Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. Daily
Speaker 1: we bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg. This
Speaker 1: is an important conversation, as he spoke to James Bullard yesterday,
Speaker 1: as we spoke to William Dudley moments ago. Michael McKee
Speaker 1: advances the discussion with Mr Kaplan of Dallas. Michael, Thank you, Tom,
Speaker 1: Good morning, Rob. Thank you very much for joining us
Speaker 1: today on Bloomberg Radio and television worldwide. Um, and thank
Speaker 1: you for not wearing a tie and not making Tom
Speaker 1: look bad here. UM. I hate to do this, but
Speaker 1: let me start by playing the cynics advocate. There are
Speaker 1: those who are saying this morning, the Framework Review change
Speaker 1: is all well and good. What makes you think you
Speaker 1: can even get to two inflation, let alone over it
Speaker 1: since you've gone a decade without getting there. Uh yeah,
Speaker 1: it's possible that it will take a while to get
Speaker 1: to two. Technology technology enabled disruption UH in particular, are
Speaker 1: limiting the pricing power of businesses and uh AN inflation
Speaker 1: has been muted for close to ten years, and so
Speaker 1: part of this policy articulation is really a reaffirmation of
Speaker 1: the of the situation we've been operating in our decision
Speaker 1: function for the last few years. It's not a radical shift.
Speaker 1: It's an affirmation that we're we've been in a more
Speaker 1: muted inflation period. We need to be alert that that
Speaker 1: could change. But uh, but I don't. I don't view
Speaker 1: this policy articulation is as a is a radical change.
Speaker 1: It's a reaffirmation of the way we've been operating. So
Speaker 1: the new policy is that quote, appropriate monetary policy will
Speaker 1: likely aim to achieve inflation moderately above two for some time.
Speaker 1: How do you define moderately above and how do you
Speaker 1: define some time? Yeah, and we've left it deliberately undefined.
Speaker 1: To me, price stability is still our dual mandate. It's
Speaker 1: full employment and price stability. Two percent is our our
Speaker 1: best indicator of that. And so for for me, what
Speaker 1: it means is if we're running, if we get into
Speaker 1: situation I hope we do in the next couple of years,
Speaker 1: we're running closer to full employment. I'm willing to take
Speaker 1: a little bit more risk and have a greater tolerance. Uh,
Speaker 1: in my monetary policy judgments that inflation could run a
Speaker 1: little bit above two percent, And for me, a little
Speaker 1: bit means a little bit. Uh in that I've I've
Speaker 1: said publicly, you know, to and a quarter maybe a
Speaker 1: little bit more than that. I still think price stability
Speaker 1: is the overriding goal. And and this framework doesn't change that. Well,
Speaker 1: why isn't this a return to nineteen sixties style FED
Speaker 1: policy trading off inflation for lower unemployment, Because of course
Speaker 1: that didn't end well. Yeah, and that's a danger. That
Speaker 1: that's a danger. And so it's not that I'm gonna
Speaker 1: lose a concern that we could have a spike in inflation.
Speaker 1: And I'm not going to lose a concern. And in fact,
Speaker 1: this this framework articulates a concern about financial stability. I
Speaker 1: think those concerns haven't gone away. Uh, it just says
Speaker 1: on the margin, this is my interpretation and the way
Speaker 1: I'll be operating. On the margin. I'm willing to take
Speaker 1: a little bit more risk in service of getting underrepresented
Speaker 1: groups into the labor force, a little bit more risk
Speaker 1: on inflation. But I am, not, for one, going to
Speaker 1: be willing to take risk that we'll lose price stability
Speaker 1: allah the sixties and seventies. I'm gonna be on guard
Speaker 1: against that. Well, there's also a concern out there that
Speaker 1: an overrepresent a group people on Wall Street are going
Speaker 1: to be the real beneficiaries here. That you may not
Speaker 1: be able to stimulate a lot of economic activity or inflation,
Speaker 1: but you sure can pump up the stock market. I
Speaker 1: think that's also something we have to be cognizant of,
Speaker 1: and in particular, not just on the FED funds rate,
Speaker 1: but also on our purchases of treasuries and mortgage backed
Speaker 1: securities and the thirteen three programs that we've implemented this year.
Speaker 1: I think it's very important that we articulate that those
Speaker 1: programs will lapse. Uh. And I do think, uh, we
Speaker 1: we need to be conscious of financial stability and excesses
Speaker 1: that could build as a result of our policies. And
Speaker 1: and I will view that as an important consideration as
Speaker 1: I make judgments going forward. Well, if you were still
Speaker 1: at Goldben Sacks looking at your Bloomberg terminal, would you
Speaker 1: think that maybe we see some bubbles forming now? I would.
Speaker 1: I would be concerned that, uh, when the Fed takes
Speaker 1: the type of actions we've needed to take this year. Uh,
Speaker 1: you have, you have excesses and risk assets, not just prices.
Speaker 1: But what I'm particularly concerned about is debt build up.
