1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. Along 2 00:00:09,240 --> 00:00:13,200 Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jaily. We bring you 3 00:00:13,320 --> 00:00:18,600 Speaker 1: insight from the best and economics, finance, investment, and international relations. 4 00:00:18,960 --> 00:00:23,840 Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com, 5 00:00:23,920 --> 00:00:30,680 Speaker 1: and of course, on the Bloomberg terminal. William Dudley is 6 00:00:30,720 --> 00:00:33,120 Speaker 1: a former Photo Reserve Bank President of New York and 7 00:00:33,200 --> 00:00:37,600 Speaker 1: buried last week in the Newsflow was his exceptionally important 8 00:00:37,800 --> 00:00:42,159 Speaker 1: essay for Bloomberg opinion on the banks and leverage. It 9 00:00:42,200 --> 00:00:45,239 Speaker 1: harkens back to the summer of two thousand four is 10 00:00:45,280 --> 00:00:50,040 Speaker 1: codified by Simon Johnson in his book Thirteen Bankers, when 11 00:00:50,080 --> 00:00:55,680 Speaker 1: the SEC allowed the broker dealers to become more leveraged 12 00:00:55,960 --> 00:00:59,200 Speaker 1: bill This is not like two thousand four, where you 13 00:00:59,280 --> 00:01:02,279 Speaker 1: say these are banks that need to be free from 14 00:01:02,320 --> 00:01:07,759 Speaker 1: regulatory restriction. Now it's completely different. Their balance sheets becoming 15 00:01:07,800 --> 00:01:11,080 Speaker 1: more tight because the feed is buying treasury securities and 16 00:01:11,200 --> 00:01:13,800 Speaker 1: agency mortgage backed securities, and that's boosting the amount of 17 00:01:13,800 --> 00:01:17,160 Speaker 1: reserves in the banking system. The banks can't make any 18 00:01:17,240 --> 00:01:19,119 Speaker 1: choice about whether they're they're going to hold the reserves 19 00:01:19,200 --> 00:01:22,120 Speaker 1: or not collectively, so that as that amount of reserves 20 00:01:22,120 --> 00:01:24,720 Speaker 1: and the systems goes up, the leverage ratios for these 21 00:01:24,720 --> 00:01:31,480 Speaker 1: banks becomes more binding. How how was Jamie Diamond or 22 00:01:31,560 --> 00:01:36,280 Speaker 1: other bankers, how are they restricted now? Well, the leverage 23 00:01:36,280 --> 00:01:39,200 Speaker 1: creation show hasn't bound very tightly for many banks, but 24 00:01:39,319 --> 00:01:41,800 Speaker 1: it will become more binding as we go forward, as 25 00:01:41,840 --> 00:01:44,440 Speaker 1: we go from now to the summer, because reserves in 26 00:01:44,440 --> 00:01:47,160 Speaker 1: the system are gonna go out pretty dramatically. What what 27 00:01:47,200 --> 00:01:49,160 Speaker 1: will happen at you know, the big banks is they'll 28 00:01:49,200 --> 00:01:52,680 Speaker 1: basically try to push deposits elsewhere. They basically won't want 29 00:01:52,720 --> 00:01:55,440 Speaker 1: to take corporate deposits. They'll want the corporations to take 30 00:01:55,480 --> 00:01:59,080 Speaker 1: their money elsewhere. That induces, you know, unnecessary frictions in 31 00:01:59,080 --> 00:02:01,240 Speaker 1: the system for no net benefits. So it seems to 32 00:02:01,280 --> 00:02:03,680 Speaker 1: me like it's pretty obvious that why don't you just 33 00:02:03,800 --> 00:02:06,320 Speaker 1: make an adjustment for the leverage ratio to take into 34 00:02:06,320 --> 00:02:08,760 Speaker 1: account the fact that the fit is driving the amount 35 00:02:08,760 --> 00:02:11,840 Speaker 1: of reserves in the system, not the banks. How uncomfortable 36 00:02:11,960 --> 00:02:15,240 Speaker 1: is it Bill to be arguing to reduce certain regulatory 37 00:02:15,320 --> 00:02:17,880 Speaker 1: pressures on banks at the same time that we're dealing 38 00:02:17,880 --> 00:02:20,840 Speaker 1: with the archagus fallout that JP Morgan says will probably 39 00:02:20,880 --> 00:02:24,800 Speaker 1: cost banks ten billion dollars. Well, remember here, reserves at 40 00:02:24,840 --> 00:02:27,240 Speaker 1: the Federal Reserve are not risky assets, so we're not 41 00:02:27,400 --> 00:02:31,400 Speaker 1: talking about an exemption of that increases bank risk. And 42 00:02:31,440 --> 00:02:34,280 Speaker 1: if we're really concerned about the idea of you know, 43 00:02:34,600 --> 00:02:37,560 Speaker 1: exempting reserves and that giving the banks more room, we 44 00:02:37,560 --> 00:02:40,080 Speaker 1: can offer we can just raise the leverage ratio requirement 45 00:02:40,120 --> 00:02:42,079 Speaker 1: from say five percent to five and a half percent. 46 00:02:42,240 --> 00:02:45,040 Speaker 1: On what's left that point is that reserves are not 47 00:02:45,160 --> 00:02:48,080 Speaker 1: risky and banks can't control how many reserves they hold. 48 00:02:48,400 --> 00:02:51,680 Speaker 1: That's determined by the fit. Although moving beyond just this 49 00:02:51,720 --> 00:02:55,280 Speaker 1: particular point of regulation talking about the leverage ratio, you've 50 00:02:55,320 --> 00:02:58,800 Speaker 1: talked before about concern about leverage building up in the 51 00:02:58,800 --> 00:03:02,720 Speaker 1: shadow banking industry, about a lack of regulation in that 52 00:03:02,840 --> 00:03:06,200 Speaker 1: particular area of financial markets. Do you still see this 53 00:03:06,240 --> 00:03:07,960 Speaker 1: as a concern and do you see it as a 54 00:03:08,040 --> 00:03:11,600 Speaker 1: pressing one or simply something to deal with perhaps later on. 55 00:03:12,800 --> 00:03:14,480 Speaker 1: I think it's pretty pressing. I mean when you think 56 00:03:14,480 --> 00:03:17,679 Speaker 1: about what happened last March a year ago. Uh, we've 57 00:03:17,680 --> 00:03:20,519 Speaker 1: been basically the federal government had to rescue the money 58 00:03:20,560 --> 00:03:24,240 Speaker 1: market mutual fund industry. Again, we had problems for mortgage 59 00:03:24,240 --> 00:03:26,200 Speaker 1: reach space. We had problems in the corporate bond space, 60 00:03:26,240 --> 00:03:28,160 Speaker 1: and we have just function in the US treasury market. 61 00:03:28,680 --> 00:03:31,840 Speaker 1: So and then more recently we had the arctical issues. 62 00:03:31,880 --> 00:03:33,880 Speaker 1: So it seems to be like the non bank financial 63 00:03:33,880 --> 00:03:35,880 Speaker 1: sector is still right for a lot of issues that 64 00:03:35,920 --> 00:03:39,800 Speaker 1: need to be dealt with sooner rather than later. Bill Dudley, 65 00:03:39,840 --> 00:03:42,320 Speaker 1: I need to switch to the present FED discussion. We've 66 00:03:42,360 --> 00:03:45,520 Speaker 1: been making jokes all this morning about transitory as well. 67 00:03:46,000 --> 00:03:48,800 Speaker 1: You and I have talked before about the British pretense 68 00:03:48,920 --> 00:03:52,520 Speaker 1: of short term, medium term, long term. Now we've got 69 00:03:52,520 --> 00:03:55,560 Speaker 1: a transitory thing. As we move along the X axis 70 00:03:55,600 --> 00:03:59,320 Speaker 1: in the timeline. Does any of this make theoretical sense? 