Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene.
Speaker 1: Always with Michael McKee. Daily we bring you insight from
Speaker 1: the best in economics, finance, investment, and international relations. Find
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Speaker 1: course on the Bloomberg Michael McKee not with Francie Laqua,
Speaker 1: will join us this morning, and that is a good
Speaker 1: and beautiful thing. We've got David Kotak for the half hour,
Speaker 1: and so with that France scene, let's set up the drama. No,
Speaker 1: not Mr Trump and Secretary Clinton, but uh, miss may
Speaker 1: and miss led some what's gonna happen here in ten twelve,
Speaker 1: fourteen minutes? Is that refreshing Tom to talk about political
Speaker 1: mayhem and for once looking at the youth. Okay, so
Speaker 1: we understand from the BBC, Tom, so we talked about
Speaker 1: it on TV. Andrew, let's some make quit. According to
Speaker 1: the BBC her conservative leadership bids, now we only have
Speaker 1: two people that want to be Conservative Party leader after
Speaker 1: a lot of people decided to pull out. So this
Speaker 1: is according to a close close to the Energy Minister
Speaker 1: um and this would be because they say the abuse
Speaker 1: has been too great. Now. What you're pointing to, Tom
Speaker 1: is the fact that she had to apologize to one
Speaker 1: Miss Theresa May, who would become a prime minister if
Speaker 1: andrewatte Lets were to step down. And this is after
Speaker 1: she suggested that being a mother made her a better
Speaker 1: candidate for UK prime minister. Yeah, remarkable. Sterling explodes straight
Speaker 1: up and we wanna h May clear the BBC report
Speaker 1: and even the BBC says is unconfirmed. So it's a
Speaker 1: little fragile. David Kotak, It's never fragile in his perspective.
Speaker 1: And David, to help, particularly our listeners in the United Kingdom,
Speaker 1: at this morning's sterling explodes out to that's uncertainty, isn't
Speaker 1: It certainly goes away. Things go well. Speculating that this
Speaker 1: report is accurate, You lose an uncertainty premium and you
Speaker 1: get a market reaction at once, and we see it
Speaker 1: now that market would turn right around if the news
Speaker 1: is not is now expected. My concern here, David, you
Speaker 1: are expert at this is when everybody's in the same trade,
Speaker 1: all my radar goes up. Sterling right now is a
Speaker 1: massive one way that week Sterling. Sure suppose you went
Speaker 1: the other way, and for some reason Parliament didn't pass
Speaker 1: or rejected the referendum, called for another one found a
Speaker 1: legal construction to reverse things. Now we'd have a different
Speaker 1: kind of mess in Europe, but it wouldn't be this one,
Speaker 1: and it could reverse markets. But markets are now all
Speaker 1: on one side of a trade and the trade is.
Speaker 1: It doesn't look good for the UK with Brexit, but
Speaker 1: at least markets are now sure that Brexit will happen. Right.
Speaker 1: We had a couple of bizarre days where they were
Speaker 1: thinking about legals and saying, well, actually breaks that may
Speaker 1: not happen. Now we have confirmation that you know, the
Speaker 1: UK will be on its way out. It sure looks
Speaker 1: like it and markets are adjusting to it. But we
Speaker 1: we are only beginning to see fancy and it seems
Speaker 1: to me the early signs of the economic change. But
Speaker 1: what happens we start to see jobs in the financial
Speaker 1: sector leave London. Where do they go? Where are the
Speaker 1: fragmented pieces going to end up? And some of that
Speaker 1: will go into the EU, some of it will go
Speaker 1: to Paris and Frankfort, some of it will go elsewhere.
Speaker 1: This has to be revealed as it does. These markets
Speaker 1: are going to change and adjust, David. Overall, and this
Speaker 1: is right where I wanted to to to ask you,
Speaker 1: are banks going to shed jobs as an excuse or
Speaker 1: will they really be here on Brexit? I know it's
Speaker 1: too soon to say because we don't know about this
Speaker 1: financial passporting, but it seems like a great way to
Speaker 1: do restructuring, a painful restructuring which you had to anyway.
Speaker 1: It would certainly be an opportunity if if you and
Speaker 1: I were running a bank and we had an excuse
Speaker 1: to alter the form and structure of the bank, we
Speaker 1: would use it. And we wouldn't say we're doing it
Speaker 1: because of our internal profit motive. We would blame the
Speaker 1: political outcome. David. When when when I look at all
Speaker 1: of this, I go back to the Italian banks. You've
Speaker 1: written on this. What is your unique perspective on the
Speaker 1: volumes that we've read on what Italy will do? There's
Speaker 1: no choice because the European method is to expand credit,
Speaker 1: print money in jet capital, have the government fix it.