Speaker 1: And there hasn't been as much discussion. Maybe there is,
Speaker 1: there should have been. But part of the issue we
Speaker 1: faced in March with the with the pandemic and the
Speaker 1: and the closures that we had to do to fight
Speaker 1: it is we had a lot of excesses in financial
Speaker 1: markets and it required the FED to step in and
Speaker 1: do quite a bit to stabilize financial markets. So those
Speaker 1: excesses can build up. They're hard to see, and yeah,
Speaker 1: i'd be I am worried about those in the seat
Speaker 1: I'm sitting in, and I'd be conscious of those. Uh
Speaker 1: if I were in the private sector. Well, you do
Speaker 1: know Wall Street given your background, and you know as
Speaker 1: well as I do that all the traders are sitting
Speaker 1: there this morning going yeah, great about this framework review.
Speaker 1: But what have you done for me lately? Are you
Speaker 1: anticipating any kind of change in the statement, something more
Speaker 1: to adjust forward guidance? Ah. I would prefer and I'm
Speaker 1: one one view around the table. I would prefer to wait.
Speaker 1: I would prefer to get more clarity on the path
Speaker 1: of the virus. I think we've already given quite a
Speaker 1: bit off forward guidance in that through our summary of
Speaker 1: economic projections, which will do another one in September. I've
Speaker 1: already said that rates are going to stay low for
Speaker 1: the rest of this year and all of next year. UH,
Speaker 1: and I would prefer to show some restraint here. We
Speaker 1: I think we've done quite a bit. We last spoke
Speaker 1: with you at the beginning of the month when COVID
Speaker 1: cases were spiking in Texas and the six hundred dollars
Speaker 1: in extra unemployment benefits was just running out. What's the
Speaker 1: economy like now? A month on from there, so we
Speaker 1: had a we had a pretty robust rebound through mid June.
Speaker 1: We saw some stalling after June, and I would say
Speaker 1: in the last two or three weeks, all our high
Speaker 1: frequency indicators mobility engagement indusseries are improved, are are firming,
Speaker 1: and so we're rebounding. Uh. We were not rebounding as
Speaker 1: much as we would have if we had the virus
Speaker 1: under better control, but we're still rebounding. We think third
Speaker 1: quarter I think third quarter GDP is going to be
Speaker 1: plus annualized, and so we are. We are growing we're rebounding.
Speaker 1: The issue is, as long as we've got relatively high
Speaker 1: levels of virus present, it limits consumers willingness to engage
Speaker 1: in a number of industries and activities, and that is
Speaker 1: having a muting effect on the rebound. But we're still
Speaker 1: but we're still rebounding. Well. A week from today we
Speaker 1: get the August payrolls report, what is the labor market like?
Speaker 1: What should we expect when we get those numbers? Uh,
Speaker 1: we think that between now and the end of the year,
Speaker 1: we're at ten point two percent unemployment right now. Uh.
Speaker 1: The bigger indicator I look at you six, which is
Speaker 1: unemployed plus discouraged workers plus people working part time who
Speaker 1: would like to work full time. Is those are both
Speaker 1: going to improve to where the unemployment rate is going
Speaker 1: to end the year. We think closer today at this point,
Speaker 1: and the U six figure will come down also proportionately.
Speaker 1: So I can't tell you the exact timing month to month,
Speaker 1: but you're you're going to see gradual improvement till the
Speaker 1: end of the year unless we have a greater resurgence
Speaker 1: than the virus. The virus is still the key. Going
Speaker 1: back to the framework bringing that into this, you decline
Speaker 1: to put a numerical target on unemployment because the inflation
Speaker 1: inflection point changes over time. According to the Fed, Uh,
Speaker 1: we got down to three and a half percent unemployment
Speaker 1: in February with no inflation. Can we get back there
Speaker 1: again under your framework? Uh, We're to give it every
Speaker 1: We're going to give the economy every opportunity to do that.
Speaker 1: The dynamics of inflation may well change, uh, and I'm
Speaker 1: a tuned to that because of supply shortages, They're going
Speaker 1: to be further changes in technology and technology enabled disruption.
Speaker 1: There may be changes in the dollar. We'll have to
Speaker 1: see if there's severe dollar weakness that could have an
Speaker 1: impact on inflation. And so UM, I think I think
Speaker 1: my own approach is going to be I want to
Speaker 1: give the labor market every opportunity to get back to
Speaker 1: that point and not pre empt improvement because I anticipate inflation.
Speaker 1: I'm willing to take a little bit more risk in
Speaker 1: having inflation run moderately above two percent in order to
Speaker 1: get to fuller employment and bring in a number of
Speaker 1: these underrepresented groups that I think will really help the
Speaker 1: country and help the labor market be stronger. Speaking of
Speaker 1: inflation expectations, as a Wall Street guy who really gets
Speaker 1: this stuff. What are ake Even's telling us? Now, there's
Speaker 1: a theory out there that while they have been rising,
Speaker 1: it's really because there's a lack of liquidity in the
Speaker 1: tips market, and if you take that liquidity premium out,
Speaker 1: you don't see any inflation embedded in the expectations markets. Uh.
Speaker 1: There's a lot of factors that affect trading markets. As
Speaker 1: you said, liquidity is one of them. I would say
Speaker 1: the concern about dollar weakness is reflected in a number
Speaker 1: of commodities, and I think is having some effect on
Speaker 1: the tips market. So there there are certain groups, I
Speaker 1: would guess in the private sector that are positioning themselves
Speaker 1: to be prepared for higher inflation than we've had the
Speaker 1: last ten years. That may or may not happen, but
Speaker 1: I think you're seeing a little bit of that concern
Speaker 1: in the tips market. Well, last quick question, I'm turning
Speaker 1: you over to Tom. Tom wants to know will the
Speaker 1: US economy collapse if there's no football in Texas this ball? Uh?