71 00:03:59,560 --> 00:04:04,760 Speaker 1: Or we just is kidding ourselves massaging the unknown. Well, 72 00:04:04,800 --> 00:04:07,360 Speaker 1: the FED is being patient for some a couple of 73 00:04:07,440 --> 00:04:10,400 Speaker 1: very obvious reasons. Number one, they're not really sure where 74 00:04:10,440 --> 00:04:13,400 Speaker 1: full employment is. Number two, they're not sure how fast 75 00:04:13,440 --> 00:04:16,240 Speaker 1: inflation will rise once they get to full employment, and 76 00:04:16,279 --> 00:04:18,840 Speaker 1: so they're willing. And number three, they're worried about inflation 77 00:04:19,640 --> 00:04:22,719 Speaker 1: expectations becoming unanchored to the downside because the FED hasn't 78 00:04:22,760 --> 00:04:25,360 Speaker 1: been able to achieve is two percent inflation objective for 79 00:04:25,360 --> 00:04:28,800 Speaker 1: a long time so that change in policy is well motivated. 80 00:04:29,120 --> 00:04:31,719 Speaker 1: The risk is that the FED will be late before 81 00:04:31,800 --> 00:04:34,320 Speaker 1: the FED basically try to tighten monetary policy to arrive 82 00:04:34,360 --> 00:04:36,719 Speaker 1: at a two percent inflation rate, full employment in the 83 00:04:36,760 --> 00:04:39,640 Speaker 1: neutral monetary policy all at the same time. Now, they're 84 00:04:39,680 --> 00:04:42,160 Speaker 1: not even going to start to tighten monetary policy until 85 00:04:42,160 --> 00:04:44,800 Speaker 1: they're at full employment, inflations at two percent, and they 86 00:04:44,800 --> 00:04:47,320 Speaker 1: expect inflation to move higher. So the FED is gonna 87 00:04:47,320 --> 00:04:50,480 Speaker 1: be much slower to tighten this regime than in prior regimes, 88 00:04:50,720 --> 00:04:52,880 Speaker 1: and that does create some risks for the economy. But 89 00:04:52,960 --> 00:04:54,720 Speaker 1: we say it's a risk that will be like, isn't 90 00:04:54,720 --> 00:04:57,560 Speaker 1: it a commitment that they're going to be Like, well, 91 00:04:57,560 --> 00:04:59,880 Speaker 1: the question is how late? Yes, I think they are 92 00:05:00,040 --> 00:05:01,840 Speaker 1: that they are making commitment that they're gonna be, Like, 93 00:05:01,920 --> 00:05:03,719 Speaker 1: the question is really how late? And then how high 94 00:05:03,720 --> 00:05:06,440 Speaker 1: will they have to raise short term rates to basically 95 00:05:06,520 --> 00:05:09,920 Speaker 1: keep inflation from continuing to accelerate? Now, the risk is 96 00:05:09,960 --> 00:05:12,680 Speaker 1: I think that the risk is that recession will be 97 00:05:12,800 --> 00:05:16,200 Speaker 1: uh more more likely at that point because the Fed's 98 00:05:16,200 --> 00:05:18,279 Speaker 1: gonna have to move not to a neutral madreate policy, 99 00:05:18,320 --> 00:05:20,720 Speaker 1: but to a tight madre policy. If they're following this 100 00:05:20,760 --> 00:05:23,360 Speaker 1: new UH framework so bill, this is a huge issue. 101 00:05:23,600 --> 00:05:25,240 Speaker 1: And I think the most important question we can ask 102 00:05:25,320 --> 00:05:27,520 Speaker 1: right now FED officials, and we asked it if last 103 00:05:27,600 --> 00:05:29,880 Speaker 1: check cloud on Friday, is how will they know if 104 00:05:29,880 --> 00:05:32,960 Speaker 1: they're wrong on this transit tree issue? If you run 105 00:05:33,000 --> 00:05:35,279 Speaker 1: the FMC back on the FMC bill, how would you 106 00:05:35,320 --> 00:05:38,320 Speaker 1: not if you were wrong? Well, at the end of 107 00:05:38,320 --> 00:05:40,080 Speaker 1: the day, I mean, I think they're gonna look at 108 00:05:40,080 --> 00:05:42,120 Speaker 1: the bubble that we're going to see inflation this year 109 00:05:42,200 --> 00:05:45,239 Speaker 1: is mostly due to base effects and some frictional costs. 110 00:05:45,240 --> 00:05:47,680 Speaker 1: You sort of reopened the economy. They're gonna be really 111 00:05:47,680 --> 00:05:50,360 Speaker 1: focusing more on the labor market. How many people are 112 00:05:50,400 --> 00:05:53,400 Speaker 1: still unemployed compared to where we were in March of 113 00:05:53,480 --> 00:05:56,440 Speaker 1: two thousand uh and twenty. Right now we have a 114 00:05:56,480 --> 00:05:58,839 Speaker 1: shortfall of employment of about eight and a half nine 115 00:05:58,839 --> 00:06:02,000 Speaker 1: million people, and Fed's gonna be tracking that very carefully. 116 00:06:02,360 --> 00:06:04,520 Speaker 1: As does people get employed, then the Federals start to 117 00:06:04,800 --> 00:06:08,000 Speaker 1: not focus on the transitory factors driving inflation. But really 118 00:06:08,400 --> 00:06:11,440 Speaker 1: the one that they are most concerned about is what 119 00:06:11,279 --> 00:06:13,160 Speaker 1: what point do you get to such a tight labor 120 00:06:13,200 --> 00:06:16,400 Speaker 1: market that it generates wage pressures that drive up crisis, 121 00:06:16,760 --> 00:06:18,760 Speaker 1: and FED officials have said that they have the tools 122 00:06:18,760 --> 00:06:22,360 Speaker 1: to combat inflation that's higher than expected. Do they have 123 00:06:22,440 --> 00:06:25,680 Speaker 1: the tools to deal with financial disruption after with this 124 00:06:25,760 --> 00:06:29,080 Speaker 1: incredible surge in risk taking that has been on the 125 00:06:29,120 --> 00:06:31,680 Speaker 1: heels of FED policy, What happens if that stopped in 126 00:06:31,720 --> 00:06:35,520 Speaker 1: its tracks as a result of FED tightening policy. I 127 00:06:35,520 --> 00:06:37,920 Speaker 1: think you're raising an important question that when the FED 128 00:06:38,000 --> 00:06:41,480 Speaker 1: goes from very very friendly to unfriendly, financial markets are 129 00:06:41,480 --> 00:06:44,040 Speaker 1: going to have an adjustment to make, and the adjustment 130 00:06:44,080 --> 00:06:46,880 Speaker 1: could be quite severe after such a long period of 131 00:06:47,320 --> 00:06:51,120 Speaker 1: low interest rates. Uh. I don't think the FED cares 132 00:06:51,160 --> 00:06:54,160 Speaker 1: about the stock market level per se, but they do 133 00:06:54,240 --> 00:06:56,400 Speaker 1: care if the stock market were to collapse, and that 134 00:06:56,480 --> 00:06:59,760 Speaker 1: would potentially hurt the US economy. So the FED does 135 00:06:59,839 --> 00:07:02,240 Speaker 1: care about financial conditions in terms of how they feed 136 00:07:02,279 --> 00:07:05,760 Speaker 1: into the performance of the economy. But the FAN is 137 00:07:05,760 --> 00:07:07,360 Speaker 1: not going to run to the rescue just because the 138 00:07:07,400 --> 00:07:11,040 Speaker 1: stock market goes downtown. No. But it raises a question 139 00:07:11,080 --> 00:07:13,600 Speaker 1: about whether if the if the FED is going to 140 00:07:13,720 --> 00:07:16,520 Speaker 1: tighten in the near term because they see that things 141 00:07:16,560 --> 00:07:18,560 Speaker 1: are getting a little bit ahead of their skis, or 142 00:07:18,600 --> 00:07:21,800 Speaker 1: if they try to take actions to combat inflation, could 143 00:07:21,840 --> 00:07:24,320 Speaker 1: the torpedo markets that are already at heavy levels. I mean, 144 00:07:24,320 --> 00:07:27,720 Speaker 1: do you feel like your colleagues are actively considering that 145 00:07:27,880 --> 00:07:30,120 Speaker 1: or is that sort of not as significant as just 146 00:07:30,120 --> 00:07:32,440 Speaker 1: getting the market and the economy back up to speed. 