WEBVTT - Trump Would Undercut U.S. by Ditching Paris, Whitman Says 0:00:00.240 --> 0:00:04.040 Runt You by Bank of America Mary Lynch. With virtual reality, 0:00:04.320 --> 0:00:09.719 virtually everything will change. Discover opportunities in a transforming world 0:00:10.160 --> 0:00:14.440 VI of a mL dot Com slash VR, Mary Lynch, 0:00:14.520 --> 0:00:28.120 Pierced Fenner and Smith Incorporated. Ye. Welcome to the Bloomberg 0:00:28.160 --> 0:00:32.320 Surveillance Podcast. I'm Tom Keene with David Gura. Daily we 0:00:32.440 --> 0:00:36.080 bring you insight from the best of economics, finance, investment, 0:00:36.120 --> 0:00:42.200 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:42.280 --> 0:00:50.160 Bloomberg dot Com, and of course on the Bloomberg. Let's 0:00:50.200 --> 0:00:52.599 kick things off with Brian Levitt, senior investment strategist at 0:00:52.600 --> 0:00:55.080 Oppenhammer Funds. He joins us here in our Bloomberg eleven 0:00:55.080 --> 0:00:57.000 three oh studios. Great to have you, Thank you. Good 0:00:57.040 --> 0:00:58.280 Martin with us so much here that we could we 0:00:58.280 --> 0:00:59.920 could talk about Le's see where it t Let's start 0:00:59.920 --> 0:01:02.760 with job stay tomorrow. Fascinating interview with James Gorman and 0:01:02.800 --> 0:01:06.200 Morgan Stanley yesterday on Bloomberg Television. Our colleague Tom McKenzie 0:01:06.240 --> 0:01:08.800 and in beating speaking with with him, and he said, quote, 0:01:09.040 --> 0:01:11.120 the dirty little secret here is the US economy is 0:01:11.160 --> 0:01:13.959 doing just fine. From where you sit when you look 0:01:14.000 --> 0:01:16.280 at the U S economy. Is it just fine? It 0:01:16.440 --> 0:01:19.080 is just fine, and it's been just fine for a 0:01:19.120 --> 0:01:22.440 long period of time. Now I think by now investors 0:01:22.440 --> 0:01:24.920 would have hoped for better than just fine. And I 0:01:24.959 --> 0:01:27.480 think you know, the U. S. Election, when we heard 0:01:27.520 --> 0:01:30.440 candidate Trump speak on the campaign trail, he would talk 0:01:30.520 --> 0:01:34.760 of three four or five percent GDP growth, and you know, 0:01:34.760 --> 0:01:36.800 in the aftermath of the election, there was hopes for 0:01:36.920 --> 0:01:40.800 tax cuts, fiscal stimulus and the like, and you know, again, 0:01:40.840 --> 0:01:43.200 three four or five percent GDP growth. The reality is 0:01:43.200 --> 0:01:45.800 in the first quarter the US grew at something like 0:01:45.840 --> 0:01:48.880 one point two percent on an annualized basis. And in 0:01:48.920 --> 0:01:51.560 general we've been saying it's a two percent economy. And 0:01:52.000 --> 0:01:54.760 you know, a two percent economy has been quite good 0:01:54.840 --> 0:02:00.640 for equities, but for workers, Um, most people that want 0:02:00.720 --> 0:02:03.720 jobs generally confined them are there? Are there wages going up? 0:02:03.840 --> 0:02:07.559 Not significantly? So just find David, I think is right. 0:02:08.080 --> 0:02:10.800 You're right that the FED is an a predicament. It's 0:02:10.840 --> 0:02:13.160 an interesting predicament here going into the next MCY meeting 0:02:13.120 --> 0:02:15.920 in June. What are policy makers wrestling with and how 0:02:15.919 --> 0:02:19.840 do you think that's gonna come out? So there's the 0:02:19.840 --> 0:02:22.560 there's a psyche. There was a psyche of zero percent, 0:02:22.600 --> 0:02:25.040 there's sort of now there's like the psyche of one percent. 