Speaker 1: I think the the the the Texas economy, and the
Speaker 1: the US has shown to be very resilient even if
Speaker 1: you take away things that that we hold sacred. We'll
Speaker 1: adapt to it and well will continue to will continue
Speaker 1: to power ahead. Robert Kaplan, the president of the Dallas,
Speaker 1: thank you very much for joining us. Did you see Oh, yes,
Speaker 1: her dad he hasn't that like a press conference is
Speaker 1: like he was practicing to be polist press conference. Michael McKee,
Speaker 1: congratulations on a bullard and cup and conversation wrapped around
Speaker 1: Chairman Paul speech as well. In days of old of
Speaker 1: Bloomberg on the economy, this would be a one hour conversation.
Speaker 1: We'll compress that in now with William Dudley. For years
Speaker 1: at Golden Sacks and given great credit for inventing modern
Speaker 1: Goldben Sacks economics, and then at the New York Fed.
Speaker 1: Bill Dudley out of Berkeley has been one of our
Speaker 1: greatest students of our theory of monetary policy. Bill Dudley,
Speaker 1: what did the chairman wrought yesterday? We knew this was coming,
Speaker 1: but the scathing notes I have read from selected economists
Speaker 1: have startled me. What did he do yesterday? But what
Speaker 1: he did yesterday was he basically changed the inflation objective
Speaker 1: of the FED reserve. Before the Fed failed what's called
Speaker 1: bygones police. Every year they tried to hit two percent,
Speaker 1: they missed for five years, ten years, a hundred years,
Speaker 1: a thousand years, next year. It was always to try
Speaker 1: to hit two percent. Problem with doing that is if
Speaker 1: you keep missing on one side, inflation expectations become an anchored,
Speaker 1: and that was troubling the FED. The FED hasn't had
Speaker 1: troubled hitting two percent objective on inflation for many years.
Speaker 1: So basically the FED has shifted and said, now, no,
Speaker 1: we don't want to hit two percent every year. We
Speaker 1: want to hit two percent on average. So if we
Speaker 1: underperform inflation for a bunch of years, then we need
Speaker 1: to have inflation above two percent for a while in
Speaker 1: order to keep inflation expectations around two percent. That's really
Speaker 1: what that's this whole shifted designed to keep inflation expectations
Speaker 1: well anchored at two percent well explained. If we combine
Speaker 1: Angus medicine on demographics and population with Alan Meltzer on
Speaker 1: the history of your institution, A simple question has to
Speaker 1: be asked, if we assume a lesser nominal GDP, if
Speaker 1: we assume a more dampened economy, why don't we just
Speaker 1: lower the two percent target to one point nine or
Speaker 1: one point eight percent. Why not do that. The reason
Speaker 1: why the Fed wants to have a inflation target of
Speaker 1: two percent, not lower, is they want to have enough
Speaker 1: room when you end uh an economic expansion to have
Speaker 1: the nominal interest rate high enough so there's enough room
Speaker 1: to cut rates to stimulate the economy and get the
Speaker 1: econmy out of recession. Let's say the inflation target was zero,
Speaker 1: then the you know, the peak short term funds rate
Speaker 1: would at the end of the cycle might be two
Speaker 1: or three percent. There wouldn't be much room to cut rates,
Speaker 1: and therefore there wouldn't be much way way to actually
Speaker 1: stimulate economic activity. J Powell essentially way writing the obituary
Speaker 1: for the Phillips curve this relationship that previously was believed
Speaker 1: that if you get unemployment lower, that will lead to
Speaker 1: a rise in inflation. I wouldn't say it's quite the obituary,
Speaker 1: but he's basically saying that we are now going to
Speaker 1: focus on inflation to god when we tighten entrey policy,
Speaker 1: not the level of the unemployer rate. So they change
Speaker 1: the language with respect to their employment goals rather than
Speaker 1: deviations around their employment goals, it's now shortfalls. So they're
Speaker 1: basically saying that we'll push the unemployer rate to whatever
Speaker 1: level we can. As long as inflation is low, we're
Speaker 1: gonna keep going. Before in this last cycle, we actually
Speaker 1: saw the Feds start to rage rates even before we
Speaker 1: got to a full employment. So we are getting inflation
Speaker 1: in certain areas, and we were talking about this earlier
Speaker 1: in the show. Certainly asset prices have gotten incredibly inflated
Speaker 1: and continued to do so on the promise that the
Speaker 1: Federal keep rates low. How concerning is this? At what
Speaker 1: point does this have to take to make the take
Speaker 1: stock and raise rates. Well, I think that they are
Speaker 1: a little bit uncomfortable with the fact that asset prices
Speaker 1: are are so buoyant. But remember that was it's also
Speaker 1: partly by design. I mean, the Fed basically did what
Speaker 1: they did in March April May to try to make
Speaker 1: the Monterrey policy easy and financial conditions a conditive, and
Speaker 1: they succeeded. Now, as the stock market keeps going up
Speaker 1: and up and up and up, that will cause some
Speaker 1: anxiety about the Fed. But remember the stock markets go up,
Speaker 1: stock markets go down. The consequences for financial stability historically
Speaker 1: have been actually been pretty modest. We had the stock
Speaker 1: market crash in lots of economists anticipated there be a recession.