147 00:07:33,080 --> 00:07:35,640 Speaker 1: I think PA repeatedly has made it very clear that 148 00:07:35,680 --> 00:07:37,600 Speaker 1: the FED is not going to be preemptive and they're 149 00:07:37,640 --> 00:07:40,600 Speaker 1: not that concerned about financialstlis. What they're concerned about is 150 00:07:40,600 --> 00:07:42,760 Speaker 1: getting that eight to nine million people back to work 151 00:07:42,760 --> 00:07:45,920 Speaker 1: as soon as possible. That's the focus of policy right now. 152 00:07:46,160 --> 00:07:48,480 Speaker 1: What that does do, though, creates a risk for markets 153 00:07:48,520 --> 00:07:51,240 Speaker 1: when the FED has to shift gears and start worry 154 00:07:51,280 --> 00:07:56,680 Speaker 1: about inflation. That's probably that's probably several years off. In 155 00:07:56,760 --> 00:08:01,920 Speaker 1: our great debate here, do we still underestimate the wage 156 00:08:01,960 --> 00:08:06,640 Speaker 1: inflation doesn't move because of the new technological impulses that 157 00:08:06,680 --> 00:08:11,480 Speaker 1: we see in our economy, Well that could be a factor. 158 00:08:11,680 --> 00:08:16,160 Speaker 1: I mean, we're running an experiment basically, and we're gonna 159 00:08:16,160 --> 00:08:18,680 Speaker 1: see how it goes. And this experiment is, you know, 160 00:08:18,840 --> 00:08:21,440 Speaker 1: has more uncertainty than usually because we've never had a 161 00:08:21,440 --> 00:08:25,720 Speaker 1: recovery from a pandemic like this before, going back for 162 00:08:25,960 --> 00:08:28,920 Speaker 1: more than a hundred years. So anybody who tells you 163 00:08:28,960 --> 00:08:30,680 Speaker 1: that they know how the economist can perform over the 164 00:08:30,720 --> 00:08:33,480 Speaker 1: next year or two. I think is not being truly 165 00:08:33,520 --> 00:08:37,400 Speaker 1: honest with you, because we've never had an economic recovery 166 00:08:37,440 --> 00:08:41,480 Speaker 1: like this one fuelled by massive mater and fiscal policy stimulus. 167 00:08:41,600 --> 00:08:43,040 Speaker 1: So I think it's gonna be very hard to know 168 00:08:43,160 --> 00:08:45,199 Speaker 1: for sure how fast this is all going to unfold 169 00:08:45,440 --> 00:08:48,800 Speaker 1: before you go, Bill. An important question Mohammad al Arian 170 00:08:48,840 --> 00:08:52,000 Speaker 1: asked on Blowing Bag Opinion this morning. Did the FETCH 171 00:08:52,000 --> 00:08:54,520 Speaker 1: shift policy lines at the wrong time? Do you think 172 00:08:54,559 --> 00:08:57,160 Speaker 1: they make this framework shift a little bit prematurely? I 173 00:08:57,200 --> 00:09:00,120 Speaker 1: asked that because I wonder if they have known was 174 00:09:00,120 --> 00:09:02,040 Speaker 1: about to happen on the fiscal side, whether they would 175 00:09:02,080 --> 00:09:05,120 Speaker 1: have made this change. I think they would have made 176 00:09:05,120 --> 00:09:07,920 Speaker 1: the change in any case, because they were really worried 177 00:09:07,920 --> 00:09:10,880 Speaker 1: about inflation expectations becoming an anchored in the downside, and 178 00:09:11,000 --> 00:09:14,040 Speaker 1: because they had such a poor record of forecasting what 179 00:09:14,320 --> 00:09:17,280 Speaker 1: level of employment is full employment. So I think they 180 00:09:17,280 --> 00:09:19,520 Speaker 1: would have made the shift no matter what. But I 181 00:09:19,520 --> 00:09:22,280 Speaker 1: think Muhammad al Arian's pieces is a good one because 182 00:09:22,280 --> 00:09:23,800 Speaker 1: I think he points out the fact that there are 183 00:09:23,840 --> 00:09:26,200 Speaker 1: some risks to this new strategy. The FED could be 184 00:09:26,280 --> 00:09:27,959 Speaker 1: late and if they fed is late, they'll have to 185 00:09:28,000 --> 00:09:30,440 Speaker 1: slam on the brakes and now have consequences not just 186 00:09:30,480 --> 00:09:34,120 Speaker 1: for the economy but also for fun financial market. Looking 187 00:09:34,120 --> 00:09:35,520 Speaker 1: forward to catching up with you both on that issue 188 00:09:35,520 --> 00:09:37,200 Speaker 1: a little bit later this week as well. Bill, Looking 189 00:09:37,240 --> 00:09:39,480 Speaker 1: forward to that Bill Dudley, the former Federal Reserve Bank 190 00:09:39,520 --> 00:09:41,920 Speaker 1: of New York President, on some of the issues right now. 191 00:09:47,880 --> 00:09:50,760 Speaker 1: This is a conversation that we wanted to have for 192 00:09:50,840 --> 00:09:54,640 Speaker 1: days with the passing of Robert Mundell. You've heard me 193 00:09:54,679 --> 00:09:57,440 Speaker 1: say that Ken rog Offen others that the line the 194 00:09:57,559 --> 00:10:01,520 Speaker 1: lineage of our international economics goes back to Chicago of 195 00:10:01,640 --> 00:10:05,080 Speaker 1: long ago. And Jacob Frankel. We are thrilled that Dr 196 00:10:05,160 --> 00:10:07,800 Speaker 1: Frankel could join us this morning. He is a course 197 00:10:07,840 --> 00:10:11,800 Speaker 1: with a group of thirty. Chairman of the Board of Trustees, Jacob. 198 00:10:11,840 --> 00:10:15,400 Speaker 1: We had a wonderful friday with Ken Rogar, Richard Clarida, 199 00:10:15,600 --> 00:10:21,800 Speaker 1: and Angus Daton talking about the twentieth century international economics. 