WEBVTT - Surveillance: Kotok, Darda, Bootle 0:00:00.680 --> 0:00:13.200 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. 0:00:13.240 --> 0:00:17.440 Always with Michael McKee. Daily we bring you insight from 0:00:17.480 --> 0:00:22.279 the best in economics, finance, investment, and international relations. Find 0:00:22.320 --> 0:00:26.880 Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of 0:00:26.920 --> 0:00:33.559 course on the Bloomberg Michael McKee not with Francie Laqua, 0:00:34.000 --> 0:00:36.600 will join us this morning, and that is a good 0:00:36.640 --> 0:00:41.000 and beautiful thing. We've got David Kotak for the half hour, 0:00:41.159 --> 0:00:45.479 and so with that France scene, let's set up the drama. No, 0:00:45.680 --> 0:00:50.000 not Mr Trump and Secretary Clinton, but uh, miss may 0:00:50.120 --> 0:00:53.880 and miss led some what's gonna happen here in ten twelve, 0:00:54.000 --> 0:00:57.800 fourteen minutes? Is that refreshing Tom to talk about political 0:00:57.840 --> 0:01:00.440 mayhem and for once looking at the youth. Okay, so 0:01:00.480 --> 0:01:02.800 we understand from the BBC, Tom, so we talked about 0:01:02.800 --> 0:01:06.160 it on TV. Andrew, let's some make quit. According to 0:01:06.200 --> 0:01:10.400 the BBC her conservative leadership bids, now we only have 0:01:10.560 --> 0:01:14.199 two people that want to be Conservative Party leader after 0:01:14.240 --> 0:01:17.440 a lot of people decided to pull out. So this 0:01:17.480 --> 0:01:20.080 is according to a close close to the Energy Minister 0:01:20.600 --> 0:01:23.760 um and this would be because they say the abuse 0:01:23.800 --> 0:01:25.679 has been too great. Now. What you're pointing to, Tom 0:01:25.760 --> 0:01:28.760 is the fact that she had to apologize to one 0:01:28.840 --> 0:01:32.280 Miss Theresa May, who would become a prime minister if 0:01:32.440 --> 0:01:35.240 andrewatte Lets were to step down. And this is after 0:01:35.319 --> 0:01:37.920 she suggested that being a mother made her a better 0:01:38.000 --> 0:01:44.440 candidate for UK prime minister. Yeah, remarkable. Sterling explodes straight 0:01:44.560 --> 0:01:48.160 up and we wanna h May clear the BBC report 0:01:48.240 --> 0:01:51.600 and even the BBC says is unconfirmed. So it's a 0:01:51.600 --> 0:01:55.560 little fragile. David Kotak, It's never fragile in his perspective. 0:01:55.800 --> 0:01:58.960 And David, to help, particularly our listeners in the United Kingdom, 0:01:59.240 --> 0:02:05.120 at this morning's sterling explodes out to that's uncertainty, isn't 0:02:05.120 --> 0:02:08.280 It certainly goes away. Things go well. Speculating that this 0:02:08.320 --> 0:02:12.760 report is accurate, You lose an uncertainty premium and you 0:02:12.840 --> 0:02:15.880 get a market reaction at once, and we see it 0:02:15.919 --> 0:02:19.239 now that market would turn right around if the news 0:02:19.360 --> 0:02:22.920 is not is now expected. My concern here, David, you 0:02:23.000 --> 0:02:26.600 are expert at this is when everybody's in the same trade, 0:02:27.120 --> 0:02:31.200 all my radar goes up. Sterling right now is a 0:02:31.240 --> 0:02:35.720 massive one way that week Sterling. Sure suppose you went 0:02:35.800 --> 0:02:40.919 the other way, and for some reason Parliament didn't pass 0:02:41.360 --> 0:02:45.120 or rejected the referendum, called for another one found a 0:02:45.200 --> 0:02:49.440 legal construction to reverse things. Now we'd have a different 0:02:49.800 --> 0:02:52.400 kind of mess in Europe, but it wouldn't be this one, 0:02:52.919 --> 0:02:56.040 and it could reverse markets. But markets are now all 0:02:56.120 --> 0:02:58.280 on one side of a trade and the trade is. 0:02:58.320 --> 0:03:01.320 It doesn't look good for the UK with Brexit, but 0:03:01.639 --> 0:03:04.840 at least markets are now sure that Brexit will happen. Right. 