Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jailey.
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 Bloomberger. We're
Speaker 1: live from Bloomberg's world headquarters in New York. I'm Scarlet Food.
Speaker 1: This is the FED decides. The Federal Reserve will announce
Speaker 1: its latest monetary policy decision. Here's what you need to know.
Speaker 1: Janet Yellen signs off. The FED chair may strike a
Speaker 1: more hawkish note with an upbeat appraisal of the economy
Speaker 1: in her swan song, and the Powell era arrives. The
Speaker 1: leadership transition at the world's most powerful central bank comes
Speaker 1: just in time for a fresh approach. How will Ellen
Speaker 1: successor tackle the inflation puzzle? Plus March move fund managers
Speaker 1: placing their bets on the fence next policy action. We'll
Speaker 1: speak with Bill gross Up, Janice Henderson, and my co
Speaker 1: host Today and every Fed Day is Tom Keen of
Speaker 1: Bloomberg Surveillance. We convinced him to Stanley and hang out
Speaker 1: with us. Tom. Thank you, Yeah, data check good to
Speaker 1: be here on an important day and historic day right now,
Speaker 1: to get some thoughts before we see this. I guess nondecision.
Speaker 1: Michael McKee with this Bloomer's International Economics and poly correspondent
Speaker 1: in Montreal the last couple of days on the NAFTA
Speaker 1: UH discussions, and I am Jersey with us, our chief
Speaker 1: US rate strategist for Bloomberg Intelligence. Michael McKee with the
Speaker 1: sartorials blended this morning. Yeah, that picture that we ran
Speaker 1: at the top of the show, Jenny Ellen. I don't
Speaker 1: think you can pull that up again. Jenny Ellen? Where's
Speaker 1: her collars? Pop? Today's her last meeting and there is
Speaker 1: a tribute going on at the FED where everybody's walking
Speaker 1: around with their pop collars. So I I would join
Speaker 1: in like everyone else, and we can we can salute
Speaker 1: Janet yelling as she every funnel there her collars popped.
Speaker 1: So there's a there's a thing going on popular collar today.
Speaker 1: It's Janet Hillen's last meeting. We gotta post you on
Speaker 1: social media so you can join the party. Are our jersey?
Speaker 1: No popped collar for you? I don't know. I just
Speaker 1: don't think I can pull it off. Like Mike Ken well,
Speaker 1: it's gonna be her last day. She's not gonna make
Speaker 1: an appearance. She's not going to give any kind of speech, right,
Speaker 1: and we don't see her. It's very quiet, right they
Speaker 1: have by now, they have finished their meeting and they've
Speaker 1: sent over the press release that they will give to
Speaker 1: the reporters. They've already given it to them, and we'll
Speaker 1: get the data in about two minutes and they'll tell
Speaker 1: us what happened. But it's done for her now and
Speaker 1: it is going to be J pals fit. Why aren't
Speaker 1: they raising rates? So many people are saying, we have
Speaker 1: to wait till March. Why do we have to wait
Speaker 1: till March on? Well, you start with the fact it's
Speaker 1: a non news conference, meaning but also there are no
Speaker 1: inflationary pressures. They're not pushing up right now on us.
Speaker 1: We're seeing break evens move a little bit, which is
Speaker 1: your reason to think we're going into March, we'll have
Speaker 1: more data. They could do that. She also doesn't want
Speaker 1: to bind J. Powell in the future with a decision today,
Speaker 1: so they'll leave it up to him. They'll leave their
Speaker 1: options open, say as little as possible. Is there a
Speaker 1: potential for a surprise here, I don't think so. I
Speaker 1: agree with Mike, but I also think that one of
Speaker 1: the reasons Tom that they're not going to hike today
Speaker 1: is because they hiked in December and they want to
Speaker 1: go slow. They want to go measured in order to
Speaker 1: do that at the pace that they want to go
Speaker 1: with three hikes this year. If they hike in January,
Speaker 1: that means that if there is a blip in the data,
Speaker 1: if there is some exogenous event, they can't take that
Speaker 1: back in March. And part of this is the idea
Speaker 1: of measured. We have Chairman Greenspan coming up later. A
Speaker 1: great honor to have them with us this last day
Speaker 1: for chure yelling, this last meeting for chair Yelling, might
Speaker 1: define for our audience what measured actually means. Well. He
Speaker 1: was the one who said, basically, what you want to
Speaker 1: do is raise rates slowly and keep inflation as flat
Speaker 1: as possible, not below two percent, but you don't want
Speaker 1: a lot of volatility. And that is the legacy of
Speaker 1: the green Span years. Some say it led to the
Speaker 1: Great Financial Crisis because it was two predictable rates were
Speaker 1: too low for too long, and now they're questioning the level.
Speaker 1: So under J. Powell We're probably gonna have a rethink
Speaker 1: of the way thing the FED does its monetary policy business,
Speaker 1: But not until two thousand nineteen will that rethink include
Speaker 1: a different way of looking at market behavior and market
Speaker 1: pricing action. Well, so, J Powell, we we don't know
Speaker 1: exactly how he's going to run this FED, and that'll
Speaker 1: be interesting to hear his first press conference and his
Speaker 1: first couple of meetings. This share is going to be
Speaker 1: important for how the markets take him and should they
Speaker 1: take him at face value or should they we read
Speaker 1: more into exactly what he's saying. All right, I Jersey
Speaker 1: mentioned the markets there, So let's get you a market
Speaker 1: check right now. The Dow recovering after a two day slide,
Speaker 1: actually the biggest to day spot since September of twenty six,
Speaker 1: before Donald Trump was elected. Let's also take a look
Speaker 1: at the tenure yield. You could see there, Uh, the
Speaker 1: bond prices are moving higher or I should say lower,
Speaker 1: and therefore the yields are moving higher. The yield broke
Speaker 1: above two point seven percent on Monday the next because three,
Speaker 1: let's go down to Chris Condon at the Federal Reserve
Speaker 1: with the announcement from the Fed on Jenny Ellen's last
Speaker 1: day Chris no rate change from the Federal Reserve, no
Speaker 1: surprise there. The Federal Open Market Committee unanimously voted to
Speaker 1: leave the target range for the Fed funds rate unchanged
Speaker 1: at one and a quarter percent to one and a
Speaker 1: half percent. There were some subtle but important changes in
Speaker 1: the Fed statement compared to December, where they twice referred
Speaker 1: to expectations for a gradual adjustment of policy and to
Speaker 1: gradually increases in the Federal funds rate. This time they
Speaker 1: added some emphasis referring to further gradual adjustments and further
Speaker 1: gradual increases. That doesn't seem really to change the meaning
Speaker 1: of those sentences, but does serve to attract attention and
Speaker 1: perhaps emphasizes their expectations for further rate increases this year. UH.
Speaker 1: At the same time, however, there was no change to
Speaker 1: the so called balance of risk statements, that is, the
Speaker 1: risk for their economic outlook was again described as roughly balanced.
Speaker 1: Their language and describing economic condition was also slightly upgraded.
Speaker 1: Things like household spending and business fixed investment were described
Speaker 1: as solid this time around, So none of these really
Speaker 1: dramatic in on themselves, but a several subtle but important upgrades,
Speaker 1: perhaps a slightly more hawkish tone from this statement compared
Speaker 1: to December Scarlett. All right, bloombergs Chris content at the
Speaker 1: Federal Reserve, Thank you very much. Michael McKee and Iro
Speaker 1: Jersey still with us. Michael, you heard Chris talk about
Speaker 1: a subtle upgrade, uh in the FEDS report. In the
Speaker 1: FEDS statement, what struck out at you? Well? Two things.