200 00:10:22,120 --> 00:10:25,120 Speaker 1: When you were writing at Chicago, what did you learn 201 00:10:25,200 --> 00:10:31,040 Speaker 1: from Mandela Colombia. Well, to begin with, when I came 202 00:10:31,080 --> 00:10:39,080 Speaker 1: to Chicago in nine, Mandel was a superstar. We were 203 00:10:39,440 --> 00:10:43,760 Speaker 1: students together. Rudy don't Bush, Michael Mussa, myself and some 204 00:10:43,920 --> 00:10:49,360 Speaker 1: other people who well, all in a way hypnotized by 205 00:10:49,400 --> 00:10:53,079 Speaker 1: the way in which he changed completely the way in 206 00:10:53,080 --> 00:10:57,520 Speaker 1: which the economic profession looked at the economy. I would 207 00:10:57,559 --> 00:11:00,880 Speaker 1: say that up to that point the world was viewed 208 00:11:00,920 --> 00:11:05,000 Speaker 1: in the textbooks as a closed economy. Each country was 209 00:11:05,040 --> 00:11:09,320 Speaker 1: a unit. Yes, it had some inter inter relationships with 210 00:11:09,400 --> 00:11:14,160 Speaker 1: other countries through trade, but by and large it was 211 00:11:14,440 --> 00:11:19,400 Speaker 1: a close unit ran by the policy makers of that unit. 212 00:11:19,880 --> 00:11:25,480 Speaker 1: Caman deal and said, the only closed economy for real world, 213 00:11:26,200 --> 00:11:31,040 Speaker 1: but each country within the world. And therefore, you know, 214 00:11:31,120 --> 00:11:34,920 Speaker 1: in order to understand how the economy works, we need 215 00:11:34,960 --> 00:11:39,280 Speaker 1: to develop a new approach, which is called open economy 216 00:11:39,600 --> 00:11:45,079 Speaker 1: macro economics. It means that you cannot run monetary policy 217 00:11:45,520 --> 00:11:48,840 Speaker 1: under the assumption that you are a close unit, because 218 00:11:49,320 --> 00:11:53,960 Speaker 1: after all, exchange rates because of time, and I know 219 00:11:54,080 --> 00:11:55,959 Speaker 1: Listen wants to get in here. I want to drive 220 00:11:56,040 --> 00:11:59,679 Speaker 1: this forward to the modern age because you were your 221 00:11:59,679 --> 00:12:02,840 Speaker 1: work with JP Morgan, with Mr Diamond and the team there, 222 00:12:03,160 --> 00:12:05,440 Speaker 1: and your work with Group of thirty. You have been 223 00:12:06,000 --> 00:12:08,959 Speaker 1: the architect of so much of our discussion of an 224 00:12:09,000 --> 00:12:12,520 Speaker 1: open economy. Is Mr Diamond mentioned in his letter the 225 00:12:12,600 --> 00:12:19,640 Speaker 1: other day, does America resist? Does America have a chance 226 00:12:19,760 --> 00:12:25,120 Speaker 1: to lose our open economy advantage? It depends if it 227 00:12:25,280 --> 00:12:30,079 Speaker 1: keeps the open economy perspective or if it closes itself. 228 00:12:30,400 --> 00:12:34,280 Speaker 1: The only way a country can succeed, small or lounge 229 00:12:34,720 --> 00:12:38,599 Speaker 1: in the intergrated world is by being open to benefit 230 00:12:39,040 --> 00:12:42,120 Speaker 1: from the better things that other countries do and to 231 00:12:42,280 --> 00:12:45,520 Speaker 1: and to benefit other countries by the things that we do. 232 00:12:45,800 --> 00:12:50,920 Speaker 1: The principles of comparative advantage that we're coined still ages 233 00:12:50,960 --> 00:12:55,319 Speaker 1: ago by David Ricardo Adam Smith, I'll still valid today, 234 00:12:55,360 --> 00:12:59,880 Speaker 1: but even more so because capital markets are very inter real. 235 00:13:00,679 --> 00:13:07,600 Speaker 1: Capital markets are moving by expectations, Expectations are being fed 236 00:13:07,640 --> 00:13:12,920 Speaker 1: by announcements, and announcements are affecting the economy through the credibility. 237 00:13:12,960 --> 00:13:17,840 Speaker 1: All of it together means that we cannot afford playing 238 00:13:17,880 --> 00:13:22,320 Speaker 1: the game of isolationism, and anyone who will try to 239 00:13:22,360 --> 00:13:26,640 Speaker 1: do it will be penalized by the markets. And I 240 00:13:26,679 --> 00:13:30,440 Speaker 1: believe that by now there is greater understanding that when 241 00:13:30,480 --> 00:13:36,559 Speaker 1: countries are trying to close themselves under the excuse of 242 00:13:36,600 --> 00:13:40,640 Speaker 1: trying to protect its own citizens, so to speak, as 243 00:13:40,640 --> 00:13:43,800 Speaker 1: a matter of fact, they helped their citizens because they 244 00:13:43,840 --> 00:13:47,760 Speaker 1: don't allow the citizens to enjoy the benefits from the 245 00:13:47,800 --> 00:13:51,920 Speaker 1: world knowledge and technology. Jacob. This used to be a 246 00:13:52,000 --> 00:13:55,679 Speaker 1: common thought, a common belief, and increasingly it's become less so, 247 00:13:56,040 --> 00:13:59,120 Speaker 1: and there's been more isolationism. I'm wondering how much pushback 248 00:13:59,160 --> 00:14:01,720 Speaker 1: you're getting in from the members that you talk with 249 00:14:02,000 --> 00:14:04,280 Speaker 1: among the group of thirty to this idea that perhaps 250 00:14:04,320 --> 00:14:07,960 Speaker 1: globalization doesn't help everyone in the same kind of ways, 251 00:14:08,160 --> 00:14:10,240 Speaker 1: and at certain things need to be done in a 252 00:14:10,280 --> 00:14:15,760 Speaker 1: more domestic capacity, especially as we see these supply chain disruptions. Absolutely, 253 00:14:16,080 --> 00:14:18,800 Speaker 1: but the main lesson is not to throw the baby 254 00:14:19,080 --> 00:14:23,720 Speaker 1: with the water tub. Namely, if globalization is not perfect, 255 00:14:24,160 --> 00:14:28,600 Speaker 1: don't make globalization a passee. On the contrary, ask yourself 256 00:14:28,720 --> 00:14:31,920 Speaker 1: what's not working. What it was not working was that 257 00:14:32,000 --> 00:14:36,240 Speaker 1: the benefits were not widely shelled. And this is basically 258 00:14:36,280 --> 00:14:40,240 Speaker 1: the agenda for governments to make sure that the benefits 259 00:14:40,280 --> 00:14:45,120 Speaker 1: are widely shelled. That's that's that's the essence of fiscal policy, 260 00:14:45,400 --> 00:14:48,880 Speaker 1: of transfer of text policy. But it is not the 261 00:14:48,920 --> 00:14:52,640 Speaker 1: case against opening the window. If you open the window, 262 00:14:52,800 --> 00:14:57,120 Speaker 1: yes you may get some storms, so make yourself more robust. 263 00:14:57,200 --> 00:15:00,120 Speaker 1: But if you close the window, you really miss the 264 00:15:00,200 --> 00:15:02,880 Speaker 1: smell of roses from the garden. Are the benefits from 265 00:15:02,880 --> 00:15:06,560 Speaker 1: globalization the same now as they were twenty thirty years ago, 266 00:15:06,760 --> 00:15:09,920 Speaker 1: given how much pay has evened out, given how much 267 00:15:09,960 --> 00:15:12,480 Speaker 1: wealth has gotten spread out around the world. We don't 268 00:15:12,520 --> 00:15:15,640 Speaker 1: have the same China today as we did thirty years ago, 269 00:15:16,040 --> 00:15:19,800 Speaker 1: driving prices down. Thirty years ago, we did not know 270 00:15:19,920 --> 00:15:22,560 Speaker 1: that China will come, and here it came, and you 271 00:15:22,600 --> 00:15:25,640 Speaker 1: could have said thirty years ago the globalization has already 272 00:15:25,680 --> 00:15:29,240 Speaker 1: exhausted its benefits by the same talking today, when you 273 00:15:29,320 --> 00:15:32,600 Speaker 1: look today at the we are, we have and we 274 00:15:32,680 --> 00:15:36,920 Speaker 1: have experienced now the pandemics. We have experienced now the 275 00:15:36,960 --> 00:15:41,760 Speaker 1: fact that pandemics did not recognize boulders, that knowledge is 276 00:15:42,120 --> 00:15:47,560 Speaker 1: an international public good, that the vaccinations are to be shared, 277 00:15:47,760 --> 00:15:50,680 Speaker 1: that the mechanisms