0:02:25.200 --> 0:02:28.280 The reality is, at some point in the future the 0:02:28.320 --> 0:02:30.640 United States is going to have an economic cycle again, 0:02:30.760 --> 0:02:34.800 and so the Fed would like to have room to 0:02:35.040 --> 0:02:39.040 reduce rates for the next recession, next economic cycle. Here's 0:02:39.080 --> 0:02:41.359 the rub. The problem is the FEDS looking at this 0:02:41.440 --> 0:02:45.000 and saying an unemployment rate below five percent, wages growing 0:02:45.040 --> 0:02:47.960 to two and a half percent, credit spreads are tight, 0:02:48.040 --> 0:02:51.320 the dollars weaker. You know, we're not seeing big capital 0:02:51.440 --> 0:02:54.720 outflows from the emerging market, so why not now? When 0:02:54.760 --> 0:02:57.960 else can we do it? The problem is that the 0:02:58.000 --> 0:03:00.639 long term bond market is not latching on to any 0:03:00.680 --> 0:03:03.320 type of reflation trade. So two point two percent on 0:03:03.360 --> 0:03:06.120 a ten year treasury is consistent with a two percent 0:03:06.160 --> 0:03:10.000 real GDP economy, and there's not that many times you 0:03:10.000 --> 0:03:13.360 can raise rates further without further flattening the yeld curve 0:03:13.440 --> 0:03:16.919 or maybe god forbid, inverting the yield curve, which would 0:03:16.960 --> 0:03:19.160 be a harbinger of worse things to come. So that's 0:03:19.200 --> 0:03:21.440 the rub. As you listen to the course of committee 0:03:21.440 --> 0:03:24.160 members Robert Kaplan talking to Tom yesterday, the counseling for 0:03:24.240 --> 0:03:27.400 Relations level. Brandard speaking earlier this week, the most de 0:03:27.480 --> 0:03:30.160 wish of the doves UH is their consensus forming here 0:03:30.200 --> 0:03:31.720 do you do you think you have a good sense 0:03:31.760 --> 0:03:33.280 from what they've been saying of what the Fed is 0:03:33.280 --> 0:03:34.640 going to do when it comes to the balance sheeter 0:03:34.680 --> 0:03:36.840 when it comes to the next rate increase, Well, I 0:03:36.840 --> 0:03:38.720 don't think we see consensus. If you look at the 0:03:38.760 --> 0:03:42.640 FED dot plot for mid eighteen, it's it's a huge 0:03:42.720 --> 0:03:47.160 band and the medians probably around two percent. So unless 0:03:47.280 --> 0:03:50.560 you get the long term bond yields up with either 0:03:50.680 --> 0:03:55.240 some stimulus or heightened inflation expectations, it's gonna be hard 0:03:55.400 --> 0:03:59.240 to get FED funds to two percent, especially when you're 0:03:59.280 --> 0:04:02.640 trying to scale down a four trillion dollar balance sheet. Now, 0:04:02.920 --> 0:04:05.400 I don't think that the four You know, in early 0:04:05.440 --> 0:04:07.240 on it was what's gonna happen when they have to 0:04:07.280 --> 0:04:09.840 sell all these mortgages and treasuries into the market, and 0:04:09.880 --> 0:04:13.160 that's going to be massively disruptive. That's not going to happen, 0:04:13.480 --> 0:04:15.720 not at you know, two percent inflation or one and 0:04:15.720 --> 0:04:18.360 a half percent inflation. What's going to happen is those 0:04:18.360 --> 0:04:20.400 securities are going to mature, and the Fed's not going 0:04:20.480 --> 0:04:24.000 to reinvest principle. We've never really done that before. The 0:04:24.080 --> 0:04:27.719 history books didn't teach this, so it's it's on precedented. 0:04:27.920 --> 0:04:30.280 So I think the Fed is going to be cautious 0:04:30.320 --> 0:04:34.120 on FED funds more deblish than expected as they scale 0:04:34.120 --> 0:04:36.480 back the balance sheet. Brian love it with this with 0:04:36.520 --> 0:04:38.440 the Uppenheimer. You know, I've been you and I've had 0:04:38.480 --> 0:04:40.800 fun this morning talking about to see if the exam. 0:04:40.839 --> 0:04:43.400 Good morning to all of you taking the the what 0:04:43.520 --> 0:04:50.440 is it like four million people take the exam? Kidding anyways, 0:04:50.480 --> 0:04:51.960 you know we'll talk a lot about this is We're 0:04:51.960 --> 0:04:54.120 gonna job to day tomorrow to see if exams on 0:04:54.200 --> 0:04:58.279 Saturday is well. One of the great fundamentals here of 0:04:58.320 --> 0:05:02.280 those exams is linking equity markets to bond markets. The 0:05:02.360 --> 0:05:04.839 fact is, as you mentioned, it's not in the textbooks. 0:05:05.279 --> 0:05:07.840 You can't do that now because you don't know where 0:05:07.839 --> 0:05:10.600 the risk free rate is. So what are your portfolio 0:05:10.680 --> 0:05:14.320 managers do? Well? I think it's I think simplistically, we 0:05:14.360 --> 0:05:17.440 can still look at the earnings yield of the broad 0:05:17.560 --> 0:05:20.239 market and compare it to a ten year treasury rate. Now, 0:05:20.480 --> 0:05:22.600 you know, people like to look at price over earnings. 