Speaker 1: Who you put your trust in matters. Investors have put
Speaker 1: their trust and independent registered investment advisors to the two
Speaker 1: and four trillion dollars. Why learn more at find your
Speaker 1: Independent Advisor dot com. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best in economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and
Speaker 1: of course, on the Bloomberg. A few minutes ago, present
Speaker 1: Elect Donald Trump saying in a statement he intends to
Speaker 1: nominate Rex Tillerson, the chairman and CEO of x On Mobile,
Speaker 1: to be Secretary of State, saying he was quote one
Speaker 1: of the most accomplished business leaders and international dealmakers in
Speaker 1: the world. And here from some perspective on that is
Speaker 1: Gideon Rose. He's the editor of Foreign Affairs magazine. Peter G. Peterson,
Speaker 1: Chair at the Council on Forimulations, getting good to see
Speaker 1: you good. Let's start with that with this nomination, this
Speaker 1: pick to be Secretary of State. I was thinking ahead
Speaker 1: to what these confirmation hearings will look like and what
Speaker 1: will be discussed, and it strikes me that for the
Speaker 1: first time in a long while, they're going to center
Speaker 1: on business much more probably than the candidate's vision for
Speaker 1: foreign policy. Um, well, it'll I think it's the relation
Speaker 1: between those two which is the question for Tillerson is
Speaker 1: he has extraordinary business experience and extraordinarily extraordinary skill, How
Speaker 1: does that apply to foreign policy? And and what is
Speaker 1: the carryover? Is there a difference between what you do
Speaker 1: as head of Exxon and a difference in what you
Speaker 1: do is Secretary of State, and how does that play in?
Speaker 1: And of course the Russia angle is going to be
Speaker 1: a major topic of concern. Let's pull on some of
Speaker 1: those threads there and first look at the similarities, so
Speaker 1: much as there are some between running a big multinational
Speaker 1: company like this and the State Department. We know of
Speaker 1: the bureaucracy of Washington, how byzantine the State Apartment is,
Speaker 1: like many other agencies in Washington. How much of a
Speaker 1: deficit will that be to come into running an organization
Speaker 1: having no familiarity with that, with that bureaucracy. Well, on
Speaker 1: the one hand, running any kind of large organization like
Speaker 1: that and doing it successfully has a lot of experience
Speaker 1: that can carry over, and so that's really good compared
Speaker 1: to a person taking over who hasn't managed anything. On
Speaker 1: the other hand, the restrictions on what you can do
Speaker 1: running a government department as opposed and running an independent
Speaker 1: foreign service as opposed to running a company in which
Speaker 1: you are the CEO, UH, you can do a lot less.
Speaker 1: And I think that even President elect Trump is going
Speaker 1: to find that, which is that just because your president
Speaker 1: doesn't mean you're the CEO of the entire country and
Speaker 1: you get to order everybody in the government to do
Speaker 1: what you want. And we just don't know how the
Speaker 1: independent institutions of the Foreign Service, the armed forces, the
Speaker 1: civil service, how all how the Trump administration is going
Speaker 1: to react if those parts of the permanent government and
Speaker 1: Congress have somewhat different views on policy. Let's look to
Speaker 1: history as a guide here. How important is this relationship
Speaker 1: between a president and UH and his secretary of state. It's,
Speaker 1: first of all, the answer is with all cabinet appointments,
Speaker 1: in all relationships, it all depends on the president. Because
Speaker 1: the president is the ultimate decision maker and gets the
Speaker 1: the deputies that he wants and runs things the way
Speaker 1: he wants to run them. So the secretary of State
Speaker 1: relationship is obviously a crucial and important one. But one
Speaker 1: of the big things in this administration, I think they
Speaker 1: we're all going to be looking for is to see
Speaker 1: what the relationship between the White House and the NSC
Speaker 1: on the one hand, and the various cabinet departments is.
Speaker 1: We've had a concentration of power in the executive in
Speaker 1: and in the White House in recent years. Will that
Speaker 1: change in this situation? Will people like Tillerson or General
Speaker 1: Maddest or Stevution or other people have more autonomy and
Speaker 1: power than they have had recently? Because right now the
Speaker 1: White House itself seems to be staffed up less and
Speaker 1: less impressively than the departments. What is this this decision
Speaker 1: telegraphed to you about the foreign policy priorities of this
Speaker 1: incoming administration. You mentioned Rex Tillerson's ties to Russia. We've
Speaker 1: seen the photograph of him and Vladimir Putina that he's
Speaker 1: received this award from the head of of Russia. He's
Speaker 1: done a lot of business there. Does it give you
Speaker 1: the sense here that this administration will be, if not
Speaker 1: fully focused, heavily focused on the relationship with Russia on
Speaker 1: day one? Well, it does suggest that there's gonna be
Speaker 1: a change in the relationship to Russia. And it also
Speaker 1: suggests that deal making and business skill is something this
Speaker 1: new president elect takes very seriously. The question is how
Speaker 1: does that play into existing American farm policy and in
Speaker 1: Russia in particular. You haven't just been about deal making
Speaker 1: with Russia, You've been criticizing them, you've been opposing them.
Speaker 1: And how is that going to play out? And we
Speaker 1: just again don't know yet. And as the sen some
Speaker 1: senators have already said they're going to question this. Um.
