision was a short term shock, but you know,

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Speaker 1: even when when we get data for July, we won't

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Speaker 1: know whether that data is really just reflecting that shock

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Speaker 1: or whether it tells us something more fundamental. So, as

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Speaker 1: I was on the MPC, I'll be waiting until the autumn.

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Speaker 1: I wouldn't want to make any changes in August. The

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Speaker 1: Bank in its Minutes Reports suggested that we are seeing

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Speaker 1: that effect of the Brexit vote on sentiment for households

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Speaker 1: and for companies. What about the psychological impact of a

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Speaker 1: rate cut, even if you don't necessarily need to respond

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Speaker 1: to the data, Well, I think that they There are

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Speaker 1: two points on this. One is a lot of the

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Speaker 1: uncertainty that's been created in the UK economy over the

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Speaker 1: last few weeks has been political, and we're now seeing

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Speaker 1: the political uncertainty being resolved. We've got a new government

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Speaker 1: in place under threes and May. She's putting together a

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Speaker 1: new team and hopefully that will build confidence that we

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Speaker 1: can manage this Brexit process in a sensible way. But

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Speaker 1: in the immediate weeks after the referendum decision, there was

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Speaker 1: clearly a shock and people may be responding to that.

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Speaker 1: I think the other thing is that you know, this

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Speaker 1: is something that's going to play out of a very

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Speaker 1: long period of time. Even if the UK leaves the

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Speaker 1: you which looks the most likely outcome, that's not going

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Speaker 1: to happen for two, three, four or five years ahead.

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Speaker 1: So monetary policy, which is designed to respond to short

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Speaker 1: term development, shouldn't necessarily overreact to the situation. And if

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Speaker 1: I was on the MPC, I would be focusing on

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Speaker 1: what the data is telling us, and we don't really

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Speaker 1: have very much data at the HIM. And we've got

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Speaker 1: a meeting scheduled today between the new Chancellor of the

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Speaker 1: Exchequer of Philip Hammond and Mark Arney. Hammond said he

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Speaker 1: wants to know Carney's views on where the economy is

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Speaker 1: and where it's going. How blunt do you think Governor

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Speaker 1: Karney will be? Well, I don't think Carney knows very

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Speaker 1: much more than Hammond. The only additional information that the

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Speaker 1: Bank has is its network of agents who visit businesses

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Speaker 1: around the country. But I think even even the views

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Speaker 1: that they have distilled will be slightly affected by the

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Speaker 1: political shock that we've seen. In that political shock, I

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Speaker 1: think will dissipate over the next two to three months.

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Speaker 1: And the job of the MPC is to respond to

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Speaker 1: the economy, so they really need hard economic data and

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Speaker 1: I'm not sure there's much hard economic data around. Even

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Speaker 1: Mark Karney can't really create data that doesn't exist. So

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Speaker 1: I think that discussion should more be about the strategy

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Speaker 1: and the way in which the bank and the chances

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Speaker 1: will work together over Then, Andrew sentence, thank you very

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Speaker 1: much for joining us today form a member of the

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Speaker 1: Monetary Policy Committee of the Bank of England. As the

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Speaker 1: Bank of England remains on hold, no change in monetary

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Speaker 1: policy this month, but a suggestion something will happen in August.

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Speaker 1: To our Global Wall Street audience, he's truly one of

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Speaker 1: our most popular guest Charles Peabody when he speaks, trust

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Speaker 1: me to use the old Hutton line. All of Global

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Speaker 1: Wall Street listens. Wonderful to have you with us this

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Speaker 1: morning with Portella's partners. Let me cut to the chase

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Speaker 1: from your last visit. Do you reaffirm that our banking

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Speaker 1: system will be an a t M machine for shareholders

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Speaker 1: in eighteen months or two years out. I do. And

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Speaker 1: this last c CAR results is a good indications result.

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Speaker 1: That was the stress test that the banks were put

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Speaker 1: under by the regulators to see whether their capital will

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Speaker 1: hold up in a stressed economic condition, and they passed

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Speaker 1: with flying colors, and the regulators finally unleashed their ability

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Speaker 1: to return capital, which I think is a seminar event

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Speaker 1: saying that the O eight oh nine financial crisis is

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Speaker 1: finally behind. One of the things you're so good at, Charles,

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Speaker 1: is the idea of relative value and absolute value relative

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Speaker 1: to the blue chip market. These stocks are dirt cheap.

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Speaker 1: We get that idea on an absolute value basis. Are

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Speaker 1: they worth buying shares today? I think City Group is

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Speaker 1: it trades at a substantial discount to book value. And

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Speaker 1: UM book value is going to grow quite rapidly. I

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Speaker 1: mean JP Morgan's tangible book value was up nine percent

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Speaker 1: year over a year in the in this quarter, UM,

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Speaker 1: so I look for a book value to grow quite rapidly.

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Speaker 1: Earnings are gonna be tough. They're gonna be tough. What

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Speaker 1: about JP Morgan Chase and JP Diamonds earnings. They're starting

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Speaker 1: to see some trading revenue pick up, but they didn't

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Speaker 1: manage to match on revenue. Where is JP Borgan at

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Speaker 1: the moment. Well, you know, it was a solid quarter,

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Speaker 1: but there were some mixed results there. There was strength

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Speaker 1: in capital markets, much better than we expected, but there

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Speaker 1: was weakness in credit cards, There's weakness and asset management.

