WEBVTT - Inflation Expectations Are Too Low, Kroszner says 0:00:00.080 --> 0:00:13.040 Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane 0:00:13.480 --> 0:00:17.560 jay Ley. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:33.760 Bloomberg dot Com, and of course on the Bloomberg Pretty 0:00:33.800 --> 0:00:36.159 must for joining me. Now, take the securities had a 0:00:36.159 --> 0:00:39.080 global interest rate strategy here in New York for now? 0:00:39.479 --> 0:00:41.080 Is that like the crack in the conviction with j 0:00:41.240 --> 0:00:44.480 Pal at the moment? Hi, John, Yes, I think power 0:00:44.560 --> 0:00:47.640 is trying to retain optionality, is trying to retain flexibility. 0:00:48.040 --> 0:00:50.199 There are a lot of uncertainties out there. You know, 0:00:50.400 --> 0:00:52.479 We've had the tax cuts, so you've had this new 0:00:52.600 --> 0:00:54.959 term boost to growth. We really don't know if that's 0:00:54.960 --> 0:00:57.279 going to affect long term growth. We also don't know 0:00:58.120 --> 0:00:59.840 how the whole trade war thing is going to play out. 0:00:59.840 --> 0:01:01.960 So I think what we're hearing from Chair Powell is 0:01:02.040 --> 0:01:04.880 for now, so the next couple of hikes. But you know, 0:01:04.920 --> 0:01:06.640 I was struck by the fact that he is not 0:01:06.760 --> 0:01:09.400 pushing the theme of a higher our star or a 0:01:09.480 --> 0:01:11.759 higher neutral rate. He actually brought up the neutral rate 0:01:11.880 --> 0:01:13.520 a bunch of times, but he's saying there's a lot 0:01:13.520 --> 0:01:16.840 of uncertainty. Second point, he's not pushing the idea that 0:01:16.920 --> 0:01:20.039 I think is embedded in the dot plot that the 0:01:20.080 --> 0:01:22.319 FED is going to go above neutral. I think that 0:01:22.680 --> 0:01:26.000 is I would say the single biggest risk factor, uh 0:01:26.400 --> 0:01:28.319 for the equity market is the fact that if the 0:01:28.360 --> 0:01:31.600 FED does go above neutral, they're going away from the 0:01:32.120 --> 0:01:36.080 narrative of of normalization to actually tightening. But chap Owl 0:01:36.200 --> 0:01:38.920 is not really pushing on these themes. So that's why, uh, 0:01:39.280 --> 0:01:41.880 you know, I would say the rates market is essentially 0:01:41.880 --> 0:01:46.280 priced for that outcome. Um. But but I think that's 0:01:46.440 --> 0:01:49.600 he's really trying to, uh, to keep up all his options. 0:01:49.720 --> 0:01:52.360 Let's explore this concept of the neutral right though, What 0:01:52.520 --> 0:01:54.480 is the neutral right? How close are we to it? 0:01:54.720 --> 0:01:56.600 So you know, if if you look at the dot plot, 0:01:56.600 --> 0:01:58.760 it's anywhere from two and a half to about three 0:01:58.760 --> 0:02:02.120 and a quarter percent, we really don't know. It's it's immeasurable. 0:02:02.160 --> 0:02:05.120 I think what drives the neutral rate is essentially long 0:02:05.240 --> 0:02:07.880 term growth. So what drives long term growth, it's it's 0:02:07.960 --> 0:02:11.200 labor force participation and its productivity. Now neither have moved, 0:02:11.240 --> 0:02:13.720 and I think this is the big puzzle in economics 0:02:13.720 --> 0:02:16.639 why are these factors not moving? And so if they're 0:02:16.639 --> 0:02:19.440 not moving, then our star is actually much lower. So 0:02:19.480 --> 0:02:21.440 I think you know it's it's a it's a big 0:02:21.480 --> 0:02:25.959 issue for the rates market. They are plug ins. A. 0:02:26.240 --> 0:02:28.920 Can we make the plug ins given the new lower 0:02:29.080 --> 0:02:32.079 terminal rate which is a mystery? Right? And B can 0:02:32.120 --> 0:02:36.560 we make the plugins given central bank balance sheet dynamics 0:02:36.560 --> 0:02:39.640 which are a mystery. We have two major mysteries. I 0:02:39.680 --> 0:02:42.800 cannot not say that we do. I think the balance 0:02:42.800 --> 0:02:44.800 sheet one is the one that most people think that 0:02:44.840 --> 0:02:46.919 the FED can continue to run the balance sheet down. 0:02:47.040 --> 0:02:49.320 I actually think that the equilivalent level of