1 00:00:00,680 --> 00:00:13,200 Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. 2 00:00:13,240 --> 00:00:17,440 Speaker 1: Always with Michael McKee. Daily we bring you insight from 3 00:00:17,480 --> 00:00:22,279 Speaker 1: the best in economics, finance, investment, and international relations. Find 4 00:00:22,320 --> 00:00:26,880 Speaker 1: Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of 5 00:00:26,920 --> 00:00:33,559 Speaker 1: course on the Bloomberg Michael McKee not with Francie Laqua, 6 00:00:34,000 --> 00:00:36,600 Speaker 1: will join us this morning, and that is a good 7 00:00:36,640 --> 00:00:41,000 Speaker 1: and beautiful thing. We've got David Kotak for the half hour, 8 00:00:41,159 --> 00:00:45,479 Speaker 1: and so with that France scene, let's set up the drama. No, 9 00:00:45,680 --> 00:00:50,000 Speaker 1: not Mr Trump and Secretary Clinton, but uh, miss may 10 00:00:50,120 --> 00:00:53,880 Speaker 1: and miss led some what's gonna happen here in ten twelve, 11 00:00:54,000 --> 00:00:57,800 Speaker 1: fourteen minutes? Is that refreshing Tom to talk about political 12 00:00:57,840 --> 00:01:00,440 Speaker 1: mayhem and for once looking at the youth. Okay, so 13 00:01:00,480 --> 00:01:02,800 Speaker 1: we understand from the BBC, Tom, so we talked about 14 00:01:02,800 --> 00:01:06,160 Speaker 1: it on TV. Andrew, let's some make quit. According to 15 00:01:06,200 --> 00:01:10,400 Speaker 1: the BBC her conservative leadership bids, now we only have 16 00:01:10,560 --> 00:01:14,199 Speaker 1: two people that want to be Conservative Party leader after 17 00:01:14,240 --> 00:01:17,440 Speaker 1: a lot of people decided to pull out. So this 18 00:01:17,480 --> 00:01:20,080 Speaker 1: is according to a close close to the Energy Minister 19 00:01:20,600 --> 00:01:23,760 Speaker 1: um and this would be because they say the abuse 20 00:01:23,800 --> 00:01:25,679 Speaker 1: has been too great. Now. What you're pointing to, Tom 21 00:01:25,760 --> 00:01:28,760 Speaker 1: is the fact that she had to apologize to one 22 00:01:28,840 --> 00:01:32,280 Speaker 1: Miss Theresa May, who would become a prime minister if 23 00:01:32,440 --> 00:01:35,240 Speaker 1: andrewatte Lets were to step down. And this is after 24 00:01:35,319 --> 00:01:37,920 Speaker 1: she suggested that being a mother made her a better 25 00:01:38,000 --> 00:01:44,440 Speaker 1: candidate for UK prime minister. Yeah, remarkable. Sterling explodes straight 26 00:01:44,560 --> 00:01:48,160 Speaker 1: up and we wanna h May clear the BBC report 27 00:01:48,240 --> 00:01:51,600 Speaker 1: and even the BBC says is unconfirmed. So it's a 28 00:01:51,600 --> 00:01:55,560 Speaker 1: little fragile. David Kotak, It's never fragile in his perspective. 29 00:01:55,800 --> 00:01:58,960 Speaker 1: And David, to help, particularly our listeners in the United Kingdom, 30 00:01:59,240 --> 00:02:05,120 Speaker 1: at this morning's sterling explodes out to that's uncertainty, isn't 31 00:02:05,120 --> 00:02:08,280 Speaker 1: It certainly goes away. Things go well. Speculating that this 32 00:02:08,320 --> 00:02:12,760 Speaker 1: report is accurate, You lose an uncertainty premium and you 33 00:02:12,840 --> 00:02:15,880 Speaker 1: get a market reaction at once, and we see it 34 00:02:15,919 --> 00:02:19,239 Speaker 1: now that market would turn right around if the news 35 00:02:19,360 --> 00:02:22,920 Speaker 1: is not is now expected. My concern here, David, you 36 00:02:23,000 --> 00:02:26,600 Speaker 1: are expert at this is when everybody's in the same trade, 37 00:02:27,120 --> 00:02:31,200 Speaker 1: all my radar goes up. Sterling right now is a 38 00:02:31,240 --> 00:02:35,720 Speaker 1: massive one way that week Sterling. Sure suppose you went 39 00:02:35,800 --> 00:02:40,919 Speaker 1: the other way, and for some reason Parliament didn't pass 40 00:02:41,360 --> 00:02:45,120 Speaker 1: or rejected the referendum, called for another one found a 41 00:02:45,200 --> 00:02:49,440 Speaker 1: legal construction to reverse things. Now we'd have a different 42 00:02:49,800 --> 00:02:52,400 Speaker 1: kind of mess in Europe, but it wouldn't be this one, 43 00:02:52,919 --> 00:02:56,040 Speaker 1: and it could reverse markets. But markets are now all 44 00:02:56,120 --> 00:02:58,280 Speaker 1: on one side of a trade and the trade is. 45 00:02:58,320 --> 00:03:01,320 Speaker 1: It doesn't look good for the UK with Brexit, but 46 00:03:01,639 --> 00:03:04,840 Speaker 1: at least markets are now sure that Brexit will happen. Right. 47 00:03:04,919 --> 00:03:08,519 Speaker 1: We had a couple of bizarre days where they were 48 00:03:08,560 --> 00:03:11,480 Speaker 1: thinking about legals and saying, well, actually breaks that may 49 00:03:11,480 --> 00:03:14,400 Speaker 1: not happen. Now we have confirmation that you know, the 50 00:03:14,520 --> 00:03:17,080 Speaker 1: UK will be on its way out. It sure looks 51 00:03:17,160 --> 00:03:20,120 Speaker 1: like it and markets are adjusting to it. But we 52 00:03:20,120 --> 00:03:22,639 Speaker 1: we are only beginning to see fancy and it seems 53 00:03:22,680 --> 00:03:27,000 Speaker 1: to me the early signs of the economic change. But 54 00:03:27,120 --> 00:03:30,000 Speaker 1: what happens we start to see jobs in the financial 55 00:03:30,000 --> 00:03:34,040 Speaker 1: sector leave London. Where do they go? Where are the 56 00:03:34,120 --> 00:03:38,040 Speaker 1: fragmented pieces going to end up? And some of that 57 00:03:38,120 --> 00:03:40,400 Speaker 1: will go into the EU, some of it will go 58 00:03:40,480 --> 00:03:43,200 Speaker 1: to Paris and Frankfort, some of it will go elsewhere. 59 00:03:44,520 --> 00:03:47,440 Speaker 1: This has to be revealed as it does. These markets 60 00:03:47,480 --> 00:03:50,120 Speaker 1: are going to change and adjust, David. Overall, and this 61 00:03:50,200 --> 00:03:52,440 Speaker 1: is right where I wanted to to to ask you, 62 00:03:52,560 --> 00:03:55,960 Speaker 1: are banks going to shed jobs as an excuse or 63 00:03:56,000 --> 00:03:58,080 Speaker 1: will they really be here on Brexit? I know it's 64 00:03:58,120 --> 00:03:59,600 Speaker 1: too soon to say because we don't know about this 65 00:03:59,600 --> 00:04:02,600 Speaker 1: financial passporting, but it seems like a great way to 66 00:04:02,640 --> 00:04:06,200 Speaker 1: do restructuring, a painful restructuring which you had to anyway. 