Speaker 1: One they talk about inflation market based measures of inflation
Speaker 1: compensation have increased in recent months, a nod to the
Speaker 1: break evens going up, and that sort of supports the
Speaker 1: idea of this word further inserted into it. I don't
Speaker 1: think there's any question that the FED is gonna be
Speaker 1: raising rates this year. It's only a matter of how
Speaker 1: many times, So it may not be that dramatic a change.
Speaker 1: But it does say that Jpal FED is going to
Speaker 1: be raising rates and he had to have signed off
Speaker 1: on it. What we do here at Bloomberg when we
Speaker 1: have a FED day, and particularly one that is historic,
Speaker 1: is this is go to Ira Jersey for proper rate translation.
Speaker 1: Market based inflation compensation gauges rose. Recent in recent months
Speaker 1: was that Cherry Yellin's recent shopping trip to the grocery store.
Speaker 1: What are we talking about in market based inflation? Compensation
Speaker 1: gauges translate, so so what that means is what Michael
Speaker 1: just talking about. You're talking about tips break evens moving higher.
Speaker 1: So when they talk about market based, one of their
Speaker 1: favorite measures is the five year five year forward tips
Speaker 1: break evens and those have gone up about forty basis
Speaker 1: points since the last meeting, which is is a lot
Speaker 1: and actually contributes to almost all of the move in
Speaker 1: uh an interst rate market. So when you look at
Speaker 1: what's happened to ten year treasury is how they've broken
Speaker 1: to sixty five and now at two seventy one. That's
Speaker 1: mostly been driven by higher inflation expectations, not necessarily real rate,
Speaker 1: so not kind of this risk premium being built into
Speaker 1: the market. Now Mike McKie has the step Offston because
Speaker 1: he has an important interview to conduct. I wanted to
Speaker 1: ask you, is there anything that can derail a March
Speaker 1: rate hike from Jerome pell Uh? Probably not. I mean,
Speaker 1: there could be, of course, a very surprising drop in inflation,
Speaker 1: but we're expecting Friday to see the unemployment rate unchanged
Speaker 1: or a little lower. We're expecting if you look at
Speaker 1: a DP gains of about two hundred thousand or more
Speaker 1: in terms of jobs, and that's a sign of the FED.
Speaker 1: They don't believe the Phillips curve is dead, that we
Speaker 1: are going to see wage inflation. They'll look past the
Speaker 1: idea of all these bonuses being given out by companies
Speaker 1: because those are one time things. But we are seeing
Speaker 1: in wage inflation moving up. It was in the employment
Speaker 1: cost index today. We're seeing commodity prices rise higher, labor
Speaker 1: market slack. Commodity prices higher, you should get inflation. So
Speaker 1: the market is going to focus on that idea going
Speaker 1: forward that the feed is going to react to that.
Speaker 1: Michael McKie, thank you so much. If you go to
Speaker 1: an important interview and discussion right now on this FET day.
Speaker 1: He's our international economics and policy correspondent. Mr Jersey will
Speaker 1: stay with us to translate various items fixed income. But
Speaker 1: right now we bring in someone with a real handle
Speaker 1: on the American economy and of course always with a
Speaker 1: different view from Chicago. Diane Swank is chief economist at
Speaker 1: Grant Sworton. Diane, what is the state of the American economy?
Speaker 1: Martin Feldstein to say? He said, said he doesn't think
Speaker 1: we can get to a three percent run rate. Where
Speaker 1: exactly is the American economy right now? Well, we are
Speaker 1: seeing an acceleration in growth, and that's good, and I
Speaker 1: think what Marty's trying to emphasize is to get to
Speaker 1: a sustained over ten years, you need to see a
Speaker 1: major upward movement and productivity growth and another upward movement
Speaker 1: that's also commensurate in labor force growth, and right now
Speaker 1: we don't have either of those. And so that's what
Speaker 1: the sustained issue is. You can get for while close
Speaker 1: to three percent. I think we'll probably get there this year,
Speaker 1: but the question is at what price? And does it
Speaker 1: borrow from growth down the road? Is the Fed behind?
Speaker 1: I don't think they're behind. I think the real challenge
Speaker 1: going forward is the Federal Reserve is tightening in two
Speaker 1: ways or easying up on the um monetary policy tightening
Speaker 1: into in two ways, and that is one through rate hikes,
Speaker 1: getting that normalizing that process, but also they're shrinking their
Speaker 1: balance sheet and that's you know, going to get more
Speaker 1: and more complicated because it's sort of on automatic pilot.
Speaker 1: But every quarter they're going to be allowing more and
Speaker 1: more of their balance sheet to roll off. That means
Speaker 1: less support for long term rates from the Federal Reserve
Speaker 1: throughout the entire year at the same time that they're
Speaker 1: raising short term rates. And that's something that markets so
Speaker 1: far have not reacted to at all. But as the
Speaker 1: FED steps that up, we could see some reaction to
Speaker 1: the interesting So it could get more complicated if the
Speaker 1: market does react. Believe that the FED could then change
Speaker 1: its approach to how it reduces its balance sheet. It
Speaker 1: certainly could. I mean, one of the things that Martin
Speaker 1: good Friend is Marvin good Friend is very known for
Speaker 1: his thoughts on the Fed's balance sheet how he thinks
Speaker 1: it is, and a lot of people within the FED
Speaker 1: system are looking forward to what he brings the table
Speaker 1: on his expertise on the balance sheet. They will be
Speaker 1: looking at that very closely. And even though it's on
Speaker 1: automatic pilot, the arkets can give it as automatic pilot,
Speaker 1: it is complicated because it's at the same time that
Speaker 1: deficits are going to be rising and Treasury is gonna
Speaker 1: have to issue more debt. Right Jersey, what's the inflation
Speaker 1: NESTA representation on the FED now now? And for the
Speaker 1: Power Fed as well. Yeah, Well, there's show some presidents
Speaker 1: in particular, who I think are worried that there's going
Speaker 1: to be inflation in the future because of the size
Speaker 1: of the Fed's balance sheet. But now that they're um
Speaker 1: they're starting to reduce it. I think that some of
Speaker 1: those fears and some of those inflation east to kind
Speaker 1: of arguments have to go away a little bit. One
Speaker 1: thing that that Diane mentioned was that you know, there's
Speaker 1: a FED balance sheet expert. I'm not sure any of
Speaker 1: us really can claim, like anyone in the world can
Speaker 1: claim to be an expert on this, because no one's
Speaker 1: trying to unwind a balance sheet of the size so
Speaker 1: um so. So I think that that's a risk, especially
Speaker 1: to change from what they've already said the Diana. I
Speaker 1: like what David Rubinstein said up my panel and Davos
Speaker 1: he called it the Science Fair experiment. I guess that
Speaker 1: maybe gets to the closest as we can and watch
Speaker 1: as I found out myself, yes it was. Yes, we
Speaker 1: all remember our disastrous Science Fair experiments. Diane, I want
Speaker 1: to go to the heritage of Janet Yell and let
Speaker 1: us go back to our important Economic Club of New
Speaker 1: York speech. Here a good number of years ago. Let's
Speaker 1: try it. I can't believe his four years coming up
Speaker 1: April as well. We anticipate that his labor market slack diminishes,
Speaker 1: it will is less of a drag on inflation. However,
Speaker 1: during the recovery, and we certainly saw that folks with
Speaker 1: cherry yelling, very high levels of slack of seemingly not
Speaker 1: generated strong downward pressure on inflation. We must therefore watch
Speaker 1: carefully to see whether diminishing slack. I think that's what
Speaker 1: we're in right now is helping return inflation to our
Speaker 1: objective dayan swack. This really go four years ago remarkably
Speaker 1: pressing um idea from chair yelling, and we really don't
Speaker 1: know anymore the linkage of inflation into this. Do you
Speaker 1: have a confidence in where inflation is right now versus
Speaker 1: an almost fully employed America? There's we know where the
Speaker 1: unemployment rate is. It's it's not the same unemployment rate,
Speaker 1: even though it's at a seventeen or low as what
Speaker 1: it was seventeen years ago. And it's really not where
Speaker 1: it was during the boom of the nineties. And I
Speaker 1: think that things have changed. During the boom of the nineties,
Speaker 1: we had falling computer prices that we're helping us to
Speaker 1: keep inflation in check and productivity growth. But there was
Speaker 1: this sense. There was a famous FED Beige book March
Speaker 1: two thousand that highlighted um now hiring pulse required. We're
Speaker 1: clearly not at that stage right now, and so we're
Speaker 1: not getting the wage pressures, we don't have the productivity
Speaker 1: growth to back them up. We're going to see an
Speaker 1: acceleration of wages, some of it um just from the
Speaker 1: minimum wages alone that are coming through in January. That'll
Speaker 1: add two tenths year every year, two leisure and hospitality wages,
Speaker 1: which will help edge up the read on the employment
Speaker 1: figures on wages on Friday. But the real issue is
Speaker 1: when are we really going to see firms really stopped
Speaker 1: treating people like commodities and treat them were like a
Speaker 1: diamond in the rough and they have to polish them
Speaker 1: up and invest in them and really push a little
Speaker 1: bit to get them to sparkle and have an enduring
Speaker 1: um impact on their human capital. Was you and Tom mentioned?