Speaker 1: Failures aren't permitted. So it looks like it's forty billion
Speaker 1: coming into the banks in recapitalization. That's the number. I've
Speaker 1: seen A hundred and fifty billion more in guarantees of
Speaker 1: of a that the European Central Bank will then be
Speaker 1: able to inject financing too, because they'll accept Italy with
Speaker 1: a trip will be credit rating as an acceptable sovereign
Speaker 1: and so we'll expand credit cheap and money and preserve
Speaker 1: a system. They don't form a bad bank, move the assets,
Speaker 1: resolve and take losses because that would mean an admission
Speaker 1: and that's not the nature of the structure in the
Speaker 1: European Union. The same thing is gonna happen in Germany.
Speaker 1: There's a bank in trouble there too. We're we're going
Speaker 1: to see that type of resolution that says more credit,
Speaker 1: more expansion of credit, more activity in the credit, expansion
Speaker 1: of the currency, more QUEUEI for a very very very
Speaker 1: long time. But David, why are the Germans playing hardball? Right?
Speaker 1: So you're saying, like many commentators that state supports cannot
Speaker 1: sit with current bail in rules. The Germans also have
Speaker 1: a lot to lose if these baili in rules are continued.
Speaker 1: Then if something happens with the German banks, and it
Speaker 1: may well do you, then they're stuck. I think I
Speaker 1: think they're stuck until they figure out how to get
Speaker 1: rid of the bail in rules because they saw that
Speaker 1: they didn't work and they created such turmoil the little
Speaker 1: bit of involvement that bail in had, and it alters
Speaker 1: the form of risk taking on the part of depositors
Speaker 1: and users of banks. Who wants to put money in
Speaker 1: a bank when you can lose it? That's just not
Speaker 1: a concept we think about. And it and the structure
Speaker 1: and payments among them between the banks has made it
Speaker 1: worse because payments do from banks are no longer counted
Speaker 1: in the liquidity computation three. You're massively skewed equity, I am,
Speaker 1: Is there value in Europe? Now? Yes, all these headlines,
Speaker 1: all this doom and gloom that Francine are doing. The
Speaker 1: investment guy in me says, opportunity. Where's the opportunity? Mr?
Speaker 1: I think the European stock markets now, you gotta set
Speaker 1: UK aside. The European stock markets are cheap. They have
Speaker 1: earnings yields in the high single digits, and they have
Speaker 1: an interest rate on sovereign debt which is negative and
Speaker 1: never seen anything like. I mean for Japan. Total Franccene
Speaker 1: of France is five point eight seven yield. That's stunning,
Speaker 1: It is stunning. But Tom, what I don't understand, and
Speaker 1: maybe David can you know, set some light into this,
Speaker 1: is that so yields are suppressed, that's a flight to safety.
Speaker 1: But then stocks her up, you know, the foot See
Speaker 1: we're seeing the foot see despite bregsit, despite all of
Speaker 1: these concerns, actually entering a bull markets from it gained
Speaker 1: from February. What exactly is going on? Do we just
Speaker 1: think that central banks can take care of everything all
Speaker 1: the time. I don't know that we think they can
Speaker 1: take care of everything all the time. Fancying, but we
Speaker 1: love long term zero interest great money in great abundance.
Speaker 1: It raises the prices of financial assets. And that's what
Speaker 1: we see a lot of places in the world, and
Speaker 1: we now see it in Europe. When Carney was on
Speaker 1: a track for a tightening policy and harder pound, the
Speaker 1: stock market struggled. Now we have a referendum that's turned
Speaker 1: that upside down. UK is headed for zero interest rates,
Speaker 1: maybe negative rates, and the stock market loves it. History
Speaker 1: being made in the United Kingdom. We are fortunate. Francine
Speaker 1: laquix is there, Francine, give us perspective on this moment
Speaker 1: for your United Kingdom. Well, Tom, until an hour ago.
Speaker 1: This was extremely unexpected. We had two people race, Andrew
Speaker 1: leed some announcing just a couple of minutes ago that
Speaker 1: she will pull out of the race to succeed David Cameron.