67 00:04:06,200 --> 00:04:09,800 Speaker 1: It would certainly be an opportunity if if you and 68 00:04:09,840 --> 00:04:13,000 Speaker 1: I were running a bank and we had an excuse 69 00:04:13,480 --> 00:04:16,000 Speaker 1: to alter the form and structure of the bank, we 70 00:04:16,040 --> 00:04:19,120 Speaker 1: would use it. And we wouldn't say we're doing it 71 00:04:19,240 --> 00:04:22,960 Speaker 1: because of our internal profit motive. We would blame the 72 00:04:23,000 --> 00:04:26,600 Speaker 1: political outcome. David. When when when I look at all 73 00:04:26,680 --> 00:04:29,200 Speaker 1: of this, I go back to the Italian banks. You've 74 00:04:29,200 --> 00:04:33,880 Speaker 1: written on this. What is your unique perspective on the 75 00:04:34,000 --> 00:04:37,720 Speaker 1: volumes that we've read on what Italy will do? There's 76 00:04:37,800 --> 00:04:41,839 Speaker 1: no choice because the European method is to expand credit, 77 00:04:41,960 --> 00:04:46,599 Speaker 1: print money in jet capital, have the government fix it. 78 00:04:46,839 --> 00:04:50,320 Speaker 1: Failures aren't permitted. So it looks like it's forty billion 79 00:04:50,760 --> 00:04:54,280 Speaker 1: coming into the banks in recapitalization. That's the number. I've 80 00:04:54,320 --> 00:04:59,320 Speaker 1: seen A hundred and fifty billion more in guarantees of 81 00:04:59,320 --> 00:05:02,839 Speaker 1: of a that the European Central Bank will then be 82 00:05:02,920 --> 00:05:06,880 Speaker 1: able to inject financing too, because they'll accept Italy with 83 00:05:06,960 --> 00:05:10,520 Speaker 1: a trip will be credit rating as an acceptable sovereign 84 00:05:10,760 --> 00:05:14,400 Speaker 1: and so we'll expand credit cheap and money and preserve 85 00:05:14,440 --> 00:05:17,680 Speaker 1: a system. They don't form a bad bank, move the assets, 86 00:05:17,960 --> 00:05:21,960 Speaker 1: resolve and take losses because that would mean an admission 87 00:05:22,480 --> 00:05:25,760 Speaker 1: and that's not the nature of the structure in the 88 00:05:25,800 --> 00:05:28,160 Speaker 1: European Union. The same thing is gonna happen in Germany. 89 00:05:28,200 --> 00:05:30,719 Speaker 1: There's a bank in trouble there too. We're we're going 90 00:05:30,760 --> 00:05:33,760 Speaker 1: to see that type of resolution that says more credit, 91 00:05:34,040 --> 00:05:38,159 Speaker 1: more expansion of credit, more activity in the credit, expansion 92 00:05:38,200 --> 00:05:42,480 Speaker 1: of the currency, more QUEUEI for a very very very 93 00:05:42,520 --> 00:05:46,360 Speaker 1: long time. But David, why are the Germans playing hardball? Right? 94 00:05:46,400 --> 00:05:50,359 Speaker 1: So you're saying, like many commentators that state supports cannot 95 00:05:50,360 --> 00:05:53,279 Speaker 1: sit with current bail in rules. The Germans also have 96 00:05:53,279 --> 00:05:56,920 Speaker 1: a lot to lose if these baili in rules are continued. 97 00:05:57,080 --> 00:05:59,240 Speaker 1: Then if something happens with the German banks, and it 98 00:05:59,360 --> 00:06:02,440 Speaker 1: may well do you, then they're stuck. I think I 99 00:06:02,480 --> 00:06:04,600 Speaker 1: think they're stuck until they figure out how to get 100 00:06:04,680 --> 00:06:07,599 Speaker 1: rid of the bail in rules because they saw that 101 00:06:07,720 --> 00:06:11,039 Speaker 1: they didn't work and they created such turmoil the little 102 00:06:11,080 --> 00:06:15,160 Speaker 1: bit of involvement that bail in had, and it alters 103 00:06:15,240 --> 00:06:18,599 Speaker 1: the form of risk taking on the part of depositors 104 00:06:18,600 --> 00:06:21,320 Speaker 1: and users of banks. Who wants to put money in 105 00:06:21,320 --> 00:06:23,680 Speaker 1: a bank when you can lose it? That's just not 106 00:06:23,800 --> 00:06:26,839 Speaker 1: a concept we think about. And it and the structure 107 00:06:26,920 --> 00:06:29,880 Speaker 1: and payments among them between the banks has made it 108 00:06:29,920 --> 00:06:34,080 Speaker 1: worse because payments do from banks are no longer counted 109 00:06:34,120 --> 00:06:40,279 Speaker 1: in the liquidity computation three. You're massively skewed equity, I am, 110 00:06:40,520 --> 00:06:44,600 Speaker 1: Is there value in Europe? Now? Yes, all these headlines, 111 00:06:44,720 --> 00:06:47,880 Speaker 1: all this doom and gloom that Francine are doing. The 112 00:06:47,920 --> 00:06:52,520 Speaker 1: investment guy in me says, opportunity. Where's the opportunity? Mr? 113 00:06:53,040 --> 00:06:56,599 Speaker 1: I think the European stock markets now, you gotta set 114 00:06:57,200 --> 00:07:01,359 Speaker 1: UK aside. The European stock markets are cheap. They have 115 00:07:01,560 --> 00:07:05,640 Speaker 1: earnings yields in the high single digits, and they have 116 00:07:05,720 --> 00:07:09,320 Speaker 1: an interest rate on sovereign debt which is negative and 117 00:07:09,400 --> 00:07:13,280 Speaker 1: never seen anything like. I mean for Japan. Total Franccene 118 00:07:13,320 --> 00:07:17,679 Speaker 1: of France is five point eight seven yield. That's stunning, 119 00:07:18,040 --> 00:07:20,080 Speaker 1: It is stunning. But Tom, what I don't understand, and 120 00:07:20,120 --> 00:07:22,280 Speaker 1: maybe David can you know, set some light into this, 121 00:07:22,840 --> 00:07:26,280 Speaker 1: is that so yields are suppressed, that's a flight to safety. 122 00:07:26,320 --> 00:07:28,200 Speaker 1: But then stocks her up, you know, the foot See 123 00:07:28,240 --> 00:07:30,720 Speaker 1: we're seeing the foot see despite bregsit, despite all of 124 00:07:30,720 --> 00:07:35,640 Speaker 1: these concerns, actually entering a bull markets from it gained 125 00:07:36,480 --> 00:07:38,480 Speaker 1: from February. What exactly is going on? Do we just 126 00:07:38,520 --> 00:07:40,800 Speaker 1: think that central banks can take care of everything all 127 00:07:40,800 --> 00:07:43,160 Speaker 1: the time. I don't know that we think they can 128 00:07:43,160 --> 00:07:45,800 Speaker 1: take care of everything all the time. Fancying, but we 129 00:07:46,000 --> 00:07:51,560 Speaker 1: love long term zero interest great money in great abundance. 130 00:07:51,640 --> 00:07:54,880 Speaker 1: It raises the prices of financial assets. And that's what 131 00:07:55,000 --> 00:07:58,080 Speaker 1: we see a lot of places in the world, and 132 00:07:58,120 --> 00:08:01,880 Speaker 1: we now see it in Europe. When Carney was on 133 00:08:01,920 --> 00:08:07,680 Speaker 1: a track for a tightening policy and harder pound, the 134 00:08:07,800 --> 00:08:11,320 Speaker 1: stock market struggled. Now we have a referendum that's turned 135 00:08:11,360 --> 00:08:14,680 Speaker 1: that upside down. UK is headed for zero interest rates, 136 00:08:14,720 --> 00:08:18,520 Speaker 1: maybe negative rates, and the stock market loves it. History 137 00:08:18,600 --> 00:08:21,720 Speaker 1: being made in the United Kingdom. We are fortunate. Francine 138 00:08:21,760 --> 00:08:25,480 Speaker 1: laquix is there, Francine, give us perspective on this moment 139 00:08:25,640 --> 00:08:28,120 Speaker 1: for your United Kingdom. Well, Tom, until an hour ago. 140 00:08:28,200 --> 00:08:31,880 Speaker 1: This was extremely unexpected. We had two people race, Andrew 141 00:08:31,960 --> 00:08:34,160 Speaker 1: leed some announcing just a couple of minutes ago that 142 00:08:34,280 --> 00:08:37,120 Speaker 1: she will pull out of the race to succeed David Cameron. 