Speaker 1: I think he'll get through ultimately. But how this plays
Speaker 1: in even to the story about Russian hacking into the election,
Speaker 1: there's an odd Russia angle to all this that nobody
Speaker 1: really knows yet how far it goes. Giving Rosa with
Speaker 1: his Foreign Affairs magazine, I have the new issue in
Speaker 1: front of me on eight pages. I can't say enough
Speaker 1: about it. For the price of one of David Gura's
Speaker 1: artisanal martiniz over in Brooklyn, you can have a year
Speaker 1: long subscription and it will make all wiser. I read
Speaker 1: it cover to cover this issue. Tim Geitner on lessons
Speaker 1: learned from the Crisis. Robin Niblet of Chatham House on liberalism,
Speaker 1: and there is a spectacular article from Catherine Newman and
Speaker 1: Hello Winston on us manufacturing the little shatter all of
Speaker 1: your preconceived conceptions that are like mine wrong, Gideon, the
Speaker 1: institutional mix here, the testing, the uncertainty. I hear in
Speaker 1: your voice there, I guess you don't work in a vacuum.
Speaker 1: Who does a Secretary of State turn to in Washington
Speaker 1: besides the Council on Foreign Relations and to read Foreign
Speaker 1: Affairs magazine to get wiser faster? Is there a bureaucracy
Speaker 1: to help him? So this is a great question, Tom,
Speaker 1: because of course there is a major bureaucracy. You have
Speaker 1: an intelligent community that is professionally charged with keeping tabs
Speaker 1: on the world and providing accurate information. You have a
Speaker 1: foreign service, you have a uniform military, uh, you have
Speaker 1: a civil service. And those people are all really superb professionals.
Speaker 1: By and large, we often derived them as bureaucrats, but
Speaker 1: the fact is they're often very serious, competent professionals who
Speaker 1: work very hard behind the scenes to to get things right.
Speaker 1: And one of the things that people are worrying about
Speaker 1: or are looking at with concern is the new the
Speaker 1: transition at least apparent lack of connect with the professional staff,
Speaker 1: as it were, of the government, as evidenced by uh,
Speaker 1: not just the President Alex not getting the intelligence briefings,
Speaker 1: but also dissing the concerns of the intelligence community when
Speaker 1: it comes to things like the Russian hackings. So the
Speaker 1: professionals who you would think would be the people you're
Speaker 1: gonna rely on for your staff right now are a
Speaker 1: little bit concerned how uh they're going to fare in
Speaker 1: the new administration. If I look up diplomacy in the
Speaker 1: in Thesaurius, I don't think that deal making would be
Speaker 1: a word there next to it. Are we right to
Speaker 1: use these interchangeably? Is deal making the same as diplomacy?
Speaker 1: Dealmaking is not the same as diplomacy. But it's not
Speaker 1: true that dealmaking isn't a part of diplomacy. It often
Speaker 1: can be. The question is what kinds of deals with
Speaker 1: whom and what the overall strategy guiding them? So right now,
Speaker 1: so one of the things that we're not clear about.
Speaker 1: People don't like uncertainty, and for good reason, right uh.
Speaker 1: The the things like the call with Taiwan and the
Speaker 1: question of is our China policy going to be overturned
Speaker 1: I mean, the US China relationship is the single most
Speaker 1: important relationship in the world over the next generation. It
Speaker 1: could bring untold prosperity to both countries. It could also
Speaker 1: bring conflict and economic disaster for the world. So messing
Speaker 1: around with that and not even knowing people, not knowing
Speaker 1: how much the new administration is messing around with that
Speaker 1: is kind of an uncertain trumpet at this point. I look,
Speaker 1: I look to a natural security, national security and natural security,
Speaker 1: the issue of client change. You have Rex Taylerson, who
Speaker 1: has been somewhat ahead out front of that, more so
Speaker 1: than perhaps that the President elect has been. How big
Speaker 1: an issue is this going to be for the State
Speaker 1: Department going forward holding to that agreement that was agreed
Speaker 1: to in Paris a few months ago. I don't think
Speaker 1: this is necessarily going to be just a State department issue.
Speaker 1: I mean, if you have a head of the e
Speaker 1: p A who might have different views than to Tilson,
Speaker 1: and and even the President elect has had different views
Speaker 1: on the subject on the campaign trail versus what his
Speaker 1: businesses have said when they're actually uh coming up against
Speaker 1: things like rising seas. So we just don't know. Gideon,
Speaker 1: Thank you so much. Gideon rose Um so much to
Speaker 1: do with foreign affairs at magazine Out of Order, the
Speaker 1: future of the international UH system. It is their issue
Speaker 1: just out. I really can't say enough about the previous
Speaker 1: issue on populism as well. We're fortunate to be joined
Speaker 1: by Barry ike and Green, Professor of Economics and Political
Speaker 1: Science at UC Berkeley, currently a Distinguished visitor at the
Speaker 1: American Academy in Berlin. Shortly after the show today, he'll
Speaker 1: be delivering a lecture on the populist turn in American
Speaker 1: politics implications for Europe. That lecture arranged by the American
Speaker 1: Academy in Berlin and the Champeter Seminar at Humboldt University. Barry,
Speaker 1: I can be great to have you with us. Hi, David, Hi, Tom.
Speaker 1: We were a few weeks ago. Tom and I were
Speaker 1: in the audiences that Christine Legard gave a speech here
Speaker 1: at Bloomberg. She talked about people talking about D globalization.
Speaker 1: She was worried about the prospects for D globalization. Who
Speaker 1: in this day and age is making the case for globalization.
Speaker 1: I don't think that globalization really has UH business advocates,
Speaker 1: political advocates hyperglobalization at least of the sort that we
Speaker 1: experienced prior to the financial crisis. What we're I think
Speaker 1: settling into as a new normal in terms of globalization,
Speaker 1: or that would be the best outcome we can hope for. UM.
Speaker 1: We had hyperglobalization where credeing financial clothes across borders for
Speaker 1: growing faster than the global economy, but that was driven
Speaker 1: by China, a story that's over. That was driven by
Speaker 1: global supply chains. A story that's over that was driven
Speaker 1: by financial deregulation, which is over. So I think settling
Speaker 1: into a new equilibrium where UM, trade, financial clothes, and
Speaker 1: the global economy are all growing at about the same
Speaker 1: rate together is a better situation than UH having create
Speaker 1: trade and international finance outstripped the real economy. We see
Speaker 1: the tendency here toward looking inward, maybe to rejecting a
Speaker 1: lot of the multilateralism that we've seen over these last
Speaker 1: few years. You've looked at at history, you talk about equilibrium.