Speaker 1: Now this paves the way for the Home Secretary Theresa
Speaker 1: May to become Britain's next prime minister. But Tom just
Speaker 1: at one word of caveats caveats. I don't think it
Speaker 1: will happen, but we will hear from the Tory Committee chairman,
Speaker 1: Mr Brady. He's essentially the man running the leadership contest
Speaker 1: and he speaks in twelve minutes, so either confirms. He
Speaker 1: could confirm that Tresa May will be Britain's next prime
Speaker 1: minister or unlikely. But he could also say we need
Speaker 1: a two person race and therefore we go back to
Speaker 1: the drawing board to find someone that Theresa May can
Speaker 1: can fight with. Okay, that's fine, but are we any
Speaker 1: closer to a general election? I think Americans are hardwired
Speaker 1: to go conservative labor. To be clear, we're not talking
Speaker 1: about that, are we. No, we're not at all. When
Speaker 1: you speak to investors, there was I think a post
Speaker 1: Brexit shock. A couple of commentators that were saying, well,
Speaker 1: we need a general election. But actually Theresa May is
Speaker 1: widely regarded as a safe pair of hands. We heard
Speaker 1: from her today pledging to crackdown on corporates, including big business.
Speaker 1: I mean, it would be very difficult toime to see
Speaker 1: how Parliament could have a no vote confidence at this point.
Speaker 1: And again there was a law past a couple of
Speaker 1: years ago to make the government more stable. So then
Speaker 1: you'd have to reverse that law. There'd be a general election,
Speaker 1: you know, and I get that, and it would be
Speaker 1: like us changing from the first Tuesday of November. David
Speaker 1: Kotech with his Cumberland advisers, fancy let me go to
Speaker 1: you and you today that this brings me back to
Speaker 1: the distinctions of conservatism in the United Kingdom, where going
Speaker 1: back to Disraeli in the nineteenth century, there's this odd
Speaker 1: thing called one nation conservatism. Theresa May and David Cameron
Speaker 1: are a one nation conservatism kind of Tory. Is that
Speaker 1: have anything to do with Brexit and leave? Yeah? Tom,
Speaker 1: I think Theresa May will find out more about how,
Speaker 1: you know, her blueprint for the future. But it surprised
Speaker 1: me she's actually a little bit more conservative than than
Speaker 1: we thought, you know. She she definitely makes David Cameron
Speaker 1: see more of a socialist. She's um, you know, on immigration,
Speaker 1: she's very tough. She's been very tough also on some
Speaker 1: of the business. So I guess my question to David
Speaker 1: is we've talked about the fact that the cloud that
Speaker 1: the UK had is being diminished by the day. What
Speaker 1: can she and the next Chancellor of the Exchequer do
Speaker 1: to regain that trust. Well, it's he got to go
Speaker 1: through the Brexit process. There's no way to avoid that.
Speaker 1: But in the context of this discussion of history and
Speaker 1: history in the world and the role the UK and
Speaker 1: the British diplomat has played in history is remarkable, and
Speaker 1: so is that character still intact. That's the test for
Speaker 1: the new to be some of this, David is they
Speaker 1: got to get out and sell the message, which you're
Speaker 1: seeing with the Chancellor in New York today and with
Speaker 1: the Prime ministers selling airplanes out in the fields of Hampshire.
Speaker 1: I mean part of this is once they get over
Speaker 1: the shock, whoever's running the show has got to go
Speaker 1: out and sell the message well. And the message has
Speaker 1: to have substance, and so they're the substance is unknown.
Speaker 1: The messengers have the capacity to sell it and that
Speaker 1: cohesive new message is what we wait await and what
Speaker 1: we do see now is this fragmentation until we get
Speaker 1: to the new message, the new package, if you will.
Speaker 1: All right, So they have to be truthful, David. It's
Speaker 1: difficult right to be to send people out in the
Speaker 1: open and saying guys were still open for business. I
Speaker 1: love the tweet that the Chancellor said, we may be
Speaker 1: shut out of the U, but we're still global and
Speaker 1: believe in the world. Well, hey, guys, we don't know
Speaker 1: if this country is going to see a recession, how
Speaker 1: tough that recession will be yet? Right, Well, exactly, I mean, Francine,
Speaker 1: you have to you have to justify and prove what
Speaker 1: you say. Otherwise you're seen as as having no substance
Speaker 1: and therefore you lose all credibility. Francine. I know our
Speaker 1: editor John Michael Twaite interviewed Disraeli a few years ago.