143 00:08:37,160 --> 00:08:39,960 Speaker 1: Now this paves the way for the Home Secretary Theresa 144 00:08:40,000 --> 00:08:42,240 Speaker 1: May to become Britain's next prime minister. But Tom just 145 00:08:42,280 --> 00:08:44,719 Speaker 1: at one word of caveats caveats. I don't think it 146 00:08:44,720 --> 00:08:48,199 Speaker 1: will happen, but we will hear from the Tory Committee chairman, 147 00:08:48,600 --> 00:08:52,280 Speaker 1: Mr Brady. He's essentially the man running the leadership contest 148 00:08:52,640 --> 00:08:56,080 Speaker 1: and he speaks in twelve minutes, so either confirms. He 149 00:08:56,120 --> 00:08:59,000 Speaker 1: could confirm that Tresa May will be Britain's next prime 150 00:08:59,040 --> 00:09:02,760 Speaker 1: minister or unlikely. But he could also say we need 151 00:09:02,960 --> 00:09:05,280 Speaker 1: a two person race and therefore we go back to 152 00:09:05,280 --> 00:09:07,920 Speaker 1: the drawing board to find someone that Theresa May can 153 00:09:08,120 --> 00:09:11,040 Speaker 1: can fight with. Okay, that's fine, but are we any 154 00:09:11,120 --> 00:09:14,920 Speaker 1: closer to a general election? I think Americans are hardwired 155 00:09:14,960 --> 00:09:18,720 Speaker 1: to go conservative labor. To be clear, we're not talking 156 00:09:18,720 --> 00:09:21,000 Speaker 1: about that, are we. No, we're not at all. When 157 00:09:21,000 --> 00:09:23,760 Speaker 1: you speak to investors, there was I think a post 158 00:09:23,760 --> 00:09:26,640 Speaker 1: Brexit shock. A couple of commentators that were saying, well, 159 00:09:26,640 --> 00:09:30,000 Speaker 1: we need a general election. But actually Theresa May is 160 00:09:30,440 --> 00:09:33,560 Speaker 1: widely regarded as a safe pair of hands. We heard 161 00:09:33,559 --> 00:09:37,280 Speaker 1: from her today pledging to crackdown on corporates, including big business. 162 00:09:37,600 --> 00:09:39,360 Speaker 1: I mean, it would be very difficult toime to see 163 00:09:39,360 --> 00:09:42,720 Speaker 1: how Parliament could have a no vote confidence at this point. 164 00:09:42,800 --> 00:09:45,280 Speaker 1: And again there was a law past a couple of 165 00:09:45,320 --> 00:09:48,360 Speaker 1: years ago to make the government more stable. So then 166 00:09:48,400 --> 00:09:51,480 Speaker 1: you'd have to reverse that law. There'd be a general election, 167 00:09:51,760 --> 00:09:52,839 Speaker 1: you know, and I get that, and it would be 168 00:09:52,920 --> 00:09:55,760 Speaker 1: like us changing from the first Tuesday of November. David 169 00:09:55,840 --> 00:09:58,560 Speaker 1: Kotech with his Cumberland advisers, fancy let me go to 170 00:09:58,600 --> 00:10:01,800 Speaker 1: you and you today that this brings me back to 171 00:10:01,840 --> 00:10:06,440 Speaker 1: the distinctions of conservatism in the United Kingdom, where going 172 00:10:06,480 --> 00:10:10,280 Speaker 1: back to Disraeli in the nineteenth century, there's this odd 173 00:10:10,320 --> 00:10:15,920 Speaker 1: thing called one nation conservatism. Theresa May and David Cameron 174 00:10:16,440 --> 00:10:21,160 Speaker 1: are a one nation conservatism kind of Tory. Is that 175 00:10:21,320 --> 00:10:24,440 Speaker 1: have anything to do with Brexit and leave? Yeah? Tom, 176 00:10:24,480 --> 00:10:27,800 Speaker 1: I think Theresa May will find out more about how, 177 00:10:28,080 --> 00:10:30,960 Speaker 1: you know, her blueprint for the future. But it surprised 178 00:10:31,000 --> 00:10:33,319 Speaker 1: me she's actually a little bit more conservative than than 179 00:10:33,360 --> 00:10:36,400 Speaker 1: we thought, you know. She she definitely makes David Cameron 180 00:10:36,400 --> 00:10:40,040 Speaker 1: see more of a socialist. She's um, you know, on immigration, 181 00:10:40,120 --> 00:10:42,680 Speaker 1: she's very tough. She's been very tough also on some 182 00:10:42,760 --> 00:10:44,720 Speaker 1: of the business. So I guess my question to David 183 00:10:45,040 --> 00:10:48,120 Speaker 1: is we've talked about the fact that the cloud that 184 00:10:48,160 --> 00:10:51,200 Speaker 1: the UK had is being diminished by the day. What 185 00:10:51,320 --> 00:10:54,000 Speaker 1: can she and the next Chancellor of the Exchequer do 186 00:10:54,520 --> 00:10:56,880 Speaker 1: to regain that trust. Well, it's he got to go 187 00:10:56,960 --> 00:11:00,760 Speaker 1: through the Brexit process. There's no way to avoid that. 188 00:11:00,960 --> 00:11:05,680 Speaker 1: But in the context of this discussion of history and 189 00:11:05,960 --> 00:11:10,160 Speaker 1: history in the world and the role the UK and 190 00:11:10,520 --> 00:11:16,280 Speaker 1: the British diplomat has played in history is remarkable, and 191 00:11:16,360 --> 00:11:20,240 Speaker 1: so is that character still intact. That's the test for 192 00:11:20,280 --> 00:11:23,480 Speaker 1: the new to be some of this, David is they 193 00:11:23,480 --> 00:11:25,679 Speaker 1: got to get out and sell the message, which you're 194 00:11:25,720 --> 00:11:27,880 Speaker 1: seeing with the Chancellor in New York today and with 195 00:11:27,960 --> 00:11:31,440 Speaker 1: the Prime ministers selling airplanes out in the fields of Hampshire. 196 00:11:31,480 --> 00:11:33,520 Speaker 1: I mean part of this is once they get over 197 00:11:33,559 --> 00:11:36,480 Speaker 1: the shock, whoever's running the show has got to go 198 00:11:36,520 --> 00:11:38,880 Speaker 1: out and sell the message well. And the message has 199 00:11:38,920 --> 00:11:43,280 Speaker 1: to have substance, and so they're the substance is unknown. 200 00:11:43,800 --> 00:11:48,280 Speaker 1: The messengers have the capacity to sell it and that 201 00:11:48,520 --> 00:11:53,200 Speaker 1: cohesive new message is what we wait await and what 202 00:11:53,240 --> 00:11:56,400 Speaker 1: we do see now is this fragmentation until we get 203 00:11:56,440 --> 00:11:59,200 Speaker 1: to the new message, the new package, if you will. 204 00:11:59,320 --> 00:12:01,800 Speaker 1: All right, So they have to be truthful, David. It's 205 00:12:01,800 --> 00:12:04,160 Speaker 1: difficult right to be to send people out in the 206 00:12:04,200 --> 00:12:06,400 Speaker 1: open and saying guys were still open for business. I 207 00:12:06,440 --> 00:12:08,840 Speaker 1: love the tweet that the Chancellor said, we may be 208 00:12:08,880 --> 00:12:10,960 Speaker 1: shut out of the U, but we're still global and 209 00:12:11,000 --> 00:12:13,040 Speaker 1: believe in the world. Well, hey, guys, we don't know 210 00:12:13,080 --> 00:12:14,880 Speaker 1: if this country is going to see a recession, how 211 00:12:14,920 --> 00:12:18,520 Speaker 1: tough that recession will be yet? Right, Well, exactly, I mean, Francine, 212 00:12:18,800 --> 00:12:21,520 Speaker 1: you have to you have to justify and prove what 213 00:12:21,600 --> 00:12:26,119 Speaker 1: you say. Otherwise you're seen as as having no substance 214 00:12:26,160 --> 00:12:29,000 Speaker 1: and therefore you lose all credibility. Francine. I know our 215 00:12:29,080 --> 00:12:32,080 Speaker 1: editor John Michael Twaite interviewed Disraeli a few years ago. 216 00:12:32,520 --> 00:12:36,160 Speaker 1: But would you explain to me the conservative politics of 217 00:12:36,200 --> 00:12:41,560 Speaker 1: a greater United Kingdom. How fragmented and polarized are they 218 00:12:41,760 --> 00:12:45,200 Speaker 1: or is it just remain Tories and leave Tories. Well, 219 00:12:45,200 --> 00:12:48,840 Speaker 1: they were fragmented and it was unclear actually until we 220 00:12:48,920 --> 00:12:51,719 Speaker 1: had you know, until David Cameron called for a referendum 221 00:12:51,720 --> 00:12:54,680 Speaker 1: exactly how fragmented they were because it was a party 222 00:12:54,760 --> 00:12:59,760 Speaker 1: that unified almost you know actually from you know, behind David, 223 00:13:00,240 --> 00:13:02,760 Speaker 1: but it was very clear that they unified in the 224 00:13:02,800 --> 