Speaker 1: How cyclical is this? Do you do you expect a
Speaker 1: period of inwardism followed by then a more multilateral view
Speaker 1: of the world Again, I think we will suffer through
Speaker 1: a period of um looking inward if policymakers do not
Speaker 1: do a better job at getting economic growth going. So
Speaker 1: I think UM, faster growth heals a lot of wounds
Speaker 1: economically and politically, and and and more successful economic growth
Speaker 1: could lay the basis for a little bit more enthusiasm
Speaker 1: and support for the multilateral system. So that's assuming a
Speaker 1: positive outcome. It would be nice if it happened. Barry,
Speaker 1: help us here with the core I can green knowledge,
Speaker 1: which is our exorbitant privilege. I love chapter four of
Speaker 1: one of your great short books, Global Imbalances and Lessons
Speaker 1: of Breton Woods Sterling's Past Dollars Future that was written
Speaker 1: a few years ago. Do you just maintain, within all
Speaker 1: of our international relations and the president elects daily dynamics,
Speaker 1: that the dollar will be our orbitant privilege? The um
Speaker 1: great advantage Mr Crump has is the same one John
Speaker 1: Connolly had when he said it's our currency, it's your
Speaker 1: problem in that there are not viable alternatives to the dollar.
Speaker 1: So even if there is more uncertainty and instability in
Speaker 1: the United States, there's really nowhere to UH to flee
Speaker 1: to UH for the moment. Over time, the Europeans might
Speaker 1: get their act together, the Chinese might get their act together.
Speaker 1: But I think for the time. For the time being,
Speaker 1: it's all about the dollar. Some would say your most
Speaker 1: wistful book is the European economies. Buried in the middle
Speaker 1: of it is towards the Golden Age. Nobody right now
Speaker 1: berries looking for the Golden Age in Europe. We're doing
Speaker 1: a ten for one reverse split on unit credit another bank.
Speaker 1: You know that's been around since you began teaching at Berkeley.
Speaker 1: It's going down the tubes. Uh the unrest that we've
Speaker 1: been talking about with you through the morning. Where is
Speaker 1: the Golden Age? It's out there somewhere. I know it's
Speaker 1: about growth. Is it really about technological progress? I think
Speaker 1: it's partly about technological progress. So Europe's Golden Age was
Speaker 1: supported by the fact that Europe was starting out behind
Speaker 1: and it could import technology from the United States and
Speaker 1: in the third quarter of the twentieth century, and even
Speaker 1: after that, it was partly a matter of political solidarity.
Speaker 1: So Europeans were able to pull together in part because
Speaker 1: of the Cold War and uh UM wanting to keep
Speaker 1: the Soviets out as it were. I I think now
Speaker 1: there are both technological headwinds and political headwinds that Um
Speaker 1: the Europeans would have to surmount that they're unlikely to surmount.
Speaker 1: Um so um. Another golden age is not in the cards.
Speaker 1: We've we've watched this low and slow global growth, and
Speaker 1: we've seen here the fracturing of a big international trade deal.
Speaker 1: Talk if you would, about the relationship between the two things.
Speaker 1: In other words, is it possible to have an uptick
Speaker 1: and global growth here if we don't have the kind
Speaker 1: of robust trading that might lead to it. I I
Speaker 1: think the robust trading system would be a consequence of
Speaker 1: better economic growth. There'd be more support for openness as
Speaker 1: we were talking about a moment ago, rather than being
Speaker 1: the engine of UH faster growth. So I think the engine,
Speaker 1: you know, has to be started at home through UH
Speaker 1: fixing the financial system in Europe, through a better balance
Speaker 1: of monitoring fiscal policies, and the trade growth will follow.
Speaker 1: One of the great moments of my career Bloomberg Folks
Speaker 1: was enjoying seeing Professor Iken Green battle in Singapore a
Speaker 1: million years ago? Were there worthy emerging market central bank
Speaker 1: chief over the future of India. Let me cut to
Speaker 1: the chase. Mr Ike and Green got the debate right,
Speaker 1: got any the other guy didn't. David gerrom My book
Speaker 1: of the Year, Ken Rogoff, The Curse of Cash. It's
Speaker 1: a brave book. It's kind of a very Green would
Speaker 1: have written. And then it talks about cash. He hedges it,
Speaker 1: he shows the weaknesses of his argument. He brings otmar Issing,
Speaker 1: the acclaimed German economists into it on page four. And
Speaker 1: then there's the thing on negative rates. But you know,
Speaker 1: we talked to Professor Rogoff even he didn't expect what's
Speaker 1: occurred in India, right, and we've we've seen a real
Speaker 1: political backlash there. And Barry, I can Green, I wonder
Speaker 1: what you make of this of a of of Ken
Speaker 1: Rogoff's argument and be sort of how it's played out,
Speaker 1: not exactly how Ken Rogoff prescribed it to take place
Speaker 1: in India here over the last couple of weeks. Yeah,
Speaker 1: I think there's a lot of um distance between Ken's
Speaker 1: careful book and the not so careful policies that they've
Speaker 1: adopted now in India. As I understand it, the argument
Speaker 1: for doing that kind of monetary reform and doing away
Speaker 1: with big bank bills is to crack down on money
Speaker 1: launderers and drug traffickers and other people who uh use
Speaker 1: hundred dollar bills and five hundred euro notes. What they've
Speaker 1: done in India is removed so many banknotes as to
Speaker 1: create hardship for shopkeepers and and and poor people without
Speaker 1: making other provision for them. These are people who are
Speaker 1: under banked, not necessarily because they're avading taxes, but simply
Speaker 1: because they're under banked. And I think that's where the
Speaker 1: backlash comes from, the that the measure was poorly targeted.