0:05:22.600 --> 0:05:25.479 You flip that over earnings over price. I don't have 0:05:25.520 --> 0:05:28.240 the exact numbers, but say the SMP five hundreds at 0:05:28.279 --> 0:05:32.560 two hundred earnings are around a hundred and ten. We 0:05:32.680 --> 0:05:35.039 call that a five percent earnings yield, give or take. 0:05:35.120 --> 0:05:36.719 For those that can do the math in their heads, 0:05:37.040 --> 0:05:39.159 I like that more than two point two percent on 0:05:39.160 --> 0:05:43.279 a treasury yield. So it's unlikely that a bull market 0:05:43.279 --> 0:05:46.240 in equities is going to end with stocks being this 0:05:46.400 --> 0:05:49.480 cheap to bond. Stocks historically are a better asset class 0:05:49.480 --> 0:05:52.240 than bonds. I think over any five year period, stocks 0:05:52.240 --> 0:05:54.960 outperformed bonds about eighty five percent of the time. So 0:05:55.880 --> 0:05:58.480 I think we can still look at that. You know, 0:05:59.480 --> 0:06:01.960 the short of having a risk free rate you can consider. 0:06:02.040 --> 0:06:05.320 Some might say the ten year rate is too low. Um, 0:06:05.360 --> 0:06:07.880 it's been overbought. I would say compare it to the 0:06:07.880 --> 0:06:10.560 nominal growth rate of the economy. Even at two percent 0:06:10.680 --> 0:06:12.680 real yield, Even if you can get one and a 0:06:12.760 --> 0:06:16.120 half two percent of two percent real growth, even if 0:06:16.120 --> 0:06:18.280 you can get one and a half two percent inflation, 0:06:18.760 --> 0:06:21.680 stocks are still cheap to nominal growth. In this country. 0:06:22.120 --> 0:06:24.280 You see catalysts on the horizon, things that could kick 0:06:24.320 --> 0:06:28.240 start econmy change the curved to something different. I mean, 0:06:28.279 --> 0:06:30.920 how how pasimistic are you about seeing a catalyst in 0:06:30.920 --> 0:06:34.599 the near term. I think it's increasingly unlikely. I think 0:06:34.640 --> 0:06:37.919 it's you know, tax reform is difficult, even in the 0:06:37.960 --> 0:06:42.159 best political environments. Um, even when Reagan got tax reform 0:06:42.240 --> 0:06:47.120 two years after his historic electoral College landslide, there were 0:06:47.160 --> 0:06:50.719 an awful number There are a large number of Democrats 0:06:50.839 --> 0:06:53.279 that were involved in that tax reform, including people like 0:06:53.320 --> 0:06:56.760 Bill Bradley. So you know, these things are difficult, They're 0:06:56.760 --> 0:07:00.240 hard to do, and we're dealing with the reality ease 0:07:00.360 --> 0:07:03.359 of governing right now, and those realities never go away 0:07:03.680 --> 0:07:05.599 even with single party where all do you deal with 0:07:05.640 --> 0:07:07.960 the realities of just figuring out what's going on or 0:07:08.040 --> 0:07:10.920 not going on In Washington, d C. We're talking with 0:07:10.960 --> 0:07:12.600 a Stan Collinder, who is an expert on the federal 0:07:12.600 --> 0:07:14.400 budget yesterday and he was up in here in New 0:07:14.480 --> 0:07:16.239 York being with clients, and he said he's just astanded 0:07:16.280 --> 0:07:18.760 by the disconnect between New York and Washington, and uh, 0:07:18.800 --> 0:07:20.440 you know how there has been so much optimism that 0:07:20.440 --> 0:07:23.080 things are going to happen in Washington when he's pessimistic 0:07:23.120 --> 0:07:25.800 that they that anything's gonna happen. How do you deal 0:07:25.840 --> 0:07:27.320 with that? How do you keep apprized of what's going on? 0:07:27.360 --> 0:07:29.400 How do you how do you develop the calculus to 0:07:29.440 --> 0:07:31.200 understand what's going on. Well, the first thing I said, 0:07:31.200 --> 0:07:33.160 and I think I've said this on this program before, 0:07:33.160 --> 0:07:35.560 is that hating the government is not an investment strategy. 