Speaker 1: Jenny Allen broke new ground and conceding that inflation is
Speaker 1: a mystery here. She also broke new ground as just
Speaker 1: being the first US female central banker. Talk a little
Speaker 1: bit Diane about her biggest achievements and also her biggest missteps. Well,
Speaker 1: I think one of her biggest achievements is this is
Speaker 1: someone who started in the FED during stagflation in the
Speaker 1: nineteen seventies, then was there during the boom with Chair
Speaker 1: green Span in the nine nineties. Then you know, was
Speaker 1: a FED president, then came back as vice chair, gave
Speaker 1: up money to do that, um went through the crisis.
Speaker 1: In all those shifts in the foundation of the economy,
Speaker 1: she kept her footing. She didn't was not an ideal log.
Speaker 1: She actually was able to rethink and say, you know what,
Speaker 1: the old rules may not apply the way we once thought.
Speaker 1: And she didn't get caught in that sort of group
Speaker 1: think of you know, hey, we're increasing the money supplice,
Speaker 1: so we're gonna have a flair and inflation. Said let's
Speaker 1: figure this out. And so I think that's our greatest strength.
Speaker 1: You know, we've seen her, she's been on a learning
Speaker 1: curve over time. Do I think that she could have
Speaker 1: pushed Congress more in terms of relations with Congress. I
Speaker 1: wish she had had even stronger relations with Congress. I
Speaker 1: think she did the best she could given the circumstances
Speaker 1: she was in that said, you know the best we kind,
Speaker 1: we can always do better. And that's where I really
Speaker 1: think the FED is under a lot of pressure. Dani's
Speaker 1: walk with us in Chicago with Grant Thorte, and we're
Speaker 1: thrilled to have Ira Jersey with us today. Of course
Speaker 1: with Bloomberg. Right now we go to the thirteenth chairman
Speaker 1: of the Federal Reserve System. March six is a special day.
Speaker 1: He will play tennis on March six, no doubt, in
Speaker 1: celebration of a birthday. Alan Greenspan, honor that you would
Speaker 1: join us here. Chairman Greenspan. When you look at the
Speaker 1: tenure of Janet Yellen, what sticks out to you? What
Speaker 1: is the most important historical note of the years of
Speaker 1: Janet yelling at the Fed? Well, Tom, let me suggest
Speaker 1: something which you probably are not aware of. It's been
Speaker 1: a fairly well adhered to a notion on the part
Speaker 1: of Federal Reserve chairman when they retire, they don't have
Speaker 1: comments to be made on their predecessors. Paul Voker, for
Speaker 1: eighteen and a half years never once commented pro con
Speaker 1: on the monetary policy I was involved with, and I
Speaker 1: think it's a very important notion. It's a very important issue,
Speaker 1: and I'd like to adhere to it. Well. I am
Speaker 1: glad that you're adhering to it. I thought maybe on
Speaker 1: this day of our final meeting we could get a comment,
Speaker 1: but we will await that down the road. Sherman Greenspan.
Speaker 1: One of the things that we're talking about, and I
Speaker 1: spoke to Martin Feldstein about, is our expanding debt and
Speaker 1: our expanding deficit. It gives pause that we will go
Speaker 1: to one trillion dollars in deficit here in the near future.
Speaker 1: What are those debts and deficits mean to Alan Greenspan? Uh,
Speaker 1: they mean what it's meaning to everybody else, namely that
Speaker 1: we're dealing with a fistly unstable long term outlook in
Speaker 1: which inflation will take hold. In fact, I was very
Speaker 1: much surprised that in the State of the Union message, Yes,
Speaker 1: they all those new initiatives who are not funded. And
Speaker 1: I think we're getting to the point now where the
Speaker 1: breakout is going to be on the inflation upside. The
Speaker 1: only question is when we've been through almost a decade
Speaker 1: now of stagnation and we're working our way towards stagflation, which,
Speaker 1: as you know, is a combination of both of those.
Speaker 1: That's a very difficult type of monetary policy to be in.
Speaker 1: But I think what we're seeing eventually here is an
Speaker 1: issue where we've got to confront the deficit. In fact,
Speaker 1: I've been arguing for quite a long period of time
Speaker 1: that entitlements are eating into gross domestic savings, and they've
Speaker 1: been doing that consistently dollar for dollar since nineteen. You
Speaker 1: knock down gross domestic savings and inevitably domestic debt. Uh,
Speaker 1: basically every type of debt tends to rise, and we
Speaker 1: have to get out of this loop. We aren't a
Speaker 1: bit of a vicious circle here, Sherman Greenspan. You mentioned
Speaker 1: a fiscally unstabled long term outlook in which inflation will
Speaker 1: take hold. We are looking a weaker dollar. It's been
Speaker 1: weakening for a while now, and the administration has talked
Speaker 1: up the benefits of a further weakening dollar helping our exports.
Speaker 1: To what extent will that contribute to inflation? At what
Speaker 1: point does that start to carry over and we see
Speaker 1: that that subsequent price rise sooner rather than later, very
Speaker 1: well said sooner rather than later. Is there a risk
Speaker 1: of a weaker US dollar that we are not seeing
Speaker 1: just yet. I mean, as we await for inflation, what
Speaker 1: are the risks that it's creating in the financial system
Speaker 1: right now we look just remember that the UH with
Speaker 1: the size of the international system UH, the value of
Speaker 1: the dollar of easily all other currencies is a critical
Speaker 1: issue in the domestic price outlook in the United States.
