Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailey. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com,
Speaker 1: and of course on the Bloomberg Terminal. Vice and Reinhard
Speaker 1: owns the research of the American economy. With twenty four
Speaker 1: years at the Federal Reserve System. He is the one
Speaker 1: who literally codified and invented modern research at the ECCOS building.
Speaker 1: He is with Melan their chief economists, Vince Reinhard, I
Speaker 1: want you to explain to radio and TV what Jackson
Speaker 1: Hole really is. A bunch of PhDs listening to dead
Speaker 1: serious papers, describe what really goes on at Jackson Hall.
Speaker 1: It's the biggest concentration of central bankers, and central bankers
Speaker 1: love to talk amongst themselves, and so that's the opportunity
Speaker 1: for them to address what they're all concerned about. And
Speaker 1: what they're all concerned about now is just how the
Speaker 1: global economy is going to pull itself out of the pandemic,
Speaker 1: and moreover, how they are going to pull themselves out
Speaker 1: of the unconventional policies they've got themselves into. I had
Speaker 1: the honor of sitting on the lawn years ago vince
Speaker 1: Reinhardt were the wonderful Alan Meltzer with Carl Brunner getting
Speaker 1: this summer's suare started with the Carnegie Rochester series of
Speaker 1: decades and decades ago, and it goes to the emotion
Speaker 1: of the serious events Villin Bouder blowing up years ago.
Speaker 1: It's some controversial paper, the controversy of the late Marvin
Speaker 1: good Friends paper of two thousand and sixteen. What will
Speaker 1: be the controversy this year? I UH, I think the
Speaker 1: big issue who is to find out UH where J
Speaker 1: pal is relative to his committee? What do we learn
Speaker 1: this week? We learned that the ethel m C by
Speaker 1: and large wants to head to the taper asks asked
Speaker 1: Rob Kaplan that later today UH wants to start slowing
Speaker 1: asset purchases. We heard it pretty firmly in the minutes,
Speaker 1: but when J. Pale at his press conference was asked
Speaker 1: about it, he didn't seem anywhere nearly as convinced, nor
Speaker 1: did he really convey that view of his committee. So
Speaker 1: which is it is? J? Pale really want to head
Speaker 1: to the exeter he doesn't. This is his opportunity if
Speaker 1: he wants to to confirm where his committee wants to
Speaker 1: go or to slow a mom How closely, evince, do
Speaker 1: you think that J Powell and the other FAN members
Speaker 1: are watching the Delta variant and the various shutdowns that
Speaker 1: we're seeing, whether it's port closures or whether it's delays
Speaker 1: the return to office of a number of different companies.
Speaker 1: Delta is the ace card that J Pal can pull
Speaker 1: out of his sleeve if he wants to slow up
Speaker 1: this committee. I think, Lease, you know you, Lisa and
Speaker 1: Kaylee had it exactly right. What have we learned over
Speaker 1: the last eighteen months. Bad things can happen to good people,
Speaker 1: and they're very bad. Uh. In that environment, you want
Speaker 1: to buy insurance that insurance includes treasury securities rates are low.
Speaker 1: That includes staying away from market activity. Uh. That's serious
Speaker 1: And from a monetary policy standpoint, it brings into the
Speaker 1: question of risk management. Do you want to head for
Speaker 1: the exits if in fact something bad could happen in
Speaker 1: between and you're wrong footed? And so if sorry? Well,
Speaker 1: thinking about how the Delta variant informs FED policy, we
Speaker 1: know this FED is prioritizing the labor market and the
Speaker 1: recovery there that seems to be taking precedents over inflation.
Speaker 1: And we heard from the US Labor Secretary, Marty Walls.
Speaker 1: She asked, are they saying that some states who have
Speaker 1: already rolled back those enhanced unemployment benefits may need to
Speaker 1: actually put them back in place because of the delta variant?
Speaker 1: I mean, how do you think about that factor into
Speaker 1: the job's recovery. Yeah, that that that's a really important
Speaker 1: point and it tells you the problem of leaning forward
Speaker 1: in an uncertain time, You just may be leaning leaning
Speaker 1: in as events turned against you. And the really interesting
Speaker 1: thing about the minutes, cably was, in fact they were
Speaker 1: less hierarchical about their dual objective for the last year.
Speaker 1: It's always been employment, employment, employment, in price stability and inflation.