0:03:04.919 --> 0:03:08.519 We had a couple of bizarre days where they were 0:03:08.560 --> 0:03:11.480 thinking about legals and saying, well, actually breaks that may 0:03:11.480 --> 0:03:14.400 not happen. Now we have confirmation that you know, the 0:03:14.520 --> 0:03:17.080 UK will be on its way out. It sure looks 0:03:17.160 --> 0:03:20.120 like it and markets are adjusting to it. But we 0:03:20.120 --> 0:03:22.639 we are only beginning to see fancy and it seems 0:03:22.680 --> 0:03:27.000 to me the early signs of the economic change. But 0:03:27.120 --> 0:03:30.000 what happens we start to see jobs in the financial 0:03:30.000 --> 0:03:34.040 sector leave London. Where do they go? Where are the 0:03:34.120 --> 0:03:38.040 fragmented pieces going to end up? And some of that 0:03:38.120 --> 0:03:40.400 will go into the EU, some of it will go 0:03:40.480 --> 0:03:43.200 to Paris and Frankfort, some of it will go elsewhere. 0:03:44.520 --> 0:03:47.440 This has to be revealed as it does. These markets 0:03:47.480 --> 0:03:50.120 are going to change and adjust, David. Overall, and this 0:03:50.200 --> 0:03:52.440 is right where I wanted to to to ask you, 0:03:52.560 --> 0:03:55.960 are banks going to shed jobs as an excuse or 0:03:56.000 --> 0:03:58.080 will they really be here on Brexit? I know it's 0:03:58.120 --> 0:03:59.600 too soon to say because we don't know about this 0:03:59.600 --> 0:04:02.600 financial passporting, but it seems like a great way to 0:04:02.640 --> 0:04:06.200 do restructuring, a painful restructuring which you had to anyway. 0:04:06.200 --> 0:04:09.800 It would certainly be an opportunity if if you and 0:04:09.840 --> 0:04:13.000 I were running a bank and we had an excuse 0:04:13.480 --> 0:04:16.000 to alter the form and structure of the bank, we 0:04:16.040 --> 0:04:19.120 would use it. And we wouldn't say we're doing it 0:04:19.240 --> 0:04:22.960 because of our internal profit motive. We would blame the 0:04:23.000 --> 0:04:26.600 political outcome. David. When when when I look at all 0:04:26.680 --> 0:04:29.200 of this, I go back to the Italian banks. You've 0:04:29.200 --> 0:04:33.880 written on this. What is your unique perspective on the 0:04:34.000 --> 0:04:37.720 volumes that we've read on what Italy will do? There's 0:04:37.800 --> 0:04:41.839 no choice because the European method is to expand credit, 0:04:41.960 --> 0:04:46.599 print money in jet capital, have the government fix it. 0:04:46.839 --> 0:04:50.320 Failures aren't permitted. So it looks like it's forty billion 0:04:50.760 --> 0:04:54.280 coming into the banks in recapitalization. That's the number. I've 0:04:54.320 --> 0:04:59.320 seen A hundred and fifty billion more in guarantees of 0:04:59.320 --> 0:05:02.839 of a that the European Central Bank will then be 0:05:02.920 --> 0:05:06.880 able to inject financing too, because they'll accept Italy with 0:05:06.960 --> 0:05:10.520 a trip will be credit rating as an acceptable sovereign 0:05:10.760 --> 0:05:14.400 and so we'll expand credit cheap and money and preserve 0:05:14.440 --> 0:05:17.680 a system. They don't form a bad bank, move the assets, 0:05:17.960 --> 0:05:21.960 resolve and take losses because that would mean an admission 0:05:22.480 --> 0:05:25.760 and that's not the nature of the structure in the 0:05:25.800 --> 0:05:28.160 European Union. The same thing is gonna happen in Germany. 0:05:28.200 --> 0:05:30.719 There's a bank in trouble there too. We're we're going 0:05:30.760 --> 0:05:33.760 to see that type of resolution that says more credit, 0:05:34.040 --> 0:05:38.159 more expansion of credit, more activity in the credit, expansion 0:05:38.200 --> 0:05:42.480 of the currency, more QUEUEI for a very very very 0:05:42.520 --> 0:05:46.360 long time. But David, why are the Germans playing hardball? Right? 0:05:46.400 --> 0:05:50.359 So you're saying, like many commentators that state supports cannot 0:05:50.360 --> 0:05:53.279 sit with current bail in rules. The Germans also have 0:05:53.279 --> 0:05:56.920 a lot to lose if these baili in rules are continued. 