need to be in place. So by 278 00:15:50,720 --> 00:15:55,360 Speaker 1: and large, the manifestation of globalization will come from different 279 00:15:55,400 --> 00:15:59,000 Speaker 1: places in the coming year or years, will be in 280 00:15:59,040 --> 00:16:03,240 Speaker 1: the ferry, in the climate area, who needs to have 281 00:16:03,360 --> 00:16:07,560 Speaker 1: the cooperation of God, all issues that do not recognize 282 00:16:08,680 --> 00:16:11,240 Speaker 1: Jacob Franco. It is such an honor to have you 283 00:16:11,360 --> 00:16:15,080 Speaker 1: on right now. Is Adam Posen of the Peterson Institute 284 00:16:15,560 --> 00:16:19,760 Speaker 1: announced the death of John Williamson. I'll be honest, Jacob, 285 00:16:19,800 --> 00:16:22,800 Speaker 1: I can't think of someone I'd better talk to at 286 00:16:22,800 --> 00:16:27,560 Speaker 1: this moment than you. John Williamson was a micro economist 287 00:16:27,640 --> 00:16:33,000 Speaker 1: who spend all of economics, including macroeconomics, and his founding 288 00:16:33,000 --> 00:16:38,680 Speaker 1: in nineteen eighty nine of the phrase the Washington Consensus. Jacob, 289 00:16:38,840 --> 00:16:43,840 Speaker 1: every bit of your work identifies what Williamson wrought. Do 290 00:16:43,920 --> 00:16:48,720 Speaker 1: we have a Washington consensus today? In honor of John Williamson? 291 00:16:50,200 --> 00:16:53,800 Speaker 1: Welcome begin with I really wanted to share other opposing 292 00:16:54,040 --> 00:17:00,400 Speaker 1: sadness and sorrow and with the death of our trend, 293 00:17:00,520 --> 00:17:06,000 Speaker 1: John Williamson, the Washington consensus was a concept that was 294 00:17:06,080 --> 00:17:09,800 Speaker 1: developed about the notion that there was a consensus of 295 00:17:09,920 --> 00:17:13,240 Speaker 1: what does it take to be a successful economy. And 296 00:17:13,280 --> 00:17:17,359 Speaker 1: I believe that today we do not have the Washington consensus. 297 00:17:17,400 --> 00:17:21,000 Speaker 1: And the reason is that, especially since the Great Financial 298 00:17:21,040 --> 00:17:25,880 Speaker 1: Crisis of two thousand and seven eight nine, subsequently with 299 00:17:26,000 --> 00:17:32,080 Speaker 1: the subsequent crisis, seems to be that policymakers in many 300 00:17:32,119 --> 00:17:36,480 Speaker 1: places of the world have I would say, lost their compass. 301 00:17:36,520 --> 00:17:39,040 Speaker 1: And if you lose your compass, you cannot have a 302 00:17:39,040 --> 00:17:42,720 Speaker 1: consensus about a strategy. And I think that The challenge 303 00:17:42,760 --> 00:17:47,960 Speaker 1: today is again to recognize what are the basic principles 304 00:17:48,000 --> 00:17:51,480 Speaker 1: that our robust and what are the things that can 305 00:17:51,520 --> 00:17:55,960 Speaker 1: be put pushed aside? And I think that consensus we 306 00:17:56,200 --> 00:17:59,240 Speaker 1: I see. I still think that the issue of globalization, 307 00:17:59,720 --> 00:18:04,280 Speaker 1: of openness, of making sure the globalization succeeds, of making 308 00:18:04,280 --> 00:18:07,399 Speaker 1: sure that the benefits are shared, of making sure that 309 00:18:07,480 --> 00:18:11,960 Speaker 1: the machinery is in place to bring about this sharing 310 00:18:12,240 --> 00:18:16,360 Speaker 1: of the benefits. This has to be a strong fiscal system, 311 00:18:16,720 --> 00:18:23,320 Speaker 1: a strong text system, and a very independent, when focused 312 00:18:23,520 --> 00:18:27,320 Speaker 1: monetaried policy looking at the long term and not just 313 00:18:27,560 --> 00:18:34,119 Speaker 1: about the show's working. About Mandeli, he was a false 314 00:18:34,200 --> 00:18:38,600 Speaker 1: sited economies that could see behind the conor and del poll. 315 00:18:38,720 --> 00:18:42,240 Speaker 1: He was so successful. And Mandel and Williams and Jacob Franco, 316 00:18:42,320 --> 00:18:43,840 Speaker 1: we are so honored to have you with us, the 317 00:18:43,920 --> 00:18:53,480 Speaker 1: former governor of the Bank of Israel. This is an 318 00:18:53,480 --> 00:18:57,480 Speaker 1: exceptionally important interview. In the last for eight hours of surveillance, 319 00:18:57,480 --> 00:19:01,520 Speaker 1: we've had terrific interviews on economics and now a must listen, 320 00:19:01,600 --> 00:19:05,200 Speaker 1: must watch on China ching, which is a JP Morgan. 321 00:19:05,280 --> 00:19:09,680 Speaker 1: She's vice chairman of Asia Pacific Banking for the firm 322 00:19:09,720 --> 00:19:13,520 Speaker 1: and that barely describes her commitment to a dialogue between 323 00:19:13,520 --> 00:19:16,840 Speaker 1: the Western world and China. We're thrilled that Jing Ulwar 324 00:19:16,920 --> 00:19:19,000 Speaker 1: could join us. This want to Jing, I want to 325 00:19:19,000 --> 00:19:21,119 Speaker 1: talk about Hong Kong. I want to talk about it 326 00:19:21,200 --> 00:19:25,600 Speaker 1: forever changed, How Hong Kong? How much is Hong Kong change? 327 00:19:25,840 --> 00:19:28,200 Speaker 1: And what does it look like for the JP Morgan 328 00:19:28,280 --> 00:19:32,480 Speaker 1: Company in the coming years. Well, Hong Kong. I've been 329 00:19:32,480 --> 00:19:36,880 Speaker 1: here for many years, and the Hong Kong financial markets 330 00:19:36,920 --> 00:19:40,719 Speaker 1: are extremely buoyant, as you could see from you know, 331 00:19:40,800 --> 00:19:45,560 Speaker 1: many activity in the I P O market, many of 332 00:19:45,600 --> 00:19:48,760 Speaker 1: the innovative companies from China coming to the Hong Kong 333 00:19:48,760 --> 00:19:53,040 Speaker 1: market to list. In terms of the recovery from the pandemic, 334 00:19:53,680 --> 00:19:57,640 Speaker 1: Hong Kong actually has done pretty well if you think 335 00:19:57,680 --> 00:20:00,280 Speaker 1: about it right. Hong Kong is a city of seven 336 00:20:00,320 --> 00:20:03,200 Speaker 1: million people all together. I think they have been about 337 00:20:03,200 --> 00:20:08,199 Speaker 1: eleven thousand cases of COVID since the pandemic began, And 338 00:20:08,280 --> 00:20:11,560 Speaker 1: these days, I think a pandemic is definitely coming under control. 339 00:20:11,960 --> 00:20:16,920 Speaker 1: Economic activity is actually returning to normal slowly but steadily. 340 00:20:17,520 --> 00:20:21,640 Speaker 1: During with your influence, your experience, the breadth of your 341 00:20:21,720 --> 00:20:24,960 Speaker 1: knowledge of the Pacific rim, do you look at Hong 342 00:20:25,040 --> 00:20:29,040 Speaker 1: Kong that it will be changed for Western banking or 343 00:20:29,080 --> 00:20:33,880 Speaker 1: will it be business as usual? Well, so far it's 344 00:20:33,920 --> 00:20:38,920 Speaker 1: been business as usual. We're as busy as ever helping 345 00:20:38,960 --> 00:20:43,440 Speaker 1: our clients among the corporates and also investors. And they 346 00:20:43,520 --> 00:20:47,240 Speaker 1: remember China has a huge amount of likuti as well. 347 00:20:47,680 --> 00:20:51,880 Speaker 1: Through the connect program between Shanghai and Hong Kong, shen 348 00:20:51,960 --> 00:20:54,879 Speaker 1: Jen and Hong Kong. There's a lot of mainland money 349 00:20:55,080 --> 00:20:59,560 Speaker 1: actually coming to Hong Kong to invest in world class companies. 