Speaker 1: The second half of the dual man it was in
Speaker 1: the background in the minutes, they said they were worried
Speaker 1: about they had made substantial further problem or rather they
Speaker 1: made further progress toward employment and probably were at their
Speaker 1: price stability goal, so they were bringing back that mandate. Now,
Speaker 1: the question is if they're really worried about the outlook Uh,
Speaker 1: do they push concerns about inflation further into the background,
Speaker 1: And just real quick, in terms of their concerns about inflation,
Speaker 1: how much do you expect them to highlight how this
Speaker 1: has been a K shaped recovery and how the inflationary
Speaker 1: pressures that we're seeing are actually hampering with people on
Speaker 1: the lower brackets more than others. That's what everybody forgets
Speaker 1: about the nineteen seventies, and that is that that inflation
Speaker 1: is a regressive tax, and part of it is what's
Speaker 1: that's doing the real wages at the lower end of
Speaker 1: the end of the spectrum. Look, Jpal has been extremely
Speaker 1: good in framing policy more inclusively than any of his predecessors,
Speaker 1: and you've identified an opportunity for him to complain about inflation,
Speaker 1: not just because it worries the bond market. Stars Vince,
Speaker 1: I got thirty seconds. I'm so sorry. You and Carmen
Speaker 1: Reinhardt wrote the paper of the summer last year Foreign
Speaker 1: Affairs on the Pandemic Depression. Have we exited the pandemic depression?
Speaker 1: Absolutely not. Uh. A message was rebound, wasn't recovery. We
Speaker 1: still have a lot of lost output in the US.
Speaker 1: And importantly, what we have done is forbearance, not forgiveness.
Speaker 1: That is, at some time, at some point, all those uh,
Speaker 1: all those payments, right is gonna come do what's gonna happen.
Speaker 1: Then we are out of time. Let's do it again,
Speaker 1: Vincent Reynard, thank you. With mel in their chief it
Speaker 1: kind of let's get right to it and we are
Speaker 1: thrilled to start strong on Friday with Dennis Garbon. He's
Speaker 1: the retired editor of the Gartment Newsletters, still writing the
Speaker 1: Gartment news Letter, and it is a jewel today in
Speaker 1: his retirement, which harkens back to Saigon. That cartoon Dennis
Speaker 1: Garden Gartment in your morning letter is painful. It is
Speaker 1: very painful. The the relationship of the similarities between what
Speaker 1: happened in nineteen seventy five and in Saigon and what
Speaker 1: is happening now in Afghanistan are frightening for those of
Speaker 1: us who were all around back in the nineteen seventies
Speaker 1: and remember how that looked. It is a is dismaying
Speaker 1: to see the United States a position in the world
Speaker 1: having been diminished as badly as it has been. This
Speaker 1: is a very disturbing circumstances prevailed, and this is a long,
Speaker 1: long week, and we have a long time ahead of
Speaker 1: us to worry about the loss of perspective here in
Speaker 1: the United States. Jonics Lisa wants to jump in, but
Speaker 1: I've got your your newsletters of jewel on how prices
Speaker 1: are priced at the margin? Almost there's a marginal pricing
Speaker 1: of the margin at the margin. Explain that well, first
Speaker 1: of all, and in all markets, I've always maintained that
Speaker 1: prices made at the margin. When the last two percent
Speaker 1: of buyers become sellers, prices go down and the last
Speaker 1: two percent of sellers become buyers, prices tend to go up,
Speaker 1: and prices made at the margin. And what bothered me
Speaker 1: this time was looking at the level of margin being
Speaker 1: used in the in the stock markets that these days
Speaker 1: had been going up for fifteen consecutive months, coextensive with
Speaker 1: a bowl market in stock prices. But there's always been
Speaker 1: a very leading indicator that the use of margin has
Speaker 1: led the market to the downside, has led the market
Speaker 1: to the upside, and now for the first time in
Speaker 1: fifteen months in July, the use of margin, and I've
Speaker 1: maintained that that's where that's where wise and sophisticated smart
Speaker 1: money has been leaving the market since July. It's very
Speaker 1: disconcerting that tends to lead the stock market higher or
Speaker 1: lower by by several months, two or three or four months,
Speaker 1: sometimes a bit longer. But when you start to see
Speaker 1: margin usage declining, you have to be careful about the
Speaker 1: stock market itself. It is one of the better leading,
Speaker 1: leading stock market indicators that I have learned to watch
Speaker 1: over the course of my nearly fifty years of being
Speaker 1: in the markets. Dennis, what does this mean in terms
Speaker 1: of some sort of draw down, considering that a draw
Speaker 1: down these days is perhaps maybe a half a percentage
Speaker 1: point decline, Well, I think there's more going on here
Speaker 1: than half a point. To client, take a look at
Speaker 1: the broader market. We tend to pay too much attention
Speaker 1: to the Dow, too much attention to the SNP, way
Speaker 1: too much attention to the NASADAC, and nobody's paying attention
Speaker 1: to the broad Russell Index, which has not made a
Speaker 1: new high now and several months has broken its upward
Speaker 1: sloping trend lines several weeks ago. That goes back into
Speaker 1: March of last year. Something is happening in the broad
Speaker 1: market that doesn't seem to be in taking place publicly.