Speaker 1: There was no recession. I think that, you know, buoyancy
Speaker 1: in the stock market is probably less risky to the
Speaker 1: economy because it's not all people that hold, you know,
Speaker 1: use a lot of leverage to own own stocks. Bill
Speaker 1: Dudley Robert Samuelson in The Washington Post wrote a fabulous
Speaker 1: book a decade ago on the sixties inflation, really centering
Speaker 1: on the theology of Walter Heller and well meaning people
Speaker 1: who were trying to tame budgets in the Vietnam we're
Speaker 1: budgets and and such. Stephen Stanley of Amir's Pier Punt
Speaker 1: wrote a wonderful essay over the weekend, and he hearkens
Speaker 1: back to the volatility that could be assumed here through
Speaker 1: what are called stop go policies. The idea of a
Speaker 1: FED that has to adapt suddenly we move away from
Speaker 1: the green span uh careful set a sequential policy back
Speaker 1: towards the Walter Heller stop go policies of the sixties
Speaker 1: and seventies. Is that a risk. I wouldn't put it
Speaker 1: quite letting that way in terms of stop go. But
Speaker 1: what what the FED is basically saying is we're gonna
Speaker 1: wait until inflation actually gets before we tighten. What that
Speaker 1: means is when they start to tighten, they'll probably try
Speaker 1: have to tighten quite a lot. And so you know,
Speaker 1: the markets right now are saying, oh, this is great.
Speaker 1: The Fed's gonna be on hold for a very long time.
Speaker 1: But it also raises the risk that when inflation actually
Speaker 1: gets above to two percent of the Fed's objective, the
Speaker 1: FED will actually have to slam on the brakes a
Speaker 1: little bit harder, and so it does increase the risk
Speaker 1: of an economic downturn. On the other side, is the
Speaker 1: is the Greenspan era ending? I mean, if if Alan
Speaker 1: Greenspan was of a gradual approach of sixteenths and eighths
Speaker 1: of a percentage point, are we going back with the
Speaker 1: stop going as you just mentioned larger increases did the
Speaker 1: Greenspan era and yesterday? You know, I'm not sure that
Speaker 1: Alan greens would necessarily disagree with what the FED is
Speaker 1: proposing here, but it certainly we're now in a new
Speaker 1: regime where you don't tighten preemptively just because you think
Speaker 1: the commun is getting to the full employment. You actually
Speaker 1: wait to see whether the low unemployer rate actually translates
Speaker 1: into rising inflation before you actually play mont So it
Speaker 1: is a it is a meaningful ship. Now that said,
Speaker 1: I think the FED is actually already acting that way today.
Speaker 1: The fact that when the FED stopped raising rates and
Speaker 1: reverse course, you know, a year and a half ago, uh,
Speaker 1: you know, that was partly due to an idea that
Speaker 1: we want to get inflation above two percent, that was
Speaker 1: already So we already have seen a shift in policy.
Speaker 1: Does the FED have any control at this point given
Speaker 1: where rates are in actually boosting the inflation rate that
Speaker 1: they want to boost. Well, that's where autocomments has some skepticism.
Speaker 1: It's it's nice to say that you want to get
Speaker 1: inflation above two but you haven't been able to accomplish
Speaker 1: that over the last ten years, and so what are
Speaker 1: the tools you're going to use to actually accomplish that outcome.
Speaker 1: So there's quite a bit of skepticism about whether the
Speaker 1: FED will actually be successful in pushing inflation above two percent.
Speaker 1: And the Japanese experience is a cautionary tale in that regard. Well,
Speaker 1: they said, I mean J F R. J. Powell said,
Speaker 1: we are prepared to use all the tools in our
Speaker 1: toolbox and they didn't go on to say what those
Speaker 1: tools were, and we're all sort of left in the dark.
Speaker 1: What do you see as the most plausible tools that
Speaker 1: the FED will engage next should there be another like
Speaker 1: of a downturn. Well, I think that they'll do more
Speaker 1: of the same, They'll do more asset purchases, They'll keep
Speaker 1: their their credit to liquidit programs in place. But I
Speaker 1: think the reality is we have to acknowledge the fact
Speaker 1: that the power of Monterrey policy right now to stimulate
Speaker 1: the economy it's pretty low. I mean, interest rates are
Speaker 1: already very low, the stock market is already very high,
Speaker 1: credit markets are very open and accessible. So the the
Speaker 1: the idea that the FED can do more. Yes, they
Speaker 1: can do more, but how much effect will it actually
Speaker 1: have in the economy. That's why the FED keeps talking
Speaker 1: about fiscal policy right now. The FED understands that that
Speaker 1: the power from Montreal policies to support the economy today
Speaker 1: is pretty darned modest, and what the economy really needs
Speaker 1: at this point is for their fiscal support. Bill Dudley,
Speaker 1: I want to go back to the heritage of Berkeley
Speaker 1: economics and folks, it's just a fabulous heritage. We know,
Speaker 1: I can green and de long of now, but the
Speaker 1: heritage back to the time of Bill Dudley is absolutely extraordinary,
Speaker 1: from Anchor Loft and uh Sayas and and others, Bill Dudley,
Speaker 1: when you look at the heritage of Berkeley economics, can
Speaker 1: you say that the speech yesterday will have a global
Speaker 1: impact that other central bankers, including Andrew Bailey speaking here
Speaker 1: in and hour or so at Jackson Hall, that they
Speaker 1: will have to adjust as well. I think people generally
Speaker 1: are are understanding more and more that the importance of
Speaker 1: keeping inflation expectations well anchored, and so I think that's
Speaker 1: a broadly share view around around the world. So I
Speaker 1: don't really think that the FED is sort of in
Speaker 1: the vanguard here. I think what they're doing is responding
Speaker 1: to a problem that's been very evident for a number
Speaker 1: of years. Bill. What's the statistic above two percent where
Speaker 1: this policy in place, where the sweat goes up among
Speaker 1: fancy guys like you. Is it two point one percent?