00:13:05,920 Speaker 1: promise of a Brexit. So it has been ugly. It's 225 00:13:05,920 --> 00:13:08,040 Speaker 1: been ugly on all sides. If you actually look at 226 00:13:08,080 --> 00:13:09,760 Speaker 1: UK politics at the moment, Tom and I know you 227 00:13:09,840 --> 00:13:12,040 Speaker 1: like to put the analogy with Games of Throne, but 228 00:13:12,080 --> 00:13:13,959 Speaker 1: the Labor Party is really nowhere to be seen in 229 00:13:14,120 --> 00:13:17,200 Speaker 1: huge divisions, and the Tories even when you look at 230 00:13:17,200 --> 00:13:21,080 Speaker 1: the race with people backstabbing and brexiteering and bre executions 231 00:13:21,160 --> 00:13:24,040 Speaker 1: like like we talked to about them in journalism, it 232 00:13:24,120 --> 00:13:26,120 Speaker 1: just makes for an ugly party. This is Fabinoe. We 233 00:13:26,160 --> 00:13:30,080 Speaker 1: are so fortunate, David if Francie U giving wisdom on 234 00:13:30,400 --> 00:13:33,640 Speaker 1: what's going on in politically United Kingdom and we're making 235 00:13:33,840 --> 00:13:39,040 Speaker 1: history and in this remarkable world, a journalist in London 236 00:13:39,200 --> 00:13:43,440 Speaker 1: is contributing to this discussion of the evolution of history. 237 00:13:43,520 --> 00:13:47,160 Speaker 1: In the US. Two American listeners, it's a markingless state 238 00:13:47,200 --> 00:13:49,320 Speaker 1: in the market. I want you to reaffirm equities right 239 00:13:49,320 --> 00:13:52,840 Speaker 1: now you can buy twenty five multiple blue chip dividend 240 00:13:52,920 --> 00:13:56,000 Speaker 1: growing stocks. Well, I buy them in basket's using e 241 00:13:56,120 --> 00:13:59,480 Speaker 1: T s. The answer is yes, because the earnings yields 242 00:13:59,679 --> 00:14:03,800 Speaker 1: are so enticing. In the sovereign debt yield are at 243 00:14:03,880 --> 00:14:06,520 Speaker 1: zero and they're gonna be at zero for a long time. 244 00:14:06,600 --> 00:14:09,680 Speaker 1: This has been great David Kotuk with us with Cumberland Advisers. 245 00:14:09,720 --> 00:14:21,680 Speaker 1: Thank you so much for your time this morning. I 246 00:14:21,760 --> 00:14:24,640 Speaker 1: will say in advance that this will be our most 247 00:14:24,680 --> 00:14:28,880 Speaker 1: important podcast of the day. Michael Darda is it the 248 00:14:29,120 --> 00:14:32,160 Speaker 1: mk M Advisors and he's truly one of our more 249 00:14:32,240 --> 00:14:36,040 Speaker 1: enduring guests. We could talk today Michael for three or 250 00:14:36,080 --> 00:14:38,000 Speaker 1: four hours. We don't have that time with you, so 251 00:14:38,040 --> 00:14:40,400 Speaker 1: I want to cut right to the chase. You made 252 00:14:40,480 --> 00:14:45,680 Speaker 1: headlines a month ago, three months ago with declining business 253 00:14:45,840 --> 00:14:49,680 Speaker 1: investment in America. Is it's still there? Tell us about 254 00:14:50,000 --> 00:14:54,960 Speaker 1: the supply and demand, the business dynamic of the American economy. Hi, Tom, 255 00:14:54,960 --> 00:14:57,840 Speaker 1: thanks for having me on UM. Look, we're still in 256 00:14:57,840 --> 00:15:01,920 Speaker 1: an environment of slow growth, uh week business fixed investment 257 00:15:02,320 --> 00:15:04,520 Speaker 1: and you know two key things for the listeners to 258 00:15:04,560 --> 00:15:07,520 Speaker 1: think about and trying to sort out what this What 259 00:15:07,640 --> 00:15:11,120 Speaker 1: these latest jobs figures tell us UM is that with 260 00:15:11,280 --> 00:15:16,280 Speaker 1: profits week and with capital spending week, it's pretty unlikely 261 00:15:16,280 --> 00:15:19,440 Speaker 1: that we're going to sustain June's job figure of two 262 00:15:19,640 --> 00:15:22,760 Speaker 1: d and eighty seven k um. Really, you know, I 263 00:15:22,760 --> 00:15:25,600 Speaker 1: think what the listeners should be doing is averaging together 264 00:15:26,120 --> 00:15:30,240 Speaker 1: the very week eleven thousand uh reading for May, for 265 00:15:30,400 --> 00:15:32,880 Speaker 1: non farm payrolls and what we saw in June. And 266 00:15:32,880 --> 00:15:35,440 Speaker 1: if you do that, you're closer to about a hundred 267 00:15:35,440 --> 00:15:37,760 Speaker 1: and fifty thousand as a run rate, which is a 268 00:15:37,840 --> 00:15:41,600 Speaker 1: fairly steep slowdown from where we were, say in bid 269 00:15:41,680 --> 00:15:44,480 Speaker 1: till late two tho fourteen, and and uh, you know 270 00:15:44,680 --> 00:15:47,640 Speaker 1: in last year as well, what does the outcome? And 271 00:15:48,000 --> 00:15:50,720 Speaker 1: you spend a lot of time looking at nominal top 272 00:15:50,760 --> 00:15:54,960 Speaker 1: line g d P are real economy plus inflation give 273 00:15:55,040 --> 00:15:58,800 Speaker 1: us the data update on animal spirit when you look 274 00:15:58,840 --> 00:16:02,200 Speaker 1: at such a relative to sparity between the United States 275 00:16:02,640 --> 00:16:05,960 Speaker 1: and a troubled Europe and the United Kingdom absolutely well, 276 00:16:06,120 --> 00:16:09,760 Speaker 1: year over year, nominal GDP real growth and inflation is 277 00:16:09,840 --> 00:16:13,280 Speaker 1: running just above three percent. The average for this six 278 00:16:13,400 --> 00:16:16,160 Speaker 1: year expansion has been closer to four and this is 279 00:16:16,200 --> 00:16:18,560 Speaker 1: the third time in a row that nominal growth has 280 00:16:18,720 --> 00:16:21,360 Speaker 1: faltered to the low end of the six year range 281 00:16:21,520 --> 00:16:23,920 Speaker 1: after the fete is huled at a QUI program. So 282 00:16:24,240 --> 00:16:26,720 Speaker 1: you know, our view has been that the tapering of 283 00:16:27,040 --> 00:16:30,800 Speaker 1: QUI in the end of QUI were forms of monetary tightening, 284 00:16:30,920 --> 00:16:33,520 Speaker 1: not just the December rate rise that occurred last year. 285 00:16:33,680 --> 00:16:36,360 Speaker 1: And so the nominal growth figures tell us that now 286 00:16:36,400 --> 00:16:38,800 Speaker 1: there's some optimism that you know, growth looks like it's 287 00:16:38,840 --> 00:16:41,560 Speaker 1: bouncing back a bit in the second quarter. But I 288 00:16:41,560 --> 00:16:46,000 Speaker 1: would just focus listeners on the bond market measures. These 289 00:16:46,040 --> 00:16:50,040 Speaker 1: low yields, a sinking yield curve, and very weak inflation 290 00:16:50,120 --> 00:16:54,080 Speaker 1: expectations are telling us that the market doesn't really think 291 00:16:54,120 --> 00:16:57,680 Speaker 1: that the q Q bounce back is going to be sustained. Francine, 292 00:16:57,680 --> 00:17:01,280 Speaker 1: I'll probably do this chart tomorrow, Untie. The four point 293 00:17:01,440 --> 00:17:06,720 Speaker 1: three nominal GDP. Now we're down to three point three. 