Speaker 1: And I suspect that if we get a continued drop
Speaker 1: in the dollar, which has not been going on for
Speaker 1: a while, that's going to have some additional effect on
Speaker 1: the price level, the domestic price level, and that's beginning
Speaker 1: to rise for a lot of reasons which you've just
Speaker 1: recently mentioned, namely that UH productivity has been dead in
Speaker 1: the water for the last UH ten years. Almost productivity
Speaker 1: growth has been a half a percent per year when
Speaker 1: it used to be over two. That is a huge difference,
Speaker 1: and that means unit labor costs are not going to
Speaker 1: start to move up. And with profit margins rising, that
Speaker 1: tells you the price level. Charman Greenspan, I know you
Speaker 1: do not want to speak about president and even future
Speaker 1: FED chairman. I don't want you to pontificate on what
Speaker 1: your own powells to do list is, But you can
Speaker 1: talk about the underlying theories of the pH d s
Speaker 1: at the Echoes Building. Does Ellen Greenspan still believe in
Speaker 1: the Phillips curve? I never did well within that. And
Speaker 1: then with the with the with the same hood of
Speaker 1: the Phillips curve right now, or at least it being
Speaker 1: is honored as it is, which model should we use
Speaker 1: is we move into the rest of this decade. Well,
Speaker 1: let me just say this, there was a big dispute
Speaker 1: in the nineties about the Phillips curve. The Phillips curve
Speaker 1: was supposed to basically engender inflation as the unemployment rate fell. Well,
Speaker 1: the unemployment rate kept falling, but productivity was accelerating at
Speaker 1: the time, so a unit labor costs didn't move and
Speaker 1: we had a period where the Phillips curve just did
Speaker 1: not work. The Phillips curve presupposes a certain fixed rate
Speaker 1: in productivity growth, and that is not the way the
Speaker 1: world works. Yeah, we're missing that right now. Now, speaking
Speaker 1: of the Alan, you famously used the term a rational
Speaker 1: exuberance to describe the bullish sentiment that was driving of
Speaker 1: stocks during the dot com bubble. I believe you use
Speaker 1: the term in a speech do you see any signs
Speaker 1: of a rational exuberance in asset prices. Well, let me
Speaker 1: put it to you this way. I think there are
Speaker 1: two bubbles. We have a stock market bubble and we
Speaker 1: have a bond market bubble. I think in the end
Speaker 1: of the day, the bond market bubble will eventually be
Speaker 1: the critical issue. But for the short term it's not
Speaker 1: too bad. But we're working, obviously towards a major increase
Speaker 1: UH in long term interest rates, and that has a
Speaker 1: very important impact, as you know, on the whole structure
Speaker 1: of the economy. So we're in the bond market bubble.
Speaker 1: You don't believe in the proclamations that a bearer market
Speaker 1: has begun in bonds. So this move towards three we're
Speaker 1: not there yet. Obviously, if we do get there, it
Speaker 1: can't sustate itself. What's behind that? What's behind the bubble? Well,
Speaker 1: the fact sense way, that we're beginning to run an
Speaker 1: ever larger government deficit. Remember that we're talking now about
Speaker 1: deficits going to a trision dollars. But debt has been
Speaker 1: rising very significantly, and we are, in fact, if one
Speaker 1: of the technical the Congressional the Congressional Budget Office figures
Speaker 1: at face value, We're gonna run through the peaks of
Speaker 1: where we were during World War Two on the ratio
Speaker 1: of federal debt to GDP, which was extraordinarily high. And
Speaker 1: I think we're just not paying enough attention to that.
Speaker 1: Sherman greens Fan. You've worked with members of the Democratic Party,
Speaker 1: the Republican Party as well, any number of administrations. You've
Speaker 1: advised any and all in Washington. What's different about the
Speaker 1: Republican Party today is the majority party from the times
Speaker 1: of your service. Where did the frugality go? Where did
Speaker 1: the prudence go? Good question? If you find it, let
Speaker 1: me know. Well, you know, there's an acclaimed photo Chairman
Speaker 1: greens Fan of you laying down in the office of
Speaker 1: I think Vice President for you were laying down on
Speaker 1: the job in the Oval Office. If you were to
Speaker 1: lay down in the Oval office today with President Trump,
Speaker 1: what would be your advice to the president? Uh, join
Speaker 1: me on the floor, Mr President, and then what would
Speaker 1: you talk about? I mean, I'm serious. Well, then they
Speaker 1: then the conversation would become classified. So then I'll go
Speaker 1: and do that. It will become I'll go with a
Speaker 1: classified combination. One of the mysteries sir, And what we
Speaker 1: saw in Dabo certainly is the mystery of modern technology.
Speaker 1: You are the archkeeper of data, whether it's railroads or
Speaker 1: airplanes or whatever. Do we have a grasp of how
Speaker 1: technology influences our economic growth? Well already much for having
Speaker 1: a whole series of them. I mean, remember that when
Speaker 1: you disaggregate output per hour, which is the critical long
Speaker 1: term determinant of standards of living, there are many ways
Speaker 1: to come out it. And we now have a very
Speaker 1: large body of data which enables us to see where
Speaker 1: productivity is going. I mean, for example, to slow down
Speaker 1: in productivity over the last decade is very clearly the
Speaker 1: result of entitlements, entitlements crowding out gross domestic savings dollar
Speaker 1: for dollar. And when gross domestic savings declines and we
Speaker 1: can't borrow from abroad anymore, remember we have an eight
Speaker 1: trillion dollar debt to overseas. So the combination of domestic
Speaker 1: gross domestic savings declining as a present of g d
Speaker 1: p UH and entitlements rising UH is the is inevitable
Speaker 1: result that was we've seen in news. It's going to
Speaker 1: be a fiscal challenge, to be sure, Alan green Fan,
Speaker 1: I want to end with the Jerome Powell changing up
Speaker 1: the guard when he takes over as the FED chairman.
Speaker 1: What will be number one on his to do list?
Speaker 1: What does he need to do first? Open this mail?
Speaker 1: Now you're supposed to say, Chairman Greenspan, figure out how
Speaker 1: to use this Bloomberg terminal. That's what we would like
Speaker 1: you to say, Alan green Fan, thank you so much,
Speaker 1: greatly appreciate your time. If we look forward to your
Speaker 1: birthday in early March as well. Diane Swank hanging on
Speaker 1: every word at Grant Thornton. I mean an interesting conversation, uh,
Speaker 1: Diane with Chairman Greenspan. And I think we go back
Speaker 1: to what you see in the Midwest, which is it's
Speaker 1: a different America than the time of Chairman Greenspan. The
Speaker 1: technology overlaid today is extraordinary. How do you interpret a
Speaker 1: Grand Thornton tick by tick, day by day technology into
Speaker 1: this American economy already have no clue or productivity is
Speaker 1: and you really have no clue where GDP is. Well,
Speaker 1: it really is complicated, there's no question about it. And
Speaker 1: it's making it harder and harder for the statistical agencies
Speaker 1: to believe it or not to stay ahead of these
Speaker 1: measurements because they have to get funded to be able
Speaker 1: to get the improvements they need to measure with big data.
Speaker 1: They've been doing a lot of experimentation with it. There
Speaker 1: are some improvements out there. But I think Chair Greenspan
Speaker 1: really made a couple of really good points about one
Speaker 1: the concern about debt and deficits. This is something he's
Speaker 1: always been a deficit hawk, he was on the Security Commission,
Speaker 1: and I think he brings up some very important points
Speaker 1: on that. And before I go into the technology piece,
Speaker 1: I want to point out it's the evidence on what
Speaker 1: happens to interest rates is not just the deficits and
Speaker 1: not just the level of debt. It's the trajectory of debt,
Speaker 1: which he's laying out a very dire scenario in and
Speaker 1: which we do have a very dire scenario on, and
Speaker 1: its subjectory of debt when it goes up, countries eventually pay.
Speaker 1: We've got an extraordinary path so far, but eventually you
Speaker 1: can not escape the fact that bills have to be
Speaker 1: paid and the rest of the world is watching and
Speaker 1: the rest of the world is also dealing with debt
Speaker 1: as well. So this is something that will be an issue,
Speaker 1: and I think he made some very good points on that.
Speaker 1: The other side about technology is that Cher Greenspan also
Speaker 1: sort of went into some areas where we know that
Speaker 1: productivity growth has been high and information technology that's where
Speaker 1: wages have been highest, but very concentrated. It hasn't been
Speaker 1: broad based and spread out all over the economy. And
Speaker 1: that's what we're seeing as well in the data is
Speaker 1: that even though everyone has a smartphone now, that doesn't
Speaker 1: necessarily make them all more productive. And having two millennials
Speaker 1: of my own that are in college, I've seen that
Speaker 1: that can happen, not always more productive. I think we've
Speaker 1: all seen that in person. Actually the inverse of productivity exactly.