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Speaker 1: There was weakness um in the top line revenues because

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Speaker 1: of the margin squeeze, and honestly, mortgage banking, which we

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Speaker 1: all thought would be very strong, was not as strong

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Speaker 1: as we anticipated. So it's a it's a mixed revenue quarter. Well,

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Speaker 1: you were talking about banks being able to return money

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Speaker 1: to shareholders. Jamie Diamond has been doing that all along.

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Speaker 1: They are the biggest bank by assets and the Fortress

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Speaker 1: Diamond that we've been told so many times. Do their

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Speaker 1: results tell us anything about what the rest of the

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Speaker 1: sector is going to be able to do or do

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Speaker 1: they sort of operate on their own? Well, they are

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Speaker 1: unique in that they have been gaining market share at

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Speaker 1: the expense of others. But I think the capital markets

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Speaker 1: results on the investment banking side boat very well. For

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Speaker 1: City Group tomorrow, although you know, bottom line, their earnings

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Speaker 1: aren't gonna be that strong, and then I think their

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Speaker 1: trading results boute a well for Goldman, who could have

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Speaker 1: a blowout quarter next next week. Are they running lean?

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Speaker 1: I asked this question earlier this morning. Let me ask

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Speaker 1: of Charles Probody by definition. Given the churn of the

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Speaker 1: political economics right now, everybody wants to quote unquote cut costs.

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Speaker 1: Do they cut costs or do they have to do

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Speaker 1: dramatic allocation of businesses Like your colleague Michael Mayo, it's

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Speaker 1: c l s A says City Group's got a jettison Mexico.

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Speaker 1: Do you jettison Mexico or do you lay off a

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Speaker 1: marginal five thousand people tom as. You know, it's it's

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Speaker 1: a balance, you know, you have to One of the

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Speaker 1: things that JP Morgan has done very well this cycle

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Speaker 1: is while they have been cost conscious, they've also invested

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Speaker 1: heavily in businesses. And you have to invest in the

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Speaker 1: mobile banking platform, you have to invest in cybersecurity, you

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Speaker 1: have to invest in you know, asset management, wealth management.

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Speaker 1: So it's a balance. I think this idea that you

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Speaker 1: can just split up the banks and you know, return

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Speaker 1: all that capital limits and there's no future in that.

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Speaker 1: There's a balance there. We saw the Bank of England

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Speaker 1: and hold today. The Fed has given us every indication

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Speaker 1: they're going to remain on hold, at least for several months.

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Speaker 1: How much does that continue to hurt the bank's net

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Speaker 1: interest margins, their ability to make profits. Well, you saw

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Speaker 1: it in Morgan's reports today. Their their net interest margin

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Speaker 1: came down a lot more than many of us anticipated.

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Speaker 1: I think sentiments tend to swing, and I think before

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Speaker 1: your end we're going to see sentiments swing back towards

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Speaker 1: a rate hike and even maybe an inflation scare. So

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Speaker 1: that would bode well for how banks trade between now

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Speaker 1: and you're in. Did we get that kind of sentiment

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Speaker 1: swift shift. Well, even if their net interest margin rises,

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Speaker 1: they need to make a loan. To make a profit

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Speaker 1: on a loan, and we've been hearing from bankers lately

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Speaker 1: saying we're not at this point seeing demand really pick up.

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Speaker 1: The c suite has sort of uh gone on hold

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Speaker 1: with all the news out there. Well, JP Morgan reported

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Speaker 1: very strong loan results. The industry should see loans grow

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Speaker 1: about eight percent plus or minus this quarter. So the

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Speaker 1: demand today exists. The question is are we going to

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Speaker 1: see a fall off because of energy, metals and mining, commercial,

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Speaker 1: real estate, etcetera. Charles Peabody with US with portel Us Partners,

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Speaker 1: and I've got to ask you this question. It's from

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Speaker 1: your U S centric view. Do you have an optimism

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Speaker 1: that the European banks can do American or Anglo sex

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Speaker 1: and style mergers and acquisitions to solve their problems? We

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Speaker 1: do that here, We do it relatively effortlessly. Do you

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Speaker 1: have any optimism they can use an American template to

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Speaker 1: solve their intractable problems? As you know, Tom, I don't

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Speaker 1: follow the European banks at a micro level, but there's

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Speaker 1: no question there's going to have to be some kind

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Speaker 1: of government involvement in helping them recapitalize. Number one and

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Speaker 1: number two, there are going to be um sales of

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Speaker 1: businesses the way City and Bank America did over the

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Speaker 1: last five years to help build their capital. So I

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Speaker 1: think those are the two approaches that will help them

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Speaker 1: deal with their capital inadequacies and and absorb the loss

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Speaker 1: of of loans. I want to make clear you mentioned

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Speaker 1: City twice. Is that your single best buy right now?

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Speaker 1: It is? I think there's tremendous value. I think the

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Speaker 1: company is surprised on how much capital they're gonna return.