0:07:35.640 --> 0:07:37.960 So I said that during the Obama administration. I'm now 0:07:38.000 --> 0:07:41.360 saying that during the Trump administration. The reality is, if 0:07:41.400 --> 0:07:44.120 you go back to the Kennedy administration, markets actually do 0:07:44.240 --> 0:07:47.000 better when the president's approval rating is below fifty. So 0:07:47.240 --> 0:07:50.280 we don't have the I did not know that we 0:07:50.360 --> 0:07:52.560 don't have to like the president for the markets to 0:07:52.640 --> 0:07:56.520 go up. Did you take that from CF level? It's 0:07:56.520 --> 0:07:58.720 really I did not know that. That's amazing. It is 0:07:58.760 --> 0:08:00.560 on the test and my colleague on the other side 0:08:00.560 --> 0:08:03.400 of the glasses studying right now, So so are you 0:08:03.480 --> 0:08:06.880 really studying in there? We have a bulletproof glass between us, 0:08:07.160 --> 0:08:10.280 say sometimes fire Artis and ken Felli will get the 0:08:10.600 --> 0:08:13.040 get the sub machine. Can we drop his name, Tom please? 0:08:13.160 --> 0:08:15.000 Drew Thornton on the other side of the glass, he 0:08:15.080 --> 0:08:18.400 is studying for the Level four derivatives how about forward 0:08:18.440 --> 0:08:22.840 market forge? Okay, so you know, I think for investors, 0:08:22.840 --> 0:08:26.400 for investors that have a broad, long term, consistent investment plan, 0:08:26.720 --> 0:08:29.480 they should not get caught up too much in the 0:08:29.520 --> 0:08:33.000 political theater taking place in DC investors trying to figure 0:08:33.040 --> 0:08:35.560 out it. From an earnings perspective, we should be looking 0:08:35.600 --> 0:08:39.520 from the bottom up. We should not be expecting broad 0:08:39.679 --> 0:08:43.480 stimulus of the fiscal kind that we haven't seen probably 0:08:43.480 --> 0:08:46.160 since two thousand nine to be the driver of earnings 0:08:46.200 --> 0:08:48.319 going forward. Just turn to the FED here quickly and 0:08:48.520 --> 0:08:51.199 the balance sheet as they wind that down. Do you 0:08:51.200 --> 0:08:53.040 think it's gonna happen fairly, stamelessly? Do you think that 0:08:53.040 --> 0:08:55.480 they are going to communicate adequately about what's going what's 0:08:55.480 --> 0:08:57.439 your what's your what are your expectations about how it's 0:08:57.440 --> 0:09:00.360 going to happen? Well, again, it's unprecedented, but my instinct 0:09:00.480 --> 0:09:02.640 is that they are going to be able to manage this, 0:09:02.760 --> 0:09:05.760 that it is going to be a very prolonged, drawn 0:09:05.760 --> 0:09:10.080 out process, gradual slow of allowing security. Critically, I couldn't 0:09:10.080 --> 0:09:12.240 get an answer from Robert Kaplan on this the how 0:09:12.280 --> 0:09:14.480 long part? I wasn't looking for, like, you know, the 0:09:14.559 --> 0:09:18.240 third week of August here we're looking at decades. I'm 0:09:18.360 --> 0:09:21.520 with you, I mean law, I don't think the market 0:09:21.559 --> 0:09:25.319 and the zeitgeist understands. This isn't about two or three years. 0:09:25.320 --> 0:09:27.559 This is not about two or three years. We've got it. 0:09:27.640 --> 0:09:29.280 This is a law there is and he made clear 0:09:29.360 --> 0:09:32.719 this is I love his phrase, Brian managing the choreography, 0:09:33.880 --> 0:09:38.240 original kaplan idea exactly. I love it exactly. But you're seriously, 0:09:38.280 --> 0:09:41.000 you're at decades. I'm at decades. You think of the 0:09:41.000 --> 0:09:43.520 maturity of the securities on the on the balance. Brian Levin, 0:09:43.559 --> 0:09:45.880 thank you so much, and congratulations on your support of 0:09:45.880 --> 0:09:48.920 New Jersey Institute of Technology. You know you're on some 0:09:49.000 --> 0:09:51.760 board up there. They're one of our great sponsors, and 0:09:52.360 --> 0:09:55.240 they've really really helped us along the way with our 0:09:55.360 --> 0:09:58.640 STEM report. So I can make a joke folks about 0:09:58.679 --> 0:10:01.679 getting wonky, which we're going to do year, but it's 0:10:01.760 --> 0:10:06.200 unfortunately no joke because everyone listening is part of the 0:10:06.240 --> 0:10:10.600 game of thrones, like religion of dividend growth, Brian Levitt 0:10:10.640 --> 0:10:14.920 with us with Oppenheimer fun, dividend growth is the bet 0:10:14.960 --> 0:10:21.480 and the future dividend overwhelming yield issues and overwhelming valuation issues. 