Speaker 1: But would you explain to me the conservative politics of
Speaker 1: a greater United Kingdom. How fragmented and polarized are they
Speaker 1: or is it just remain Tories and leave Tories. Well,
Speaker 1: they were fragmented and it was unclear actually until we
Speaker 1: had you know, until David Cameron called for a referendum
Speaker 1: exactly how fragmented they were because it was a party
Speaker 1: that unified almost you know actually from you know, behind David,
Speaker 1: but it was very clear that they unified in the
Speaker 1: promise of a Brexit. So it has been ugly. It's
Speaker 1: been ugly on all sides. If you actually look at
Speaker 1: UK politics at the moment, Tom and I know you
Speaker 1: like to put the analogy with Games of Throne, but
Speaker 1: the Labor Party is really nowhere to be seen in
Speaker 1: huge divisions, and the Tories even when you look at
Speaker 1: the race with people backstabbing and brexiteering and bre executions
Speaker 1: like like we talked to about them in journalism, it
Speaker 1: just makes for an ugly party. This is Fabinoe. We
Speaker 1: are so fortunate, David if Francie U giving wisdom on
Speaker 1: what's going on in politically United Kingdom and we're making
Speaker 1: history and in this remarkable world, a journalist in London
Speaker 1: is contributing to this discussion of the evolution of history.
Speaker 1: In the US. Two American listeners, it's a markingless state
Speaker 1: in the market. I want you to reaffirm equities right
Speaker 1: now you can buy twenty five multiple blue chip dividend
Speaker 1: growing stocks. Well, I buy them in basket's using e
Speaker 1: T s. The answer is yes, because the earnings yields
Speaker 1: are so enticing. In the sovereign debt yield are at
Speaker 1: zero and they're gonna be at zero for a long time.
Speaker 1: This has been great David Kotuk with us with Cumberland Advisers.
Speaker 1: Thank you so much for your time this morning. I
Speaker 1: will say in advance that this will be our most
Speaker 1: important podcast of the day. Michael Darda is it the
Speaker 1: mk M Advisors and he's truly one of our more
Speaker 1: enduring guests. We could talk today Michael for three or
Speaker 1: four hours. We don't have that time with you, so
Speaker 1: I want to cut right to the chase. You made
Speaker 1: headlines a month ago, three months ago with declining business
Speaker 1: investment in America. Is it's still there? Tell us about
Speaker 1: the supply and demand, the business dynamic of the American economy. Hi, Tom,
Speaker 1: thanks for having me on UM. Look, we're still in
Speaker 1: an environment of slow growth, uh week business fixed investment
Speaker 1: and you know two key things for the listeners to
Speaker 1: think about and trying to sort out what this What
Speaker 1: these latest jobs figures tell us UM is that with
Speaker 1: profits week and with capital spending week, it's pretty unlikely
Speaker 1: that we're going to sustain June's job figure of two
Speaker 1: d and eighty seven k um. Really, you know, I
Speaker 1: think what the listeners should be doing is averaging together
Speaker 1: the very week eleven thousand uh reading for May, for
Speaker 1: non farm payrolls and what we saw in June. And
Speaker 1: if you do that, you're closer to about a hundred
Speaker 1: and fifty thousand as a run rate, which is a
Speaker 1: fairly steep slowdown from where we were, say in bid
Speaker 1: till late two tho fourteen, and and uh, you know
Speaker 1: in last year as well, what does the outcome? And
Speaker 1: you spend a lot of time looking at nominal top
Speaker 1: line g d P are real economy plus inflation give
Speaker 1: us the data update on animal spirit when you look
Speaker 1: at such a relative to sparity between the United States
Speaker 1: and a troubled Europe and the United Kingdom absolutely well,
Speaker 1: year over year, nominal GDP real growth and inflation is
Speaker 1: running just above three percent. The average for this six
Speaker 1: year expansion has been closer to four and this is
Speaker 1: the third time in a row that nominal growth has
Speaker 1: faltered to the low end of the six year range
Speaker 1: after the fete is huled at a QUI program. So
Speaker 1: you know, our view has been that the tapering of
Speaker 1: QUI in the end of QUI were forms of monetary tightening,
Speaker 1: not just the December rate rise that occurred last year.
Speaker 1: And so the nominal growth figures tell us that now
Speaker 1: there's some optimism that you know, growth looks like it's
Speaker 1: bouncing back a bit in the second quarter. But I
Speaker 1: would just focus listeners on the bond market measures. These
Speaker 1: low yields, a sinking yield curve, and very weak inflation
Speaker 1: expectations are telling us that the market doesn't really think
Speaker 1: that the q Q bounce back is going to be sustained. Francine,
Speaker 1: I'll probably do this chart tomorrow, Untie. The four point
Speaker 1: three nominal GDP. Now we're down to three point three.