Speaker 1: I think that's true. Jersey Diane was talking about the
Speaker 1: trajectory of debt. When you look at the sell off
Speaker 1: in treasuries, there's gonna be a lot of supply coming
Speaker 1: to market fairly soon as well. How much of this
Speaker 1: week's sell off is a supply story. I think part
Speaker 1: of it's a supply story, but we've known that that
Speaker 1: supply was coming. This morning, the Treasury Department just told
Speaker 1: us exactly how we'll get it, which is much more
Speaker 1: in two and three year notes and a lot less
Speaker 1: than uh in ten and thirty year notes, but they're
Speaker 1: still increasing issuance throughout the curve. So there's going to
Speaker 1: be you know, trillion dollars of debt coming. We know
Speaker 1: that already. And to Diane's point, I think, you know,
Speaker 1: we we have this push and pull. One of two
Speaker 1: things has to happen in order for us to eventually
Speaker 1: pay our debts. Either um, either we pay more in
Speaker 1: taxes or we have to somehow inflate our way out
Speaker 1: of it and have much faster growth. And it's not
Speaker 1: obvious how you get that part, Diane. I want to
Speaker 1: bring up this chart because you've seen the two year
Speaker 1: leap out to two point one six percent. Do you
Speaker 1: have in your head, Diane Swung, a critical level of
Speaker 1: critical threshold for two year yield or ten year yield
Speaker 1: where it does begin to affect the American economy. I
Speaker 1: don't have an exact threshold, but I think one of
Speaker 1: you know, chere Greenspan has always been really good at
Speaker 1: green speak. And when he said you know when is inflation?
Speaker 1: Company said soon? And he said, um, interest rates are
Speaker 1: going to go up a lot, And it's how much
Speaker 1: I think, you know, you have to remember that from
Speaker 1: these old levels, you get back to three percent, you're
Speaker 1: back in tapered um tantrum territory. That's something we've had recently.
Speaker 1: You get above three and a half percent, you're talking
Speaker 1: about a major percentage increase in long term interest rates.
Speaker 1: And that's not only an increase in interest expense from
Speaker 1: all debtors out there, but the interest expense on our
Speaker 1: debt as well. And so you start to get those
Speaker 1: kinds of interactions. And I think when you start to
Speaker 1: get three and a half three and three quarter percent
Speaker 1: interest rates, even though historically they're low, those are significant, Diane,
Speaker 1: very quickly. Do we get there before the March f
Speaker 1: MC meeting, No, I hope not. If we do, then
Speaker 1: you really have burst the bond market bubble over right.
Speaker 1: So UM, I won't say no for sure because I
Speaker 1: don't know. And if I did, I know to buy
Speaker 1: an island where they don't have hurricanes. But um, other
Speaker 1: than that, I just don't know, all right, Diane Swank, honesty, Uh,
Speaker 1: they're on the markets. Diane Swank of Granthorne in Chicago,
Speaker 1: thank you so much for joining us. Our Jersey of
Speaker 1: Bloomberg Intelligence is sticking with us now. Coming up. Bill
Speaker 1: Gross of Jannis Henderson joins a conversation. We'll talk bond yields,
Speaker 1: we'll talk markets, and we'll talk about the Fed. This
Speaker 1: is the FED decides on Bloomberg TV and radio. This
Speaker 1: is the FED decides on Bloomberg television and radio. I'm
Speaker 1: scarlet food from our world headquarters in New York. Still
Speaker 1: with US is IRA Jersey Bloomberg Intelligence is chief US
Speaker 1: rates Strategists and IRA. When we look at what Jerome Powell,
Speaker 1: who will be sworn in as a new FED chair
Speaker 1: this evening, I believe right, I don't remember tenure begins,
Speaker 1: tenure begins to Okay, his tenure begins soon. Is it
Speaker 1: important for him to establish his independence right away? I mean,
Speaker 1: we're looking at a rate increase anyway in March, but
Speaker 1: is that an important marker to set? So one of
Speaker 1: the things that's gone on with the Federal Reserve over
Speaker 1: the last couple of years is really um, you know,
Speaker 1: more control or more um I don't want to say independence,
Speaker 1: but certainly more input from the other members. So presidents
Speaker 1: and governors, you know, certainly they've been out there. When
Speaker 1: Alan Greenspan was chair, he's what he said that's what
Speaker 1: the FED said, That's what the FED did. The FED
Speaker 1: did everything that he wanted and and the FED chair
Speaker 1: certainly guides things. But Jerome Powell will have his own style.
Speaker 1: And will he try and be like Alan Greenspan and
Speaker 1: and uh, you know, be a little bit less open
Speaker 1: when it comes to taking another people's ideas, or will
Speaker 1: he be consuliatory and say, look, if you really think
Speaker 1: that we should hike rates seven times this year, go
Speaker 1: ahead and say that, but you know that's not my view.
Speaker 1: All right. We also want to bring in Bloomber Economics
Speaker 1: chief you as economist Carl rick O Donna and Carl,
Speaker 1: you came prepared with a chart as well to look
Speaker 1: at some of the things Jerome Power will need to
Speaker 1: confront when he becomes chair. And one of them, of course,
Speaker 1: is this flattening yield curve. Right absolutely so. Well, what
Speaker 1: I show in the chart on the screen here, uh
Speaker 1: is basically the two tens spread relative to FED hikes
Speaker 1: and we can see that under the Greenspan Fed when
Speaker 1: we got about it was probably about seven hikes into
Speaker 1: the tightening cycle, always saw a similar flatness in the
Speaker 1: yield curve. And so this has been a lot of
Speaker 1: discussion in the marketplace lately that because of the flatness
Speaker 1: and the curve, the FED will be constrained. Uh and
Speaker 1: if the power Fed operates anything like the green Span
Speaker 1: FED something. I was alluding to green Span Blue right
Speaker 1: through that and didn't concern himself too much with the
Speaker 1: uh flatness or eventual inversion of the curve. The FED
Speaker 1: tightened at least as much thereafter as they did running
Speaker 1: up to that. You know, one of the things is
Speaker 1: they can't help this, right, So if the federerser wants
Speaker 1: to keep on hiking, they're gonna keep on getting flattening.
Speaker 1: It's just the way that the market is going to work.
Speaker 1: Unless they say that they're going to slow down their hikes,
Speaker 1: you're not likely to see a significant resteepening in the
Speaker 1: yield curve. Right to the extent that the market has
Speaker 1: confidence and the FED keeping inflation under control, then you're
Speaker 1: not going to see that meaningful backup, Where's normal? I
Speaker 1: think none of us know. There's too many plugins to
Speaker 1: get to normal. Whether it's a tailor rule or whatever
Speaker 1: rule you want to use. How far from normal are
Speaker 1: we even if we know where it is? I think
Speaker 1: if we see growth picking up in a more sustained fashion. Uh.
Speaker 1: In mind you we're not at three percent growth yet,
Speaker 1: but we're heading towards probably a sustainable pace of two
Speaker 1: and a half to two and three quarters growth this year,
Speaker 1: and maybe three percent beyond that. That you're going to
Speaker 1: see the FED finally tweaking their longer run growth estimates
Speaker 1: in the other directions. So if we have confidence that
Speaker 1: we can get back to two GDP growth, back to
Speaker 1: two percent inflation, then I think the view of normal,
Speaker 1: be it trend growth in the economy or the normal
Speaker 1: level of the FED funds rate start to creep higher
Speaker 1: as well, then critical over Jersey. What's the markets say
Speaker 1: to that? I mean, does the market agree with that
Speaker 1: assessment or they still far apart from the powle Fed.