0:05:57.080 --> 0:05:59.240 Then if something happens with the German banks, and it 0:05:59.360 --> 0:06:02.440 may well do you, then they're stuck. I think I 0:06:02.480 --> 0:06:04.600 think they're stuck until they figure out how to get 0:06:04.680 --> 0:06:07.599 rid of the bail in rules because they saw that 0:06:07.720 --> 0:06:11.039 they didn't work and they created such turmoil the little 0:06:11.080 --> 0:06:15.160 bit of involvement that bail in had, and it alters 0:06:15.240 --> 0:06:18.599 the form of risk taking on the part of depositors 0:06:18.600 --> 0:06:21.320 and users of banks. Who wants to put money in 0:06:21.320 --> 0:06:23.680 a bank when you can lose it? That's just not 0:06:23.800 --> 0:06:26.839 a concept we think about. And it and the structure 0:06:26.920 --> 0:06:29.880 and payments among them between the banks has made it 0:06:29.920 --> 0:06:34.080 worse because payments do from banks are no longer counted 0:06:34.120 --> 0:06:40.279 in the liquidity computation three. You're massively skewed equity, I am, 0:06:40.520 --> 0:06:44.600 Is there value in Europe? Now? Yes, all these headlines, 0:06:44.720 --> 0:06:47.880 all this doom and gloom that Francine are doing. The 0:06:47.920 --> 0:06:52.520 investment guy in me says, opportunity. Where's the opportunity? Mr? 0:06:53.040 --> 0:06:56.599 I think the European stock markets now, you gotta set 0:06:57.200 --> 0:07:01.359 UK aside. The European stock markets are cheap. They have 0:07:01.560 --> 0:07:05.640 earnings yields in the high single digits, and they have 0:07:05.720 --> 0:07:09.320 an interest rate on sovereign debt which is negative and 0:07:09.400 --> 0:07:13.280 never seen anything like. I mean for Japan. Total Franccene 0:07:13.320 --> 0:07:17.679 of France is five point eight seven yield. That's stunning, 0:07:18.040 --> 0:07:20.080 It is stunning. But Tom, what I don't understand, and 0:07:20.120 --> 0:07:22.280 maybe David can you know, set some light into this, 0:07:22.840 --> 0:07:26.280 is that so yields are suppressed, that's a flight to safety. 0:07:26.320 --> 0:07:28.200 But then stocks her up, you know, the foot See 0:07:28.240 --> 0:07:30.720 we're seeing the foot see despite bregsit, despite all of 0:07:30.720 --> 0:07:35.640 these concerns, actually entering a bull markets from it gained 0:07:36.480 --> 0:07:38.480 from February. What exactly is going on? Do we just 0:07:38.520 --> 0:07:40.800 think that central banks can take care of everything all 0:07:40.800 --> 0:07:43.160 the time. I don't know that we think they can 0:07:43.160 --> 0:07:45.800 take care of everything all the time. Fancying, but we 0:07:46.000 --> 0:07:51.560 love long term zero interest great money in great abundance. 0:07:51.640 --> 0:07:54.880 It raises the prices of financial assets. And that's what 0:07:55.000 --> 0:07:58.080 we see a lot of places in the world, and 0:07:58.120 --> 0:08:01.880 we now see it in Europe. When Carney was on 0:08:01.920 --> 0:08:07.680 a track for a tightening policy and harder pound, the 0:08:07.800 --> 0:08:11.320 stock market struggled. Now we have a referendum that's turned 0:08:11.360 --> 0:08:14.680 that upside down. UK is headed for zero interest rates, 0:08:14.720 --> 0:08:18.520 maybe negative rates, and the stock market loves it. History 0:08:18.600 --> 0:08:21.720 being made in the United Kingdom. We are fortunate. Francine 0:08:21.760 --> 0:08:25.480 laquix is there, Francine, give us perspective on this moment 0:08:25.640 --> 0:08:28.120 for your United Kingdom. Well, Tom, until an hour ago. 0:08:28.200 --> 0:08:31.880 This was extremely unexpected. We had two people race, Andrew 0:08:31.960 --> 0:08:34.160 leed some announcing just a couple of minutes ago that 0:08:34.280 --> 0:08:37.120 she will pull out of the race to succeed David Cameron. 0:08:37.160 --> 0:08:39.960 Now this paves the way for the Home Secretary Theresa 0:08:40.000 --> 0:08:42.240 May to become Britain's next prime minister. But Tom just 0:08:42.280 --> 0:08:44.719 at one word of caveats caveats. I don't think it 0:08:44.720 --> 0:08:48.199 will happen, but we will hear from the Tory Committee chairman, 0:08:48.600 --> 0:08:52.280 Mr Brady. He's essentially the man running the leadership contest 0:08:52.640 --> 0:08:56.080 and he speaks in twelve minutes, so either confirms. He 0:08:56.120 --> 0:08:59.000 could confirm that Tresa May will be Britain's next prime 0:08:59.040 --> 0:09:02.760 minister or