Speaker 1: We've taken a stick one point out of our animal
Speaker 1: spirit in the United Kings in the United States. That's something, Franzy, Yeah,
Speaker 1: it is something. And Tom, we want to go back to,
Speaker 1: you know, the fears basically that we had maybe just
Speaker 1: five days ago about the US economy and labor market
Speaker 1: abated a little bit. But Michael, when you look at
Speaker 1: the global players, right the US, Let's say the EU
Speaker 1: and Japan, they're not all doing their bit to stabilize
Speaker 1: the global economy. Yeah, it's a great question, you know. Um,
Speaker 1: it's very interesting because if you look at phenomenal GDP trends,
Speaker 1: say in the Eurozone in Japan, they've actually done a
Speaker 1: little bit better in recent years following the QUI programs
Speaker 1: in those countries, But the credit markets, the bond market
Speaker 1: measures I mentioned recently, have been weakening everywhere, so it
Speaker 1: looks like investors don't really expect those better numbers to
Speaker 1: be sustained. And at the same time, we've had a
Speaker 1: pretty steep slowdown in nominal growth in China in the
Speaker 1: emerging world, so as the FED shifted towards tapering KIWI
Speaker 1: and then ending it and then raising interest rates last December,
Speaker 1: nominal growth in the US slowed, in nominal growth in
Speaker 1: China in the emerging world slowed sharply. So that in
Speaker 1: my opinion, really explains the huge commodity price crash really
Speaker 1: starting in the middle of two thousand fourteen and extending
Speaker 1: into the first few months of this year. And so, Michael,
Speaker 1: what's the sweet spot for the economy or or for
Speaker 1: globals is it good enough news? You want good enough
Speaker 1: news to know that we're not getting any worse, But
Speaker 1: actually if you get good news, that means that central
Speaker 1: banks may start holding off. Yeah, it's interesting. Another good
Speaker 1: question because unfortunately, if we have to discuss the productivity statistics,
Speaker 1: you know, those don't look very good in the United States,
Speaker 1: and in other countries they've been weak as well. But
Speaker 1: for the US, we're just averaging point five per cent
Speaker 1: per animal non farm productivity since two thousand ten, the
Speaker 1: labor force working age population growing at about the same mounts,
Speaker 1: So it looks like growth potential may only be running
Speaker 1: about one percent per annum. And if you add the
Speaker 1: FED two percent inflation target to that, that gives you
Speaker 1: about three percent nominal growth. So anything above that probably
Speaker 1: means the FED tightness to slow things down. So unfortunately,
Speaker 1: you know, the three percent figure on nominal growth maybe
Speaker 1: about as much as we can expect in the US
Speaker 1: from here on out. Also, you know what else that means.
Speaker 1: There's a lot of talk about physical stimulus and the
Speaker 1: need for it, but it won't do anything if the
Speaker 1: FED offsets it with tighter money. So you know, I
Speaker 1: don't think physical stimulus is really going to do anything
Speaker 1: for us in the US at this point in time.
Speaker 1: So we are here with the most interesting day, Michael
Speaker 1: Darta helping us out here. Michael, let's link your economics
Speaker 1: over to a fully priced equity market. Are equities now
Speaker 1: so priced that they are a bubble? Or is there
Speaker 1: a data rationalization to owning these priced earnings ratios? Well?
Speaker 1: Um uh, the word bubble is very popular now, I
Speaker 1: think unfortunately because rates are low, So a lot of
Speaker 1: people mistake that for overly easy monetary conditions and bubbles.
Speaker 1: But rates are always low if nominal growth is low
Speaker 1: and inflation is low, and equity prices will tend to
Speaker 1: be high if investors think those conditions will be sustained.
Speaker 1: So I don't think we have an equity bubble. But
Speaker 1: what we do have is an aging economic expansion where
Speaker 1: seven years into it, the longest one in history in
Speaker 1: the US is lasted a decade. You know, we're starting
Speaker 1: to see the data points that you would see when
Speaker 1: you're moving into the later innings of a cycle. Profits
Speaker 1: peaking as a sharedage of GDP business fixed investment weakening,
Speaker 1: the FED you know already having started. Um, you know,
Speaker 1: a monetary tightening, and so you know, I think we
Speaker 1: could be in the last year or two of this
Speaker 1: business cycle expansion. And that's really what investors need to
Speaker 1: worry about in terms of the stock market, because typically
Speaker 1: bear markets are linked to recessions, and typically sessions feature
Speaker 1: stock market to quanit. We haven't seen a hint of this.
Speaker 1: We are addicted to the new bearer market as negative seven.