reserves is 0:02:49.440 --> 0:02:51.960 much higher than what it was pre crisis, and so 0:02:52.000 --> 0:02:53.760 at some point next year, the FED is going to 0:02:53.840 --> 0:02:58.160 have to deal with the fact that banking reserves will 0:02:58.240 --> 0:03:00.800 become a binding constraint, so they'll have to stop balance 0:03:00.840 --> 0:03:03.240 sheet run off. At the same time, if they've hiked 0:03:03.240 --> 0:03:05.080 a couple of times and we'll let's say two and 0:03:05.080 --> 0:03:07.399 a half three on the first rate, I think they'll 0:03:07.400 --> 0:03:09.760 have to stop the hiking cycle. This is really important. 0:03:09.760 --> 0:03:11.680 Back up again and say what's going to happen in 0:03:11.720 --> 0:03:15.560 a year with a balance sheet choice at given bank reserves. 0:03:15.600 --> 0:03:20.280 That's advanced. Mumbo jumbo. Explain it in English. So what's 0:03:20.280 --> 0:03:22.720 happening is as the FED lets the portfolio run off, 0:03:22.720 --> 0:03:25.520 access reserves in the banking system do decline. Now, if 0:03:25.520 --> 0:03:27.640 you look at pre crisis, access reserves in the banking 0:03:27.680 --> 0:03:30.120 system was zero. So I think a lot of people 0:03:30.160 --> 0:03:31.920 believe that the FED has a long way to go. 0:03:31.960 --> 0:03:35.000 Access reserves at about two trillion. If you look at 0:03:35.000 --> 0:03:38.360 the primary Dealers survey um in May, they actually asked 0:03:38.360 --> 0:03:41.360 primary dealers what is the equidible level of reserves, and 0:03:41.400 --> 0:03:44.960 primary dealers about five billion. I think it's closer to 0:03:45.120 --> 0:03:48.120 potentially one and a half trillion. So you've got three 0:03:48.240 --> 0:03:51.560 four billion of reserves that can drain, and then at 0:03:51.600 --> 0:03:53.680 some point banks are going to demand these Where do 0:03:53.880 --> 0:03:57.320 they drain? To the swamp in Washington? Where do they 0:03:57.920 --> 0:04:01.480 So it's an accounting entity, that's a fair point. It's 0:04:01.480 --> 0:04:04.040 so as the FED lets the portfolio run off, so 0:04:04.160 --> 0:04:07.040 they let these treasuries mature, it's an accounting entity. They 0:04:07.120 --> 0:04:09.760 essentially reduced the level of results. Do you know I've 0:04:09.800 --> 0:04:13.640 never passed John an exam on debits and credits? You know? 0:04:13.720 --> 0:04:17.080 I I When she says an accounting entity. I'm like, 0:04:17.320 --> 0:04:19.880 I'm like the ultimate D plus student. How did you 0:04:19.920 --> 0:04:22.800 pass the cf A? It was a miracle clouds. I 0:04:22.839 --> 0:04:25.560 went to the Rigs School of c f A training. 0:04:26.080 --> 0:04:29.360 It was the clouds parted. I mean, I just barely 0:04:29.720 --> 0:04:31.880 and you slipped someone a few hundred dollar bills? No, no, 0:04:31.960 --> 0:04:34.560 I did not. But but the bottle of the eighteen 0:04:34.640 --> 0:04:37.360 year bottle of Scotch. It was a Saturday in July 0:04:37.920 --> 0:04:42.000 in Charlottesville, Virginia, and I expressed that Johnny Walker Blue Down, 0:04:42.000 --> 0:04:44.080 there was this a dark knight on the in the 0:04:44.120 --> 0:04:48.400 seven sties. Yeah, it was. It was gonna imagine seventies, 0:04:49.440 --> 0:04:51.839 you know. But seriously, you know this is really advanced. 0:04:52.080 --> 0:04:54.680 This is a really grown up discussion with Priam, Mr 0:04:54.800 --> 0:04:58.760 john and it's about the mysteries of these flows. And 0:04:58.800 --> 0:05:01.839 even the smartest people Johnny have no clue what's going 0:05:01.880 --> 0:05:04.880 to happen over the next eighteen months. They can guess. Yeah, 0:05:05.600 --> 0:05:07.680 I want your guests on how the fed response of 0:05:07.720 --> 0:05:11.120 this yield curve inverts lights this year. So I think 0:05:11.120 --> 0:05:14.360 it it depends on how it inverts. If it inverts 0:05:14.160 --> 0:05:16.680 at this level, I think the market is going to 0:05:16.720 --> 0:05:20.640 have to price cuts in twenty or twenty one. I 0:05:20.680 --> 0:05:23.479 think that will absolutely terrify the fair because then the 0:05:23.480 --> 0:05:25.120 FED is going to say, well, the market's pricing in 0:05:25.120 --> 0:05:27.640 a policy mistake, and it's not if the Fed is 0:05:27.640 --> 0:05:29.719 going above neutral, which is why I say, if it 0:05:29.760 --> 0:05:31.880 inverts that, you know, three and a half percent, then 0:05:31.880 --> 0:05:33.600 the FED is going to say, yes, we did go 0:05:33.640 --> 0:05:36.240 above neutral, so therefore we have to ease. But I 0:05:36.279 --> 0:05:39.360 think an inversion or even flattening here, I think is 0:05:39.800 --> 0:05:41.800 going to worry the FED. Now. I do think that 0:05:41.839 --> 0:05:44.080 they're trying to push back a little bit here. They're saying, look, 0:05:44.120 --> 0:05:47.359 the curve is flat because of the long end. But 0:05:47.880 --> 0:05:50.039 you know, in our analysis, we actually find that the 0:05:50.080 --> 0:05:53.880 curve is very fair. If we are heading into the 0:05:53.880 --> 0:05:56.719 neutral rate, the market is saying stopped right here. I 0:05:56.720 --> 0:05:59.320 find it really interesting the white people view the yield 0:05:59.320 --> 0:06:01.799 curve and come to different conclusions. I think some people 0:06:01.839 --> 0:06:04.279 look at it and think about whether it's a symptom 0:06:04.320 --> 0:06:06.680 of something that's happening with the business cycle, and then 0:06:06.720 --> 0:06:09.719 others look at it and think, what are the consequences 0:06:09.760 --> 0:06:13.760 of a inverted yield curve flat yield curve? Regardless of 0:06:13.760 --> 0:06:15.599 whether it's a symptom of anything, because there will be 0:06:15.640 --> 0:06:19.400 consequences for maturity transformation, just credit formature, um, there will 0:06:19.400 --> 0:06:22.159 be consequences for how people at risk and what happens 0:06:22.160 --> 0:06:25.120 to risk sinking capital. Aren't they the bigger concerns prayer 0:06:25.520 --> 0:06:27.760 there are? And so this the sole cause and effect 0:06:27.839 --> 0:06:30.240 issue is key. I would argue, you know, right now 0:06:30.279 --> 0:06:33.160 the market is essentially priced, or the or the rates market, 0:06:33.240 --> 0:06:35.760 or the yield curve is pricing in this lead cycle 0:06:35.839 --> 0:06:38.680 behavior at some point of the curve does become flat. 0:06:38.880 --> 0:06:41.680 I actually think it has broader implications across the discasses 0:06:41.880 --> 0:06:44.400 as well as maturity transformation. You know, if you can 0:06:44.440 --> 0:06:48.120 buy two your notes at to sixty, why take on 0:06:48.279 --> 0:06:51.240 more risk in any other product? You know, when cash 0:06:51.279 --> 0:06:54.480 has yield, that's pretty attractive. You know, there's your trade warheage. 0:06:54.680 --> 0:06:56.880 Essentially you don't need to sell any stocks. You can 0:06:56.960 --> 0:06:59.440 just buy some front end treasuries. So I think that's 0:06:59.440 --> 0:07:01.880 where the flat cove does matter. So I would say, 0:07:01.960 --> 0:07:04.440 right now, what it's signaling is FEDS about to end 0:07:04.440 --> 0:07:06.799 the hiking cycle. And this is where the inversion becomes 0:07:06.800 --> 0:07:08.960 scary because if the fens is no, no, actually we're 0:07:08.960 --> 0:07:11.000 going to hike until three and a half as you 0:07:11.080 --> 0:07:13.320 and voted cove, which I think will actually be self 0:07:13.360 --> 0:07:18.920 limiting because that's going to spook the ful no idea 0:07:19.000 --> 0:07:38.200 what you said strategies. Let's talk to the congressman from 0:07:38.200 --> 0:07:41.480 Corning glass Works, Corning, New York where they make all 0:07:41.520 --> 0:07:44.679 that miracle glass. It's in our cell phones. Tom Reid 0:07:44.760 --> 0:07:47.640 is from the District, New York, which is under the 0:07:47.680 --> 0:07:49.720 Finger Lakes of New York State, and of course he 0:07:49.840 --> 0:07:52.679 is a former mayor of Corning and we welcome him today. 