unlikely. But he could also say we need 0:09:02.960 --> 0:09:05.280 a two person race and therefore we go back to 0:09:05.280 --> 0:09:07.920 the drawing board to find someone that Theresa May can 0:09:08.120 --> 0:09:11.040 can fight with. Okay, that's fine, but are we any 0:09:11.120 --> 0:09:14.920 closer to a general election? I think Americans are hardwired 0:09:14.960 --> 0:09:18.720 to go conservative labor. To be clear, we're not talking 0:09:18.720 --> 0:09:21.000 about that, are we. No, we're not at all. When 0:09:21.000 --> 0:09:23.760 you speak to investors, there was I think a post 0:09:23.760 --> 0:09:26.640 Brexit shock. A couple of commentators that were saying, well, 0:09:26.640 --> 0:09:30.000 we need a general election. But actually Theresa May is 0:09:30.440 --> 0:09:33.560 widely regarded as a safe pair of hands. We heard 0:09:33.559 --> 0:09:37.280 from her today pledging to crackdown on corporates, including big business. 0:09:37.600 --> 0:09:39.360 I mean, it would be very difficult toime to see 0:09:39.360 --> 0:09:42.720 how Parliament could have a no vote confidence at this point. 0:09:42.800 --> 0:09:45.280 And again there was a law past a couple of 0:09:45.320 --> 0:09:48.360 years ago to make the government more stable. So then 0:09:48.400 --> 0:09:51.480 you'd have to reverse that law. There'd be a general election, 0:09:51.760 --> 0:09:52.839 you know, and I get that, and it would be 0:09:52.920 --> 0:09:55.760 like us changing from the first Tuesday of November. David 0:09:55.840 --> 0:09:58.560 Kotech with his Cumberland advisers, fancy let me go to 0:09:58.600 --> 0:10:01.800 you and you today that this brings me back to 0:10:01.840 --> 0:10:06.440 the distinctions of conservatism in the United Kingdom, where going 0:10:06.480 --> 0:10:10.280 back to Disraeli in the nineteenth century, there's this odd 0:10:10.320 --> 0:10:15.920 thing called one nation conservatism. Theresa May and David Cameron 0:10:16.440 --> 0:10:21.160 are a one nation conservatism kind of Tory. Is that 0:10:21.320 --> 0:10:24.440 have anything to do with Brexit and leave? Yeah? Tom, 0:10:24.480 --> 0:10:27.800 I think Theresa May will find out more about how, 0:10:28.080 --> 0:10:30.960 you know, her blueprint for the future. But it surprised 0:10:31.000 --> 0:10:33.319 me she's actually a little bit more conservative than than 0:10:33.360 --> 0:10:36.400 we thought, you know. She she definitely makes David Cameron 0:10:36.400 --> 0:10:40.040 see more of a socialist. She's um, you know, on immigration, 0:10:40.120 --> 0:10:42.680 she's very tough. She's been very tough also on some 0:10:42.760 --> 0:10:44.720 of the business. So I guess my question to David 0:10:45.040 --> 0:10:48.120 is we've talked about the fact that the cloud that 0:10:48.160 --> 0:10:51.200 the UK had is being diminished by the day. What 0:10:51.320 --> 0:10:54.000 can she and the next Chancellor of the Exchequer do 0:10:54.520 --> 0:10:56.880 to regain that trust. Well, it's he got to go 0:10:56.960 --> 0:11:00.760 through the Brexit process. There's no way to avoid that. 0:11:00.960 --> 0:11:05.680 But in the context of this discussion of history and 0:11:05.960 --> 0:11:10.160 history in the world and the role the UK and 0:11:10.520 --> 0:11:16.280 the British diplomat has played in history is remarkable, and 0:11:16.360 --> 0:11:20.240 so is that character still intact. That's the test for 0:11:20.280 --> 0:11:23.480 the new to be some of this, David is they 0:11:23.480 --> 0:11:25.679 got to get out and sell the message, which you're 0:11:25.720 --> 0:11:27.880 seeing with the Chancellor in New York today and with 0:11:27.960 --> 0:11:31.440 the Prime ministers selling airplanes out in the fields of Hampshire. 0:11:31.480 --> 0:11:33.520 I mean part of this is once they get over 0:11:33.559 --> 0:11:36.480 the shock, whoever's running the show has got to go 0:11:36.520 --> 0:11:38.880 out and sell the message well. And the message has 0:11:38.920 --> 0:11:43.280 to have substance, and so they're the substance is unknown. 