350 00:21:00,320 --> 00:21:02,280 Speaker 1: Can we talk about what's happening on the mainland right now? 351 00:21:02,320 --> 00:21:05,040 Speaker 1: The equity market is really struggled over the last month 352 00:21:05,119 --> 00:21:08,480 Speaker 1: or so. What's going on? Well, you know, the equity 353 00:21:08,520 --> 00:21:12,840 Speaker 1: markets in China have performed differently from the US. The 354 00:21:12,920 --> 00:21:16,399 Speaker 1: U S indusseries are near all time highs. The China 355 00:21:16,480 --> 00:21:20,320 Speaker 1: market had done very well up until February of this year. 356 00:21:20,960 --> 00:21:23,600 Speaker 1: I think this has to do with the liquidity situation 357 00:21:23,840 --> 00:21:27,480 Speaker 1: in China. As you know, normally the Chinese equity market 358 00:21:27,480 --> 00:21:31,959 Speaker 1: performance is very much um in synct with the credit cycle. 359 00:21:32,480 --> 00:21:36,159 Speaker 1: Now that the mainland authorities are actually typing liquidity because 360 00:21:36,280 --> 00:21:40,560 Speaker 1: economic recovery is firmly on track, they want to control 361 00:21:41,080 --> 00:21:44,960 Speaker 1: the laborage ratio. They want to control the risk of overheating. 362 00:21:45,400 --> 00:21:50,080 Speaker 1: So therefore, as they really raining raining in the credit 363 00:21:50,480 --> 00:21:54,960 Speaker 1: uh growth, you're seeing some softening of the mainland markets. 364 00:21:55,200 --> 00:21:58,080 Speaker 1: They had done very very well throughout two thousand and 365 00:21:58,119 --> 00:22:01,760 Speaker 1: twenty and also into January February this year. I think 366 00:22:01,800 --> 00:22:05,159 Speaker 1: this is taking a breather, not just reigning in credit. 367 00:22:05,200 --> 00:22:06,879 Speaker 1: They're running in some of the big tech players. And 368 00:22:06,880 --> 00:22:08,720 Speaker 1: I understand you can't do single names, so I do 369 00:22:08,760 --> 00:22:11,080 Speaker 1: it for you, Ali Baba and Financial very much in 370 00:22:11,080 --> 00:22:12,720 Speaker 1: the news at the moment ing and I think for 371 00:22:12,800 --> 00:22:15,200 Speaker 1: people outside of the main land, outside of Hong Kong 372 00:22:15,280 --> 00:22:17,640 Speaker 1: even I think they're struggling with what's happening with regulation 373 00:22:17,720 --> 00:22:19,640 Speaker 1: on the ground around some big tech players. These were 374 00:22:19,640 --> 00:22:23,159 Speaker 1: big themes that investors worldwide wanted to get some traction, 375 00:22:23,240 --> 00:22:27,000 Speaker 1: some exposure to. What are you telling them now, Well, 376 00:22:27,040 --> 00:22:31,439 Speaker 1: you know, despite the recent market volatility, we think the 377 00:22:31,480 --> 00:22:35,920 Speaker 1: digital economy in China is still alive and well, especially 378 00:22:36,000 --> 00:22:39,360 Speaker 1: since the pandemic. The digital way of life is definitely 379 00:22:39,359 --> 00:22:42,439 Speaker 1: not turning back. If you look at e commerce, you 380 00:22:42,520 --> 00:22:46,600 Speaker 1: look at the sharing economy, you look at payments, everything 381 00:22:46,760 --> 00:22:50,320 Speaker 1: is growing in a very robust passion. So we believe 382 00:22:50,760 --> 00:22:54,200 Speaker 1: the medium to a long term outlook for the large 383 00:22:54,240 --> 00:22:58,760 Speaker 1: tech companies remains very robust. Although you've got to wonder 384 00:22:59,040 --> 00:23:01,600 Speaker 1: which area people are going to invest in big tech. 385 00:23:01,640 --> 00:23:04,360 Speaker 1: Do you find that some of your international investors are 386 00:23:04,400 --> 00:23:07,600 Speaker 1: more hesitant to invest in Chinese big tech because of 387 00:23:07,640 --> 00:23:12,200 Speaker 1: the regulatory oversight that does seem to be tightening. Actually, 388 00:23:12,440 --> 00:23:16,600 Speaker 1: many international investors are looking at China as an asset class. 389 00:23:17,040 --> 00:23:21,359 Speaker 1: They find themselves actually under exposed to China. If you 390 00:23:21,480 --> 00:23:25,080 Speaker 1: think about the next ten years, the Chinese economy is 391 00:23:25,119 --> 00:23:28,080 Speaker 1: going to surpass the US economy to become the largest 392 00:23:28,160 --> 00:23:31,120 Speaker 1: in the world. However, if you look at the waiting 393 00:23:31,480 --> 00:23:36,080 Speaker 1: of global funds in China, it remains very low. So 394 00:23:36,200 --> 00:23:40,000 Speaker 1: we're actually looking at in the national institutions finding different 395 00:23:40,040 --> 00:23:45,040 Speaker 1: ways to gain more exposure to China, both equities and 396 00:23:45,240 --> 00:23:48,800 Speaker 1: fixed income securities. And on the fix income side, you know, 397 00:23:49,160 --> 00:23:51,720 Speaker 1: I know, you guys talk about the tenure treasure yield 398 00:23:51,800 --> 00:23:54,760 Speaker 1: all the time every day on your show. China is 399 00:23:55,119 --> 00:23:58,560 Speaker 1: three point two percent on the tenure right now, so 400 00:23:58,680 --> 00:24:02,920 Speaker 1: that's relatively a track tip for international funds really seeking 401 00:24:03,040 --> 00:24:07,200 Speaker 1: to get some additional yields could you dovetail the advent 402 00:24:07,400 --> 00:24:10,399 Speaker 1: of a digital u N into this conversation, the idea 403 00:24:10,440 --> 00:24:13,879 Speaker 1: that that could potentially lure more money into the nation 404 00:24:14,040 --> 00:24:17,439 Speaker 1: due to it being on the cusp of more modern technology. 