0:07:52.920 --> 0:07:56.480 Tom read Corning glass Works has gone through like fifteen 0:07:56.600 --> 0:08:00.600 lives since Stu Bend Glass. How is glass Works doing 0:08:00.680 --> 0:08:03.840 up in Corning. You know, they're doing really very well 0:08:03.920 --> 0:08:07.400 right now. They always have an uncanny ability to yes, 0:08:08.000 --> 0:08:10.400 look over the horizon and develop the next product that 0:08:10.440 --> 0:08:12.960 becomes a huge driver for them. And you know the 0:08:13.160 --> 0:08:15.520 guerrilla glass and the fiber out They're doing very well 0:08:15.560 --> 0:08:17.440 and they've got more opportunities coming down to five part. 0:08:17.640 --> 0:08:21.040 It's amazing compared to that photographic company up northwest, up 0:08:21.040 --> 0:08:24.240 in Rochester that's had some challenges over the years. Tom, 0:08:24.280 --> 0:08:26.800 I've got to go to the business that's usual right now. 0:08:27.040 --> 0:08:31.000 You were a Democratic district. You are now a Republican district, 0:08:31.320 --> 0:08:33.640 and you're caught in the middle of all the emotions 0:08:33.679 --> 0:08:36.400 of the president and of course at double negatives and 0:08:36.480 --> 0:08:39.480 all that. What do you hear from your constituents and 0:08:39.520 --> 0:08:41.400 what are you gonna do in the next couple of days. 0:08:41.720 --> 0:08:45.320 Is you listen to your Republican president. Well, you know 0:08:46.080 --> 0:08:48.840 obviously that the president has done very well and are 0:08:48.880 --> 0:08:51.480 part of New York States, that he did very well 0:08:51.480 --> 0:08:53.400 in our district in the last election. And I'll say 0:08:53.480 --> 0:08:55.320 the sense I get as I go around, as the 0:08:55.360 --> 0:08:57.760 silent majority is standing firm with him because they appreciate 0:08:57.800 --> 0:09:01.000 the disruptive approach that he's bringing to Washington, d c. 0:09:01.160 --> 0:09:04.640 Into putting American interests first and everything he does in 0:09:04.679 --> 0:09:09.359 regards to trade, new policy, foreign policies. And from my perspective, 0:09:09.360 --> 0:09:12.840 it's resonating still with people back home. Then this is 0:09:12.920 --> 0:09:16.240 critical lot of horseheads high school. Your father served the 0:09:16.360 --> 0:09:20.120 nation in the army. He was, I believe, in Korea 0:09:20.320 --> 0:09:24.080 up against a communistant at the time, Soviet threat. How 0:09:24.120 --> 0:09:28.079 do you take your constituents uh support of the president 0:09:28.240 --> 0:09:31.920 and dovetail with what we saw in Helsinki. I think 0:09:31.960 --> 0:09:35.880 everyone worldwide wants to know what does his court constituency 0:09:36.000 --> 0:09:40.720 do with what happened in Helsinki. You know, I, you know, 0:09:40.760 --> 0:09:42.920 as I've always said that if there's an issue I 0:09:42.960 --> 0:09:45.640 disagree with the President on, I will express that, and 0:09:45.760 --> 0:09:47.800 most of the time I do it privately. But on 0:09:47.840 --> 0:09:50.760 this issue I disagree. I think with the President in 0:09:50.800 --> 0:09:54.240 regards to the Russian relationship. Russia is an enemy, is 0:09:54.280 --> 0:09:57.800 an adversary, but even with your adversaries and your enemies, 0:09:57.800 --> 0:09:59.760 and this is what I do appreciate about the president 0:09:59.800 --> 0:10:02.439 do in Helsinki is reach out to your enemies and 0:10:02.480 --> 0:10:04.720 see is there a common interest where we can align 0:10:05.000 --> 0:10:09.200 to address issues like North Korea, like Iran, like Syria, 0:10:09.480 --> 0:10:12.760 and the Middle East immigration catastrophe that's coming as a 0:10:12.760 --> 0:10:16.600 result of that destabilization. And so from my perspective, that 0:10:16.679 --> 0:10:19.080 type of approach to Russia is the more appropriate approach. 