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Speaker 1: They're gonna they can buy back seven percent of their

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Speaker 1: stock based on what they were approved for in c cars,

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Speaker 1: So that's like a forward stock split. That's a joke,

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Speaker 1: folks on attend to one reverse split. Charles you age,

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Speaker 1: you age the day they did that. Charles Peobody looking

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Speaker 1: adsome in her studios. He is with fortell Us Partners

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Speaker 1: on where were you June two thousand nine. I was

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Speaker 1: enjoying the company of the wonderful and late Ken Pruitt,

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Speaker 1: who used to go out west and catch trout the

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Speaker 1: size of your leg. And we were talking with one

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Speaker 1: m Holland on June two thousand nine. Mr Holland said,

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Speaker 1: low valuations make profitable investing easier. You would have made

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Speaker 1: ten point nine percent per year up in the Dow

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Speaker 1: if you listen to Michael Holland. He joins us right now, Michael,

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Speaker 1: congratulations on being a resilient bull. I guess just for

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Speaker 1: today it looked like a genius. Thank you to What

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Speaker 1: an exciting morning to be on is lots of news

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Speaker 1: this morning, and yeah, you're four oh one K or

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Speaker 1: what he used to call your two oh one K

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Speaker 1: has tripled its up its value in the equity portion

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Speaker 1: of since the two thousand eight two thousand nine, and uh,

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Speaker 1: maybe it's some some time to put a little bit

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Speaker 1: aside in in terms of a sleepwell insurance policy. But

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Speaker 1: evaluations still aren't crazy with with the large cap stocks

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Speaker 1: and other parts of the world. Also, as you were

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Speaker 1: talking about David Sour, we met with we met with

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Speaker 1: some of our advisors from from Asia yesterday up in Boston,

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Speaker 1: and some valuations there look interesting as well. So even

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Speaker 1: Michael Holland is beginning to look abroad. When you do that,

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Speaker 1: do you sell twenty five multiple US multinational shares that,

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Speaker 1: like bonds, appear to be priced to perfection? Yes? Quick

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Speaker 1: quick answer is yes, Tom. In cases where you have

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Speaker 1: extremely high valuation, companies that were trading when you and

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Speaker 1: I spoke in June of that year at at nine,

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Speaker 1: ten and eleven times earnings are now at five and

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Speaker 1: twenty eight times earnings. You can go abroad. You can

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Speaker 1: go to London, you can go to Shanghai, you can

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Speaker 1: go to different parts of South America and Latin America

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Speaker 1: and get great companies at attractions of those multiples. So

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Speaker 1: the answer is yes. But before we go any further,

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Speaker 1: I have to point out this morning, one stock here

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Speaker 1: in the US that it still is trading at a

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Speaker 1: very modest multiple, less than ten times earnings is JP Morgan.

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Speaker 1: And talking about people making a call, Jamie Diamond h

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Speaker 1: made the Diamond call of the bottom for JP Morgan

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Speaker 1: stock in February eleventh of this year when he bought

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Speaker 1: half a million shares and I think fifty three dollars

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Speaker 1: a share. He's made a cool quick five million dollars

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Speaker 1: on his holding. And if you look at the one

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Speaker 1: year chart on JP Morgan stock, you should be talking

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Speaker 1: to him, not to me, about the stock market. Mr Diamond.

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Speaker 1: If you're listening to sporting, you can come into the

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Speaker 1: New York studio, bring Mr Evangelista and all of your

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Speaker 1: entourage and we will ask you good fair questions. Or

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Speaker 1: Jamie Diamond, you can visit Michael McKee out in Victor, Idaho.

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Speaker 1: That would probably be We'll take him out in the

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Speaker 1: surveillance golf Victor, Idaho. That would be more fun. I'm

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Speaker 1: absolutely sure of it. Uh, Mike, I'm curious. We keep

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Speaker 1: hearing over and over again from everybody, that stocks are

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Speaker 1: getting over value, that the there's a limited upside, maybe

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Speaker 1: not a downside, but a limited upside, but stocks keep

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Speaker 1: going higher. And Larry Fink when it was out this

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Speaker 1: morning saying that retail investors are pulling funds from stocks.

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Speaker 1: So what is it that the real money is seeing here?

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Speaker 1: Is it that there's just no other alternative. The only

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Speaker 1: way you're going to get any kind of yield as

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Speaker 1: to buy equities. Now, whether or not you think the

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Speaker 1: price is fair, well, we know that's part of it, Michael.

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Speaker 1: But in addition, we had a lot of people position

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Speaker 1: on the short side over the last couple of months

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Speaker 1: coming and these are hedge funds and institutions. As you say,

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Speaker 1: the individuals have been out of this market and continuing

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Speaker 1: to retreat, but institutions and hedge funds had been had

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Speaker 1: been out, had been betting against this market, and there

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Speaker 1: there is obviously some shortcoming. I think think referred to

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Speaker 1: that this morning as well. So that's been going on.

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Speaker 1: I think that one of one of the things that

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Speaker 1: was easy back in two thousand eight, two thousand nine

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Speaker 1: times referred to that time period Ken prove it we

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Speaker 1: we we had these incredibly low valuations for these really

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Speaker 1: great properties. JP Morgan at that demonstrating less than four times.

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Speaker 1: That's crazy stuff. So today we have whole valuation, except

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Speaker 1: that we have this this this conundrum with with the

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Speaker 1: interest rates that you would talking about every morning, and

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Speaker 1: the fact that we have these these incredibly low or

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Speaker 1: negative rates around the world means that the valuations for

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Speaker 1: stocks we don't know. People don't know. There's no pricing

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Speaker 1: mechanism that works to tell you what is too high.