405 00:24:17,480 --> 00:24:20,520 Speaker 1: Do you view a digital UN as bringing more capital 406 00:24:20,720 --> 00:24:24,320 Speaker 1: into the nation? Well, I think China has been very 407 00:24:24,400 --> 00:24:28,640 Speaker 1: judicious in terms of bringing capital on shore because they 408 00:24:28,680 --> 00:24:32,320 Speaker 1: don't want too much capital flooding into the country causing 409 00:24:32,720 --> 00:24:37,080 Speaker 1: you know, bubble concerns, and there's ample liquidity already in China, 410 00:24:37,240 --> 00:24:40,560 Speaker 1: so I think when it comes to capital inflows and outflows, 411 00:24:40,880 --> 00:24:45,240 Speaker 1: the authorities are very careful in terms of controlling what 412 00:24:45,320 --> 00:24:48,320 Speaker 1: types of money comes into the country and what types 413 00:24:48,359 --> 00:24:51,680 Speaker 1: of money can flow outside of the country. So we're 414 00:24:51,680 --> 00:24:54,920 Speaker 1: seeing obviously in a recent couple of years, the gradual 415 00:24:54,960 --> 00:24:59,439 Speaker 1: internationalization of the Chinese currency. We're seeing the Chinese currency 416 00:24:59,480 --> 00:25:02,520 Speaker 1: being use of lot more in international trade. But there's 417 00:25:02,560 --> 00:25:04,560 Speaker 1: a long way to go. You know, in the next 418 00:25:04,600 --> 00:25:07,200 Speaker 1: ten years, as I said, channel become the largest economy 419 00:25:07,200 --> 00:25:10,159 Speaker 1: in the world, but the Chinese un is still not 420 00:25:10,280 --> 00:25:13,439 Speaker 1: fully convertible on a couple account, So it's going to 421 00:25:13,520 --> 00:25:16,840 Speaker 1: be a steady journey or gradual opening up. And I 422 00:25:16,880 --> 00:25:19,560 Speaker 1: do believe in the coming several years, capital influence and 423 00:25:19,600 --> 00:25:25,520 Speaker 1: outflows will gradually become loosened. Jing. I want to speak 424 00:25:25,560 --> 00:25:28,720 Speaker 1: about not so much the politics at the moment or 425 00:25:28,760 --> 00:25:32,399 Speaker 1: frankly the politics of the future, but the reality that 426 00:25:32,520 --> 00:25:35,840 Speaker 1: business can often lead politics. JP Morgan has been in 427 00:25:35,960 --> 00:25:40,440 Speaker 1: Hong Kong for nineties years or so. JP Morgan provided 428 00:25:40,600 --> 00:25:46,080 Speaker 1: leadership and being in Taipei in seventy explain of business 429 00:25:46,200 --> 00:25:51,200 Speaker 1: and financials will interlink with our politics in this delicate 430 00:25:51,240 --> 00:25:56,080 Speaker 1: debate between the mainland and Taiwan. Well, you know, I 431 00:25:56,119 --> 00:26:00,560 Speaker 1: will leave the politics to politicians. So we UM as 432 00:26:00,560 --> 00:26:04,399 Speaker 1: a firm are very committed to the Asia Pacific region, 433 00:26:04,760 --> 00:26:08,360 Speaker 1: of course, including China and the rest of the economies 434 00:26:08,800 --> 00:26:11,199 Speaker 1: and UH as you said, you know, we've been in 435 00:26:11,240 --> 00:26:14,119 Speaker 1: the region in some countries for over a hundred years 436 00:26:14,160 --> 00:26:17,880 Speaker 1: and this year we're actually celebrating our one hundred anniversary 437 00:26:18,000 --> 00:26:21,840 Speaker 1: in China. So we're here to serve our clients, both 438 00:26:21,880 --> 00:26:24,280 Speaker 1: in the national clients who want to do more business 439 00:26:24,280 --> 00:26:28,240 Speaker 1: in the region, and also UM local clients who actually 440 00:26:28,280 --> 00:26:31,720 Speaker 1: want to go global. So we are here really acting 441 00:26:31,760 --> 00:26:35,360 Speaker 1: as a bridge between East and West, and we're here 442 00:26:35,400 --> 00:26:38,920 Speaker 1: to facilitate capital transactions both in and out of the 443 00:26:39,000 --> 00:26:43,760 Speaker 1: region doing some really really sensitive topics. We appreciate your 444 00:26:43,760 --> 00:26:45,960 Speaker 1: time this morning to comment on some of them. Jingle 445 00:26:46,040 --> 00:26:49,040 Speaker 1: Rick there, JP Morgan Chase Managing Director and Asia Pacific 446 00:26:49,119 --> 00:26:58,199 Speaker 1: Vice Chairman. Tony Rodriguez is with newving with years and 447 00:26:58,280 --> 00:27:00,560 Speaker 1: years of work, and what's wonderful about in his work 448 00:27:00,840 --> 00:27:03,840 Speaker 1: it's really been focused on the corporate side and investment 449 00:27:03,840 --> 00:27:07,800 Speaker 1: grade his tenure of credit Suite of years ago. Tony Rodriguez, 450 00:27:07,840 --> 00:27:11,920 Speaker 1: you are ever optimistic here about the credit quality that's 451 00:27:11,960 --> 00:27:16,080 Speaker 1: out there? Do we underestimate the goodness of the balance 452 00:27:16,080 --> 00:27:20,159 Speaker 1: sheet of Corporate America? Well, good morning, Tom, good to 453 00:27:20,200 --> 00:27:22,960 Speaker 1: be with with all of you guys. Um. I do 454 00:27:23,080 --> 00:27:25,480 Speaker 1: think that there is some underestimation the quality balance sheet. 455 00:27:25,520 --> 00:27:28,280 Speaker 1: I mean, we are looking at UVINE this year at 456 00:27:29,520 --> 00:27:32,840 Speaker 1: or higher earnings and cash flow growth. And when you 457 00:27:32,880 --> 00:27:37,560 Speaker 1: look at what companies did basically throughout was they really 458 00:27:37,600 --> 00:27:39,879 Speaker 1: fortified their balance sheet. They borrowed a lot, but they 459 00:27:39,960 --> 00:27:42,040 Speaker 1: kept a lot of cash on the balance sheet. So 460 00:27:42,160 --> 00:27:44,720 Speaker 1: we're expecting to see this year, both in the high 461 00:27:44,720 --> 00:27:47,680 Speaker 1: grade space and the high yield space, is a significant 462 00:27:47,680 --> 00:27:50,800 Speaker 1: pay out of that debt where you might get one 463 00:27:51,160 --> 00:27:55,840 Speaker 1: full turn of leverage decline this year in the high 464 00:27:55,920 --> 00:27:59,240 Speaker 1: yield market, So balance sheets are gonna be very healthy 465 00:27:59,359 --> 00:28:02,280 Speaker 1: in our view. And from then, from that perspective, you 466 00:28:02,320 --> 00:28:04,919 Speaker 1: can look at the pricing in the high yield market 467 00:28:05,320 --> 00:28:08,240 Speaker 1: and what we certainly think it's pretty full. We think 468 00:28:08,280 --> 00:28:11,440 Speaker 1: that it's justified by the reality of the improvement in 469 00:28:11,480 --> 00:28:13,840 Speaker 1: the fundamentals. So I'm going to suggest that something new 470 00:28:13,920 --> 00:28:16,000 Speaker 1: year to see the gross paid down that we see 471 00:28:16,000 --> 00:28:18,400 Speaker 1: and we saw it from Jim Suva on Apple where 472 00:28:18,440 --> 00:28:20,080 Speaker 1: he says they're going to really come in with a 473 00:28:20,160 --> 00:28:22,560 Speaker 1: vengeance on buybex and div it an increase to see 474 00:28:22,640 --> 00:28:24,400 Speaker 1: leverage come in. But then in a high yield space, 475 00:28:24,440 --> 00:28:26,200 Speaker 1: look at the story right now, you're not in airlines 476 00:28:26,200 --> 00:28:28,680 Speaker 1: out this morning kicking off the five point five billion 477 00:28:28,720 --> 00:28:30,639 Speaker 1: dollar high yield bond sale. We've had a ton of 478 00:28:30,680 --> 00:28:32,800 Speaker 1: supply and the numbers this year is set to get 479 00:28:32,800 --> 00:28:35,480 Speaker 1: bigger tony and the numbers of one thing. What that 480 00:28:35,560 --> 00:28:37,679 Speaker 1: money is used for is another And you've touched on 481 00:28:37,760 --> 00:28:41,480 Speaker 1: this how much of that is just refinancing, But we're 482 00:28:41,520 --> 00:28:46,360 Speaker 1: seeing the numbers that well indicate something like is refinancing. 