0:10:19.080 --> 0:10:20.920 And I think you know, the President as heart is 0:10:21.280 --> 0:10:24.400 trying to do that, but obviously that was not comfortable 0:10:24.960 --> 0:10:28.199 with the agreeing with him in regards to the embracing 0:10:28.280 --> 0:10:30.360 Russia as a true ally and a true front that 0:10:30.480 --> 0:10:32.160 they are not. And Tom, I don't think you were 0:10:32.200 --> 0:10:34.120 alone Jonathan here and I just want to jump in 0:10:34.160 --> 0:10:36.920 and focus the conversation now on the trade side of 0:10:36.960 --> 0:10:39.000 the story. I think many people agree with you that 0:10:39.040 --> 0:10:41.080 they're happy that someone has come along trying to break 0:10:41.120 --> 0:10:42.960 up the status quo and take a new approach to 0:10:43.000 --> 0:10:45.960 get some different outcomes. I'm just wondering what kind of 0:10:46.000 --> 0:10:49.800 outcomes you're hoping for here, Tom, Yeah, what we're looking 0:10:49.840 --> 0:10:53.320 for it's just an equitable thing field, a fair plain 0:10:53.400 --> 0:10:56.440 field upon which we can trade on the world marketplace. 0:10:56.760 --> 0:10:59.319 So you start with our our family friends, so to speak, 0:10:59.360 --> 0:11:01.880 Canada and Sick though, and you look at a deal 0:11:01.920 --> 0:11:05.520 that hasn't been negotiated in decades and renegotiated modernized. So 0:11:05.559 --> 0:11:08.560 there's issues of digital commerce, there's issues of access to 0:11:08.640 --> 0:11:12.199 their dairy markets in regards to Canada in particular, and 0:11:12.520 --> 0:11:13.839 I think at the end of the day we will 0:11:13.880 --> 0:11:15.280 be able to work that out because we are so 0:11:15.440 --> 0:11:18.760 aligned and we're such a close friendship with Canada Mexico, 0:11:19.200 --> 0:11:21.360 and all we're looking for when we go onto the 0:11:21.360 --> 0:11:24.320 world stage outside of Canada Mexico is when we take 0:11:24.360 --> 0:11:27.760 on China, that we all recognize the unfair trade practices 0:11:27.800 --> 0:11:29.840 that China engages in. And when I say we am 0:11:29.840 --> 0:11:31.840 talking about all the countries of the world to send 0:11:31.840 --> 0:11:35.160 the message to China. You can't steal our intellectual property, 0:11:35.160 --> 0:11:39.400 you can't require the investment standards of just having Chinese 0:11:39.400 --> 0:11:42.720 ownership and businesses. They're you're hollowing out countries. You're taking 0:11:42.720 --> 0:11:46.000 away countries ability to compete fairly, and that's that's to me, 0:11:46.120 --> 0:11:48.560 is what we're ultimately looking for in this trade So 0:11:48.600 --> 0:11:50.000 but I think it would be quite easy on the 0:11:50.000 --> 0:11:53.000 international stage to build there are the coalition to really 0:11:53.040 --> 0:11:56.280 address what is happening with the Chinese. But unfortunately the 0:11:56.320 --> 0:11:58.520 President has trying to do everything all at once. Do 0:11:58.520 --> 0:12:00.079 you think trying to do everything all at one to 0:12:00.200 --> 0:12:03.679 run the risk of isolating allies when perhaps there is 0:12:03.720 --> 0:12:05.600 a better option to go at China try to get 0:12:05.600 --> 0:12:08.080 them to address these trade issues. But do that and 0:12:08.120 --> 0:12:11.480 do that alone and get your allies on board. You know, 0:12:11.520 --> 0:12:14.840 I appreciate that, but that has been tried for decades 0:12:14.880 --> 0:12:17.520 and kind of that slowgo grow, glacial type of approach 0:12:17.559 --> 0:12:19.839 to trade policy. What the President has done doing is 0:12:19.880 --> 0:12:23.120 sending the message the trade policy of yesterday has come 0:12:23.160 --> 0:12:26.120 to an end. From America's perspective, we're going to disrupt it. 0:12:26.360 --> 0:12:28.800 And when you when you do that, clearly now your 0:12:28.800 --> 0:12:33.040 adversaries in those relationships understand that you mean a different game, 0:12:33.120 --> 0:12:35.520 You mean a different side of business that you're going 0:12:35.559 --> 0:12:37.040 to bring to the table. So that's what I think 0:12:37.160 --> 0:12:42.440 is going on here. You have terroriffs affected less works. No, 0:12:42.559 --> 0:12:45.199 I mean, obviously any type of trade war is gonna 0:12:46.320 --> 0:12:48.800 impact you know, they have obviously a world stage they 0:12:48.840 --> 0:12:51.400 operate on them. But then also are agricultural communities, so 0:12:51.440 --> 0:12:53.199 we're all sensitive to it. But at the end of 0:12:53.200 --> 0:12:55.560 the day, the message I send to