0:10:21.840 --> 0:10:26.600 How far out are we buying that growth? Are we 0:10:26.640 --> 0:10:29.960 out one year? Are we out two years? When I 0:10:30.080 --> 0:10:33.680 buy a quality stock like something in an Appendheimer Funds 0:10:33.679 --> 0:10:36.920 portfolio International or not? Are we so desperate that we're 0:10:36.960 --> 0:10:41.560 buying year five dividend? I think I think we are, UM, 0:10:41.960 --> 0:10:44.800 and I think that you know, investors continue to search, 0:10:44.840 --> 0:10:47.280 work for yield wherever they could find it, and they 0:10:47.320 --> 0:10:49.000 found a little bit of a come up. And with 0:10:49.200 --> 0:10:53.120 that when interest rates rose last summer and we're climbing 0:10:53.280 --> 0:10:55.640 um all the way through the end of the year. Now, 0:10:55.920 --> 0:10:58.000 of course this year we've seen rates come down and 0:10:58.040 --> 0:11:02.320 dividend strategies have done quite fine. My my view on 0:11:02.559 --> 0:11:07.079 dividend strategies, on low volatility strategies that if we're in 0:11:07.120 --> 0:11:12.199 this slow economic environment, um, those types of strategies can 0:11:12.240 --> 0:11:16.560 do fine. My concern is if investors don't right size 0:11:16.600 --> 0:11:21.880 that position accordingly, they should have some caution. Um, you know, 0:11:21.920 --> 0:11:24.480 the downside could be worse at some point than the 0:11:24.559 --> 0:11:27.679 upside is. From here, look at Europe just a little bit. Here, 0:11:27.679 --> 0:11:31.200 we're focusing a lot on the trans atlantic relationship, American 0:11:31.280 --> 0:11:32.920 leadership in the world in light of what we expect 0:11:32.960 --> 0:11:35.040 to hear today from the President of the Rose Garden 0:11:35.080 --> 0:11:38.679 on the Paris Agreement. What's your attitude generally towards investing 0:11:38.679 --> 0:11:41.480 in Europe at this point? What's attractive to you in Europe? 0:11:41.520 --> 0:11:43.440 It's actually a great part of the economic cycle in 0:11:43.480 --> 0:11:45.720 Europe in which to invest Investors have been asking me 0:11:45.800 --> 0:11:48.880 for years. Is Europe two years behind the United States? 0:11:48.880 --> 0:11:52.000 And and presumably that meant with regards to the financial markets. 0:11:52.000 --> 0:11:54.480 If you look at it from a credit cycle perspective, 0:11:54.800 --> 0:11:58.440 given all the austerity forced on the peripheral country's rate 0:11:58.520 --> 0:12:02.040 hikes in twleven, Europe is probably more like six seven 0:12:02.120 --> 0:12:04.240 eight years behind the United States with regards to their 0:12:04.280 --> 0:12:07.240 credit cycle. We're only first seeing credit growth in twenty 0:12:07.320 --> 0:12:11.520 six seventeen, So that's good news, David. The This was 0:12:11.559 --> 0:12:13.920 supposed to be the make or break year for the 0:12:13.920 --> 0:12:18.840 European Union, the common currency, and one by one the 0:12:18.920 --> 0:12:22.960 elections have gone in favor of the pro europe candidate, 0:12:23.000 --> 0:12:26.079 and we've seen that in Austria and the Netherlands, um 0:12:26.120 --> 0:12:29.439 in France, and less in favor of the euroskeptics. So 0:12:29.720 --> 0:12:32.480 for those investors that didn't want to be positioned because 0:12:32.520 --> 0:12:35.440 of the politics, they've missed out on what's been a 0:12:35.720 --> 0:12:39.679 good economic recovery in Europe. In fact, European growth in 0:12:39.720 --> 0:12:41.839 the first quarter better than US growth. And this is 0:12:41.880 --> 0:12:47.160 a typical Offenhimer Funds question and broader, bigger view of management. 