Speaker 1: I well, we we I'm not convinced that we exactly
Speaker 1: know what the power FED is going to do, but
Speaker 1: I think the markets anticipating continued continued increases in in hikes. Certainly,
Speaker 1: you know, we're pricing five ish hikes now over the
Speaker 1: next two years. That's you know, more or less the uh,
Speaker 1: the pace that that two year notes is certainly pricing in.
Speaker 1: So the question then becomes, you know how much does
Speaker 1: the other side, how much does supply side wind up
Speaker 1: dripping into bond yields and pricing, and with much more
Speaker 1: supply in twos and threes, I'd have to imagine that
Speaker 1: it's not going to be for a much deeper yield curve.
Speaker 1: Can you get to normal though, Carl, When you've got
Speaker 1: the ECB and the b o J staying so accommodative, well,
Speaker 1: that complicates the you know, potentially. I think, for example,
Speaker 1: the movement we've seen in the dollar to date this
Speaker 1: year has been more determined by b o J, a
Speaker 1: ECB comments, and necessarily any reassessment of the trajectory for
Speaker 1: the FEDS. So that's going to be an important moving
Speaker 1: part in the background. Absolutely, and whether the dollars going
Speaker 1: up or down really influences the impact of how much
Speaker 1: UH normalization the FED has to pursue as well. So
Speaker 1: if we see the dollar which is down about ten
Speaker 1: percent year on year, if that friend is continuing, that's right,
Speaker 1: the inflationary it's gonna be pro growth and it's going
Speaker 1: to mean that the pal FED may have to do
Speaker 1: a little more rather than a little less. I want
Speaker 1: to introduce his chart right now, We're gonna use this
Speaker 1: with Mr gross here in a little bit, but I
Speaker 1: want to use it with Mr Jersey right now. We
Speaker 1: quote yield yield, yield yield at Bloomberg surveillance all day,
Speaker 1: Scarlett screaming at me. Quote price sometime talk to you.
Speaker 1: So here's price. Back to Thanksgiving, the white circle and
Speaker 1: Ira Jersey. I'm sorry. If it is a bear market,
Speaker 1: it looks like a bear market. When is there a
Speaker 1: bear market in bonds? Price down, yield up. It's three
Speaker 1: point six percent down from Thanksgiving and annualized n down.
Speaker 1: How do you know when you're in a bond bear market? Well, so,
Speaker 1: so the price is down, but you also get income
Speaker 1: at the same time. We're we're in a bear market,
Speaker 1: if you want to call it that, because prices will
Speaker 1: probably continue to fall modestly. What's what's interesting is that
Speaker 1: over the last thirty years, we've never had a two
Speaker 1: year period where we've had negative returns for um for
Speaker 1: for treasury securities. And I think that that's important because
Speaker 1: what ten to happen is you get these sharp sell offs,
Speaker 1: they wind up lasting for a couple of months, and
Speaker 1: then you'll and then the bond yield stabilizes, and when
Speaker 1: they as they stabilize, you continue to get interest on it,
Speaker 1: and you wind up building back up some kind of
Speaker 1: some some income. And so so how long will this last?
Speaker 1: It could last a long time. I'm a little skeptical
Speaker 1: that we're going to see this disaster uber high yields.
Speaker 1: We're gonna see four percent ten year fields. I don't
Speaker 1: think that that. Being said, this year has been terrible
Speaker 1: for bond so far. Where are you on the idea
Speaker 1: of the percentage of the strategists you read, the economists
Speaker 1: you read to think we're gonna blow through bill gross
Speaker 1: is two point and go on to a true higher
Speaker 1: yield regime. I don't think we're going into a meaningfully
Speaker 1: higher yield regime now exactly. We have to see a
Speaker 1: much more pronounced uptaket inflation. So what we're trending in
Speaker 1: a positive direction, that doesn't mean we're blowing the doors
Speaker 1: off to any degree that would justify really substantial bartment.
Speaker 1: Mind you, how much debt is out there, whether it's
Speaker 1: household debt at floating great UH, mortgages and whatnot, a
Speaker 1: little bit of backup and rates will really take a
Speaker 1: toll on intersensitive spending in the economy, household or corporate.
Speaker 1: This is the FED desides on Bloomberg Television and Bloomberg Radio.
Speaker 1: We're with Bloomberg Economics chief US economists called Rick and Donna.
Speaker 1: Also with us is our Jersey Bloomberg Intelligence chief rates strategists.
Speaker 1: We were talking about the move higher and yield to
Speaker 1: move down in bond prices. Our wire is going to
Speaker 1: start emerging as the spread between US treasuries and Eurozone
Speaker 1: yields gets wider and wider and we get to that
Speaker 1: three percent, because that's what we've seen in the past.
Speaker 1: It's been a consistent reaction, right, It's what we've seen
Speaker 1: in the past. It's what we saw. Going back to
Speaker 1: the chart I brought with me about the Greenspan FED
Speaker 1: and the flattening of the curve, if not inversion, there
Speaker 1: is a global glut of capital slashing around looking for
Speaker 1: higher returns. UH. And so I think that the you know,
Speaker 1: we talk about economic fundamentals be a growth and inflation
Speaker 1: driving the dynamics of the treasury yield curve, but we
Speaker 1: also have to factor in UH foreign capital flows, and
Speaker 1: I think that could be a very important driver this year. UH.
Speaker 1: Not only given the fluctuations in the currency and that
Speaker 1: surplus of capital. But one particular policy this repatriation of
Speaker 1: foreign earnings, which is incentivized by the tax reforms. And
Speaker 1: so we could look back to, for instance, the two
Speaker 1: thousand one to two thousand seven cycle. The dollar was
Speaker 1: continually weakening over that period, with the exception of two years.
Speaker 1: In those two years were the period where we were
Speaker 1: incentivizing repatriation of foreign earnings in that period as well.
Speaker 1: So I think that all of that cash flowing back
Speaker 1: into the US helps to grease the skids for President
Speaker 1: Trump to uh pursue a more aggressive, more expansive uh
Speaker 1: fiscal I just want to say Scarlett for Bloomberg Radio
Speaker 1: and putting out that boom price chart right now just
Speaker 1: as we get down pricedown pricedown yield up. That's my
Speaker 1: Frobosi moment for the day. Continue while I put this
Speaker 1: out for Bloomberg Radio. So I'd just like to add
Speaker 1: something so we keep on talking about, you know, high
Speaker 1: interest rates, what's going to happen because we have two
Speaker 1: year yields going up. I think it's important to note
Speaker 1: that the structure of the economy has changed over the
Speaker 1: last twenty years, where a lot of both governments in
Speaker 1: the United States and municipal governments as well as corporations
Speaker 1: have extended the amount of depth that they have, so
Speaker 1: they've extended their term and they've really used the last
Speaker 1: seven years or so to do quite a lot of that.
Speaker 1: So I think it might take a little longer than
Speaker 1: some people realize for higher interest rates to really filter
Speaker 1: in to the real economy. So you think, look at
Speaker 1: things like weighted average cost of capital for corporations, that's
Speaker 1: not going to go up the same way as it
Speaker 1: did when they were funded twenty or with like on
Speaker 1: loans in commercial but then with the mergers and acquisitions,
Speaker 1: now you see it was Snapple and the rest of
Speaker 1: them Dr Pepper Snapple in the last number of days.
Speaker 1: Are they looking at yields as a nominal cost or
Speaker 1: they look at it really you which are basically were
Speaker 1: given money away? Well, I think, and they probably use
Speaker 1: a lot of nominal costs, but the fact is real
Speaker 1: yields are next enough. Really yields do matter, yeah, for
Speaker 1: sure in a lot of people's minds, but that only
Speaker 1: in so far as they can actually pass along price increases.