Speaker 1: A lot of our listeners have never experienced us. They well,
Speaker 1: you know, we certainly have had some volatility over the
Speaker 1: course of the last year year and a half, so
Speaker 1: you know, the S and p F is at a
Speaker 1: new nominal high, but you know, it really hasn't made
Speaker 1: a tremendous amount of net progress over the course of
Speaker 1: the last year, and we've had some fairly steep drop
Speaker 1: offs as investors have become worried about, you know, the
Speaker 1: fate of the business cycle. We're down almost from the
Speaker 1: highs um you know, just in the opening month and
Speaker 1: a half of this year, and so it's important to
Speaker 1: put it in context. So we'll stay up at elevated
Speaker 1: levels of investors feel like the business cycle is secure
Speaker 1: and we're not falling into a downturn. But I would
Speaker 1: think that you know that assumption probably will be challenged
Speaker 1: sometime in the next year or two. So my view
Speaker 1: is still more cautious one, unfortunately, right Michael. But this
Speaker 1: to me it seems very intuitive, right that you're cautious
Speaker 1: because everywhere you look, there's there's nothing great. Sure we're
Speaker 1: not falling off a cliff, but there's nothing that you
Speaker 1: can say, right, I'm I'm confident about this and it's
Speaker 1: good news. So where where does all this pollutions come
Speaker 1: from when you look at equities? Well, I'm not sure
Speaker 1: that you know that we're seeing a you know, as
Speaker 1: much bullishness is widely assumed simply because equity markets are
Speaker 1: are at elevated levels. I mean, that's what you'll tend
Speaker 1: to see in a low growth, low inflation environment that
Speaker 1: investors feel is sustainable. So the risk here is that
Speaker 1: if that feeling of sustainability starts to change, that's when
Speaker 1: you know we could see the equity market take a
Speaker 1: steep fall. And and so you know, that comes down
Speaker 1: to where do you think we are in the business cycle?
Speaker 1: And if you think we're in the eighth or ninth inning,
Speaker 1: as I do, then you want to have a more
Speaker 1: conservative approach to investing, and this is something we've been
Speaker 1: advocating really since last summer, and you know, that's served
Speaker 1: investors well if that's what they've been doing. I mean,
Speaker 1: the bond markets actually done fight well better than stocks
Speaker 1: over the course of the last year. You know, now
Speaker 1: the fields are at very low levels, and so that's
Speaker 1: created some concern that there's no value there. But as
Speaker 1: a shock absorber against market volatility or sharp market decline,
Speaker 1: you know, having some funds in cash and bonds has
Speaker 1: certainly been helpful of the last year. But Michael, Japanese
Speaker 1: shares today posting their biggest gain in almost five months.
Speaker 1: Thisbe one and investors are hoping or thinking that actually
Speaker 1: we're going to get more stimulus, and it will come
Speaker 1: sooner than expect it. Does the world need ebonomics to
Speaker 1: work to make sure that growth doesn't leave I think. So,
Speaker 1: you know, Japan's equity market has done very poorly this year,
Speaker 1: and more worryingly to me, bond market inflation expectations and
Speaker 1: in all the major economies, but in Japan in particular,
Speaker 1: it's just completely fallen out of bed. And they were
Speaker 1: having some success with the seweek program, but for whatever
Speaker 1: reason markets have come to doubt the bo j's ability
Speaker 1: or willingness to staining it, and so we're probably seeing
Speaker 1: a marginal reversal of that. So that's good news as
Speaker 1: far as it goes. Michael, I'm looking at a photo
Speaker 1: of you from Italy with the Laureate Robert Mundell. I'm
Speaker 1: counting one, two, three, four, five, six, seven bottles of
Speaker 1: wine on the table. I want to on the cappuccino.