0:12:47.360 --> 0:12:52.080 Are they becoming more Anglo American? They they are, And 0:12:52.120 --> 0:12:55.400 I mean there's a lot of great companies in Europe 0:12:55.559 --> 0:12:57.679 um doing a lot of great things, involved in a 0:12:57.679 --> 0:13:01.120 lot of industries where they maybe the one or two 0:13:01.200 --> 0:13:05.240 largest players within that industry. So, you know, for investors 0:13:05.520 --> 0:13:08.320 that didn't want to be there because of politics, because 0:13:08.360 --> 0:13:11.679 of the strong dollar, that has now all abated. And 0:13:12.080 --> 0:13:15.320 you know, we we aspire as consumers to a lot 0:13:15.360 --> 0:13:18.559 of the products that the Europeans provide U, but as 0:13:18.600 --> 0:13:20.880 investors we tend to shun it. And I don't think 0:13:20.920 --> 0:13:25.400 that that's an appropriate investment strategy. That home bias is 0:13:25.440 --> 0:13:28.280 probably too persistent in the US. Are the politics entirely 0:13:28.280 --> 0:13:30.440 peripheral now in Europe? Are you able to look at 0:13:30.480 --> 0:13:33.720 valuations in a vacuum or or are you still concerned 0:13:33.720 --> 0:13:35.400 about what might happen to Italy, say, or what might 0:13:35.440 --> 0:13:37.480 happen in two weeks, two weeks, not even two weeks 0:13:37.520 --> 0:13:39.360 a weeks time in the UK Well, I, I like 0:13:39.559 --> 0:13:43.720 political uncertainty from the sense that markets like to climb 0:13:43.720 --> 0:13:46.880 a wall of worry. When when we get to UH 0:13:47.000 --> 0:13:50.480 absolute clarity on politics and policy, that's probably when we 0:13:50.480 --> 0:13:53.560 should be concerned about markets. Now, the UK is a 0:13:53.559 --> 0:13:56.080 little bit of a different story than the continent. If 0:13:56.280 --> 0:13:59.520 if we were to stick to the continent valuations, if 0:13:59.559 --> 0:14:02.080 you were to look at it um on a on 0:14:02.120 --> 0:14:04.719 a trailing twelve month earning basis or it is not, 0:14:05.280 --> 0:14:08.520 you wouldn't say this is screaming attractive. But what you 0:14:08.600 --> 0:14:11.960 have to realize is that that denominator has not improved 0:14:12.160 --> 0:14:14.560 in a large in a number of years broadly, and 0:14:14.600 --> 0:14:17.560 we're seeing that now cyclically in Europe. Brian Levit, thank 0:14:17.600 --> 0:14:32.240 you so much with Oppenheimer Funds joining us at Europe. 0:14:32.280 --> 0:14:36.040 Andrew balls right now with Pimco UH an important and 0:14:36.120 --> 0:14:39.760 timely conversation. Andrew I, I we should note that your 0:14:39.800 --> 0:14:41.960 brother has been involved in the United Kingdom politics. I 0:14:41.960 --> 0:14:45.000 don't want to step on family territory. What is your 0:14:45.000 --> 0:14:48.960 reaction to what we've seen in this abrupt change in 0:14:49.040 --> 0:14:51.360 the election in the United Kingdom? Could you give us 0:14:51.360 --> 0:14:56.120 an observation on that? Yes? Great, Thanks for having me today. 0:14:56.200 --> 0:14:59.280 So UM, So you you started up with a very 0:14:59.640 --> 0:15:02.960 um big lead for the Conservatives, it's um, it's it's 0:15:03.000 --> 0:15:05.000 shrunk a lot. I think that's why you would have 0:15:05.520 --> 0:15:11.160 expected UM, and the UK polsters have have done a 0:15:11.160 --> 0:15:15.080 pretty poor job at the time. So I think the 0:15:15.080 --> 0:15:18.680 baseline is um is that we're going to have a 0:15:18.720 --> 0:15:24.320 conservative government and that racer may will increase the majority, 0:15:24.400 --> 0:15:26.760 which is what we expect to going into this. But 0:15:26.840 --> 0:15:29.480 that said, there's an uncertainty in the polls, and you know, 0:15:29.600 --> 0:15:32.480 the campaign is not gone, gone very well. They had 0:15:32.480 --> 0:15:35.120 a major commitment in their manifesto, they reversed it a 0:15:35.160 --> 0:15:38.160 week later and I think that's ever happened before. So 0:15:38.200 --> 0:15:40.000 I think in spite of it, what's not been a 0:15:40.000 --> 0:15:44.840 great campaign. You know, expectation would be conservative government, increased majority. 