my to the 0:12:55.559 --> 0:12:58.760 trading partners to stay at the table, negotiate these things out. 0:12:59.240 --> 0:13:01.360 Stay at the table, don't walk away if you if 0:13:01.360 --> 0:13:02.760 you think you're gonna walk away, you're only going to 0:13:02.800 --> 0:13:07.160 prolong this dispute. Stay at the table and negotiate this through. Well, 0:13:07.160 --> 0:13:09.200 we're gonna negotiate it through. But do we need to 0:13:09.240 --> 0:13:13.440 do it bilateral and so adversarial or can we find 0:13:14.160 --> 0:13:19.280 a more multilateral path? I mean, essentially, Congress and reader, 0:13:19.320 --> 0:13:23.120 we back to the nineteen thirties. Smooth, Hollie, Well, I 0:13:23.160 --> 0:13:25.480 think you know we're not to to the nineteen thirties. 0:13:25.520 --> 0:13:27.680 And my humble opinion, we all recognize we're on the 0:13:27.720 --> 0:13:31.199 world stage. The world consumers was outside of America's borders. 0:13:31.480 --> 0:13:33.240 So what I think to see is, you know, we 0:13:33.360 --> 0:13:37.120 we can do bilaterally, can do multilateral. But the bottom 0:13:37.120 --> 0:13:39.480 line is we will negotiate like you saw with South Korea, 0:13:39.520 --> 0:13:41.840 for example, in regards to modern Night and some of 0:13:41.840 --> 0:13:44.440 the provisions there to make it a little fairer for 0:13:44.520 --> 0:13:46.800 American interests. You know, you stay at the table, will 0:13:46.800 --> 0:13:49.520 work this out, the bilateral, multilateral. I think there's an 0:13:49.520 --> 0:13:52.680 appetite to get this taken care of. Tom last question, 0:13:52.880 --> 0:13:56.400 big tax package passed by the Republican Party in Congress, 0:13:56.480 --> 0:13:59.439 and there are some people concerned that the trade push 0:13:59.520 --> 0:14:01.880 could be the doing of the stimulus that we could 0:14:01.880 --> 0:14:05.480 get for the US economy. Do you see that offsetting 0:14:06.120 --> 0:14:09.040 the tax story? Now? You know, I don't see that. 0:14:09.559 --> 0:14:11.800 In regards to the numbers that we're seeing, the economic 0:14:11.840 --> 0:14:15.240 growth numbers, the job growth numbers, the confidence, the consumer 0:14:15.320 --> 0:14:18.600 confidence numbers, those are all good indicators that you know, 0:14:18.640 --> 0:14:22.360 this type of short term disruptive anxiety and fear I 0:14:22.360 --> 0:14:24.680 don't see having a long term impact on the economic 0:14:24.760 --> 0:14:27.840 growth trajectory of America. And from that perspective, I think 0:14:27.840 --> 0:14:29.800 we're in a position that you just continue this growth 0:14:29.840 --> 0:14:32.480 and keep writing it up. Tom Read, thank you so much, 0:14:32.520 --> 0:14:34.960 greatly appreciated that he is with the twenty three district 0:14:35.040 --> 0:14:39.000 Republican in Upstate New York. This is just under the 0:14:39.040 --> 0:14:42.560 finger Lakes as well, Tom Reid on a number of topics. 0:14:55.400 --> 0:14:57.480 Right now, let's switch gears and go to a steam 0:14:57.480 --> 0:14:59.560 gentleman who has never had a Schmitz in his life. 0:14:59.680 --> 0:15:03.280 That with be Randall Krasner on finance in our central 0:15:03.280 --> 0:15:07.360 banking as well. Randy, All, my radar is up. Everybody's 0:15:07.400 --> 0:15:12.280 telling me it's boring, boring, predictable, boring, boring. And you 0:15:12.320 --> 0:15:14.840 know that's when you get your tail deviation. That's when 0:15:14.880 --> 0:15:17.960 you get your three standard deviation. Shock. Are we there? 