294 00:17:06,840 --> 00:17:10,280 Speaker 1: We've taken a stick one point out of our animal 295 00:17:10,400 --> 00:17:14,520 Speaker 1: spirit in the United Kings in the United States. That's something, Franzy, Yeah, 296 00:17:14,520 --> 00:17:16,280 Speaker 1: it is something. And Tom, we want to go back to, 297 00:17:16,440 --> 00:17:18,880 Speaker 1: you know, the fears basically that we had maybe just 298 00:17:19,160 --> 00:17:21,840 Speaker 1: five days ago about the US economy and labor market 299 00:17:22,200 --> 00:17:24,600 Speaker 1: abated a little bit. But Michael, when you look at 300 00:17:24,600 --> 00:17:28,200 Speaker 1: the global players, right the US, Let's say the EU 301 00:17:28,280 --> 00:17:32,120 Speaker 1: and Japan, they're not all doing their bit to stabilize 302 00:17:32,160 --> 00:17:35,520 Speaker 1: the global economy. Yeah, it's a great question, you know. Um, 303 00:17:35,600 --> 00:17:39,399 Speaker 1: it's very interesting because if you look at phenomenal GDP trends, 304 00:17:39,400 --> 00:17:42,840 Speaker 1: say in the Eurozone in Japan, they've actually done a 305 00:17:42,920 --> 00:17:46,919 Speaker 1: little bit better in recent years following the QUI programs 306 00:17:46,920 --> 00:17:50,159 Speaker 1: in those countries, But the credit markets, the bond market 307 00:17:50,240 --> 00:17:53,879 Speaker 1: measures I mentioned recently, have been weakening everywhere, so it 308 00:17:53,920 --> 00:17:57,520 Speaker 1: looks like investors don't really expect those better numbers to 309 00:17:57,560 --> 00:18:00,359 Speaker 1: be sustained. And at the same time, we've had a 310 00:18:00,400 --> 00:18:03,399 Speaker 1: pretty steep slowdown in nominal growth in China in the 311 00:18:03,440 --> 00:18:07,159 Speaker 1: emerging world, so as the FED shifted towards tapering KIWI 312 00:18:07,359 --> 00:18:11,200 Speaker 1: and then ending it and then raising interest rates last December, 313 00:18:11,359 --> 00:18:14,159 Speaker 1: nominal growth in the US slowed, in nominal growth in 314 00:18:14,280 --> 00:18:18,679 Speaker 1: China in the emerging world slowed sharply. So that in 315 00:18:18,720 --> 00:18:22,760 Speaker 1: my opinion, really explains the huge commodity price crash really 316 00:18:22,800 --> 00:18:25,320 Speaker 1: starting in the middle of two thousand fourteen and extending 317 00:18:25,320 --> 00:18:27,920 Speaker 1: into the first few months of this year. And so, Michael, 318 00:18:27,960 --> 00:18:30,199 Speaker 1: what's the sweet spot for the economy or or for 319 00:18:30,240 --> 00:18:32,840 Speaker 1: globals is it good enough news? You want good enough 320 00:18:32,840 --> 00:18:35,000 Speaker 1: news to know that we're not getting any worse, But 321 00:18:35,000 --> 00:18:36,879 Speaker 1: actually if you get good news, that means that central 322 00:18:36,880 --> 00:18:40,320 Speaker 1: banks may start holding off. Yeah, it's interesting. Another good 323 00:18:40,400 --> 00:18:45,000 Speaker 1: question because unfortunately, if we have to discuss the productivity statistics, 324 00:18:45,440 --> 00:18:47,840 Speaker 1: you know, those don't look very good in the United States, 325 00:18:47,880 --> 00:18:50,000 Speaker 1: and in other countries they've been weak as well. But 326 00:18:50,080 --> 00:18:53,200 Speaker 1: for the US, we're just averaging point five per cent 327 00:18:53,280 --> 00:18:56,920 Speaker 1: per animal non farm productivity since two thousand ten, the 328 00:18:57,040 --> 00:19:00,359 Speaker 1: labor force working age population growing at about the same mounts, 329 00:19:00,400 --> 00:19:03,399 Speaker 1: So it looks like growth potential may only be running 330 00:19:03,440 --> 00:19:06,359 Speaker 1: about one percent per annum. And if you add the 331 00:19:06,400 --> 00:19:09,199 Speaker 1: FED two percent inflation target to that, that gives you 332 00:19:09,240 --> 00:19:12,880 Speaker 1: about three percent nominal growth. So anything above that probably 333 00:19:12,920 --> 00:19:17,080 Speaker 1: means the FED tightness to slow things down. So unfortunately, 334 00:19:17,359 --> 00:19:20,359 Speaker 1: you know, the three percent figure on nominal growth maybe 335 00:19:20,400 --> 00:19:22,800 Speaker 1: about as much as we can expect in the US 336 00:19:22,880 --> 00:19:25,520 Speaker 1: from here on out. Also, you know what else that means. 337 00:19:25,840 --> 00:19:28,080 Speaker 1: There's a lot of talk about physical stimulus and the 338 00:19:28,119 --> 00:19:31,119 Speaker 1: need for it, but it won't do anything if the 339 00:19:31,160 --> 00:19:34,119 Speaker 1: FED offsets it with tighter money. So you know, I 340 00:19:34,160 --> 00:19:37,080 Speaker 1: don't think physical stimulus is really going to do anything 341 00:19:37,119 --> 00:19:39,399 Speaker 1: for us in the US at this point in time. 342 00:19:39,680 --> 00:19:42,240 Speaker 1: So we are here with the most interesting day, Michael 343 00:19:42,280 --> 00:19:46,720 Speaker 1: Darta helping us out here. Michael, let's link your economics 344 00:19:46,760 --> 00:19:50,760 Speaker 1: over to a fully priced equity market. Are equities now 345 00:19:51,280 --> 00:19:54,480 Speaker 1: so priced that they are a bubble? Or is there 346 00:19:54,480 --> 00:19:59,480 Speaker 1: a data rationalization to owning these priced earnings ratios? Well? 347 00:20:00,080 --> 00:20:02,760 Speaker 1: Um uh, the word bubble is very popular now, I 348 00:20:02,800 --> 00:20:06,560 Speaker 1: think unfortunately because rates are low, So a lot of 349 00:20:06,560 --> 00:20:11,480 Speaker 1: people mistake that for overly easy monetary conditions and bubbles. 350 00:20:11,480 --> 00:20:14,040 Speaker 1: But rates are always low if nominal growth is low 351 00:20:14,280 --> 00:20:17,320 Speaker 1: and inflation is low, and equity prices will tend to 352 00:20:17,320 --> 00:20:21,120 Speaker 1: be high if investors think those conditions will be sustained. 353 00:20:21,520 --> 00:20:23,199 Speaker 1: So I don't think we have an equity bubble. But 354 00:20:23,280 --> 00:20:26,920 Speaker 1: what we do have is an aging economic expansion where 355 00:20:26,960 --> 00:20:29,159 Speaker 1: seven years into it, the longest one in history in 356 00:20:29,200 --> 00:20:31,679 Speaker 1: the US is lasted a decade. You know, we're starting 357 00:20:31,720 --> 00:20:33,880 Speaker 1: to see the data points that you would see when 358 00:20:33,920 --> 00:20:36,800 Speaker 1: you're moving into the later innings of a cycle. Profits 359 00:20:36,840 --> 00:20:40,879 Speaker 1: peaking as a sharedage of GDP business fixed investment weakening, 360 00:20:41,160 --> 00:20:44,320 Speaker 1: the FED you know already having started. Um, you know, 361 00:20:44,680 --> 00:20:47,240 Speaker 1: a monetary tightening, and so you know, I think we 362 00:20:47,280 --> 00:20:49,440 Speaker 1: could be in the last year or two of this 363 00:20:49,600 --> 00:20:52,679 Speaker 1: business cycle expansion. And that's really what investors need to 364 00:20:52,880 --> 00:20:56,240 Speaker 1: worry about in terms of the stock market, because typically 365 00:20:56,320 --> 00:21:01,080 Speaker 1: bear markets are linked to recessions, and typically sessions feature 366 00:21:02,240 --> 00:21:08,159 Speaker 1: stock market to quanit. We haven't seen a hint of this. 367 00:21:08,280 --> 00:21:11,840 Speaker 1: We are addicted to the new bearer market as negative seven. 