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Speaker 1: Now we knew what was crazy low back in two

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Speaker 1: thousand and eight two night. We don't know how far

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Speaker 1: up this market can go. So I think to be

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Speaker 1: out of stocks right now, even though they're at all

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Speaker 1: time highs, would be crazy. But I think it's a

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Speaker 1: great time to consider putting a little bit of your

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Speaker 1: profits aside into a sleep well fund that if the

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Speaker 1: market does have a major correction sometime in the future,

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Speaker 1: which you can imagine it might actually happen, uh, you

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Speaker 1: sleep well. Despite the fact you own some stocks, you

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Speaker 1: have a nice cash reserve as well to buy some stocks.

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Speaker 1: I like the idea of a sleep well fund. UM

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Speaker 1: maybe s L E E P for a ticker or

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Speaker 1: something like that exactly within the e t F and

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Speaker 1: the cost of running will be very low because it's

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Speaker 1: all in cash. Looking at JP Morgan, the net interest

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Speaker 1: margins as we were talking with Charles Peaboddy came down

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Speaker 1: quite a bit. Return on assets uh just one percent? Uh.

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Speaker 1: Can JP Morgan keep earning its way into higher stock

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Speaker 1: prices as you're suggesting they are as a value? Well,

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Speaker 1: you know, the earnings were down, let's let's be clear

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Speaker 1: about that. And but also cost drop. You know I

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Speaker 1: heard you talking earlier about the management Charles Peabody about

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Speaker 1: the expenses costs went from fourteen and a half billion

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Speaker 1: down to thirteen point six and that's in a period

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Speaker 1: where he isn't continuing to invest in cyber cyber security

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Speaker 1: and and asset management. And uh, there's a great management

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Speaker 1: display going on at Morgan in a very difficult time.

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Speaker 1: But I think the top right is the problem. And

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Speaker 1: I think that the trading the trading results were a

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Speaker 1: month ago said that they were they looked at actually

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Speaker 1: pretty good, so it shouldn't be too much of a right.

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Speaker 1: But they've done a great job. Michael hallan to get

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Speaker 1: a little nerdy here with a low rate environment wherein

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Speaker 1: CFOs have almost a moral mandate to take way at

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Speaker 1: the average cost of capital analysis and add on debt.

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Speaker 1: What is their constraint to do that? I mean, it

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Speaker 1: just makes sense. You go in your pile on near

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Speaker 1: zero coupon international debt and your retire equity. Is that

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Speaker 1: a dumb idea? It's a no brainer, Tom. You know, well,

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Speaker 1: we'll transfer this from the nerdy column into the no brainer.

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Speaker 1: They have to do it, and if they don't do it,

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Speaker 1: they better have a very good reason why the central

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Speaker 1: banks of the world have have taken the cost of

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Speaker 1: capital two levels. We have UH close to of all

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Speaker 1: uh sovereign debt around the world is trading at a

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Speaker 1: negative yield. Excuse me, that doesn't make any sense, but

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Speaker 1: that's that's what Bloomberg tells you. And so we we

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Speaker 1: have these incredibly low interest rates. Of all sovereign debt

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Speaker 1: is trading below two percent. Again, recording to Bomber, these

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Speaker 1: these are crazy numbers. So so when we have companies

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Speaker 1: like JP Morgan paying cash dividends of three Microsoft, Johnson

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Speaker 1: and Johnson ex On Mobile, the world's great companies. How

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Speaker 1: and then David Sowerby referred to the six percent earnings

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Speaker 1: field earlier in your conversation. So you add you at

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Speaker 1: six and three and that's nine. When you can get

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Speaker 1: nine with your money that you buy for two percent

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Speaker 1: or one percent. If you don't do it, you better

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Speaker 1: you better have a good reason, because you should go

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Speaker 1: to jail. This is what we like. This is what

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Speaker 1: we like, folks. You have Olivia Blonchard on Mr sawerryon

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Speaker 1: one m Holland on to give us a cross section

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Speaker 1: of wisdom around economics, finance and investment. It's it's enough

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Speaker 1: to make Pim Fox smile because Pim just wants to

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Speaker 1: know how can I make money? And I believe we're

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Speaker 1: getting suggestions from Michael Holland on that. Don't forget Pim

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Speaker 1: Fox out on podcast taking stock always a chestnut on

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Speaker 1: how to not lose money as well. So I just

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Speaker 1: put out on Twitter for the benefit of one J.

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Speaker 1: Gorman over at Morgan Stanley a photo a snapshot of

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Speaker 1: Ellen Zetner going after sturgeon in some unnamed river in

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Speaker 1: Idaho and white Ooming. We now bring in this is

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Speaker 1: get about Gaddis Coast to coast. We bring in Michael

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Speaker 1: McKee and get about Gaddis Fishing Hour of Bloomberg Surveillance.

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Speaker 1: Mike introduce our steamed fishing guest, Ellen, do do you

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Speaker 1: get the impression that Tom might be a little jealous here?