0:15:19.680 --> 0:15:21.280 I don't think we're quite there, but I think you're 0:15:21.280 --> 0:15:23.680 exactly right. It's only when you don't expect it that 0:15:23.840 --> 0:15:26.680 it hits. I mean, think back to early February. Everything 0:15:26.760 --> 0:15:30.880 was the smoothest, this the simplest, the easiest, and suddenly 0:15:31.000 --> 0:15:33.760 a new piece of data came out and the markets 0:15:33.760 --> 0:15:36.480 were in tumult for for a few weeks. Randy, I 0:15:36.480 --> 0:15:38.000 want to give a shout out. You can use their 0:15:38.000 --> 0:15:41.600 research work at BOOST Schools Chicago. Deutsche Bank I think 0:15:41.640 --> 0:15:45.120 has done beautiful Peter Hooper like work on the dynamics 0:15:45.200 --> 0:15:49.880 of the yield curve and central bank balance sheets. His 0:15:50.440 --> 0:15:54.440 the uniqueness of q E and then to QT his 0:15:54.840 --> 0:15:58.720 given us a wrong picture or snapshot of that twos 0:15:58.800 --> 0:16:03.480 tend spread dynamic. Well, I don't necessarily think wrong, but 0:16:03.720 --> 0:16:06.560 I do think we have to be open to these 0:16:06.600 --> 0:16:08.920 These data are not the same as what we typically 0:16:08.920 --> 0:16:12.680 have had and so and the circumstances are different, and 0:16:12.800 --> 0:16:15.080 so to just say, oh, well, in the past, you 0:16:15.080 --> 0:16:18.640 know this flatness always meant recession. I think we have 0:16:18.680 --> 0:16:20.840 to be open to the possibility that it doesn't because 0:16:20.840 --> 0:16:22.960 of all these other interventions. Do you think there are 0:16:23.000 --> 0:16:25.720 consequences though, that come about from an inverted yield curve, 0:16:25.800 --> 0:16:29.640 for instance, maturity transformation, What happens with credit in the economy, 0:16:29.680 --> 0:16:32.720 what happens in terms of seeking capital just flooding to 0:16:33.080 --> 0:16:38.040 the front end of treasuries. Do you have those concerns? Randig? Well, well, 0:16:38.360 --> 0:16:43.200 clearly people are not getting compensated for waiting thirty years 0:16:43.280 --> 0:16:46.000 rather than waiting overnight. I mean the difference between overnight 0:16:46.080 --> 0:16:49.040 rates and tenure rates in the US is you know, 0:16:49.360 --> 0:16:51.760 less than much less in a percentage point, that's not 0:16:51.880 --> 0:16:55.320 much much compensation for that. So obviously they're not given 0:16:55.360 --> 0:16:58.880 incentives to to wait, and that can have consequences as 0:16:58.960 --> 0:17:01.320 exactly as you said, for where money flowing in different 0:17:01.320 --> 0:17:04.440 ways than would be typical with a more steep yield curve. 0:17:04.720 --> 0:17:07.359 So regardless of what the reasons are for the flatness 0:17:07.440 --> 0:17:10.440 or perhaps the inversion later this year, you'd have to think, Randy, 0:17:10.480 --> 0:17:12.520 there are consequences that come about from that that the 0:17:12.560 --> 0:17:16.800 Federal Reserve should be taken now to solve. Well, again, 0:17:16.840 --> 0:17:19.840 it actually gets back to what's driving the flatness. So 0:17:19.920 --> 0:17:23.359 is the flatness being driven because people expect the economy 0:17:23.359 --> 0:17:25.320 to be going down in the future, or is it 0:17:25.359 --> 0:17:28.879 because they expect so little inflation have so little worry 0:17:28.920 --> 0:17:32.440 about the upside to inflation. I think it's more the ladder, 0:17:32.680 --> 0:17:35.320 and in that case then the yield curve isn't necessarily 0:17:35.359 --> 0:17:37.919 telling you such a negative story. But it's hard to 0:17:37.960 --> 0:17:40.680 know now, you know, it's always easy exposed to say, oh, well, no, 0:17:40.800 --> 0:17:43.040 of course it was because things were going over the cliff. 0:17:43.720 --> 0:17:46.760 But it is true that the inflation expectations are pretty low. 0:17:47.000 --> 0:17:49.920 And the expectations of inflation spike seemed to be very low. 0:17:50.119 --> 0:17:51.680 I think they're probably a little bit too low for 0:17:51.760 --> 0:17:56.360 my taste. Finally, Wednesday Math with Randall Krasner. Randy, there's 0:17:56.760 --> 0:18:02.080 the idea of linear fed raises rates step by step, 0:18:02.160 --> 0:18:06.240 inch by quarter point inch, and the fact is quadratic, 0:18:06.280 --> 0:18:09.840 which is an exponential function, Folks. The fact is is 0:18:09.880 --> 0:18:13.800 we raise rates more, you begin to get more profound, 0:18:13.880 --> 0:18:17.760 more quadratic effects. Do you know where that moment is 0:18:18.000 --> 0:18:21.200 or is that something that you feel your way towards. 