368 00:21:12,720 --> 00:21:16,439 Speaker 1: A lot of our listeners have never experienced us. They well, 369 00:21:16,520 --> 00:21:19,479 Speaker 1: you know, we certainly have had some volatility over the 370 00:21:19,480 --> 00:21:22,000 Speaker 1: course of the last year year and a half, so 371 00:21:22,280 --> 00:21:24,199 Speaker 1: you know, the S and p F is at a 372 00:21:24,240 --> 00:21:27,080 Speaker 1: new nominal high, but you know, it really hasn't made 373 00:21:27,119 --> 00:21:31,320 Speaker 1: a tremendous amount of net progress over the course of 374 00:21:31,400 --> 00:21:34,000 Speaker 1: the last year, and we've had some fairly steep drop 375 00:21:34,000 --> 00:21:36,840 Speaker 1: offs as investors have become worried about, you know, the 376 00:21:36,840 --> 00:21:39,840 Speaker 1: fate of the business cycle. We're down almost from the 377 00:21:39,920 --> 00:21:42,240 Speaker 1: highs um you know, just in the opening month and 378 00:21:42,240 --> 00:21:44,679 Speaker 1: a half of this year, and so it's important to 379 00:21:44,720 --> 00:21:47,639 Speaker 1: put it in context. So we'll stay up at elevated 380 00:21:47,720 --> 00:21:50,359 Speaker 1: levels of investors feel like the business cycle is secure 381 00:21:50,400 --> 00:21:53,200 Speaker 1: and we're not falling into a downturn. But I would 382 00:21:53,200 --> 00:21:55,960 Speaker 1: think that you know that assumption probably will be challenged 383 00:21:56,000 --> 00:21:58,880 Speaker 1: sometime in the next year or two. So my view 384 00:21:58,880 --> 00:22:02,520 Speaker 1: is still more cautious one, unfortunately, right Michael. But this 385 00:22:02,640 --> 00:22:05,240 Speaker 1: to me it seems very intuitive, right that you're cautious 386 00:22:05,280 --> 00:22:08,199 Speaker 1: because everywhere you look, there's there's nothing great. Sure we're 387 00:22:08,240 --> 00:22:10,080 Speaker 1: not falling off a cliff, but there's nothing that you 388 00:22:10,080 --> 00:22:13,400 Speaker 1: can say, right, I'm I'm confident about this and it's 389 00:22:13,480 --> 00:22:16,399 Speaker 1: good news. So where where does all this pollutions come 390 00:22:16,440 --> 00:22:18,840 Speaker 1: from when you look at equities? Well, I'm not sure 391 00:22:18,880 --> 00:22:21,320 Speaker 1: that you know that we're seeing a you know, as 392 00:22:21,400 --> 00:22:25,200 Speaker 1: much bullishness is widely assumed simply because equity markets are 393 00:22:25,200 --> 00:22:27,600 Speaker 1: are at elevated levels. I mean, that's what you'll tend 394 00:22:27,640 --> 00:22:31,119 Speaker 1: to see in a low growth, low inflation environment that 395 00:22:31,200 --> 00:22:35,080 Speaker 1: investors feel is sustainable. So the risk here is that 396 00:22:35,400 --> 00:22:39,040 Speaker 1: if that feeling of sustainability starts to change, that's when 397 00:22:39,160 --> 00:22:41,560 Speaker 1: you know we could see the equity market take a 398 00:22:41,640 --> 00:22:44,520 Speaker 1: steep fall. And and so you know, that comes down 399 00:22:44,520 --> 00:22:46,359 Speaker 1: to where do you think we are in the business cycle? 400 00:22:46,440 --> 00:22:48,200 Speaker 1: And if you think we're in the eighth or ninth inning, 401 00:22:48,280 --> 00:22:49,960 Speaker 1: as I do, then you want to have a more 402 00:22:50,000 --> 00:22:52,600 Speaker 1: conservative approach to investing, and this is something we've been 403 00:22:52,640 --> 00:22:55,720 Speaker 1: advocating really since last summer, and you know, that's served 404 00:22:55,720 --> 00:22:58,480 Speaker 1: investors well if that's what they've been doing. I mean, 405 00:22:58,520 --> 00:23:01,240 Speaker 1: the bond markets actually done fight well better than stocks 406 00:23:01,240 --> 00:23:03,040 Speaker 1: over the course of the last year. You know, now 407 00:23:03,080 --> 00:23:05,359 Speaker 1: the fields are at very low levels, and so that's 408 00:23:05,440 --> 00:23:08,040 Speaker 1: created some concern that there's no value there. But as 409 00:23:08,040 --> 00:23:13,560 Speaker 1: a shock absorber against market volatility or sharp market decline, 410 00:23:13,760 --> 00:23:15,840 Speaker 1: you know, having some funds in cash and bonds has 411 00:23:15,880 --> 00:23:18,960 Speaker 1: certainly been helpful of the last year. But Michael, Japanese 412 00:23:18,960 --> 00:23:21,880 Speaker 1: shares today posting their biggest gain in almost five months. 413 00:23:21,880 --> 00:23:27,480 Speaker 1: Thisbe one and investors are hoping or thinking that actually 414 00:23:27,480 --> 00:23:29,359 Speaker 1: we're going to get more stimulus, and it will come 415 00:23:29,400 --> 00:23:33,000 Speaker 1: sooner than expect it. Does the world need ebonomics to 416 00:23:33,040 --> 00:23:37,600 Speaker 1: work to make sure that growth doesn't leave I think. So, 417 00:23:37,840 --> 00:23:41,200 Speaker 1: you know, Japan's equity market has done very poorly this year, 418 00:23:41,440 --> 00:23:45,199 Speaker 1: and more worryingly to me, bond market inflation expectations and 419 00:23:45,400 --> 00:23:48,040 Speaker 1: in all the major economies, but in Japan in particular, 420 00:23:48,080 --> 00:23:51,400 Speaker 1: it's just completely fallen out of bed. And they were 421 00:23:51,400 --> 00:23:54,240 Speaker 1: having some success with the seweek program, but for whatever 422 00:23:54,280 --> 00:23:58,600 Speaker 1: reason markets have come to doubt the bo j's ability 423 00:23:58,720 --> 00:24:01,680 Speaker 1: or willingness to staining it, and so we're probably seeing 424 00:24:01,680 --> 00:24:04,560 Speaker 1: a marginal reversal of that. So that's good news as 425 00:24:04,560 --> 00:24:07,200 Speaker 1: far as it goes. Michael, I'm looking at a photo 426 00:24:07,240 --> 00:24:09,920 Speaker 1: of you from Italy with the Laureate Robert Mundell. I'm 427 00:24:09,960 --> 00:24:13,959 Speaker 1: counting one, two, three, four, five, six, seven bottles of 428 00:24:14,040 --> 00:24:17,000 Speaker 1: wine on the table. I want to on the cappuccino. 429 00:24:17,840 --> 00:24:20,760 Speaker 1: Only cappuccino for me, Tom today. Yeah, I would get 430 00:24:20,840 --> 00:24:23,399 Speaker 1: what have you learn from Professor Mundell and others about 431 00:24:23,400 --> 00:24:26,600 Speaker 1: the struggle that Italy faces right now? Oh, it's a 432 00:24:26,600 --> 00:24:29,240 Speaker 1: great question. You know. I've been thinking in Mundeli in 433 00:24:29,320 --> 00:24:31,359 Speaker 1: terms since we've been out here for you know, for 434 00:24:31,440 --> 00:24:35,359 Speaker 1: Bob's economic conference. And if you think about the shock 435 00:24:35,440 --> 00:24:38,119 Speaker 1: that the global economy went through from from two thousand 436 00:24:38,200 --> 00:24:41,840 Speaker 1: fourteen into two thousand fifteen, as the FED was tapering 437 00:24:41,880 --> 00:24:45,199 Speaker 1: and ending KIWI and signaling rate rises, what happened The 438 00:24:45,320 --> 00:24:49,840 Speaker 1: dollar exchange rates sword over in a very short period 439 00:24:49,880 --> 00:24:54,000 Speaker 1: of time. And that's endous pressure on any country that was, 440 00:24:54,200 --> 00:24:56,840 Speaker 1: you know, dollar linked close to being dollar linked. China 441 00:24:56,880 --> 00:24:58,639 Speaker 1: is the biggest economy in the world. It has a 442 00:24:58,720 --> 00:25:01,720 Speaker 1: quasi peg to the dollar. And so that's that explains, 443 00:25:01,880 --> 00:25:05,200 Speaker 1: you know, these disruptions with a huge commodity price crash, 444 00:25:05,560 --> 00:25:10,000 Speaker 1: we had a credit market crisis. Okay, we're gonna Michael, 445 