Speaker 1: Let's take a step back and talk about reform more broadly.
Speaker 1: Can talk about that as one facet of reform. You're
Speaker 1: you're speaking on reform in Europe populism in Europe today?
Speaker 1: Where do things need to head? As you see when
Speaker 1: it comes to the banking regulation in Europe. But we
Speaker 1: we've heard the cries for the removal of the the
Speaker 1: revision of Dodd Franca in the US. What's the future
Speaker 1: of regulation here in the year two thousand seventeen. Well,
Speaker 1: in Europe, I think they have a problem with the
Speaker 1: new resolution regime where they make it very hard to
Speaker 1: uh and check public funds into bad banks and under
Speaker 1: capitalized banks. And that's part of the reason why progress
Speaker 1: in resolving the Italian banking problem has been so slow
Speaker 1: in in the US case, it would obviously be reckless
Speaker 1: to remove Dodd Frank before you had other ideas about
Speaker 1: a substitute for it. So to go back to pre
Speaker 1: two and seven bank regulation um would not be a
Speaker 1: solution obviously to any of the unintended consequences of Dodd Frank.
Speaker 1: So it's easy for populists to object to measures in
Speaker 1: place and to criticize Dodd Frank. It's much harder to
Speaker 1: see what they're going to put in its place, and
Speaker 1: where we're waiting to find out. I wonder what you've
Speaker 1: heard in the conversation, the ongoing conversation about the prospects
Speaker 1: for an infrastructure spending package here in the United States,
Speaker 1: how that could be most effective, if in fact there
Speaker 1: there is one, and whether you are cheered by the
Speaker 1: fact that what's being promoted here it seems as a
Speaker 1: sort of public private partnership model. Well, I think what
Speaker 1: we um want to see is UH infrastructure spending that
Speaker 1: actually increases the productivity of the economy, not wide elephants,
Speaker 1: but but productive productive investment UH infrastructure projects. We don't
Speaker 1: have any evidence that that's what we're we're going to
Speaker 1: see going forward. The real question is whether UH infrastructure
Speaker 1: projects go to the UH states of the president's friends
Speaker 1: and political allies, or or or or or business partners,
Speaker 1: or whether they really go to enhance the productivity and
Speaker 1: efficiency of the economy with dollars strength. Professor I con Green,
Speaker 1: how close are we to the strong dollar policies of
Speaker 1: late nineties into two thousand two or to the Plaza
Speaker 1: Accord world of a lifetime ago. I think we're very
Speaker 1: very where. We're a galaxy away from the Plaza Accord.
Speaker 1: We're not going to get that kind of agreement internationally,
Speaker 1: especially given the diplomatic and geo political tensions that are
Speaker 1: are are coming down the road. I don't think it's
Speaker 1: this administration's policy to support or maintain a strong dollar,
Speaker 1: but that's what they're getting, obviously from the expectation of
Speaker 1: increased deficit spending. I would add to the UH what
Speaker 1: you asked, Tom, that those of us who worry about
Speaker 1: protectionism have more reason to worry given the strength of
Speaker 1: the dollar. Well, thank you so much, Barry. I agree
Speaker 1: this morning from our studios in Berlin, David Geren, Tom King, worldwide,
Speaker 1: this is Bloomberg, who you put your trust in matters.
Speaker 1: Investors have put their trust in independent registered investment advisors
Speaker 1: to the two and of four trillion dollars. Why they
Speaker 1: see their roles to serve, not sell. That's why Charles
Speaker 1: Schwab is committed to the success over seven thousand independent
Speaker 1: financial advisors who passionately dedicate themselves to helping people achieve
Speaker 1: their financial goals. Learn more at find your Independent Advisor
Speaker 1: dot com. We now turn to what do you actually
Speaker 1: do in banking? Joining us buying Fortress Diamond at the
Speaker 1: absolute Autumn David Harrow, he of Chicago, he of Harris Associates. David,
Speaker 1: once again congratulations with being out front on ownership of
Speaker 1: banking shares and it has been a test of Harris
Speaker 1: Associates and your patients. Do you celebrate this morning the
Speaker 1: restructure of UniCredit? What does it mean for your portfolio? UM?
Speaker 1: First of all, we never celebrate in this business. Tom,
Speaker 1: you should know that UM. The Unit Credit news is
Speaker 1: good because it shows that some proactivity is finally occurring
Speaker 1: in Italy. Uh it is their biggest bank. We do
Speaker 1: have an Italian bank, but our Italian bank doesn't have
Speaker 1: any of the issues that that un Credit has. UM
Speaker 1: un Credit has been selling some assets, which is good.
Speaker 1: They're raising capital, which is good. They're really fortifying themselves.
Speaker 1: And if they could get this Montepeche d siana um
Speaker 1: situation six and get to ntail situation six, they'll be
Speaker 1: on their way. But our view was a lot of
Speaker 1: these European banking shares were just selling to low prices.
Speaker 1: They were overly reflecting um, the bad news that's in
Speaker 1: Europe and not reflecting some of the positive things that
Speaker 1: were happening. And so we we thought it was an
Speaker 1: opportunity and it took a while for the shares to
Speaker 1: perk up, but they're finally doing. So Now, what are
Speaker 1: what are some of those positive things that are happening
Speaker 1: in Europe? When you we hear we do hear the
Speaker 1: bad news more often than the good. Well, yeah, first
Speaker 1: of all, you have the plateau of slowing growth. Growth
Speaker 1: seems to be picking up a little bit. Second of all,
Speaker 1: you have loan losses have actually declined pretty much across Europe,
Speaker 1: and it's been kind of a source of profit in
Speaker 1: a way because you're just seeing higher quality credit than
Speaker 1: what you have seen in Europe. You're actually seeing some
Speaker 1: credit growth in the low single digits, and you're seeing
Speaker 1: banks proactively cut fees. So at the beginning of the year,
Speaker 1: when everyone was fearing at these low negative rates with
Speaker 1: smash earnings of banks, we haven't seen bank earnings be smashed.