0:18:22.560 --> 0:18:24.760 It's something that you definitely feel your way towards. Our 0:18:24.800 --> 0:18:27.120 models are not very good at sort of pointing out 0:18:27.160 --> 0:18:31.040 those inflection points. They're pointing out those turning points. Most models, 0:18:31.280 --> 0:18:34.840 even if they have some nonlinear elements. As you're you're describing, 0:18:35.119 --> 0:18:38.560 and it tends to be very very smooth. This is 0:18:38.600 --> 0:18:40.359 one of the reasons why the FETE is wanted to 0:18:40.359 --> 0:18:42.760 go at such a gradual pace so that they have 0:18:42.920 --> 0:18:45.720 time to figure out if something's going wrong. And I 0:18:45.760 --> 0:18:48.199 think they've been pretty successful at me so far. What 0:18:48.320 --> 0:18:51.520 you just heard there from Professor Krauser, Folks is profound. 0:18:52.119 --> 0:18:55.720 You have to go along the path and monitor what 0:18:56.040 --> 0:18:59.240 happens because of the danger if you get it wrong, 0:18:59.560 --> 0:19:01.720 as you it up towards a neutral rate and even 0:19:01.720 --> 0:19:05.760 a restrictive policy, not that we've had that in a 0:19:05.880 --> 0:19:08.320 zillion years. Randall Crosser, thank you so much. With the 0:19:08.400 --> 0:19:11.040 University of Chicago, they're both school and of course a 0:19:11.119 --> 0:19:27.680 former governor. The putters are Terry Haynes joins us now 0:19:28.520 --> 0:19:32.240 with abcre I s I and we will digress from policy. 0:19:32.280 --> 0:19:36.880 Here was someone qualified to speak of the double negative? 0:19:36.920 --> 0:19:39.119 He is out of Oberlin, which is a school that 0:19:39.200 --> 0:19:42.600 takes immense pride and it's English curriculum. Just to get 0:19:42.600 --> 0:19:46.320 through I'm serious, folks, the core gut English one twenty 0:19:46.440 --> 0:19:51.560 three introduction is Shakespeare is a thing of legend it Oberlin. 0:19:51.600 --> 0:19:56.000 Did you take introduction to Shakespeare? Terry Haynes, I did not, Tom. 0:19:56.080 --> 0:19:59.760 I was a what they called then government and now 0:20:00.000 --> 0:20:04.840 politics and religion, major double major. Well, the religion of 0:20:04.880 --> 0:20:07.080 the double negative has come front and center and the 0:20:07.160 --> 0:20:10.960 rhetoric of Washington with your years of experience down there, 0:20:11.440 --> 0:20:14.480 what's the follow on from what we observed yesterday? Is 0:20:14.520 --> 0:20:17.240 it a one off event that drifts away into the 0:20:17.280 --> 0:20:21.040 August heat, or does it have any permanent substance to 0:20:21.119 --> 0:20:25.560 Republicans in Washington. Well, I think it does. You know 0:20:25.680 --> 0:20:29.720 the uh, Yeah, there are plenty of times the Congressional 0:20:29.720 --> 0:20:34.159 Democrats didn't agree with President Obama. The Congress's uh, in 0:20:34.240 --> 0:20:37.399 the same majority as the president, always find themselves in 0:20:37.480 --> 0:20:40.480 these sorts of pickles. I think the the immediate fall 0:20:40.560 --> 0:20:43.920 out of interest to markets, though, is that I think 0:20:44.160 --> 0:20:46.679 Republicans are going to feel a little bit free or 0:20:46.720 --> 0:20:51.800 about trying to challenge and again when necessary and guide 0:20:51.800 --> 0:20:57.240 when necessary, the the policy of the United States government 0:20:57.920 --> 0:21:01.760 on things that are either directly related such as Russian 0:21:01.800 --> 0:21:06.000 sanctions and the like, uh, or weapons sales and things 0:21:06.000 --> 0:21:08.920 that are indirect uh. And and that includes trade because 0:21:08.960 --> 0:21:11.560 I think the what I've been saying for about a 0:21:11.600 --> 0:21:14.240 month now, and I continue to see signs of it 0:21:14.600 --> 0:21:20.159 this week, is that Congress is thinking about starting to 0:21:20.200 --> 0:21:22.760 take back some of its trade related powers that had 0:21:23.000 --> 0:21:26.000 longer US Okay, that's important. How will they do that? 0:21:26.080 --> 0:21:28.680 Particularly butt of stuff as the clock to the mid terms, 0:21:29.000 --> 0:21:32.000 can they take how do they take power back from 0:21:32.000 --> 0:21:36.760