Speaker 1: Or is it the number substantially higher the tape is
Speaker 1: really I think it depends on two things. One, how
Speaker 1: long have you been below two percent? And by how much?
Speaker 1: And numbers and how that is then affected inslation expectations
Speaker 1: at the end of the day is they made it
Speaker 1: very clear in their policy statement what they care about
Speaker 1: at the end of the day is keeping inflation expectations
Speaker 1: anchored at two percent. So the inflation outcomes necessary to
Speaker 1: do that are what going to drive their decision beating.
Speaker 1: It turned out that inflation rising to two and a
Speaker 1: quarter percent was sufficient to keep inflation expectations anchored at
Speaker 1: two percent, and they stopped there. It turned out that
Speaker 1: they needed inflation to rise to two and a half
Speaker 1: or three percent to get inflation expectations will anchor and
Speaker 1: maybe more patient. This is fascinating, Bill Dudley, thank you
Speaker 1: so much, a very generous interview or the former president
Speaker 1: of the New York Fed. Right now, the gentleman from
Speaker 1: Michigan and Chicago joins us Smart Casel. He is with
Speaker 1: PIMCO or CIO for Global Credit. Mark your world changed
Speaker 1: yesterday and what way did Pimco's world change because of
Speaker 1: the new framework of Chairman Pouel. Well, Tom, I think
Speaker 1: this is a big deal. Powell. I agree, and this
Speaker 1: is it may not be a paradigm ship, but I
Speaker 1: think this is a significant evolution of how the FED thinks.
Speaker 1: And I think Powell is a really good leader. If
Speaker 1: you if you look at the inflation, the core PC inflation,
Speaker 1: we haven't gotten to the FEDS inflation target mandate since
Speaker 1: two thousand five to two thousand and six, so we
Speaker 1: have had fifteen years of undershooting in our country. And
Speaker 1: by the way, the same thing has happened in Europe
Speaker 1: and Japan. So I think, you know, Paul has realized
Speaker 1: this and they are willing to run the economy hot,
Speaker 1: and I think he's going to go all in. Uh
Speaker 1: in Sport. I hate to say, is Lisa, but it's
Speaker 1: a victory lab for Kis. We gotta do it this morning.
Speaker 1: Marquis your shop full disclosure, folks, I visited Newport, I've
Speaker 1: been to Cappy's Cafe with Mohammed, you guys, with the
Speaker 1: leadership of Bill and Mohammed, and then following on after
Speaker 1: that train wreck with your leadership, Marquisel. PIMCO has been
Speaker 1: dead on about a low rate regime. Do you maintain
Speaker 1: that low rate regime or can you see out two years,
Speaker 1: five years, ten years where we get back to the
Speaker 1: normalcy The chairman Paul desires, uh, Tom, you know we
Speaker 1: we think we're probably closer to the lows now and
Speaker 1: rates and that's simply because we are going to get
Speaker 1: um We think a big fiscal push it could it
Speaker 1: could happen after the election, but monetary policy is going
Speaker 1: all in the said has been unbelievably supportive for markets.
Speaker 1: Uh and and we think ultimately with the mobility data
Speaker 1: will improve, the economy will start growing again. If we
Speaker 1: get fiscal infrastructure spending with the Democrats, we could see
Speaker 1: a much deeper curve and you could over time see
Speaker 1: higher rates. So I think we're closer to the lows now,
Speaker 1: even though yes, we did think rates would come down,
Speaker 1: but now now I think we're we're suggesting that with
Speaker 1: the economic recovery and all the fiscal and monetary policy support,
Speaker 1: that rates over time could could go higher. Mark. This
Speaker 1: is a huge call, the idea that we could be
Speaker 1: near the lows after thirty forty years of yields going down.
Speaker 1: What does that mean about investment grade credit? Given the
Speaker 1: fact that duration, a measure of the sensitivity to interest rates,
Speaker 1: has risen to the highest levels on record, is investment
Speaker 1: grade credit riskier than high yield at this point? Well,
Speaker 1: I think what you're gonna see And if you go
Speaker 1: back to March, what was fascinating about this, Lisa, is
Speaker 1: the opportunity actually back then was an investment grade. The said,
Speaker 1: did this corporate bond purchasing program. By the way, they
Speaker 1: announced the secondary market facility at two and fifty billion,
Speaker 1: they've only used thirteen billions, so they've used five percent
Speaker 1: of it. And yet the investment grade corporate bond market
Speaker 1: is priced one point for trillion this year of investment
Speaker 1: grade supply. That's a hundred multiplier on the government's money.