0:11:43.800 --> 0:11:48.280 The messengers have the capacity to sell it and that 0:11:48.520 --> 0:11:53.200 cohesive new message is what we wait await and what 0:11:53.240 --> 0:11:56.400 we do see now is this fragmentation until we get 0:11:56.440 --> 0:11:59.200 to the new message, the new package, if you will. 0:11:59.320 --> 0:12:01.800 All right, So they have to be truthful, David. It's 0:12:01.800 --> 0:12:04.160 difficult right to be to send people out in the 0:12:04.200 --> 0:12:06.400 open and saying guys were still open for business. I 0:12:06.440 --> 0:12:08.840 love the tweet that the Chancellor said, we may be 0:12:08.880 --> 0:12:10.960 shut out of the U, but we're still global and 0:12:11.000 --> 0:12:13.040 believe in the world. Well, hey, guys, we don't know 0:12:13.080 --> 0:12:14.880 if this country is going to see a recession, how 0:12:14.920 --> 0:12:18.520 tough that recession will be yet? Right, Well, exactly, I mean, Francine, 0:12:18.800 --> 0:12:21.520 you have to you have to justify and prove what 0:12:21.600 --> 0:12:26.119 you say. Otherwise you're seen as as having no substance 0:12:26.160 --> 0:12:29.000 and therefore you lose all credibility. Francine. I know our 0:12:29.080 --> 0:12:32.080 editor John Michael Twaite interviewed Disraeli a few years ago. 0:12:32.520 --> 0:12:36.160 But would you explain to me the conservative politics of 0:12:36.200 --> 0:12:41.560 a greater United Kingdom. How fragmented and polarized are they 0:12:41.760 --> 0:12:45.200 or is it just remain Tories and leave Tories. Well, 0:12:45.200 --> 0:12:48.840 they were fragmented and it was unclear actually until we 0:12:48.920 --> 0:12:51.719 had you know, until David Cameron called for a referendum 0:12:51.720 --> 0:12:54.680 exactly how fragmented they were because it was a party 0:12:54.760 --> 0:12:59.760 that unified almost you know actually from you know, behind David, 0:13:00.240 --> 0:13:02.760 but it was very clear that they unified in the 0:13:02.800 --> 0:13:05.920 promise of a Brexit. So it has been ugly. It's 0:13:05.920 --> 0:13:08.040 been ugly on all sides. If you actually look at 0:13:08.080 --> 0:13:09.760 UK politics at the moment, Tom and I know you 0:13:09.840 --> 0:13:12.040 like to put the analogy with Games of Throne, but 0:13:12.080 --> 0:13:13.959 the Labor Party is really nowhere to be seen in 0:13:14.120 --> 0:13:17.200 huge divisions, and the Tories even when you look at 0:13:17.200 --> 0:13:21.080 the race with people backstabbing and brexiteering and bre executions 0:13:21.160 --> 0:13:24.040 like like we talked to about them in journalism, it 0:13:24.120 --> 0:13:26.120 just makes for an ugly party. This is Fabinoe. We 0:13:26.160 --> 0:13:30.080 are so fortunate, David if Francie U giving wisdom on 0:13:30.400 --> 0:13:33.640 what's going on in politically United Kingdom and we're making 0:13:33.840 --> 0:13:39.040 history and in this remarkable world, a journalist in London 0:13:39.200 --> 0:13:43.440 is contributing to this discussion of the evolution of history. 0:13:43.520 --> 0:13:47.160 In the US. Two American listeners, it's a markingless state 0:13:47.200 --> 0:13:49.320 in the market. I want you to reaffirm equities right 0:13:49.320 --> 0:13:52.840 now you can buy twenty five multiple blue chip dividend 0:13:52.920 --> 0:13:56.000 growing stocks. Well, I buy them in basket's using e 0:13:56.120 --> 0:13:59.480 T s. The answer is yes, because the earnings yields 0:13:59.679 --> 0:14:03.800 are so enticing. In the sovereign debt yield are at 0:14:03.880 --> 0:14:06.520 zero and they're gonna be at zero for a long time. 0:14:06.600 --> 0:14:09.680 This has been great David Kotuk with us with Cumberland Advisers. 