Speaker 1: In fact, we've seen some stability or growing. David, I
Speaker 1: gotta I gotta make some money back because I keep
Speaker 1: losing embedding against the packers, Uh, David Hero, Should I
Speaker 1: be acquiring European bank shares this morning? I think they still.
Speaker 1: I think there's certain certain banks. Again, as you know, Tom,
Speaker 1: we're really stock selective, company selective, and I think certain
Speaker 1: of the high quality banks that are still selling out
Speaker 1: attractive valuations, being p parabond as I saw paul O
Speaker 1: Lloyd's credit suits. These are things which still offer very
Speaker 1: very good value all for their Each individual UH company
Speaker 1: has its own reasons, really, but they're selling that low prices,
Speaker 1: and I believe almost in every one of those cases
Speaker 1: I mentioned, you're going to continue to see earnings growth.
Speaker 1: Can you attribute the political stability that we're seeing, I mean,
Speaker 1: are looking back at that referendum, and it seems now
Speaker 1: that you do have at leasy say taking more proactive
Speaker 1: approach here too, to these banks. Can you attribute that
Speaker 1: to the referendum and we got the news yesterday that
Speaker 1: pure Color Pedant will stay on as the finance minister
Speaker 1: in that country. Are you convinced we're going to have
Speaker 1: a stable enough environment there to get these reforms done
Speaker 1: here in the near to medium term. Well, I think
Speaker 1: there's just really a strong motivation to get these reforms done.
Speaker 1: And one of the most important things is in these
Speaker 1: MTLs is the collateral and enabling the creditors to make
Speaker 1: a call on the collateral. In Italy this process takes seven, eight, nine, ten,
Speaker 1: eleven years, and everywhere else in the world it takes
Speaker 1: one or two years, and that puts that causes those
Speaker 1: npls to be worth a lower price maybe cents on
Speaker 1: the dollar verse thirty or forty. And they're working on this.
Speaker 1: This this is known, this is a known issue that
Speaker 1: they have to accelerate um the resolution in process in Italy.
Speaker 1: And this step alone would be very meaningful because because
Speaker 1: it would almost increase the price of these mplsh the
Speaker 1: ones that are selling at twenty cents on the dollar
Speaker 1: to thirty thirty five, in some cases forty cents on
Speaker 1: the dollar. And there is a ready market for you
Speaker 1: see um various financial firms in there buying these npls.
Speaker 1: We know that the banking secretory is so overbanked in Italy.
Speaker 1: How do you position yourself, you know, given there's likely
Speaker 1: to be some some mergers here in the in the
Speaker 1: near term. Yeah, this is one of the bits of
Speaker 1: good news. Spain did this a couple of years ago
Speaker 1: very successfully, and they basically told all these co op
Speaker 1: banks the game is over. This is you have to
Speaker 1: be a for profit entity and if you can't make
Speaker 1: money and race capital, you're out of business or you're
Speaker 1: emerging with someone else. Now finally they're doing this in Italy.
Speaker 1: Germany also needs for this to happen. The landa spank
Speaker 1: and these are these regional banks that are kind of
Speaker 1: stayed owned entities that just don't exist to make profits.
Speaker 1: So they're they're lacks on credit, they chart, they give
Speaker 1: too much interest and their non economic hurting the companies
Speaker 1: like Deutsche Bank, which can't compete well, Italy is ahead
Speaker 1: of is actually ahead of Germany and trying to get
Speaker 1: these co op banks merged. Uh and he kept up
Speaker 1: with his David Harrow International investment, particularly of a more
Speaker 1: large cap variety. David Harrow, help me here. I'm on
Speaker 1: the couch. It's December seven. I gotta reallocate my four
Speaker 1: oh one K. What is the Harrow attractiveness of US
Speaker 1: multinationals versus international big cap Yeah, I think you still
Speaker 1: see a little better value in non US multinationals. Uh. Certainly,
Speaker 1: there are certain sectors that the US I think offers
Speaker 1: very good value. And if you look at the US
Speaker 1: financials as as just one example, and maybe even some
Speaker 1: of the U S industrial names I think are looking attractive.
Speaker 1: What you've really seen are than a geographical bifurcation. You've
Speaker 1: seen industry sectors, because for about two thirds of the year,
Speaker 1: you've just had the wave of money going into what
Speaker 1: was viewed as safe and safety. Uh, in sectors like
Speaker 1: industrials and consumer discretionary financials were ignored. And I think
Speaker 1: these are the sectors that are finally starting to perk
Speaker 1: up a little bit. The valuation differential differentials or just
Speaker 1: way too high, and and economic growth is not falling
Speaker 1: off a cliff as their valuations would have suggested. In fact,
Speaker 1: one could even argue that we're starting to see in
Speaker 1: acceleration and global GDP growth. So this is where you
Speaker 1: really want to be in these economic sensitive names and financials, industrials,
Speaker 1: consumer discretionary and um, you know these some of the
Speaker 1: other areas like utilities and some of the healthcare names,
Speaker 1: consumer staples. Still you're paying too much for the stability
Speaker 1: that you get in these things. So I think that's
Speaker 1: we're investors should look in the economic sensitivity area, whether
Speaker 1: it's US or international European. This is where opportunity allies.
Speaker 1: When you look at things on a sector by sector basis,
Speaker 1: do you do you subscribe to the belief here that
Speaker 1: we are seeing a so called Trump rally or was
Speaker 1: that rotation under way well before the election? You know,
Speaker 1: it actually did start a little bit before the election.