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Speaker 1: I get the impression that that Tom is not a

432
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Speaker 1: fly fisherman because we don't go for sturgeon and sorry, no,

433
00:24:48,119 --> 00:24:51,960
Speaker 1: he's not really a fisherman. Allen Xettner is chief US

434
00:24:52,000 --> 00:24:57,280
Speaker 1: economists at Fork and Stanley, one of the Bloomberg best economists,

435
00:24:57,440 --> 00:24:59,919
Speaker 1: a long time in the industry, and probably has been

436
00:25:00,040 --> 00:25:03,400
Speaker 1: fishing much longer than she's been studying economics. Because you've

437
00:25:03,400 --> 00:25:05,080
Speaker 1: been out here for a couple of days. You came

438
00:25:05,080 --> 00:25:10,879
Speaker 1: out early to get an opportunity to seriously early and

439
00:25:10,920 --> 00:25:14,480
Speaker 1: this is a side trip. What's it like? I am

440
00:25:14,520 --> 00:25:17,200
Speaker 1: seriously what is it like fishing out in the great

441
00:25:17,240 --> 00:25:20,120
Speaker 1: state of Idaho? You know, I have people that tell

442
00:25:20,160 --> 00:25:23,480
Speaker 1: me that, uh, whatever your religion, if you can't find

443
00:25:23,560 --> 00:25:26,080
Speaker 1: God on the water, then you're not going to find

444
00:25:26,119 --> 00:25:28,760
Speaker 1: it your religion at all. I mean, it's it's it's

445
00:25:28,840 --> 00:25:33,280
Speaker 1: really a spiritual experience when you hook into a big trout,

446
00:25:34,160 --> 00:25:37,600
Speaker 1: uh and and you you bring them into the net successfully,

447
00:25:38,359 --> 00:25:41,880
Speaker 1: Look at how beautiful these fish are. Thank it for

448
00:25:41,880 --> 00:25:45,119
Speaker 1: such a wonderful ride and then let it back into

449
00:25:45,160 --> 00:25:47,520
Speaker 1: the into the wild to be caught again. It's a

450
00:25:47,560 --> 00:25:50,440
Speaker 1: great experience. How's that time for poetry? That was wonderful.

451
00:25:52,000 --> 00:25:55,840
Speaker 1: So now let's move on and ask about hooking Janet Yellen.

452
00:25:56,040 --> 00:25:59,439
Speaker 1: She's certainly providing a fight to traders in the in

453
00:25:59,520 --> 00:26:03,000
Speaker 1: the market who have been whipside all year. Now, don't

454
00:26:03,000 --> 00:26:05,879
Speaker 1: believe anything is going to happen. You were one of

455
00:26:05,920 --> 00:26:08,600
Speaker 1: the first, one of the earliest calls that the FED

456
00:26:08,640 --> 00:26:11,320
Speaker 1: would be on hold. Let me ask the tough question,

457
00:26:11,320 --> 00:26:13,159
Speaker 1: were you right for the wrong reason or right for

458
00:26:13,200 --> 00:26:16,119
Speaker 1: a reason you didn't know at the time. Is the

459
00:26:16,240 --> 00:26:19,120
Speaker 1: US economy the reason we're not seeing the FED move

460
00:26:19,280 --> 00:26:21,640
Speaker 1: or is it externalities? Yeah, you know, I think Mike,

461
00:26:21,720 --> 00:26:24,600
Speaker 1: that's a great question. Being right but for the for

462
00:26:24,680 --> 00:26:27,600
Speaker 1: the wrong reasons? Um, you know, I think we were

463
00:26:27,720 --> 00:26:30,120
Speaker 1: right to expect them to wait so long to high

464
00:26:30,119 --> 00:26:33,119
Speaker 1: grades last year because we knew that they would be

465
00:26:33,160 --> 00:26:37,680
Speaker 1: extraordinarily cautious. I can tell you before the summer global

466
00:26:37,720 --> 00:26:41,199
Speaker 1: growth meltdown last year, I was getting nervous um that

467
00:26:41,240 --> 00:26:42,359
Speaker 1: we were going to be wrong and they were going

468
00:26:42,400 --> 00:26:45,240
Speaker 1: to high grades earlier in September, and that global growth

469
00:26:45,280 --> 00:26:49,000
Speaker 1: melt meltdown was not in my forecast um so in

470
00:26:49,040 --> 00:26:51,440
Speaker 1: a way it saved our expectation that they would wait

471
00:26:51,520 --> 00:26:55,400
Speaker 1: until December. But we still have a FED that's extraordinarily cautious,

472
00:26:55,440 --> 00:26:59,560
Speaker 1: and I think what I noticed the undercurrent right now

473
00:26:59,640 --> 00:27:03,399
Speaker 1: is that because financial conditions have not tightened, and actually

474
00:27:03,440 --> 00:27:06,399
Speaker 1: on net they've eased a bit since Brexit, that people

475
00:27:06,440 --> 00:27:10,399
Speaker 1: assume that Brexit won't play into the Fed's thinking at all,

476
00:27:10,560 --> 00:27:14,560
Speaker 1: particularly for this July meeting, and that things are just fine, right,

477
00:27:14,600 --> 00:27:17,120
Speaker 1: But they lose sight of what the economy was like

478
00:27:17,320 --> 00:27:21,959
Speaker 1: before Brexit, where business investment was declining, job growth was slowing,

479
00:27:22,000 --> 00:27:25,480
Speaker 1: the credit cycles turned. This is definitely a late phase

480
00:27:25,520 --> 00:27:28,440
Speaker 1: of the business expansion and that has to play into