00:25:10,000 --> 00:25:12,240 Speaker 1: We're gonna have to leave it there. Michael Darda in 446 00:25:12,359 --> 00:25:25,040 Speaker 1: Italy drinking wine. We're not. Roger Brutle joins us now 447 00:25:25,080 --> 00:25:29,040 Speaker 1: from Catholic Economus, of course, writing in Worldwide Read in 448 00:25:29,080 --> 00:25:31,439 Speaker 1: the Telegraph as well. Roger, I want to get to 449 00:25:31,520 --> 00:25:34,320 Speaker 1: fiscal policy, what you're writing about right now. But first 450 00:25:34,320 --> 00:25:37,639 Speaker 1: of all, all my radar is up. Everyone in the 451 00:25:37,680 --> 00:25:42,919 Speaker 1: world is screaming weaker sterling. You know, Okay, I get it, 452 00:25:43,000 --> 00:25:47,080 Speaker 1: I understand sterling. Could weekend? Could we be shocked by 453 00:25:47,119 --> 00:25:50,679 Speaker 1: sterling stability? Here? Well, I've been thinking that the pound 454 00:25:50,760 --> 00:25:52,840 Speaker 1: needs to fall for quite some time, and then of 455 00:25:52,880 --> 00:25:55,439 Speaker 1: course along came the Brexit vote and it sent it 456 00:25:55,640 --> 00:25:57,960 Speaker 1: a lot lower. Now, I happened to think that this 457 00:25:58,000 --> 00:26:01,920 Speaker 1: sort of exchange rate against the dollars at one thirty dollar, uh, 458 00:26:01,960 --> 00:26:04,880 Speaker 1: and indeed where we are against the end, that's probably 459 00:26:04,920 --> 00:26:07,960 Speaker 1: about right. I don't think there's any need for it 460 00:26:08,000 --> 00:26:09,879 Speaker 1: to go a lot lower. Not to say they won't, 461 00:26:09,960 --> 00:26:12,639 Speaker 1: but I don't think there's any need for it. My 462 00:26:12,840 --> 00:26:15,480 Speaker 1: might worry, by the way, thinking is a British national 463 00:26:15,520 --> 00:26:18,320 Speaker 1: concerned about the British economy? Am I concerned about the 464 00:26:18,320 --> 00:26:20,960 Speaker 1: pound falling a lot further? No? Am I concerned about 465 00:26:20,960 --> 00:26:24,400 Speaker 1: the pound recovering? Yes, it wouldn't be the first time 466 00:26:24,440 --> 00:26:26,639 Speaker 1: this has happened. It wouldn't help. But I think this 467 00:26:26,720 --> 00:26:29,239 Speaker 1: is around about the right level. Roger, how concerned are 468 00:26:29,240 --> 00:26:31,280 Speaker 1: you about the UK economy? You're saying you're concerned, but 469 00:26:31,320 --> 00:26:34,040 Speaker 1: this is this recessions are given and it's going to 470 00:26:34,080 --> 00:26:35,600 Speaker 1: be tough to get out of it, or this is 471 00:26:35,680 --> 00:26:38,040 Speaker 1: just a mild recession, and then things will get better 472 00:26:38,080 --> 00:26:40,200 Speaker 1: because we'll have a plan be this time around. Well, 473 00:26:40,200 --> 00:26:41,920 Speaker 1: of course you can't see me, but if you could 474 00:26:41,960 --> 00:26:44,639 Speaker 1: see me, you would see that I was well, I've 475 00:26:44,640 --> 00:26:46,920 Speaker 1: been around the block a few times, shall we say, ah, 476 00:26:47,280 --> 00:26:50,719 Speaker 1: And I've been around the block enough time to realize 477 00:26:50,720 --> 00:26:54,200 Speaker 1: that nothing in economics is certain. I keep hearing people saying, oh, 478 00:26:54,280 --> 00:26:57,320 Speaker 1: recessions baked in, but of all nonsense. I mean it 479 00:26:57,520 --> 00:27:00,480 Speaker 1: was true. I think that before the Brexit vote, economy 480 00:27:00,560 --> 00:27:03,880 Speaker 1: seemed to be slowing a bit, and it might well 481 00:27:03,920 --> 00:27:06,399 Speaker 1: have ended up in recession without the Prexit vote. You 482 00:27:06,400 --> 00:27:09,120 Speaker 1: know my best guess, but I can't dignify it by 483 00:27:09,160 --> 00:27:12,199 Speaker 1: describing anything better than that. My best guess is that 484 00:27:12,280 --> 00:27:14,639 Speaker 1: we will probably just about a void recession, but the 485 00:27:14,680 --> 00:27:17,360 Speaker 1: economy will slow a bit in the near term. Of course, 486 00:27:17,359 --> 00:27:19,560 Speaker 1: the long terms a different matter. And when you have 487 00:27:19,600 --> 00:27:21,560 Speaker 1: a vote on something as important as we had a 488 00:27:21,640 --> 00:27:24,520 Speaker 1: vote on frankly, you shouldn't really be obsessed about the 489 00:27:24,520 --> 00:27:27,240 Speaker 1: next few months, right Roger. You're a UK citizens, Tom 490 00:27:27,280 --> 00:27:29,400 Speaker 1: and I aren't. What do you hope for your country? 491 00:27:29,520 --> 00:27:31,359 Speaker 1: You are going to have a new prime minister, either 492 00:27:31,400 --> 00:27:33,639 Speaker 1: today or in the next couple of days or maybe weeks. 493 00:27:33,640 --> 00:27:36,920 Speaker 1: She's going to be Theresa May. How should her negotiating 494 00:27:36,960 --> 00:27:39,640 Speaker 1: tactic with the eub Well, I think first of all 495 00:27:39,800 --> 00:27:44,439 Speaker 1: she should conduct some exploratory, exploratory talks to find what 496 00:27:44,640 --> 00:27:47,399 Speaker 1: their frame of mind is and whether they're going to 497 00:27:47,480 --> 00:27:50,680 Speaker 1: play ball or whether they're going to be probot playing 498 00:27:50,680 --> 00:27:53,879 Speaker 1: our ball as well. To use your expression, um now, 499 00:27:54,040 --> 00:27:57,879 Speaker 1: if it's the latter, then I don't think that Britain 500 00:27:57,960 --> 00:28:01,520 Speaker 1: should stand there as a sub plicant and begging and saying, oh, 501 00:28:01,560 --> 00:28:03,479 Speaker 1: please give us this, please give us that you know, 502 00:28:03,840 --> 00:28:08,200 Speaker 1: there is an alternative, which is to operate under World 503 00:28:08,200 --> 00:28:12,720 Speaker 1: Trade Organization w t O rules and to declare unilateral 504 00:28:12,880 --> 00:28:17,679 Speaker 1: free trade. I think that's actually quite an attractive option. 505 00:28:18,040 --> 00:28:21,320 Speaker 1: I would certainly prefer that to the prolonged uncertainty with 506 00:28:21,400 --> 00:28:24,359 Speaker 1: Britain trying to get a trade deal. You saying well, no, 507 00:28:24,520 --> 00:28:27,040 Speaker 1: you've been naughty boys and are sitting here for a 508 00:28:27,040 --> 00:28:29,639 Speaker 1: long time with business uncertain I wouldn't like that. I 509 00:28:29,760 --> 00:28:34,280 Speaker 1: look Roger where we are, Chancellor of the Exchequer Osborne 510 00:28:34,320 --> 00:28:38,240 Speaker 1: in New York, the Prime Minister speaking today flagging airlines 511 00:28:38,280 --> 00:28:43,160 Speaker 1: are buying airlines or whatever. Prime Minister May has to 512 00:28:43,200 --> 00:28:46,920 Speaker 1: go on a massive sales campaign of her nation. Am 513 00:28:46,920 --> 00:28:49,400 Speaker 1: I right on that that the tone has got to 514 00:28:49,440 --> 00:28:54,520 Speaker 1: be set, whatever anybody's politics. Yes, I think that is right, 515 00:28:54,560 --> 00:28:56,440 Speaker 1: But um I wouldn't be doing it in a spirit 516 00:28:56,480 --> 00:28:59,720 Speaker 1: of desperation. Quiet the opposite. I mean, we've been here before, 517 00:29:01,520 --> 00:29:04,080 Speaker 1: and we came out of the European exchange rate mechanism 518 00:29:04,240 --> 00:29:07,360 Speaker 1: comes to mind, and people are all terribly gloomy. In fact, 519 00:29:07,400 --> 