Speaker 1: One of the most effective programs in the history of
Speaker 1: central banking. So the fact is is that you're right,
Speaker 1: the opportunity was an investment grade. But now what people
Speaker 1: are realizing is that, hey, if this economy broadens, you're
Speaker 1: gonna have to own some equities. You're gonna have to
Speaker 1: own some high yield. So we are seeing a transition
Speaker 1: in the market. And I think as people feel more
Speaker 1: comfortable flying and getting getting on planes and the mobility
Speaker 1: dat improves, you'll start to see investors continue to take
Speaker 1: more risk. Okay, mark investors, people broadening out? What about you?
Speaker 1: Are you seeing the opportunity for you to take PIMCO
Speaker 1: money or funds managed by the firm and move it
Speaker 1: more into that equity like risk away from investment grade.
Speaker 1: Has there been any shift in allocation on the heels
Speaker 1: of this, So we've we've added nine million jobs, but
Speaker 1: we've still got thirteen million more to add back. The
Speaker 1: unemployment rates still ten percent. We we still think it
Speaker 1: will take two years to get to two percent inflation.
Speaker 1: What where we've been kind of modifying our strategy? Is
Speaker 1: it back in March and April? You know, we came
Speaker 1: out with this ring the bell moment on March twentieth.
Speaker 1: We said that investment grade credit was the cheapest I
Speaker 1: had seen it in my career other than once before.
Speaker 1: So we were buying a lot of investment grade credit
Speaker 1: in March, April, May. And now what we've done. And
Speaker 1: back then, by the way, we were buying healthcare, telecom, cable,
Speaker 1: a lot of the non cyclical, a lot of the
Speaker 1: defensive credits like technology. Now we actually think the recovery trade,
Speaker 1: if it goes through, you could see the travel and
Speaker 1: tourism sector pick up airlines, lodging, et cetera. Mark to
Speaker 1: get Matthew on you we can do that with a
Speaker 1: guy from Chicago. You're calling for the end of the
Speaker 1: great moderation, I believe, And then do you follow on
Speaker 1: that there is a small or a great agitation that
Speaker 1: follows on? Well, Tom, I think what some people may
Speaker 1: be underestimating is these large cap companies have built up
Speaker 1: a massive war chest of liquidity. Even if you look
Speaker 1: at the deeply affected COVID hit sectors like airlines, hotels,
Speaker 1: gaming companies, these companies, Tom have twenty to thirty six
Speaker 1: months of liquidity. So any vaccine that comes out over
Speaker 1: the next six to twelve months, as businesses consumers start
Speaker 1: to travel again, I think you could see a rebound
Speaker 1: and I think that's that's the next wave of the rally.
Speaker 1: The first wave of the rally was clearly housing and technology.
Speaker 1: But if we get an economic recovery, if this mobile
Speaker 1: of the data takes off, you're gonna see the airlines
Speaker 1: take off. You're going to see people start to travel
Speaker 1: over the next six twelve, eighteen months, and that's I
Speaker 1: think the potential next wave of the rally. So Mark
Speaker 1: just quickly, here, is this a bet that you're willing
Speaker 1: to make now that we are going to get that
Speaker 1: gain in airline airline bonds, airline credit as well as
Speaker 1: the rest of the travel sector. We do have an
Speaker 1: overweight to that sector. We've done it in what we
Speaker 1: consider to be a prudent way, and how we've done
Speaker 1: it is we've basically lent to airlines through through secured
Speaker 1: uh bonds, which are basically collateralized by very new planes.
Speaker 1: We've also lent to some of the strongest lodging companies
Speaker 1: out there. I'm talking about companies that are the leaders
Speaker 1: in their field, also gaming companies and so yes, we
Speaker 1: do think that that sector, which has been beaten down
Speaker 1: significantly can bounce back. It's not going to be a
Speaker 1: straight line. There's clearly risks. There's risk with the virus,
Speaker 1: there's risk with the fiscal So we're doing this eyes
Speaker 1: wide open. But assuming we get the mobility data and
Speaker 1: travel to eventually come back. Remember we're the t s
Speaker 1: A data. We're where we were last year. I'm willing
Speaker 1: to say that by next year will be at fifty.
Speaker 1: So the whole point is to get an improvement. Given
Speaker 1: the liquidity these companies have, I think you'll see a
Speaker 1: rebound there. Mark case. This has been wonderful, Thank you
Speaker 1: so much. With PIMCO this morning, joining us down David Rubinstein,
Speaker 1: co founder, co executive chairman of the Carlisle Group, an
Speaker 1: author of a new book, How to Lead, which is
Speaker 1: a really piercing testament to the quality of his interviews.
Speaker 1: I can't say enough about interview to interview the way
Speaker 1: that Mr Rubinstein has approached this for Bloomberg. This book
Speaker 1: is a triumph of cutting to the chase. There's a
Speaker 1: lack of media bladder and an immense amount of direct
Speaker 1: questioning of people successful. Mr Rubinstein, I must start with
Speaker 1: my favorite interview you've ever done, with the always mysterious
Speaker 1: Jeff Bezos. What did you learn from Mr Bezos? Well, Jeff,
Speaker 1: of course, saw is an unusual person. He's built one
Speaker 1: of the most valuable companies in the world in a
Speaker 1: relatively short period of time. But some of the secrets
Speaker 1: he gave were He makes no decisions before ten am.