481
00:27:28,480 --> 00:27:32,560
Speaker 1: monetery policy thinking regardless of an event like Brexit. Well,

482
00:27:32,560 --> 00:27:36,040
Speaker 1: the big question is were there on jobs? A big

483
00:27:36,119 --> 00:27:39,000
Speaker 1: question is inflation. This morning pp I comes in much

484
00:27:39,000 --> 00:27:42,840
Speaker 1: stronger than forecast. It's not going to be capturing the

485
00:27:42,840 --> 00:27:46,480
Speaker 1: Philips curve effects of a tighter labor market. But are

486
00:27:46,560 --> 00:27:51,359
Speaker 1: we seeing slack used up and inflation beginning to be

487
00:27:51,440 --> 00:27:53,480
Speaker 1: generated as we probably should have seen in a normal

488
00:27:53,520 --> 00:27:56,000
Speaker 1: recovery some time ago, or are we just looking at

489
00:27:56,040 --> 00:27:58,040
Speaker 1: base effects that are going to fade, and the FED

490
00:27:58,119 --> 00:28:00,720
Speaker 1: doesn't have to worry about it. Well, I think so,

491
00:28:00,760 --> 00:28:02,760
Speaker 1: of course, is a good economist. I'm gonna say, there's

492
00:28:02,840 --> 00:28:05,119
Speaker 1: there's both in there, right. You know, you look at

493
00:28:05,200 --> 00:28:08,119
Speaker 1: import prices that were also released this week, and that

494
00:28:08,160 --> 00:28:11,800
Speaker 1: tells you that the pipeline of price pressures still is

495
00:28:11,840 --> 00:28:14,320
Speaker 1: not pointing to anything that should make the FED feel

496
00:28:14,359 --> 00:28:17,159
Speaker 1: like they have to move soon. Um, You've still got

497
00:28:17,200 --> 00:28:22,000
Speaker 1: an incredible amount of deflationary pressures coming from China. Uh.

498
00:28:22,040 --> 00:28:25,880
Speaker 1: And that started long before the China adjusted its its

499
00:28:25,880 --> 00:28:29,399
Speaker 1: currency in a more pronounced way last year. UM. And

500
00:28:29,480 --> 00:28:32,639
Speaker 1: so that's that's irrespective of what the the US dollar,

501
00:28:32,720 --> 00:28:35,440
Speaker 1: the trade weighted dollars doing, China is going to continue

502
00:28:35,440 --> 00:28:39,120
Speaker 1: to provide those disinflationary pressures. The FED is always going

503
00:28:39,160 --> 00:28:41,040
Speaker 1: to be confident that over the medium term it can

504
00:28:41,080 --> 00:28:43,760
Speaker 1: return inflation back to the two percent goal. I think

505
00:28:43,760 --> 00:28:47,120
Speaker 1: what they're bigger problem is is convincing people that they're

506
00:28:47,120 --> 00:28:49,440
Speaker 1: going to get there. Investors are not convinced. We can

507
00:28:49,480 --> 00:28:53,400
Speaker 1: see that in inflation expectations. Households are not convinced. That

508
00:28:53,560 --> 00:28:57,120
Speaker 1: is what terrifies monetary policymakers that people lose faith in

509
00:28:57,560 --> 00:29:01,160
Speaker 1: their ability to return inflation back to goal UH and

510
00:29:01,160 --> 00:29:03,640
Speaker 1: and that, certainly, I think is the bigger problem for

511
00:29:03,720 --> 00:29:06,440
Speaker 1: them right now. Certainly in the Minutes, it was noted

512
00:29:06,480 --> 00:29:08,680
Speaker 1: that a number of FED officials like they have a

513
00:29:08,680 --> 00:29:12,320
Speaker 1: problem with their communications strategy. We are talking with Ellen Sander,

514
00:29:12,400 --> 00:29:15,320
Speaker 1: the chief economist at Morgan Stanley, and we were talking

515
00:29:15,320 --> 00:29:17,920
Speaker 1: about her FED call that the FED would be on

516
00:29:17,960 --> 00:29:20,120
Speaker 1: hold for quite a while because of what was going

517
00:29:20,160 --> 00:29:22,680
Speaker 1: on in the United States, and that of course she

518
00:29:22,720 --> 00:29:25,520
Speaker 1: thought you might be wrong until the Brexit vote, and

519
00:29:25,560 --> 00:29:29,640
Speaker 1: that is the dominant theme now around the world, the

520
00:29:30,240 --> 00:29:32,840
Speaker 1: fallout from that and what it might mean, not just

521
00:29:33,320 --> 00:29:36,000
Speaker 1: in terms of the political climate and the economic climate

522
00:29:36,000 --> 00:29:38,600
Speaker 1: for the United Kingdom, but the political climate around the world.