00:29:09,680 Speaker 1: what turned out is that was our salvation and we 520 00:29:09,960 --> 00:29:13,920 Speaker 1: surged ahead thereafter. I think you know, you can overdo 521 00:29:14,040 --> 00:29:17,640 Speaker 1: the importance of trade deals. When your President Obama came 522 00:29:17,680 --> 00:29:21,840 Speaker 1: over to Britain, he said that, to be under no illusions, 523 00:29:22,000 --> 00:29:23,680 Speaker 1: if you come out of the EU, you'll go to 524 00:29:23,720 --> 00:29:26,480 Speaker 1: the back of the queue for trade deals with the 525 00:29:26,560 --> 00:29:29,240 Speaker 1: United States. And various people picked up on that. The 526 00:29:29,360 --> 00:29:31,520 Speaker 1: use of the word que which you in America, I 527 00:29:31,520 --> 00:29:34,360 Speaker 1: don't think you use. You say line, and various people 528 00:29:34,400 --> 00:29:36,160 Speaker 1: thought that meant that his speech had been written by 529 00:29:36,280 --> 00:29:39,320 Speaker 1: number ten Downing Street. Well, I replied in the newspaper article, 530 00:29:39,360 --> 00:29:41,520 Speaker 1: I said, I'm going to cross the linguistic of the 531 00:29:41,680 --> 00:29:44,640 Speaker 1: divide and similarly hues the term that's not used in 532 00:29:44,640 --> 00:29:47,320 Speaker 1: the other country. And I said, what's the extent of 533 00:29:47,400 --> 00:29:52,600 Speaker 1: Britain's trade deal with the United States? Now answer zippo, 534 00:29:53,280 --> 00:29:56,320 Speaker 1: we don't have one. We don't have a trade deal 535 00:29:56,360 --> 00:29:58,280 Speaker 1: with the United States. And yet look at how close 536 00:29:58,320 --> 00:30:02,040 Speaker 1: our trading links are. Incredibly close. So I think you 537 00:30:02,080 --> 00:30:05,640 Speaker 1: can overdo this stuff. Prosperity does not emerge from the 538 00:30:05,680 --> 00:30:09,080 Speaker 1: tip of a politician's pen. It emerges the result of 539 00:30:09,120 --> 00:30:12,440 Speaker 1: what business people do. What will labor do? From where 540 00:30:12,480 --> 00:30:15,200 Speaker 1: you said, and I'm going to assume that you're sympathetic 541 00:30:15,240 --> 00:30:20,080 Speaker 1: to conservative politics, correct, me if I'm wrong, what would 542 00:30:20,080 --> 00:30:23,280 Speaker 1: you expect to see? I mean, we in America sort 543 00:30:23,280 --> 00:30:26,200 Speaker 1: of baffled. Way, it's just about Tories right now. If 544 00:30:26,240 --> 00:30:29,000 Speaker 1: there is a general election at some point, what would 545 00:30:29,040 --> 00:30:31,840 Speaker 1: be the tongue from labor? Do they swing to Gordon 546 00:30:31,920 --> 00:30:36,000 Speaker 1: Brown and Alistair Darling politics? Where do they go? Well, 547 00:30:36,320 --> 00:30:38,680 Speaker 1: you don't have to be in America to be baffled. 548 00:30:38,680 --> 00:30:41,840 Speaker 1: I'll tell you we're baffled as well. I mean the 549 00:30:41,880 --> 00:30:44,760 Speaker 1: Conservative Party I went, it's in meltdown, but it's in disarray. 550 00:30:44,920 --> 00:30:49,200 Speaker 1: We've had this ugly division within the party between remain 551 00:30:49,280 --> 00:30:53,320 Speaker 1: and leave and don't forget. You know, most Conservative MPs 552 00:30:53,360 --> 00:30:56,560 Speaker 1: were in favor of remaining in the EU, so they've 553 00:30:56,600 --> 00:30:59,040 Speaker 1: got a job adjusting themselves to all this. Now. As 554 00:30:59,080 --> 00:31:01,880 Speaker 1: far as labor cern, well this is this is just 555 00:31:02,000 --> 00:31:07,280 Speaker 1: incredible when labor is tearing itself apart. Jeremy Corbyn, the leader, 556 00:31:07,560 --> 00:31:10,280 Speaker 1: is very far left, I suppose you would say in 557 00:31:10,400 --> 00:31:12,760 Speaker 1: many ways he's to the left of Bernie Sanders in 558 00:31:12,760 --> 00:31:15,640 Speaker 1: your country, and he is much less effective than Bernie Sanders. 559 00:31:15,640 --> 00:31:19,760 Speaker 1: He's extremely disorganized and he can't come on much support 560 00:31:19,800 --> 00:31:23,560 Speaker 1: from the Parliamentary Party. We don't know if Angela Eagle 561 00:31:23,720 --> 00:31:27,840 Speaker 1: his challenger for the leadership when yet another woman in charge. 562 00:31:28,040 --> 00:31:30,200 Speaker 1: We don't really know what she would be like, but 563 00:31:30,240 --> 00:31:33,080 Speaker 1: at least she'd be pretty competent. I think she'd be 564 00:31:33,120 --> 00:31:35,960 Speaker 1: well to the right of Jeremy Corbin. She believes in 565 00:31:36,000 --> 00:31:39,960 Speaker 1: renewing Britain's tribe and nuclear to terrant. She's not strongly 566 00:31:40,000 --> 00:31:43,120 Speaker 1: anti business. It will be interesting, I think, you know, 567 00:31:43,160 --> 00:31:45,960 Speaker 1: if labor could hold together under the leadership of someone 568 00:31:46,120 --> 00:31:49,120 Speaker 1: like Angela Eagle, then the Tories might yet have a 569 00:31:49,160 --> 00:31:52,600 Speaker 1: fight on their hands. Roger, talking about businesses, do you 570 00:31:52,680 --> 00:31:56,800 Speaker 1: think that banks, big US banks, other European banks will 571 00:31:56,880 --> 00:31:59,520 Speaker 1: leave London because that either they don't get access as 572 00:31:59,520 --> 00:32:02,160 Speaker 1: single more get over this passporting, or just because London 573 00:32:02,160 --> 00:32:04,400 Speaker 1: becomes too expensive. And if they do leave, is that 574 00:32:04,480 --> 00:32:07,320 Speaker 1: good riddance? Well no, it certainly wouldn't be good riddence 575 00:32:07,360 --> 00:32:09,240 Speaker 1: if a major blow to London. But no, I don't 576 00:32:09,240 --> 00:32:11,480 Speaker 1: think they're going to leave at all. On the contrary, 577 00:32:11,480 --> 00:32:13,560 Speaker 1: after the exchange rate change, of course it's cheaper now 578 00:32:13,600 --> 00:32:16,800 Speaker 1: to be in London than in all the other European centers. 579 00:32:16,800 --> 00:32:19,240 Speaker 1: What I think is going to happen is that because 580 00:32:19,240 --> 00:32:24,640 Speaker 1: of European regulations about passporting that some jobs and some 581 00:32:24,720 --> 00:32:28,760 Speaker 1: financial operations will transfer to the continent, But I think 582 00:32:28,760 --> 00:32:30,960 Speaker 1: these are going to be quite marginal. I mean, the 583 00:32:31,000 --> 00:32:33,520 Speaker 1: fact the matter is London is tremendously attractive. It's an 584 00:32:33,520 --> 00:32:36,200 Speaker 1: attractive place to live, and it's an attractive place to 585 00:32:36,240 --> 00:32:39,080 Speaker 1: do business. You've got to got to have been to 586 00:32:39,200 --> 00:32:44,600 Speaker 1: Frankfurt to compare the two. Yeah are going I would 587 00:32:44,600 --> 00:32:48,000 Speaker 1: go that, Roger Brutal Capital Economics. Thank you so much. 588 00:32:50,480 --> 00:32:54,560 Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and 589 00:32:54,600 --> 00:33:00,120 Speaker 1: listen to interviews on iTunes, SoundCloud, or whichever podcast platform 590 00:33:00,120 --> 00:33:04,200 Speaker 1: you prefer. I'm on Twitter at Tom Keane, Michael McKee 591 00:33:04,240 --> 00:33:07,840 Speaker 1: is at Economy Before the podcast. You can always catch 592 00:33:07,920 --> 00:33:10,440 Speaker 1: us worldwide. I'm Bloomberg Radio