Speaker 1: And I think you could go back to post brakesit
Speaker 1: you had a huge Brexit shock, and then two or
Speaker 1: three weeks after that you started to see some return
Speaker 1: to normalcy in markets. Uh and and unless of this
Speaker 1: knee jerk rapid response. And so you saw finally maybe
Speaker 1: in August and September even October a little bit of
Speaker 1: what I would call a leveling out of these valuation differentials,
Speaker 1: and then when the election came, it just started to
Speaker 1: accelerate and I think we're probably in the third or
Speaker 1: fourth ending. They're still given evaluation differentials. This is the key.
Speaker 1: Look at the prices you're paying for businesses, and if
Speaker 1: something like Daimler is UH eight or nine times earnings
Speaker 1: and something like Uni levers eighteen or nineteen times earnings,
Speaker 1: when you see these big gaps between companies that actually
Speaker 1: grow at not such dissimilar rates, there's an opportunity to
Speaker 1: be had. Do you see the market becoming more earnings
Speaker 1: driven here in the near term? Absolutely? I think this
Speaker 1: this macro obsession which investors have had is perhaps starting
Speaker 1: to wane off. And evidence of that would be what
Speaker 1: happened post the Italian referendum, when it wasn't necessarily good
Speaker 1: news for the markets, and you really saw a very
Speaker 1: little reaction. And so maybe investors are beginning to realize
Speaker 1: that these macro and global political events do not matter
Speaker 1: as much as a company's ability to grow their earnings
Speaker 1: and cash flow streams and what they do with them. Yeah,
Speaker 1: but I would actually prefer at the bottom up value inmester.
Speaker 1: I want them to be obsessed with macro because it
Speaker 1: gives us opportunity. David, one final question. It's been a
Speaker 1: challenging year for so many people in investment. What's your
Speaker 1: enthusiasm for the ownership of equities in the next year.
Speaker 1: It's pretty high, Um, not as high as it was
Speaker 1: six months ago, just because valuation moved. Yeah, we've moved.
Speaker 1: But I still think, especially at much rather being equities
Speaker 1: and growing earning streams with good yields than in bonds,
Speaker 1: which are the prices of bonds are going to go down.
Speaker 1: David Packers super Bowl bound. I don't believe so. Tom.
Speaker 1: I would love to sit here and tell you yes,
Speaker 1: but I have to be honest. I still think our
Speaker 1: defense is suspect. I'm really happy to see Aaron Rodgers
Speaker 1: coming out of his funk. I mean, the last couple
Speaker 1: of games, he looked really good. But the defense is
Speaker 1: just two week Okay, talker, be sure that goes out
Speaker 1: on Bloomberg. Attribute that to Packer Packers shareholder, Packers shareholder.
Speaker 1: He's just you know, if we're interviewing somebody up at
Speaker 1: Bloomberg Boston, we wouldn't be having this conversation. They'd be
Speaker 1: like all Tom Brady, David Harrow, Harris Associates in Chicago,
Speaker 1: and of course the gentleman from Wisconsin, David, I have
Speaker 1: been remiss. Dal Jones year to date thirteen point six percent,
Speaker 1: SMP five double John Tucker double digit. I say ten
Speaker 1: point four percent. I have to update the four. Oh,
Speaker 1: I'm just I'm in the triple leverage all cash fun
Speaker 1: I'm getting killed. NASA up eight point one percent. Nasdack
Speaker 1: compositive because it's not the retirement next year, thank you.
Speaker 1: The only retirement plan I have is a surveillance cactus
Speaker 1: casket castus like cactus. Yeah, the bright orange cast. Thank you.
Speaker 1: There we are, David, here by the coastline, with a
Speaker 1: smell of salt air in the midtown air. John Tucker
Speaker 1: is going to be cold like Thursdays, like like a
Speaker 1: Boston would say, wicked cold. You have no idea how one.
Speaker 1: He is frozen by the Tucker House. Not safe enough
Speaker 1: to skate on just yet. But yeah, let's get there.
Speaker 1: Speaking of skating, that takes us to freshwater economics. A
Speaker 1: breath of freshwater economics just wandered in the room. Charles
Speaker 1: Plaster is the esteem former president of the Philadelphia Fed,
Speaker 1: which carries its own historical baggage with it. But far
Speaker 1: more importantly, Professor Plaster out of Rochester is known as
Speaker 1: someone who has looked at the saltwater milieu of the
Speaker 1: east in the certitude of Chicago to the west, the
Speaker 1: economics the Bractish economics to the west to note Rochester,
Speaker 1: Virginia and other freshwater climbs. Professor Plaster joins us, Now,
Speaker 1: are we heading towards a freshwater fed? Is that really?
Speaker 1: Is it? That's an interesting question, and that after the
Speaker 1: death of the Phillips curve, the lack of inflation, finally
Speaker 1: we're going to get our Trump reflation. Is it a
Speaker 1: freshwater moment in economics? It's an interesting way to put
Speaker 1: it down. But I think not so much. I mean,
Speaker 1: the UM I think freshwater has so called freshwater economics,
Speaker 1: has a lot of good things that need that needs
Speaker 1: to be implemented at the FED. But the you know,
Speaker 1: but the economics is the staff mostly the FED and
Speaker 1: and and they are decidedly UM a big institution, and
Speaker 1: they're only going to change very slow. Within that is
Speaker 1: where the I S curve is. What is your perspective
Speaker 1: of where the real economy is represented by that ancient
Speaker 1: simple model? Well, uh, I S curve is is the
Speaker 1: wrong way to think about economic but that's why everybody doesn't.