0:15:44.920 --> 0:15:46.760 But there's a lot of uncertainty. But you weren't right 0:15:46.760 --> 0:15:49.240 where I knew you'd go, which is and you can't 0:15:49.320 --> 0:15:51.200 help us with this. You've got the ability on this. 0:15:51.800 --> 0:15:54.920 How do you poll in a parliamentary system. I mean, 0:15:54.920 --> 0:15:57.920 it's not like polling in the United States is no, 0:15:58.280 --> 0:16:01.520 and the the other thing in the UK is um. Traditionally, 0:16:01.520 --> 0:16:06.120 conservative voters don't want to say they vote conservative in 0:16:06.160 --> 0:16:09.200 a pent of the cases, so the posters have to 0:16:09.240 --> 0:16:12.920 make adjustments for what they call shy um the Conservatives. 0:16:13.480 --> 0:16:17.920 There was an effort by one of the pollsters published 0:16:18.280 --> 0:16:22.920 this week where they went constituency constituency, huge areas around it. 0:16:22.960 --> 0:16:24.960 But what they do is they look at what happened 0:16:25.040 --> 0:16:28.160 last time and they are just based upon the national 0:16:28.200 --> 0:16:31.080 polls for each seat. But they did they did a 0:16:31.080 --> 0:16:36.000 lousy job last time around. So from our perspective, we 0:16:36.040 --> 0:16:38.080 don't have a lot of risk riding on this. But 0:16:38.440 --> 0:16:42.840 from our perspective, the most likely thing is um um 0:16:43.080 --> 0:16:48.440 Conservative majority, um and um. That's what we are assuming. 0:16:48.760 --> 0:16:50.560 But it would be interesting if you had a hung parliament. 0:16:50.560 --> 0:16:54.960 There's the Brexit recommend the Brexit negotiations ready to start. 0:16:55.160 --> 0:16:58.520 Ending up with a hung parliament trouble forming a government 0:16:58.520 --> 0:17:01.920 would be a pretty awful way to start these Brexit negotiations. 0:17:02.000 --> 0:17:04.200 Andrew Brows, thank you for doing at the General Council 0:17:04.240 --> 0:17:06.959 of PIMCO. Just aged David Grew jump in here and 0:17:07.119 --> 0:17:08.919 get Mr Balls on it. Yeah, you're out with your 0:17:08.920 --> 0:17:10.680 global secular outlet. Let me just ask you, how is 0:17:10.720 --> 0:17:13.200 an investor you're watching what's unfolding in the UK. And 0:17:13.200 --> 0:17:15.200 we were talking earlier about the degree to which politics 0:17:15.280 --> 0:17:18.760 is perhaps after skating the health of the European kindly 0:17:18.840 --> 0:17:21.080 just give us your your outlook on on where you're 0:17:21.119 --> 0:17:23.040 ups headed here in the next six to twelve months, 0:17:23.080 --> 0:17:25.919 So the UK, So start with the UK. The it 0:17:25.960 --> 0:17:29.000 looks okay. We slowed a little bit, but overall since 0:17:29.040 --> 0:17:32.280 the Brexit referendum a year ago, it looks it looks 0:17:32.280 --> 0:17:35.480 pretty good. You've got you've got a lot of uncertainty 0:17:34.840 --> 0:17:39.280 m in the in the outlook, um we you know, 0:17:39.320 --> 0:17:41.520 the level of interest rates looks too low here compared 0:17:41.560 --> 0:17:44.840 with the US um um. So I think over time 0:17:44.880 --> 0:17:46.720 we should see higher rates in the UK. You know, 0:17:46.760 --> 0:17:49.720 I want to get paid more to own UK interest 0:17:49.800 --> 0:17:54.280 rate risk than I do in the US. But we haven't. 0:17:54.359 --> 0:17:58.680 We haven't seen Brexit before obviously, and so these negotiations 0:17:58.880 --> 0:18:01.720 they could have a big impact on confidence. But so 0:18:01.760 --> 0:18:04.560 far it's been okay. On the European side, you know, 0:18:04.600 --> 0:18:07.720 by European very low standards, things are going quite well. 0:18:08.000 --> 0:18:11.960 Um um. The the year Zone has been growing above 0:18:12.359 --> 0:18:15.040 above its potential for a couple of years. We expect 0:18:15.080 --> 0:18:19.679 that to um continue um that there. They've been a 0:18:19.680 --> 0:18:21.800 long way behind the US and this recovery. So this 0:18:21.880 --> 0:18:25.720 is what should be happening. But you know, my former 0:18:25.760 --> 0:18:28.320 Cully pot Colleie Paul McCully used to say, you know, 0:18:28.440 --> 0:18:31.320 Europe there's kind of nashing at teeth one percent to 0:18:31.440 --> 0:18:33.879 Nirvana at two percent. We're a bit closer to two 0:18:33.920 --> 0:18:36.840 percent at the moment. It is good fortunately of Andrew 0:18:36.840 --> 0:18:40.959 balls with us