0:14:09.720 --> 0:14:21.680 Thank you so much for your time this morning. I 0:14:21.760 --> 0:14:24.640 will say in advance that this will be our most 0:14:24.680 --> 0:14:28.880 important podcast of the day. Michael Darda is it the 0:14:29.120 --> 0:14:32.160 mk M Advisors and he's truly one of our more 0:14:32.240 --> 0:14:36.040 enduring guests. We could talk today Michael for three or 0:14:36.080 --> 0:14:38.000 four hours. We don't have that time with you, so 0:14:38.040 --> 0:14:40.400 I want to cut right to the chase. You made 0:14:40.480 --> 0:14:45.680 headlines a month ago, three months ago with declining business 0:14:45.840 --> 0:14:49.680 investment in America. Is it's still there? Tell us about 0:14:50.000 --> 0:14:54.960 the supply and demand, the business dynamic of the American economy. Hi, Tom, 0:14:54.960 --> 0:14:57.840 thanks for having me on UM. Look, we're still in 0:14:57.840 --> 0:15:01.920 an environment of slow growth, uh week business fixed investment 0:15:02.320 --> 0:15:04.520 and you know two key things for the listeners to 0:15:04.560 --> 0:15:07.520 think about and trying to sort out what this What 0:15:07.640 --> 0:15:11.120 these latest jobs figures tell us UM is that with 0:15:11.280 --> 0:15:16.280 profits week and with capital spending week, it's pretty unlikely 0:15:16.280 --> 0:15:19.440 that we're going to sustain June's job figure of two 0:15:19.640 --> 0:15:22.760 d and eighty seven k um. Really, you know, I 0:15:22.760 --> 0:15:25.600 think what the listeners should be doing is averaging together 0:15:26.120 --> 0:15:30.240 the very week eleven thousand uh reading for May, for 0:15:30.400 --> 0:15:32.880 non farm payrolls and what we saw in June. And 0:15:32.880 --> 0:15:35.440 if you do that, you're closer to about a hundred 0:15:35.440 --> 0:15:37.760 and fifty thousand as a run rate, which is a 0:15:37.840 --> 0:15:41.600 fairly steep slowdown from where we were, say in bid 0:15:41.680 --> 0:15:44.480 till late two tho fourteen, and and uh, you know 0:15:44.680 --> 0:15:47.640 in last year as well, what does the outcome? And 0:15:48.000 --> 0:15:50.720 you spend a lot of time looking at nominal top 0:15:50.760 --> 0:15:54.960 line g d P are real economy plus inflation give 0:15:55.040 --> 0:15:58.800 us the data update on animal spirit when you look 0:15:58.840 --> 0:16:02.200 at such a relative to sparity between the United States 0:16:02.640 --> 0:16:05.960 and a troubled Europe and the United Kingdom absolutely well, 0:16:06.120 --> 0:16:09.760 year over year, nominal GDP real growth and inflation is 0:16:09.840 --> 0:16:13.280 running just above three percent. The average for this six 0:16:13.400 --> 0:16:16.160 year expansion has been closer to four and this is 0:16:16.200 --> 0:16:18.560 the third time in a row that nominal growth has 0:16:18.720 --> 0:16:21.360 faltered to the low end of the six year range 0:16:21.520 --> 0:16:23.920 after the fete is huled at a QUI program. So 0:16:24.240 --> 0:16:26.720 you know, our view has been that the tapering of 0:16:27.040 --> 0:16:30.800 QUI in the end of QUI were forms of monetary tightening, 0:16:30.920 --> 0:16:33.520 not just the December rate rise that occurred last year. 0:16:33.680 --> 0:16:36.360 And so the nominal growth figures tell us that now 0:16:36.400 --> 0:16:38.800 there's some optimism that you know, growth looks like it's 0:16:38.840 --> 0:16:41.560 bouncing back a bit in the second quarter. But I 0:16:41.560 --> 0:16:46.000 would just focus listeners on the bond market measures. These 0:16:46.040 --> 0:16:50.040 low yields, a sinking yield curve, and very weak inflation 0:16:50.120 --> 0:16:54.080 expectations are telling us that the market doesn't really think 0:16:54.120 --> 0:16:57.680 that the q Q bounce back is going to be sustained. Francine, 0:16:57.680 --> 0:17:01.280 I'll probably do this chart tomorrow, Untie. The four point 0:17:01.440 --> 0:17:06.720 three nominal GDP. Now we're down to three point three. 0:17:06.840 --> 0:17:10.280 We've taken a stick one point out of our animal 0:17:10.400 --> 0:17:14.520 spirit in the United Kings in the United States. That's something, Franzy, Yeah, 0:17:14.520 --> 0:17:16.280 it is something. And Tom, we want to go back to, 0:17:16.440 --> 0:17:18.880 you know, the fears basically that we had maybe just 0:17:19.160 --> 0:17:21.840 five days ago about the US economy and labor market 0:17:22.200 --> 0:17:24.600 abated a little bit. But Michael, when you look at 0:17:24.600 --> 0:17:28.200 the global players, right the US, Let's say the EU 0:17:28.280 --> 0:17:32.120 and Japan, they're not all doing their bit to stabilize 0:17:32.160 --> 0:17:35.520 