Speaker 1: So the question is how much of the price increases
Speaker 1: and wage pressures, for example, can be passed along the consumer.
Speaker 1: It's certainly one of the things that's been keeping things down.
Speaker 1: But you know, Carl did a great piece today on
Speaker 1: the employment costs index, and you know, maybe, um, you know,
Speaker 1: maybe if if employment costs keep on going up, one
Speaker 1: of two things has to happen. Either you get more
Speaker 1: inflation or you get margin pressure. One is okay for
Speaker 1: things like equity markets and corporate debt. One is not. Yeah, certainly,
Speaker 1: I want to go back to a point about how
Speaker 1: things get pushed out, because structurally the economy is different
Speaker 1: than what it was before. How much time did companies
Speaker 1: did governments buy with the ability to push things out further? Well?
Speaker 1: So so in uh SO the US government, for example,
Speaker 1: they extended their average maturity from about three and a
Speaker 1: half years to almost six years in terms of uh
Speaker 1: in terms of average maturity of their debt, So basically
Speaker 1: they bought themselves a lot of time. They basically said, Okay,
Speaker 1: interest rates are super low, we're going to cut two
Speaker 1: in three year debt. Back in two thousand, thirteen and fourteen,
Speaker 1: they cut the amount of short term debt that they
Speaker 1: were issuing, and they issued a lot of long term debt,
Speaker 1: so their liabilities now are far longer. Now they are
Speaker 1: worried about, you know, certain walls of maturities, and now
Speaker 1: that they're issuing more debt in the front end. Um,
Speaker 1: you know this is a problem, but it gets pushed
Speaker 1: out a little further. So my point there was, you know,
Speaker 1: how much of today's hikes are going to be built
Speaker 1: into the economy in six months. It's not obvious to
Speaker 1: me that six months anymore. These long and variable legs
Speaker 1: that monetary policy takes might be even longer than the
Speaker 1: Fed even things. How worried should we be about funding
Speaker 1: the government and the debt ceiling? Carl, It seems like
Speaker 1: we're really worried about it earlier this month than they
Speaker 1: kicked the can down the road for a couple of
Speaker 1: weeks and we kind of all forgot about it, went
Speaker 1: back to watching the stock market rise. Well, I think
Speaker 1: you know, as we kicked that can closer and closer
Speaker 1: to midterm elections, people are not going to be willing
Speaker 1: to shut down the government and then potentially face the
Speaker 1: comment that uh come November. More broadly, as we think
Speaker 1: about government funding, I mean, if you look at UH,
Speaker 1: you know, and I will say, don't use these at
Speaker 1: traditional models. But if we look at just the nominal
Speaker 1: GDP growth versus a tenure yield, uh, there's a pretty
Speaker 1: good correlation over the broad history of time. UH. And
Speaker 1: if you look in the last five years or so,
Speaker 1: you can see that tenure yields are low relative to
Speaker 1: those economic fundamentals. And that's giving you a free pass
Speaker 1: to increase issue with bring up this chart. I don't
Speaker 1: have a banner for it, but we don't need what
Speaker 1: our jersey helped me here with how distorted we are
Speaker 1: in these times. This is the price of apple paper
Speaker 1: out to two thousand thirty. That's paying three quarters of
Speaker 1: a percent per year in Swiss Frank's. You have to
Speaker 1: pay up a premium to own this thing. It was
Speaker 1: up at one ten, it's done at one one. I mean,
Speaker 1: that's just one example of the distortions in your world. Sure,
Speaker 1: and when you look at places like other currencies, we
Speaker 1: have to remember the funding in those currencies matter, for
Speaker 1: for one thing. So Swiss rates are lower than US
Speaker 1: rates are lower than US rates for example. UM. But
Speaker 1: you know, the question is are you willing to buy
Speaker 1: Swiss francs and make that amount of money, and if
Speaker 1: you do all the hedges that you have to do
Speaker 1: to hedge out your currency risk, you'll realize that if
Speaker 1: you were to buy that Swiss frank that you're only
Speaker 1: making you're only making a little bit less than you
Speaker 1: are to buy treasury. So you know it's not as
Speaker 1: distorted as you might think. Iro Jersey with us in.
Speaker 1: Carl Ricka done as well from Bloomberg. As we discuss
Speaker 1: here these interesting times in economics, investment in finance. When
Speaker 1: Dan Fuss speaks, Bill Gross listens, we know that for certain,
Speaker 1: here is the legend of loomas sales. Assuming our economy
Speaker 1: stays as strong as it seems to be, and assuming
Speaker 1: that inflation rates gradually climb, and I suspect there's a
Speaker 1: slight lay in the inflation rates, uh, then I would
Speaker 1: expect the Fed to keep going the The open question
Speaker 1: then becomes, well, you know how far how long um
Speaker 1: does the jenior go to flour? That's a stretch. Dan
Speaker 1: Fuss speaking the gospel, according to Bill Gross, who were
Speaker 1: pleased that Mr Gross joins us today from Janis Anderson,
Speaker 1: Bill agree with me. It's always good to hear from
Speaker 1: Dan Fuss with the experiment as well is experience. Rather,
Speaker 1: we've seen price down, yield up. Let me cut to
Speaker 1: the shakes bill gross. Are we in a bun bear market? Well,
Speaker 1: I think we all. I think we've been there for
Speaker 1: that a few months ago, and I think there are
Speaker 1: a number of reasons for that time. Although I would, um,
Speaker 1: you know, suggest that the bear market to see is
Speaker 1: probably a mild one with the tenure going to three percent.
Speaker 1: But let's let's put some of the pieces together. In
Speaker 1: terms of the police nominal GDP is moving higher from
Speaker 1: four percent, which is savage for the US five years,
Speaker 1: so about five. Um. You know, inflation is moving slightly higher,
Speaker 1: as the Fed noted today, and I think ultimately, um,
Speaker 1: you know, the treasury in terms of the budget deficit
Speaker 1: is perhaps an important factor as well that many analysts
Speaker 1: have failed to mention. You know, the Treasury is going
Speaker 1: to be issuing about five billion dollars more more this
Speaker 1: year than they did last year, and that's because the
Speaker 1: deficit is moving up to you close to a trillion dollars.
Speaker 1: And that's because you know, basically that the fit itself
Speaker 1: is reducing its balance sheet and so you know, I
Speaker 1: wonder who will buy you know the current level of bonds, uh,
Speaker 1: you know, relative to what has happened in the past,
Speaker 1: because in the past central banks have bought. In the future,
Speaker 1: the private market is going to be forced to buy
Speaker 1: Bill Gross. We've heard from Martin fell Steine today of
Speaker 1: Harvard and also Chairman Greenspan, and both of them have
Speaker 1: great concern over consecutive and maybe even more than consecutive
Speaker 1: trillion dollar deficits. Do you change how you manage money
Speaker 1: because in twenty four months Ill Gross is going to
Speaker 1: enjoy a trillion dollar US deficit? Well, I think you know,
Speaker 1: investor has to do that if you're a vigilante, And
Speaker 1: I would suggest that the bond vigilantes are sort of
Speaker 1: down the list in terms of control or power relative
Speaker 1: to what they used to have. Central banks basically are
Speaker 1: on charge um. But a trillion dollar deficit, to my
Speaker 1: way of thinking, you know, entails a substantial supply, a
Speaker 1: new supply as I just suggested of treasuries. And uh,
Speaker 1: if the FIT is not buying, actually the FIT is
Speaker 1: selling and reducing this balance sheet, then then who will buy?