523
00:29:39,160 --> 00:29:42,160
Speaker 1: What are you watching it, Morgan Stanley in this post

524
00:29:42,200 --> 00:29:45,200
Speaker 1: Brexit world. One of the things that investors and people

525
00:29:45,240 --> 00:29:47,000
Speaker 1: need to be concerned about. You know what I think

526
00:29:47,120 --> 00:29:50,440
Speaker 1: is that we shouldn't hang our hat on Brexit, and

527
00:29:50,480 --> 00:29:53,479
Speaker 1: that Brexit and the fallout from Brexit is the reason

528
00:29:53,560 --> 00:29:57,360
Speaker 1: why the FED would not hike rates. Further, I want

529
00:29:57,440 --> 00:30:00,760
Speaker 1: investors to focus on what was the US economy like

530
00:30:01,240 --> 00:30:04,959
Speaker 1: before Brexit. Through the second quarter of this year, business

531
00:30:05,040 --> 00:30:09,360
Speaker 1: investment has declined now for three straight quarters. It's difficult

532
00:30:09,400 --> 00:30:13,400
Speaker 1: to find that outside of recession. Not saying that this

533
00:30:13,480 --> 00:30:16,960
Speaker 1: is a recession environment in the US, but just noting

534
00:30:17,280 --> 00:30:21,800
Speaker 1: the risks around US growth that were present even before Brexit.

535
00:30:22,080 --> 00:30:24,520
Speaker 1: And it's not just an energy story. In the beginning,

536
00:30:24,560 --> 00:30:27,960
Speaker 1: when oil prices were dropping, it was all energy investment

537
00:30:28,040 --> 00:30:32,840
Speaker 1: dragging down overall investment numbers um. But you can't escape

538
00:30:32,880 --> 00:30:35,640
Speaker 1: the incredible run up that we've had in the dollar

539
00:30:35,680 --> 00:30:40,480
Speaker 1: and not expected to start impacting manufacturing. Uh an investment

540
00:30:40,480 --> 00:30:42,360
Speaker 1: in the US in a bigger way, and so it's

541
00:30:42,400 --> 00:30:45,880
Speaker 1: broadened out right. The declining investment is more broad based

542
00:30:46,280 --> 00:30:51,160
Speaker 1: than just an energy story. Of the jobs in the US,

543
00:30:51,280 --> 00:30:54,280
Speaker 1: Manufacturing jobs and news are tied to exports and global

544
00:30:54,320 --> 00:30:57,520
Speaker 1: growth matters, and global growth is sluggish, and that's a

545
00:30:57,600 --> 00:31:00,840
Speaker 1: theme that is present in the US regardless of an

546
00:31:00,840 --> 00:31:03,920
Speaker 1: event like Brexit. What's weighing on global growth? I mean,

547
00:31:03,960 --> 00:31:07,600
Speaker 1: how do we get out of this? The scary thing

548
00:31:07,760 --> 00:31:12,480
Speaker 1: is is that monetary policy around the world has for

549
00:31:12,520 --> 00:31:15,400
Speaker 1: the most part run its course, and Janet Yellen has

550
00:31:15,440 --> 00:31:20,320
Speaker 1: been very uh realistic and vocal about expressing that they

551
00:31:20,360 --> 00:31:23,560
Speaker 1: have limited tools to fight downturns, and that's why they

552
00:31:23,600 --> 00:31:27,920
Speaker 1: have to be extraordinarily cautious in raising rates further. UM

553
00:31:28,000 --> 00:31:30,200
Speaker 1: And I think you could say that's the general theme

554
00:31:30,320 --> 00:31:34,560
Speaker 1: for the entire global economy. UH. And so I think

555
00:31:34,680 --> 00:31:39,400
Speaker 1: something that everyone should be focused on is fiscal policy.

556
00:31:39,840 --> 00:31:43,120
Speaker 1: Fiscal policy around the globe needs to step up. And

557
00:31:43,160 --> 00:31:45,240
Speaker 1: I know this sounds like a broken record. We've been

558
00:31:45,240 --> 00:31:48,200
Speaker 1: calling for it in the US for quite some time. UH.

559
00:31:48,200 --> 00:31:51,200
Speaker 1: And there's a lot of election uncertainty this year. What

560
00:31:51,320 --> 00:31:54,080
Speaker 1: will a new president mean for the prospects of greater

561
00:31:54,160 --> 00:31:56,920
Speaker 1: fiscal policy and fiscal stimulus in the US. But this

562
00:31:57,000 --> 00:32:01,800
Speaker 1: is a global issue. UH. And you know, to some extent,

563
00:32:02,640 --> 00:32:08,520
Speaker 1: UH Summer's recent blog last week pointing out that government's

564
00:32:08,600 --> 00:32:12,240
Speaker 1: really in this low interest rate environment need to uh

565
00:32:12,440 --> 00:32:17,000
Speaker 1: set aside concerns over debt and just physical policy. I

566
00:32:17,080 --> 00:32:21,480
Speaker 1: can't see how we get another impetus to boost global

567
00:32:21,520 --> 00:32:24,240
Speaker 1: demand and global growth without that. Ellen, what is the

568
00:32:24,360 --> 00:32:27,800
Speaker 1: mood of investment by businesses? You've done a lot of

569
00:32:27,840 --> 00:32:31,440
Speaker 1: work on that over the years. The granularity, the micro

570
00:32:31,680 --> 00:32:35,520
Speaker 1: analysis of what business businesses choosing to do. Are they

571
00:32:35,600 --> 00:32:39,640
Speaker 1: investing and will they invest with all the other turmoil

572
00:32:39,680 --> 00:32:43,240
Speaker 1: and distractions. It's a good question, Tom. You know, we've

573
00:32:43,320 --> 00:32:49,040
Speaker 1: just released our Business Conditions Index. It's the first survey