the global economy. Yeah, it's a great question, you know. Um, 0:17:35.600 --> 0:17:39.399 it's very interesting because if you look at phenomenal GDP trends, 0:17:39.400 --> 0:17:42.840 say in the Eurozone in Japan, they've actually done a 0:17:42.920 --> 0:17:46.919 little bit better in recent years following the QUI programs 0:17:46.920 --> 0:17:50.159 in those countries, But the credit markets, the bond market 0:17:50.240 --> 0:17:53.879 measures I mentioned recently, have been weakening everywhere, so it 0:17:53.920 --> 0:17:57.520 looks like investors don't really expect those better numbers to 0:17:57.560 --> 0:18:00.359 be sustained. And at the same time, we've had a 0:18:00.400 --> 0:18:03.399 pretty steep slowdown in nominal growth in China in the 0:18:03.440 --> 0:18:07.159 emerging world, so as the FED shifted towards tapering KIWI 0:18:07.359 --> 0:18:11.200 and then ending it and then raising interest rates last December, 0:18:11.359 --> 0:18:14.159 nominal growth in the US slowed, in nominal growth in 0:18:14.280 --> 0:18:18.679 China in the emerging world slowed sharply. So that in 0:18:18.720 --> 0:18:22.760 my opinion, really explains the huge commodity price crash really 0:18:22.800 --> 0:18:25.320 starting in the middle of two thousand fourteen and extending 0:18:25.320 --> 0:18:27.920 into the first few months of this year. And so, Michael, 0:18:27.960 --> 0:18:30.199 what's the sweet spot for the economy or or for 0:18:30.240 --> 0:18:32.840 globals is it good enough news? You want good enough 0:18:32.840 --> 0:18:35.000 news to know that we're not getting any worse, But 0:18:35.000 --> 0:18:36.879 actually if you get good news, that means that central 0:18:36.880 --> 0:18:40.320 banks may start holding off. Yeah, it's interesting. Another good 0:18:40.400 --> 0:18:45.000 question because unfortunately, if we have to discuss the productivity statistics, 0:18:45.440 --> 0:18:47.840 you know, those don't look very good in the United States, 0:18:47.880 --> 0:18:50.000 and in other countries they've been weak as well. But 0:18:50.080 --> 0:18:53.200 for the US, we're just averaging point five per cent 0:18:53.280 --> 0:18:56.920 per animal non farm productivity since two thousand ten, the 0:18:57.040 --> 0:19:00.359 labor force working age population growing at about the same mounts, 0:19:00.400 --> 0:19:03.399 So it looks like growth potential may only be running 0:19:03.440 --> 0:19:06.359 about one percent per annum. And if you add the 0:19:06.400 --> 0:19:09.199 FED two percent inflation target to that, that gives you 0:19:09.240 --> 0:19:12.880 about three percent nominal growth. So anything above that probably 0:19:12.920 --> 0:19:17.080 means the FED tightness to slow things down. So unfortunately, 0:19:17.359 --> 0:19:20.359 you know, the three percent figure on nominal growth maybe 0:19:20.400 --> 0:19:22.800 about as much as we can expect in the US 0:19:22.880 --> 0:19:25.520 from here on out. Also, you know what else that means. 0:19:25.840 --> 0:19:28.080 There's a lot of talk about physical stimulus and the 0:19:28.119 --> 0:19:31.119 need for it, but it won't do anything if the 0:19:31.160 --> 0:19:34.119 FED offsets it with tighter money. So you know, I 0:19:34.160 --> 0:19:37.080 don't think physical stimulus is really going to do anything 0:19:37.119 --> 0:19:39.399 for us in the US at this point in time. 0:19:39.680 --> 0:19:42.240 So we are here with the most interesting day, Michael 0:19:42.280 --> 0:19:46.720 Darta helping us out here. Michael, let's link your economics 0:19:46.760 --> 0:19:50.760 over to a fully priced equity market. Are equities now 0:19:51.280 --> 0:19:54.480 so priced that they are a bubble? Or is there 0:19:54.480 --> 0:19:59.480 a data rationalization to owning these priced earnings ratios? Well? 0:20:00.080 --> 0:20:02.760 Um uh, the word bubble is very popular now, I 0:20:02.800 --> 0:20:06.560 think unfortunately because rates are low, So a lot of 0:20:06.560 --> 0:20:11.480 people mistake that for overly easy monetary conditions and bubbles. 