Speaker 1: He doesn't like to make any decisions too late in
Speaker 1: the afternoon. He likes to get eight hours of sleep.
Speaker 1: He thinks that he has less than eight hours of sleep,
Speaker 1: he can't really focus well. He also thinks they has
Speaker 1: to listen to people. He wants to make certainty. Here's
Speaker 1: ideas from other people, doesn't think all of his ideas
Speaker 1: are necessarily the best ones. And I would say relatively
Speaker 1: speaking compared to compared to what he's accomplished, is his
Speaker 1: demeanor is quite modest, and he has an incredible sense
Speaker 1: of humor. David, this is so important, and I say
Speaker 1: this with immense respect for your philanthropy to America, particularly
Speaker 1: with our historical documents. There has been criticism, including Mark
Speaker 1: Bennioff on Bloomberg the other day, over the philanthropy of
Speaker 1: these tech giants. Right now, Bezos is a pinata over
Speaker 1: fifteen dollars an hour, twenty dollars an hour, thirty dollars
Speaker 1: an hour. Do you advise some of these voices in
Speaker 1: your book to get more like David Rubinstein and be
Speaker 1: more philanthropic? And that's not what I tried to do
Speaker 1: the interviews. The interviews are done on peer to peer
Speaker 1: on Bloomberg and UH, they're basically an effort to get
Speaker 1: people to say what made them successful. And in the book,
Speaker 1: I try to talk about the the qualities that make
Speaker 1: people successful and how they become leaders. And that's what
Speaker 1: I'm trying to do. I'm not really trying to give
Speaker 1: them advice. Privately, I might ask them if they're interested
Speaker 1: in certain things, or they might ask me certain things
Speaker 1: about philanthropy. Jeff Bezos has given away a fair amount
Speaker 1: of money. It's just that compared to his net worth,
Speaker 1: it might seem small, but it's staggering amounts of money
Speaker 1: so far. David, good morning to you. And you've interviewed
Speaker 1: doing Pizza Peg. You've interviewed people from such different backgrounds,
Speaker 1: such different fields. Is it possible to find a common thread,
Speaker 1: to find something that makes all of these people good
Speaker 1: leaders regardless of the fielding which they operate. Yes, there
Speaker 1: are a couple of qualities I talk about in the book.
Speaker 1: One is they have focused early on their career. They're
Speaker 1: focused focused on doing whatever they want to do, approving
Speaker 1: an idea or a concept. They have failed at some
Speaker 1: point in their life because they recognize that failure probably helps,
Speaker 1: and so failure has helped them. They also have persistence.
Speaker 1: They're very persistent. They also learned how to persuade other people.
Speaker 1: The key to life and getting people do what you
Speaker 1: want is persuading them either by writing or orally, or
Speaker 1: by leading by example. Most of them are actually fairly humble. Um,
Speaker 1: you know, every leader isn't humble. We know of some
Speaker 1: leaders that are not humble, but generally these are people
Speaker 1: that are quite humble. They also keep learning, They re read, read, read,
Speaker 1: keep learning more and more. They have a fair amount
Speaker 1: of integrity. I would say that's very important to them.
Speaker 1: And they also, I think, are people who share the credit.
Speaker 1: They don't think that they're the only ones who are
Speaker 1: responsible for their success. In the end, most of them
Speaker 1: will say they had a lot of luck. Yeah, that's
Speaker 1: really interesting too, isn't it. The elements of luck. I mean,
Speaker 1: they were all humble. They will humble on TV, David,
Speaker 1: I wonder what they say to you behind the scenes.
Speaker 1: But you lead a business of course yourself, and so
Speaker 1: what what have you identified about your own leadership journey
Speaker 1: by doing this series of interviews. Well, I think in
Speaker 1: my own case, I got lucky. I I really wasn't
Speaker 1: supposed to be a business person. I thought I was
Speaker 1: a lawyer. I changed, I got lucky. I failed many times.
Speaker 1: I learned from that. I do think that sharing the
Speaker 1: credit it's very important. And I also think one thing
Speaker 1: I didn't mention just mone Ago is rising to the occasion.
Speaker 1: Leaders have to rise to the occasion. It's okay to
Speaker 1: run a company on the normal times when something bad happens,
Speaker 1: like a pandemic. If you can rise to the occasion,
Speaker 1: you're more likely than not to be a really great leader.
Speaker 1: David Rubinstein, I need to go back to your public
Speaker 1: service to the nation. You served with President Carter long
Speaker 1: ago in far away their echoes this morning of the
Speaker 1: sixties and seventies, stated by economists, is our central bank
Speaker 1: recalibrates how they will try to reflate the economy to
Speaker 1: provide for economic growth. You lived with the Carter administration
Speaker 1: very high inflation. Do we risk echoes or shadows of
Speaker 1: that time? If we could get inflation to two or
Speaker 1: three or four percent, it wouldn't be the worst thing
Speaker 1: in the world. We had double digit inflation. And the
Speaker 1: difference was then the U. S economy was relatively um separate.