of course with Pacific Investment Management Company 0:18:41.000 --> 0:18:45.120 PIMCO and their chief investment officer Global Fixed Income. Let 0:18:45.119 --> 0:18:48.200 me ask you the basic question, Uh, Andrews, you will 0:18:48.200 --> 0:18:51.240 give last rights to see if a test takers at 0:18:51.280 --> 0:18:54.480 PIMCOT here in the coming two days. Where's the risk 0:18:54.520 --> 0:18:57.480 free rate? Right now? Do you have a clue where 0:18:57.560 --> 0:18:59.480 is the risk free rates? So the risk free rate 0:18:59.640 --> 0:19:03.360 is in the US, you know, i'd look at US 0:19:03.440 --> 0:19:07.360 real rates or US nominal rates, and we've just had 0:19:07.359 --> 0:19:11.800 our our annual secular Forum, and in that regard, we 0:19:11.800 --> 0:19:16.439 we think even you know, just above two percent, US 0:19:16.840 --> 0:19:19.880 US rates look look broadly anchored for the next few 0:19:19.960 --> 0:19:24.040 years based on our new neutral view on the FED 0:19:24.160 --> 0:19:26.320 that the FED is you know, maybe gets to two 0:19:26.320 --> 0:19:28.840 percent or a little bit higher, but it's not gonna 0:19:28.880 --> 0:19:31.400 be going much further than that in the next cycle. 0:19:31.680 --> 0:19:35.520 So low level of yields, but pretty well anchored given 0:19:35.560 --> 0:19:38.480 the growth outlook and the FED outlook. I was struck 0:19:38.480 --> 0:19:40.800 by the probability you placed on the likelihood of a 0:19:40.800 --> 0:19:43.439 recession here in the next five years around seventy percent. 0:19:43.520 --> 0:19:45.760 Walk us through your your thinking pimcost thinking on that. 0:19:46.040 --> 0:19:48.760 So if you have you know, something like a twenty 0:19:48.760 --> 0:19:52.520 percent chance of recession every year in the US, given 0:19:52.560 --> 0:19:56.320 the the kind of the frequency of post war recessions, 0:19:56.320 --> 0:19:59.760 then you can get to that kind of number. Now 0:19:59.760 --> 0:20:01.640 you need to be careful because we could always be 0:20:01.960 --> 0:20:04.880 negative based upon expectations of over three to five years 0:20:04.920 --> 0:20:07.639 of recession. But in this case, you know, this is 0:20:07.680 --> 0:20:11.320 a long expansion we've had in the US. It has 0:20:11.359 --> 0:20:15.200 been quite stable the last few years. You don't see 0:20:15.200 --> 0:20:18.119 a lot of imbalances UM, and the FED is not 0:20:18.160 --> 0:20:20.879 going to be trying to kill this um recession by 0:20:21.359 --> 0:20:25.320 very aggressive monetary policy. But over three to five years UM, 0:20:25.760 --> 0:20:28.119 that kind of longer term time frame, then there's a 0:20:28.160 --> 0:20:31.200 good chance we get a slowdown and recession in the US. 0:20:31.240 --> 0:20:33.520 And it's easier to get there when you start at 0:20:33.520 --> 0:20:36.320 two percent growth rather than the uh, you know, the 0:20:36.400 --> 0:20:39.160 three or four percent growth that the Trump administration has 0:20:39.280 --> 0:20:41.880 has has talked about. So you have this this secular 0:20:41.960 --> 0:20:44.520 form you meet around the table Larry Summers is Therey 0:20:44.560 --> 0:20:47.600 Jean claud Trichet Emory slout of the rest. You moved 0:20:47.600 --> 0:20:50.119 from that to investment strategy, and I wonder sort of 0:20:50.160 --> 0:20:52.720 what conclusions you came to in the second half of 0:20:53.000 --> 0:20:55.480 that meeting. Is the focus still going to be here 0:20:55.520 --> 0:20:59.320 on capital preservation? It is, yes, so so a three 0:20:59.400 --> 0:21:02.320 to five year out look, so it doesn't change every year. Um, 0:21:03.160 --> 0:21:06.320 it pivots from time to time, but similar view, so 0:21:06.560 --> 0:21:09.600 that we see an outlook which is pretty stable, but 0:21:09.720 --> 0:21:12.040 we see it as as insecure. There's a lot of 0:21:12.200 --> 0:21:15.440 challengers in the US, in China, in the rest of 0:21:15.520 --> 0:21:17.919 the world. Um. And then the big thing which has 0:21:17.960 --> 0:21:20.080 changed over the last year is risk assets have all 0:21:20.160 --> 0:21:24.080