0:20:11.480 --> 0:20:14.040 But rates are always low if nominal growth is low 0:20:14.280 --> 0:20:17.320 and inflation is low, and equity prices will tend to 0:20:17.320 --> 0:20:21.120 be high if investors think those conditions will be sustained. 0:20:21.520 --> 0:20:23.199 So I don't think we have an equity bubble. But 0:20:23.280 --> 0:20:26.920 what we do have is an aging economic expansion where 0:20:26.960 --> 0:20:29.159 seven years into it, the longest one in history in 0:20:29.200 --> 0:20:31.679 the US is lasted a decade. You know, we're starting 0:20:31.720 --> 0:20:33.880 to see the data points that you would see when 0:20:33.920 --> 0:20:36.800 you're moving into the later innings of a cycle. Profits 0:20:36.840 --> 0:20:40.879 peaking as a sharedage of GDP business fixed investment weakening, 0:20:41.160 --> 0:20:44.320 the FED you know already having started. Um, you know, 0:20:44.680 --> 0:20:47.240 a monetary tightening, and so you know, I think we 0:20:47.280 --> 0:20:49.440 could be in the last year or two of this 0:20:49.600 --> 0:20:52.679 business cycle expansion. And that's really what investors need to 0:20:52.880 --> 0:20:56.240 worry about in terms of the stock market, because typically 0:20:56.320 --> 0:21:01.080 bear markets are linked to recessions, and typically sessions feature 0:21:02.240 --> 0:21:08.159 stock market to quanit. We haven't seen a hint of this. 0:21:08.280 --> 0:21:11.840 We are addicted to the new bearer market as negative seven. 0:21:12.720 --> 0:21:16.439 A lot of our listeners have never experienced us. They well, 0:21:16.520 --> 0:21:19.479 you know, we certainly have had some volatility over the 0:21:19.480 --> 0:21:22.000 course of the last year year and a half, so 0:21:22.280 --> 0:21:24.199 you know, the S and p F is at a 0:21:24.240 --> 0:21:27.080 new nominal high, but you know, it really hasn't made 0:21:27.119 --> 0:21:31.320 a tremendous amount of net progress over the course of 0:21:31.400 --> 0:21:34.000 the last year, and we've had some fairly steep drop 0:21:34.000 --> 0:21:36.840 offs as investors have become worried about, you know, the 0:21:36.840 --> 0:21:39.840 fate of the business cycle. We're down almost from the 0:21:39.920 --> 0:21:42.240 highs um you know, just in the opening month and 0:21:42.240 --> 0:21:44.679 a half of this year, and so it's important to 0:21:44.720 --> 0:21:47.639 put it in context. So we'll stay up at elevated 0:21:47.720 --> 0:21:50.359 levels of investors feel like the business cycle is secure 0:21:50.400 --> 0:21:53.200 and we're not falling into a downturn. But I would 0:21:53.200 --> 0:21:55.960 think that you know that assumption probably will be challenged 0:21:56.000 --> 0:21:58.880 sometime in the next year or two. So my view 0:21:58.880 --> 0:22:02.520 is still more cautious one, unfortunately, right Michael. But this 0:22:02.640 --> 0:22:05.240 to me it seems very intuitive, right that you're cautious 0:22:05.280 --> 0:22:08.199 because everywhere you look, there's there's nothing great. Sure we're 0:22:08.240 --> 0:22:10.080 not falling off a cliff, but there's nothing that you 0:22:10.080 --> 0:22:13.400 can say, right, I'm I'm confident about this and it's 0:22:13.480 --> 0:22:16.399 good news. So where where does all this pollutions come 0:22:16.440 --> 0:22:18.840 from when you look at equities? Well, I'm not sure 0:22:18.880 --> 0:22:21.320 that you know that we're seeing a you know, as 0:22:21.400 --> 0:22:25.200 much bullishness is widely assumed simply because equity markets are 0:22:25.200 --> 0:22:27.600 are at elevated levels. I mean, that's what you'll tend 0:22:27.640 --> 0:22:31.119 to see in a low growth, low inflation environment that 0:22:31.200 --> 0:22:35.080 investors feel is sustainable. So the risk here is that 0:22:35.400 --> 0:22:39.040 if that feeling of sustainability starts to change, that's when 0:22:39.160 --> 0:22:41.560 you know we could see the equity market take a 0:22:41.640 --> 0:22:44.520 steep fall. And and so you know, that comes down 0:22:44.520 --> 0:22:46.359 to where do you think we are in the business cycle? 0:22:46.440 --> 0:22:48.200 And if you think we're in the eighth or ninth inning, 0:22:48.280 --> 0:22:49.960