Speaker 1: We didn't have enormous amounts of low income products coming
Speaker 1: in from China. It was an economy where the workforce
Speaker 1: was unionized. Well, that's not a bad thing. I would
Speaker 1: just say that today you've got less than ten percent unionized,
Speaker 1: and so the pressure from wages isn't as great as
Speaker 1: it used to be. And then you've got the outside
Speaker 1: world producing products and services at much lower prices than
Speaker 1: we can in the United States, so that's kept inflation
Speaker 1: down a great deal. I don't think the situation is
Speaker 1: replicable then if we see an atomization of the labor
Speaker 1: force witness Senator Paul of Kentucky last night accosted on
Speaker 1: the streets of Washington with echoes of nineteen to eight, etcetera, etcetera.
Speaker 1: How would you suggest, Mr Rubenstein, that the elites provide
Speaker 1: the labor economy that this nation screams for. What's the
Speaker 1: best path? Well? I do think that UH companies that
Speaker 1: have employed lots of workers should be sensitive to their
Speaker 1: needs and we should pay them a a respectable wage,
Speaker 1: plus side benefits. Healthcare benefits are extremely important for people,
Speaker 1: and not all employers provide them. But I think we
Speaker 1: should recognize the dignity of basic workers, and in some
Speaker 1: cases that is over overlooked. But in the whole, I
Speaker 1: don't see the situation where we're gonna get let massive inflation.
Speaker 1: Inflation would actually probably help us a bit and paying
Speaker 1: down some of our enormous debt, but I don't see
Speaker 1: that happening. If the FED could get two percent or
Speaker 1: three percent inflation. I think they'd be quite happy with that.
Speaker 1: Useful to have you on the program, David having written
Speaker 1: a book all about leadership, on the day that we
Speaker 1: find out that Japan is looking for a new leader.
Speaker 1: I don't know if you ever mention Zo Abe or
Speaker 1: the pleasure of spending much time with him, but he
Speaker 1: certainly managed to last a long time for a Japanese
Speaker 1: prime minister. Certainly the ones who came before him. There
Speaker 1: was sort of a revolving door in terms of the
Speaker 1: politicians that you have met and have talked to and
Speaker 1: that has stayed the course. Do they have something special
Speaker 1: that you note? Yes, Um, I have met Prime Minister Abbey.
Speaker 1: He served quite well for eight years. I spent some
Speaker 1: time one time in his office talking about the value
Speaker 1: of private equity to the Japanese economy. I'm not sure
Speaker 1: that that persuaded him of the value of private equity,
Speaker 1: but I have spent some time, and I think he
Speaker 1: did a very good job. It's unfortunately needs to step
Speaker 1: down now. UM. I think politicians are different than business leaders.
Speaker 1: They obviously have different considerations. I did have an interview
Speaker 1: in the book of President Bush and President Clinton together
Speaker 1: President Bush forty uh forty three and President Clinton and
Speaker 1: it's quite humorous and how they get along and have
Speaker 1: a pretty pretty good relationship. Politicians don't have much different
Speaker 1: considerations and business people. It's much harder to be a
Speaker 1: political leader and survived than to be a business leader
Speaker 1: and survive. In my view, what's been your favorite inner view? Well,
Speaker 1: I think it's like asking which of my children I
Speaker 1: like the best. But my favorite person to be interviewed
Speaker 1: by is Tom you. Um. But aside from that, the
Speaker 1: persons I've interviewed, I think the Jeff Bezos interview was extraordinary.
Speaker 1: He had quite a sense of humor. We had two
Speaker 1: thousand people there. He was he was really great. Oprah
Speaker 1: was terrific. I mean she really doesn't need an interviewer
Speaker 1: to dring her out. She I mean, she gave a
Speaker 1: masterclass and how to be interviewed and uh and she
Speaker 1: said the key to her success has been listening to
Speaker 1: people when she does interviews. Warren Buffet and Bill Gates
Speaker 1: were also quick good. Um. So I don't think there
Speaker 1: was anybody didn't like. A Yo yo mob was great
Speaker 1: uh um. Ruth Bader Ginsburgh had an incredible crowd of
Speaker 1: people cheering for her, A real rock star. David, what's
Speaker 1: your I got one final question before you you turn
Speaker 1: me off? What's your first question to President Trump? And
Speaker 1: appear to peer interview with Donald Trump? I have interviewed
Speaker 1: him before before he was president, and I told me
Speaker 1: he was going to run for president. I I was surprised.
Speaker 1: I didn't think he was really gonna do it, but
Speaker 1: he did. If I interviewed them today, I would say
Speaker 1: in the end, what surprised you about the presidency? Did
Speaker 1: you anticipate it would be as hard as it was
Speaker 1: or do you think it's easier than you thought it was?
Speaker 1: And why do you really want to do this for
Speaker 1: another four years? Because it can really tax you and
Speaker 1: you can do so many other things. What is it
Speaker 1: that you want to do in the next four years
Speaker 1: that you haven't done in the first four years? David Rubinstein,
Speaker 1: thank you so much and congratulations on But for Bloomberg.
Speaker 1: We stumbled into this with Mr Rubinstein, and this has
Speaker 1: been a massive success, a massive win for uh Bloomberg.
Speaker 1: The peer to peer conversations of Mr Rubinstein How to
Speaker 1: Lead is a new effort here in these books and again,
Speaker 1: as David Rubinstein said their folks. If you got to
Speaker 1: pick one interview of the Jeff Bezos interview is just magical.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keane before
Speaker 1: the podcast. You can always catch us worldwide. I'm Boomberg
Speaker 1: Radio