Speaker 1: I knew you were going to say that, but the
Speaker 1: fact is, that's how business gets done. O MG. The
Speaker 1: I S curve is terrible. Do something that's modern economics right. Unfortunately,
Speaker 1: modern economics has been heavily influenced by Kenjian models and
Speaker 1: versions that somehow the whole world is driven by demand
Speaker 1: and and it's very difficult to get macro economists in general,
Speaker 1: but certainly the FED to think outside of that demand
Speaker 1: view of the world. And I think it's been illustrated
Speaker 1: pretty clearly over the crisis and recession that there's a
Speaker 1: lot more going on here than just lack of demand.
Speaker 1: And I think that, um uh, you know as well
Speaker 1: as I do. Tom. I'm I'm an old I'm not
Speaker 1: an old, I am old, but a real business cycle guy.
Speaker 1: And I think if you look at a lot of
Speaker 1: what's happened, it's about productivity, which is really what the
Speaker 1: supply side really is all about. What is most concerning
Speaker 1: to you right now when you look at the health
Speaker 1: of the U. S economy, Well, I think it's productivity
Speaker 1: that is the big concern. I mean, if you think
Speaker 1: of why growth is slow, it's about productivity. And none
Speaker 1: of our macroeconomic models, generally speaking, not just at the
Speaker 1: FABIT elsewhere, none of them have a mechanism very easily
Speaker 1: to build in what happens to productivity why productivity moves
Speaker 1: as it does. So if you think, like I do,
Speaker 1: that much of the productivity slow down is at least
Speaker 1: or at least partially attributable to sort of a massive
Speaker 1: shift in sort of the regulatory state, if you will,
Speaker 1: If you think that has an impact on productivity, the
Speaker 1: FEDS models never were capable of building that effect in
Speaker 1: because they're so focused on the demand side of the
Speaker 1: economy that there's no mechanisms for how a productivity might evolve.
Speaker 1: When you bring up the weight of the regulatory and
Speaker 1: environment looking ahead here to what might have been in
Speaker 1: two thousand seventeen two th eighteen with regard to regulation,
Speaker 1: do you see that es potentially changing productivity? We just
Speaker 1: not know enough about what could what could jump started
Speaker 1: in the new year. Well, I think we don't know
Speaker 1: enough at this point. I do think that there are
Speaker 1: two things obviously that that have been stress and that
Speaker 1: is a fiscal policy which would be sort of traditional
Speaker 1: KNESI and stimulus, which is to stimulate demand, and fiscal
Speaker 1: policy actions that would focus on enhancing productivity in various ways.
Speaker 1: Those are very different types of policies, and the question
Speaker 1: is what will we get? Can I go wonk right now?
Speaker 1: I mean, I've got to do this. Kittling and Prescott
Speaker 1: two thousand and four Nobel Prize winners, many arguably suggested
Speaker 1: Plaster should have been added to that name. Professor Plaster.
Speaker 1: When you look at business cycle theory, the modern bringing
Speaker 1: in the supply side into demand dynamics, and all the
Speaker 1: Kittling and Prescott did is labor in that model cans
Speaker 1: put labor front and center in the depression? Can business
Speaker 1: cycle theory help us understand labor dynamics that leads to
Speaker 1: wage increase? Sure? Sure, sure it can, and many and
Speaker 1: some of those models there is labor now, models of
Speaker 1: labor behavior and labor supply in particular are uh complicated.
Speaker 1: They things that we don't understand about some of that.
Speaker 1: But nonetheless the models can can do that. We're wanted
Speaker 1: to bring a Charles Plaster, the former president of the
Speaker 1: Philadelphia Fed, professor plus or there was pushing ten years ago.
Speaker 1: I can't believe I'm saying that a fabulous moment at
Speaker 1: the Dallas fed in honor of John B. Taylor of
Speaker 1: Stanford University. A bunch of worthies like yourself got together,
Speaker 1: including Bennett McCollum of Carnegie Mellon, Lawrence Cristiano at a
Speaker 1: wonderful paper, Rules and Discretion in the simplicity all these
Speaker 1: other fancy titles about real time data and Botton premiums,
Speaker 1: just rules and Discretion for our global audience, explain the
Speaker 1: bait in the heat around it of rules indiscretion? How
Speaker 1: long have I got? No? The debate is pretty actually
Speaker 1: pretty simple, and the debate is a very old one
Speaker 1: goes back to UM assignments back in the nineteen thirties,
Speaker 1: and the question is is it better for policy makers
Speaker 1: to behave in a systematic rule like manner or is
Speaker 1: it better for them to behave with discretion, which essentially
Speaker 1: means to make the choices they have at the time
Speaker 1: and try to do the best thing at the right time,
Speaker 1: which is the way that you it's usually put. And
Speaker 1: the problem with that is that UM for most economists
Speaker 1: and many economists, that debate was settled a long time ago,
Speaker 1: and and partly by uh Kitlin Prescott. As you were
Speaker 1: talking about, but Mike, Mike, I was testifying actually with
Speaker 1: John Taylor just last week. UM and UM. I think
Speaker 1: the problem is is that policymakers like discretion and it's
Speaker 1: hard for them to give that discretion up because they said, well,
Speaker 1: we need to be able to do the right thing
Speaker 1: at the right time. But that also at discretion also
Speaker 1: means they could do the wrong thing at the wrong time,
Speaker 1: the wrong thing at the right time, and so you
Speaker 1: increase volatility and uncertainty about the path of policy with discretion,
Speaker 1: and that's the problem. Charles Poster, what does this say
Speaker 1: about the relationship between the Fed Reserve UH and lawmakers
Speaker 1: on Capitol Hill? There are those on Capitol Hill pushing
Speaker 1: for more rules based approach from the Fed. Can anything
Speaker 1: be done to make that relationship better between the Fed
Speaker 1: and Congress? To make that relationship better? Well, I'm terribly
Speaker 1: worried that the direction that some proposals for reform are
Speaker 1: actually going to result in making the FED more political
Speaker 1: rather than more accountable. So I stressed it it's important
Speaker 1: for the FED to be accountable, but that the path
Speaker 1: to that isn't through making it more political, And I'm
Speaker 1: terribly worried about making sure that whatever Congress does, it
Speaker 1: gets that balance right. So the FED already works with rules.