483 00:28:46,680 --> 00:28:49,040 Speaker 1: So companies have been able to extend out the debt, 484 00:28:49,120 --> 00:28:51,680 Speaker 1: which is clearly very critical in case you run into 485 00:28:51,760 --> 00:28:55,440 Speaker 1: some sort of liquidity hiccup and an ability to finance. 486 00:28:55,760 --> 00:28:58,200 Speaker 1: But in addition to that, by paying down some of 487 00:28:58,200 --> 00:29:00,840 Speaker 1: the cash that they've built up given all the uncertainty 488 00:29:00,840 --> 00:29:04,280 Speaker 1: they were facing in now, that really starts to bring 489 00:29:04,320 --> 00:29:06,760 Speaker 1: down the leverage. And that's a big reason why we 490 00:29:06,840 --> 00:29:10,960 Speaker 1: see default forecasts, not only our own, but rating agencies, 491 00:29:11,240 --> 00:29:14,600 Speaker 1: other street firms bringing them down to numbers in many 492 00:29:14,640 --> 00:29:16,760 Speaker 1: cases are as low as two percent of faults on 493 00:29:16,800 --> 00:29:19,320 Speaker 1: a trailing twelve month basis. By the end of this year, 494 00:29:19,800 --> 00:29:22,760 Speaker 1: those are almost record lows, Tony. This makes sense when 495 00:29:22,800 --> 00:29:24,600 Speaker 1: you look back six months, but there seems to be 496 00:29:24,680 --> 00:29:26,880 Speaker 1: a cognitive dissonance a little bit when you take a 497 00:29:26,880 --> 00:29:29,080 Speaker 1: look at the one point six trillion dollars of high 498 00:29:29,120 --> 00:29:31,280 Speaker 1: old dead outstanding in the United States and you look 499 00:29:31,320 --> 00:29:33,720 Speaker 1: at that it's near a record high that if you 500 00:29:33,720 --> 00:29:38,240 Speaker 1: look back beyond the immediate pandemic times, these companies still 501 00:29:38,280 --> 00:29:41,840 Speaker 1: look highly leveraged. Is there some sort of reckoning that 502 00:29:42,000 --> 00:29:45,200 Speaker 1: is waiting for these companies past this arrow when they 503 00:29:45,240 --> 00:29:47,840 Speaker 1: actually have to start paying this down in real time, 504 00:29:47,920 --> 00:29:49,840 Speaker 1: not just paying down some of the borrowing that they 505 00:29:49,880 --> 00:29:54,760 Speaker 1: did during the pandemic times to stay alive. Yeah. Well, 506 00:29:54,800 --> 00:29:56,800 Speaker 1: when we look at kind of lawn term averages of 507 00:29:56,840 --> 00:29:58,360 Speaker 1: debt to cash flow and you look at the high 508 00:29:58,520 --> 00:30:00,240 Speaker 1: market and say maybe it's four to we're and a 509 00:30:00,280 --> 00:30:03,240 Speaker 1: half times debt to but down market we see numbers 510 00:30:03,280 --> 00:30:06,360 Speaker 1: coming back down into that range, meaning the long term 511 00:30:06,440 --> 00:30:09,560 Speaker 1: historical average range. So what that tells us is that 512 00:30:09,640 --> 00:30:13,680 Speaker 1: the overall high market is really not we don't believe 513 00:30:13,960 --> 00:30:18,120 Speaker 1: as significant risk of dislocation just from the level of debt. 514 00:30:18,560 --> 00:30:22,720 Speaker 1: The dislocation would come really more from a surprise and inflation, 515 00:30:23,200 --> 00:30:27,680 Speaker 1: a much weaker growth outlook, potentially negative outcomes on whether 516 00:30:27,720 --> 00:30:30,960 Speaker 1: it's the vaccine or resurgence of COVID more of a 517 00:30:31,040 --> 00:30:35,560 Speaker 1: fundamental driver of weaker growth. But from a financial stability perspective, 518 00:30:35,880 --> 00:30:38,320 Speaker 1: the high market is pretty well positioned in terms of 519 00:30:38,440 --> 00:30:41,520 Speaker 1: level of debt and where cash flow is and where 520 00:30:41,560 --> 00:30:44,480 Speaker 1: companies have been able to restructure their balance sheet to 521 00:30:44,560 --> 00:30:47,680 Speaker 1: extend out their maturities, kind of pushing back any near 522 00:30:47,800 --> 00:30:50,880 Speaker 1: term maturity wall that is often a big risk in 523 00:30:51,200 --> 00:30:53,840 Speaker 1: the market. From a liquidity perspective, tell you just a 524 00:30:53,840 --> 00:30:56,440 Speaker 1: find question for me before we let you go, marches 525 00:30:56,480 --> 00:30:59,280 Speaker 1: could be an issue this year, and marches will being 526 00:30:59,320 --> 00:31:00,840 Speaker 1: focused in the next couple of weeks when we get 527 00:31:00,840 --> 00:31:03,640 Speaker 1: the onnings as well. On the cost side of things, 528 00:31:03,880 --> 00:31:07,280 Speaker 1: how closely are you looking at that and right now? So, honey, well, 529 00:31:07,400 --> 00:31:09,880 Speaker 1: very closely, and we clearly expect there to be some 530 00:31:09,960 --> 00:31:12,800 Speaker 1: cost pressures, particularly here in the middle of the year 531 00:31:12,840 --> 00:31:14,640 Speaker 1: as we head into towards the end of the year. 532 00:31:14,920 --> 00:31:16,920 Speaker 1: All of the supply bottle next thing. You guys have 533 00:31:17,240 --> 00:31:21,320 Speaker 1: highlighted some of the initial reopening price pressures. Whether it's 534 00:31:21,400 --> 00:31:24,400 Speaker 1: from not only a goods perspective, but I also obviously 535 00:31:24,440 --> 00:31:28,080 Speaker 1: from employment bringing people back in quickly enough to match 536 00:31:28,160 --> 00:31:31,400 Speaker 1: what we think would be a big surge and services demand. 537 00:31:31,960 --> 00:31:34,160 Speaker 1: So we'll be looking to see whether that is truly 538 00:31:34,240 --> 00:31:38,800 Speaker 1: just a transitory short term bulge in those pressures impacting 539 00:31:38,840 --> 00:31:42,680 Speaker 1: margins negatively, and what the outlook will be for twenty two. 540 00:31:43,080 --> 00:31:45,760 Speaker 1: Right now, our view is that the margin pressures will 541 00:31:45,800 --> 00:31:48,440 Speaker 1: be transitory and in twenty two you get back to 542 00:31:48,480 --> 00:31:53,760 Speaker 1: an equilibrium level of really still pretty supportive margins. From 543 00:31:53,760 --> 00:31:56,800 Speaker 1: a depth perspective. London getting drunk on this program quickly, 544 00:31:56,800 --> 00:31:59,240 Speaker 1: This drinking games taking off isn't it. Tony Drake has 545 00:31:59,280 --> 00:32:02,280 Speaker 1: moving head fix thing comes Johnny. This is the Bloomberg 546 00:32:02,320 --> 00:32:06,680 Speaker 1: Surveillance Podcast. Thanks for listening. Join us live weekdays from 547 00:32:06,680 --> 00:32:10,080 Speaker 1: seven to ten am Eastern on Bloomberg Radio and on 548 00:32:10,160 --> 00:32:14,440 Speaker 1: Bloomberg Television each day from six to nine am for 549 00:32:14,680 --> 00:32:19,640 Speaker 1: insight from the best in economics, finance, investment, and international relations. 550 00:32:20,080 --> 00:32:24,760 Speaker 1: And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, 551 00:32:24,920 --> 00:32:28,520 Speaker 1: Bloomberg dot com, and of course on the terminal. I'm 552 00:32:28,560 --> 00:32:31,280 Speaker 1: Tom Keene, and this is Bloomberg