Speaker 1: Only cappuccino for me, Tom today. Yeah, I would get
Speaker 1: what have you learn from Professor Mundell and others about
Speaker 1: the struggle that Italy faces right now? Oh, it's a
Speaker 1: great question. You know. I've been thinking in Mundeli in
Speaker 1: terms since we've been out here for you know, for
Speaker 1: Bob's economic conference. And if you think about the shock
Speaker 1: that the global economy went through from from two thousand
Speaker 1: fourteen into two thousand fifteen, as the FED was tapering
Speaker 1: and ending KIWI and signaling rate rises, what happened The
Speaker 1: dollar exchange rates sword over in a very short period
Speaker 1: of time. And that's endous pressure on any country that was,
Speaker 1: you know, dollar linked close to being dollar linked. China
Speaker 1: is the biggest economy in the world. It has a
Speaker 1: quasi peg to the dollar. And so that's that explains,
Speaker 1: you know, these disruptions with a huge commodity price crash,
Speaker 1: we had a credit market crisis. Okay, we're gonna Michael,
Speaker 1: We're gonna have to leave it there. Michael Darda in
Speaker 1: Italy drinking wine. We're not. Roger Brutle joins us now
Speaker 1: from Catholic Economus, of course, writing in Worldwide Read in
Speaker 1: the Telegraph as well. Roger, I want to get to
Speaker 1: fiscal policy, what you're writing about right now. But first
Speaker 1: of all, all my radar is up. Everyone in the
Speaker 1: world is screaming weaker sterling. You know, Okay, I get it,
Speaker 1: I understand sterling. Could weekend? Could we be shocked by
Speaker 1: sterling stability? Here? Well, I've been thinking that the pound
Speaker 1: needs to fall for quite some time, and then of
Speaker 1: course along came the Brexit vote and it sent it
Speaker 1: a lot lower. Now, I happened to think that this
Speaker 1: sort of exchange rate against the dollars at one thirty dollar, uh,
Speaker 1: and indeed where we are against the end, that's probably
Speaker 1: about right. I don't think there's any need for it
Speaker 1: to go a lot lower. Not to say they won't,
Speaker 1: but I don't think there's any need for it. My
Speaker 1: might worry, by the way, thinking is a British national
Speaker 1: concerned about the British economy? Am I concerned about the
Speaker 1: pound falling a lot further? No? Am I concerned about
Speaker 1: the pound recovering? Yes, it wouldn't be the first time
Speaker 1: this has happened. It wouldn't help. But I think this
Speaker 1: is around about the right level. Roger, how concerned are
Speaker 1: you about the UK economy? You're saying you're concerned, but
Speaker 1: this is this recessions are given and it's going to
Speaker 1: be tough to get out of it, or this is
Speaker 1: just a mild recession, and then things will get better
Speaker 1: because we'll have a plan be this time around. Well,
Speaker 1: of course you can't see me, but if you could
Speaker 1: see me, you would see that I was well, I've
Speaker 1: been around the block a few times, shall we say, ah,
Speaker 1: And I've been around the block enough time to realize
Speaker 1: that nothing in economics is certain. I keep hearing people saying, oh,
Speaker 1: recessions baked in, but of all nonsense. I mean it
Speaker 1: was true. I think that before the Brexit vote, economy
Speaker 1: seemed to be slowing a bit, and it might well
Speaker 1: have ended up in recession without the Prexit vote. You
Speaker 1: know my best guess, but I can't dignify it by
Speaker 1: describing anything better than that. My best guess is that
Speaker 1: we will probably just about a void recession, but the
Speaker 1: economy will slow a bit in the near term. Of course,
Speaker 1: the long terms a different matter. And when you have
Speaker 1: a vote on something as important as we had a
Speaker 1: vote on frankly, you shouldn't really be obsessed about the
Speaker 1: next few months, right Roger. You're a UK citizens, Tom
Speaker 1: and I aren't. What do you hope for your country?
Speaker 1: You are going to have a new prime minister, either
Speaker 1: today or in the next couple of days or maybe weeks.
Speaker 1: She's going to be Theresa May. How should her negotiating
Speaker 1: tactic with the eub Well, I think first of all
Speaker 1: she should conduct some exploratory, exploratory talks to find what
Speaker 1: their frame of mind is and whether they're going to
Speaker 1: play ball or whether they're going to be probot playing
Speaker 1: our ball as well. To use your expression, um now,
Speaker 1: if it's the latter, then I don't think that Britain
Speaker 1: should stand there as a sub plicant and begging and saying, oh,
Speaker 1: please give us this, please give us that you know,
Speaker 1: there is an alternative, which is to operate under World
Speaker 1: Trade Organization w t O rules and to declare unilateral
Speaker 1: free trade. I think that's actually quite an attractive option.