Speaker 1: And so it takes a higher interest rate to my
Speaker 1: way of thinking, supplying command, It takes a higher interest
Speaker 1: right forward demand to meet supply going forward. Now, I
Speaker 1: want to get your thoughts on what we've seen the
Speaker 1: last days with regards to markets and equity markets. In particular,
Speaker 1: it was, if you want to be generous, a sell
Speaker 1: off in U s Ox because the doubt had its
Speaker 1: biggest two day decline since before President Trump was elected.
Speaker 1: Do you take anything away from that or was this
Speaker 1: a long awaited consolidation? Well, I think some of the latter.
Speaker 1: I suppose along awaited consolidation. But I think what is
Speaker 1: driving that consolidation is the realization that the yields will
Speaker 1: be moving higher on the tenure um. You know, just
Speaker 1: several weeks ago they were at two point five percent,
Speaker 1: now they're at the two point seven And does that matter?
Speaker 1: You know? I think many pundits suggest that, you know,
Speaker 1: it'll take a four percent ten youre treasury to affect
Speaker 1: the market. I don't think so. I think the economy
Speaker 1: is significant. A three percent treasury will begin to affect
Speaker 1: you know, relative valuations in terms of stocks, in terms
Speaker 1: of utility prices, etcetera, etcetera. You know, I think it's
Speaker 1: all due to the bond market. I think there's a
Speaker 1: good correlation now and if treasury yields higher, and perhaps
Speaker 1: stocks will continue to consolidate or move a little bit lower. Right.
Speaker 1: We've also seen Wall Street banks, credit Switee among them
Speaker 1: forecasting this shift from pensions into fixeding comassets from equities,
Speaker 1: especially after the big run up we've seen in US
Speaker 1: stocks this year. Do you see it playing out the
Speaker 1: way that they expect or are the returns and bonds
Speaker 1: still too low for that? Well? I think that's the case,
Speaker 1: you know. I think a astute pension fund manager would
Speaker 1: probably want to take some gains and put some of
Speaker 1: that back into bonds. But the return on bonds just
Speaker 1: the same is probably not attractive to UH pension managers,
Speaker 1: but it helps them to basically, uh, you know, solidify
Speaker 1: their duration or match their durations. Um. You know, what
Speaker 1: is the tenure holder of treasuries or a holder of
Speaker 1: tenure of treasures expect for the next year. You know,
Speaker 1: if it moves to three percent, you're gonna get two
Speaker 1: point seven five percent in terms of interests and lose
Speaker 1: about two point seven five in terms of price. So
Speaker 1: there's nothing there in terms of treasuries either. No, let
Speaker 1: me bring up this chart we showed earlier. Bill Gross,
Speaker 1: we say good morning and a good afternoon to all
Speaker 1: of you around the world. On Bloomberg Television and Radio,
Speaker 1: William Gross of Janis Henderson with us with our Carl, RecA,
Speaker 1: Donna and Ira Jersey as well. Bill. It's just simply
Speaker 1: the ten year yield and down, down we go Bloomberg Radio.
Speaker 1: I put this out on Twitter for you. This is
Speaker 1: price price down bills. Aware of this. It's an unconstrained
Speaker 1: moved down in the price of the ten year yield bill. Gross.
Speaker 1: This is all LinkedIn and correlated to other markets. How
Speaker 1: did you respond to the week dollar policy of Mr Manutian,
Speaker 1: the President's adjustment to an ultimately strong dollar policy, and
Speaker 1: how does that fold into what you do unconstrained every
Speaker 1: day at Janis Henderson, Well, Tom, I I don't listen
Speaker 1: to much to UH, to President Trump or minut in
Speaker 1: terms of what policy they want. I think they speak
Speaker 1: with forked tongue or with UH, you know, different scenarios
Speaker 1: in order to please the market. I think what's important
Speaker 1: in terms of the dollar, and we know the dollar
Speaker 1: has been down ten percent basically over the past twelve
Speaker 1: months relative to other currencies, is the budget deficit If
Speaker 1: if we're moving to a trillion dollars, that's basically you know,
Speaker 1: scares foreign investors in terms of holding dollars because it
Speaker 1: means you know that the fiscal situation is deteriorating. So
Speaker 1: I think I would pay more attention to, you know,
Speaker 1: perhaps the success or lack of success of the infrastructure
Speaker 1: program advanced last night, and the fact that even without that,
Speaker 1: you know, we're headed towards a trillion dollars in terms
Speaker 1: of a deficit, and a week dollar is probably what
Speaker 1: we should expect as opposed to a strong dollar. So
Speaker 1: within that a week dollar in higher yields, maybe up
Speaker 1: to a bracket at two point three percent yield. Does
Speaker 1: Bill Gross just assume more volatility for investors in the
Speaker 1: next twelve months, Yeah, I think a little bit more times,
Speaker 1: certainly on the on the stock side. I mean, the
Speaker 1: vix got so low down to about nine, and now
Speaker 1: it's moving appreciably higher. On the bond market to volatility
Speaker 1: got low. Um. I don't think we're in a period
Speaker 1: of time in which volatility spikes significantly higher because central
Speaker 1: banks are still in control, and if things got out
Speaker 1: of hand in terms of yields are out of hand,
Speaker 1: in terms of lower stock prices than to fit you
Speaker 1: probably wouldn't increase interest rates by the expected three or
Speaker 1: four times. I simply think they're going up by one
Speaker 1: or two times in you know, two thousand and eighteen,
Speaker 1: and that should dampen volatility significantly. Well, we'll see how
Speaker 1: that all plays out. Bill Gross of Janis Henderson, thank
Speaker 1: you for your time. We want to get our final
Speaker 1: thoughts now from our Jersey of Bloomberrick Intelligence and calrickt
Speaker 1: Down of Bloombrick Economics. And I let's start with Jenny
Speaker 1: Allen's legacy because most people great her very highly when
Speaker 1: it comes to managing the economy and managing the transition
Speaker 1: back to normalization. How are you want to define it?
Speaker 1: But there are some criticisms about how Yelling performed at
Speaker 1: the politics of her role. Yeah, so so I think
Speaker 1: Jenny Yellen was great in the fact that she went
Speaker 1: from a uber accommodative policy and said, hey, we don't
Speaker 1: need this ubercommodative policy. When she came in, we all
Speaker 1: thought she was going to be very doublish, because she
Speaker 1: was when she was president of the San Francisco Fed
Speaker 1: so and and she wasn't. But when she brought up
Speaker 1: things to Congress like um typical fiscal type of things
Speaker 1: like income in equality, for example. She was criticized for that,
Speaker 1: and I think that damaged her reputation with some members
Speaker 1: of Congress. Now Jerome Powell is coming in and he
Speaker 1: might have a friendly Congress this year, but we're not
Speaker 1: sure after the midterm elections what will happen next year.
Speaker 1: You agree with Ira Jersey, there's a mystery to German Paul.
Speaker 1: I think that obviously he's untested in the seat, and
Speaker 1: even when he was just a governor, he had a
Speaker 1: sparse public so there is some degree regulatory based, right,
Speaker 1: very regulatory based. Um. What we have heard from him
Speaker 1: on the economy seems very consistent with Yelling's view of
Speaker 1: the world, maybe a tad bit more hawkish than Yelling
Speaker 1: has been. And we also know that he was a
Speaker 1: little bit less of a proponent of the unconventional policy
Speaker 1: of quantitative easing relative to Chair Yelling. So in peacetime
Speaker 1: that should do the spine. If the economy rolls over
Speaker 1: in a bad way, then that would be really I
Speaker 1: love that in peacetime called Rick a donna, don't break
Speaker 1: economic economics. Chief of US economists of course, Iron Jersey,
Speaker 1: chief rates strategists here for us at bloom Rick Intelligence.
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 Bloomberg
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