574
00:32:49,080 --> 00:32:52,800
Speaker 1: of business conditions post brexit, and actually it looks like

575
00:32:52,920 --> 00:32:56,960
Speaker 1: at the at the industry level, um Brexit is not

576
00:32:57,320 --> 00:33:00,160
Speaker 1: an an issue. So it doesn't seem like invest men

577
00:33:00,280 --> 00:33:03,520
Speaker 1: is going to be further hit, at least domestic investment

578
00:33:03,520 --> 00:33:06,720
Speaker 1: here in the US buy Brexit concerns. I think it's

579
00:33:06,720 --> 00:33:10,240
Speaker 1: more an issue of just investment being dampened, right. We

580
00:33:10,320 --> 00:33:13,640
Speaker 1: have to lower our expectations of the level of investment

581
00:33:13,680 --> 00:33:16,640
Speaker 1: that's appropriate in a in a global economy that's growing

582
00:33:17,280 --> 00:33:21,560
Speaker 1: this slowly. Uh And so I think it can improve

583
00:33:21,720 --> 00:33:26,160
Speaker 1: as we absorb the hit to energy investment as oil

584
00:33:26,160 --> 00:33:29,680
Speaker 1: prices have stabilized, will probably get better energy investment in

585
00:33:29,760 --> 00:33:33,240
Speaker 1: the second half of the year. But other areas, I

586
00:33:33,240 --> 00:33:35,959
Speaker 1: think we see a lot of concentration in areas like

587
00:33:36,040 --> 00:33:38,920
Speaker 1: the tech sector with growing R and D, where you've

588
00:33:38,920 --> 00:33:42,479
Speaker 1: got big complexes of testing driverless cars out in the

589
00:33:42,480 --> 00:33:48,640
Speaker 1: Midwest somewhere, which will benefit investment, But the time horizon

590
00:33:48,880 --> 00:33:51,520
Speaker 1: has varied so greatly that we probably just aren't going

591
00:33:51,560 --> 00:33:54,240
Speaker 1: to see those benefits for a time thirty seconds, Allen

592
00:33:54,360 --> 00:33:58,080
Speaker 1: Zentner to be formal, when will Janet Yellen raise rates?

593
00:33:58,120 --> 00:34:00,760
Speaker 1: Just so we can get that on record. We've taken

594
00:34:00,840 --> 00:34:04,160
Speaker 1: rates off the table for this year. Uh. In fact,

595
00:34:04,200 --> 00:34:07,360
Speaker 1: we've taken rates off the table for the foreseeable future. UH.

596
00:34:07,400 --> 00:34:10,359
Speaker 1: And we'll see how things play out next year. I

597
00:34:10,440 --> 00:34:12,960
Speaker 1: just I don't see this as an economy that needs

598
00:34:13,000 --> 00:34:16,239
Speaker 1: to have tighter financial conditions that the FED needs to

599
00:34:16,239 --> 00:34:18,960
Speaker 1: step in and slow it, that there's areas of overheating.

600
00:34:19,160 --> 00:34:21,279
Speaker 1: I just don't see that, and so I think policymakers

601
00:34:21,320 --> 00:34:23,799
Speaker 1: will come to the conclusion that that further rate hikes

602
00:34:23,840 --> 00:34:26,759
Speaker 1: just don't seem appropriate. Ellen Ner and Michael McKay quick,

603
00:34:26,840 --> 00:34:28,799
Speaker 1: Oh go ahead, Michael please. I just got a very

604
00:34:28,880 --> 00:34:31,960
Speaker 1: quickly in ten seconds to say, how far do we

605
00:34:32,000 --> 00:34:35,239
Speaker 1: have to go before the expansion ends? Well, we're in

606
00:34:35,280 --> 00:34:38,440
Speaker 1: the late phase of the business expansion historically can last

607
00:34:38,480 --> 00:34:41,440
Speaker 1: a few months to a few years. What I like

608
00:34:41,560 --> 00:34:44,200
Speaker 1: is that the housing market is still producing a nice

609
00:34:44,280 --> 00:34:47,840
Speaker 1: recovery there, and I think we'll produce enough jobs to

610
00:34:47,920 --> 00:34:50,640
Speaker 1: get keep income growing. So I think the business expansion

611
00:34:50,680 --> 00:34:55,160
Speaker 1: can continue if monetary policy doesn't choke it off, Ellen Zentner,

612
00:34:55,640 --> 00:35:04,200
Speaker 1: Michael McKee, Where are they? We're We're not in Colorado,

613
00:35:04,280 --> 00:35:06,759
Speaker 1: but we are in the rocky bottles. Yes, we'll go

614
00:35:06,880 --> 00:35:20,520
Speaker 1: talk fishy as far as you can see. Say thanks

615
00:35:20,560 --> 00:35:24,680
Speaker 1: for listening to the Bloomberg Surveillance Podcast. Subscribe and listen

616
00:35:24,960 --> 00:35:30,360
Speaker 1: to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer.

617
00:35:30,960 --> 00:35:34,399
Speaker 1: I'm on Twitter at Tom Keane. Michael McKee is at

618
00:35:34,560 --> 00:35:38,799
Speaker 1: Economy Before the podcast. You can always catch us worldwide.

619
00:35:39,160 --> 00:35:40,240
Speaker 1: I'm Bloomberg Radio