Speaker 1: I would certainly prefer that to the prolonged uncertainty with
Speaker 1: Britain trying to get a trade deal. You saying well, no,
Speaker 1: you've been naughty boys and are sitting here for a
Speaker 1: long time with business uncertain I wouldn't like that. I
Speaker 1: look Roger where we are, Chancellor of the Exchequer Osborne
Speaker 1: in New York, the Prime Minister speaking today flagging airlines
Speaker 1: are buying airlines or whatever. Prime Minister May has to
Speaker 1: go on a massive sales campaign of her nation. Am
Speaker 1: I right on that that the tone has got to
Speaker 1: be set, whatever anybody's politics. Yes, I think that is right,
Speaker 1: But um I wouldn't be doing it in a spirit
Speaker 1: of desperation. Quiet the opposite. I mean, we've been here before,
Speaker 1: and we came out of the European exchange rate mechanism
Speaker 1: comes to mind, and people are all terribly gloomy. In fact,
Speaker 1: what turned out is that was our salvation and we
Speaker 1: surged ahead thereafter. I think you know, you can overdo
Speaker 1: the importance of trade deals. When your President Obama came
Speaker 1: over to Britain, he said that, to be under no illusions,
Speaker 1: if you come out of the EU, you'll go to
Speaker 1: the back of the queue for trade deals with the
Speaker 1: United States. And various people picked up on that. The
Speaker 1: use of the word que which you in America, I
Speaker 1: don't think you use. You say line, and various people
Speaker 1: thought that meant that his speech had been written by
Speaker 1: number ten Downing Street. Well, I replied in the newspaper article,
Speaker 1: I said, I'm going to cross the linguistic of the
Speaker 1: divide and similarly hues the term that's not used in
Speaker 1: the other country. And I said, what's the extent of
Speaker 1: Britain's trade deal with the United States? Now answer zippo,
Speaker 1: we don't have one. We don't have a trade deal
Speaker 1: with the United States. And yet look at how close
Speaker 1: our trading links are. Incredibly close. So I think you
Speaker 1: can overdo this stuff. Prosperity does not emerge from the
Speaker 1: tip of a politician's pen. It emerges the result of
Speaker 1: what business people do. What will labor do? From where
Speaker 1: you said, and I'm going to assume that you're sympathetic
Speaker 1: to conservative politics, correct, me if I'm wrong, what would
Speaker 1: you expect to see? I mean, we in America sort
Speaker 1: of baffled. Way, it's just about Tories right now. If
Speaker 1: there is a general election at some point, what would
Speaker 1: be the tongue from labor? Do they swing to Gordon
Speaker 1: Brown and Alistair Darling politics? Where do they go? Well,
Speaker 1: you don't have to be in America to be baffled.
Speaker 1: I'll tell you we're baffled as well. I mean the
Speaker 1: Conservative Party I went, it's in meltdown, but it's in disarray.
Speaker 1: We've had this ugly division within the party between remain
Speaker 1: and leave and don't forget. You know, most Conservative MPs
Speaker 1: were in favor of remaining in the EU, so they've
Speaker 1: got a job adjusting themselves to all this. Now. As
Speaker 1: far as labor cern, well this is this is just
Speaker 1: incredible when labor is tearing itself apart. Jeremy Corbyn, the leader,
Speaker 1: is very far left, I suppose you would say in
Speaker 1: many ways he's to the left of Bernie Sanders in
Speaker 1: your country, and he is much less effective than Bernie Sanders.
Speaker 1: He's extremely disorganized and he can't come on much support
Speaker 1: from the Parliamentary Party. We don't know if Angela Eagle
Speaker 1: his challenger for the leadership when yet another woman in charge.
Speaker 1: We don't really know what she would be like, but
Speaker 1: at least she'd be pretty competent. I think she'd be
Speaker 1: well to the right of Jeremy Corbin. She believes in
Speaker 1: renewing Britain's tribe and nuclear to terrant. She's not strongly
Speaker 1: anti business. It will be interesting, I think, you know,
Speaker 1: if labor could hold together under the leadership of someone
Speaker 1: like Angela Eagle, then the Tories might yet have a
Speaker 1: fight on their hands. Roger, talking about businesses, do you
Speaker 1: think that banks, big US banks, other European banks will
Speaker 1: leave London because that either they don't get access as
Speaker 1: single more get over this passporting, or just because London
Speaker 1: becomes too expensive. And if they do leave, is that
Speaker 1: good riddance? Well no, it certainly wouldn't be good riddence
Speaker 1: if a major blow to London. But no, I don't
Speaker 1: think they're going to leave at all. On the contrary,
Speaker 1: after the exchange rate change, of course it's cheaper now
Speaker 1: to be in London than in all the other European centers.
Speaker 1: What I think is going to happen is that because
Speaker 1: of European regulations about passporting that some jobs and some
Speaker 1: financial operations will transfer to the continent, But I think
Speaker 1: these are going to be quite marginal. I mean, the
Speaker 1: fact the matter is London is tremendously attractive. It's an
Speaker 1: attractive place to live, and it's an attractive place to
Speaker 1: do business. You've got to got to have been to
Speaker 1: Frankfurt to compare the two. Yeah are going I would
Speaker 1: go that, Roger Brutal Capital Economics. Thank you so much.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
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