Speaker 1: They could be a lot more transparent about what they
Speaker 1: do do with rules, and and they could head awful
Speaker 1: out of this debate. But I do think there ought
Speaker 1: to be pressure on the FED to be more rule like.
Speaker 1: Do you think that the regional presidents speak too much,
Speaker 1: that there is too little unanimity, that that the FED
Speaker 1: could do better by having a more unified voice. I
Speaker 1: recall for seeing you with the FEDS one anniversary conference
Speaker 1: at the Philadelphia FED a few years ago. Now, you
Speaker 1: gave a speech, and you met with reporters afterward and
Speaker 1: gave some comments. FED presidents do talk a lot. Does
Speaker 1: that somehow dilute the message of the the the the
Speaker 1: importance perhaps of the Federal Reserve When you have so
Speaker 1: many different people speaking about what the FED is doing.
Speaker 1: I wouldn't mind the Federals are becoming less important, actually so,
Speaker 1: But no, I think that I think that's no, I
Speaker 1: don't agree with that. I think, in fact, that it's
Speaker 1: important that the presidents speak. I actually think would be
Speaker 1: better if the governor spoke more often expressing their view.
Speaker 1: I mean at the FED we eat striving for consensus.
Speaker 1: Everybody agrees, and what that does is lead to poor
Speaker 1: communications because people don't know what the debates I think
Speaker 1: and the other. The other thing it is it leads
Speaker 1: to group think, and you want to not have group
Speaker 1: think at the fit and the only way to get
Speaker 1: that is to have people sharing ideas, different ideas to
Speaker 1: keep the debate lively and honest. How do policymakers deal
Speaker 1: with potentiality? I think of the conversations we've been having
Speaker 1: here about the prospects for infrastructure reform, our infrastructure spending,
Speaker 1: tax reform, tax cuts. Uh, we're going into a meeting
Speaker 1: here today and tomorrow. How are they processing what could
Speaker 1: happen here with a Trump administration in the new year.
Speaker 1: Are they thinking about that or they have to sort
Speaker 1: of think in the vacuum of the Equos building and
Speaker 1: not give thought to what any potential implications on the
Speaker 1: economy might be from from laws like those. Well, I
Speaker 1: think they clearly do have to give it some thoughts,
Speaker 1: and they will give it some thoughts, And they don't
Speaker 1: know any more than you and I do about what's
Speaker 1: likely to transpire from Congress. And I think I made
Speaker 1: the point earlier about whether the fiscal decisions made by
Speaker 1: Congress focus on enhancing productivity versus just stimulating aggregate demand
Speaker 1: in sort of a Kenzie and naive in kind of sense.
Speaker 1: And I think it's the effect on the economy is
Speaker 1: going to be much about which of those paths end
Speaker 1: up being taken, and we just don't know for sure yet.
Speaker 1: Is the Taylor rule still useful in policy? If you
Speaker 1: were sitting here with Rick Michigan, who's got a different
Speaker 1: view than Charles Plaster, could the two of you agree
Speaker 1: that there is efficacy to the Taylor rule? Absolutely? I
Speaker 1: think Rick and I would would agree wholeheartedly on some
Speaker 1: of that. I mean, I think I think the there's
Speaker 1: a difference between saying, you know, we're going to follow
Speaker 1: the Tailor rule lavishly or what value are rules for policymaking?
Speaker 1: And I think Rick Michigan would say this and I
Speaker 1: have known each other for forty years and he would
Speaker 1: probably say some of the same things. I'd be saying,
Speaker 1: there is value to rule like behavior. Now we can
Speaker 1: get down the weeds and talk about the details of that,
Speaker 1: but I think we would agree on that. Are we
Speaker 1: are we at full employment now? From from Charles Ploster standpoint.
Speaker 1: When you look at the labor market right now, are
Speaker 1: you satisfied with where things are? From the statistical point
Speaker 1: of view, It's hard to argue we're not pretty darn
Speaker 1: close to full now. That doesn't necessarily say that we
Speaker 1: ought to be satisfied with that, or they're not other
Speaker 1: things that can be done, or why is the labor
Speaker 1: force participation rate so low? Why isn't it higher? But
Speaker 1: those are not things monetary policy can do anything about
Speaker 1: very quickly. I talked to Gary Showing the other day
Speaker 1: about good and bad inflation? Can we have a good
Speaker 1: inflation with a Trump reflation? I don't see any inflation
Speaker 1: as being necessarily good. End of story. Paul Bulker once said,
Speaker 1: why do you guys have a two percent inflation target?
Speaker 1: Why not? Why not zero? Remember I remember it, well,
Speaker 1: this has been fabulous, folks. This is we don't do
Speaker 1: this too often. That was a wonk fest with Professor
Speaker 1: plus or send me emails, etcetera. David Gura, John Tucker
Speaker 1: on Kidling and Prescott and all the other theory, Rick
Speaker 1: Michigan and John V. Taylor that we spoken. This was
Speaker 1: really a specially Professor plus or thank you. Thank you
Speaker 1: so much, Charles Plaster as a former president of the
Speaker 1: Philadelphia uh FED. Thanks for listening to the Bloomberg Surveillance podcast.
Speaker 1: Subscribe and listen to interviews on iTunes, SoundCloud, or whichever
Speaker 1: podcast platform you prefer. I'm out on Twitter at Tom Keene.
Speaker 1: David Gura is at David Gura. Before the podcast, you
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