Speaker 1: The public is still involved in the markets. It still
Speaker 1: sees the down making new highs. It still sees the
Speaker 1: SMP and the NASDAC making new highs. And you brought
Speaker 1: up the fact that you have to pay attention to
Speaker 1: what happened in Amazon. Amazon, for the technicians, gaped lower
Speaker 1: dramatically almost ten days ago and has not come close
Speaker 1: to bouncing since then at all. And and Amazon had
Speaker 1: been one of the leaders to the upside. When the leaders,
Speaker 1: when the generals get taken out and get shot, you
Speaker 1: have to be worried about what the sergeants and corporals
Speaker 1: and privates are going to be doing. Yeah, And I
Speaker 1: look at things like the AII sentiment survey that we
Speaker 1: got this week, the Bears out exceeding the Bowls for
Speaker 1: the first time this year. Have we started to see
Speaker 1: a real shift in sentiment this week? I think you have.
Speaker 1: I think that that's starting to take place. I think
Speaker 1: there's no question about it. People talking about the inevitable
Speaker 1: tapering of the FEDS expansionary policies. That's going to happen.
Speaker 1: Whether it happens in October and November, December, January, certainly
Speaker 1: that's going to happen. And I've maintained all along that
Speaker 1: the great bull market that we've gone through has been
Speaker 1: almost solely predicated upon the expansionary policies, not just by
Speaker 1: the FED, but by the Bank of Canada, the Bank
Speaker 1: of England, the e c B, the Bank of Japan,
Speaker 1: and the FED is is clearly at sometime in the
Speaker 1: next month, two months, three months, four months, going to
Speaker 1: start the process of tapering. Whenever that happens, that's less
Speaker 1: money coming into the market, and money will leave the
Speaker 1: stock market and go into the expanding economic circumstances. Clearly,
Speaker 1: the economy is doing well, and that's what happens at
Speaker 1: turning points. Stocks go up before the economy turns higher,
Speaker 1: stocks go down before the economy turns lower. Stocks are
Speaker 1: going to start moving lower, and the economy will continue
Speaker 1: to not boom, but be really quite quite expansive, quite strong.
Speaker 1: Dennis Gartman, thank you so much. Too short to visit
Speaker 1: this morning, to get us started on this Friday, Chairman,
Speaker 1: the University of Akron's Endelman uh fun on a Friday
Speaker 1: in August. It's always important and on Blueboard Radio this
Speaker 1: place so well. I went into the closet this morning,
Speaker 1: my closet with my suits is about in the west
Speaker 1: Wingley says, it's a good thirty ft long. And you know,
Speaker 1: I said, I said, blue is the only way to go.
Speaker 1: And I come in and you know, Teal's got the
Speaker 1: blue thing going and Lisa's got the blue thing going,
Speaker 1: and I said, canceled the guest at seven thirty and
Speaker 1: find someone in blue. Gabriella Santos joins us now in
Speaker 1: JP Morgan Blue and that is always good to see. Gabriel.
Speaker 1: Thank you so much for joining us on a blue
Speaker 1: Friday here. And one of the things you talk about
Speaker 1: is something John Farrow and his Gloom on the Way
Speaker 1: to Crete talks about, which is a draw down. And
Speaker 1: you say, and particularly with a draw downs are normal.
Speaker 1: We should not be afraid of the Pharaoh draw down. Well,
Speaker 1: this drawdown we're seeing in China's is absolutely business as
Speaker 1: usual for investing in Chinese equities. Every year you should
Speaker 1: expectent annual correction, and every three years or so you
Speaker 1: tend to have an over thirty percent correction. We had
Speaker 1: this in ten, we had it in and eleven. And
Speaker 1: it's unrelated to the economic cycle. It's related to China's
Speaker 1: regulatory and reform campaigns, which tend to happen every once
Speaker 1: in a while. It takes time to rebuild confidence. But
Speaker 1: three months out Chinese equities tend to be up ten percent.
Speaker 1: Uh in six months out they tend to be up
Speaker 1: twenty percent. During these moments, we hold on a second, Gabriella,
Speaker 1: are you saying that it's a good time to go
Speaker 1: buy Chinese equities? We fundamentally disagree with the thesis that
Speaker 1: China is now uninvestible, and that is not what we're
Speaker 1: speaking to our client. It's about, or hearing from our
Speaker 1: institutional clients. It's really still a story about building a
Speaker 1: strategic allocation to Chinese onshore equities and onshore bonds. To me,
Speaker 1: that is one of the most important themes of the
Speaker 1: next decade is the rise of China and portfolios, and
Speaker 1: it's really just about navigating these moments of volatility and
Speaker 1: thinking carefully about how to invest in China rather than
Speaker 1: going through an existential crisis every time we get these
Speaker 1: draw downs, and in fact it's it's what one of
Speaker 1: your guests that the CEO of the Norwegian Sovereign Wealth
Speaker 1: Fund on Wednesday not rethinking that long term allocation to
Speaker 1: Chinese on shore equities. Well, let's talk about how to
Speaker 1: invest in China. Let's go there, especially at a time
Speaker 1: when you've got so many cross currents. You've got the
Speaker 1: regulatory uncertainty around the shifting priorities of the executive leadership
Speaker 1: in China. You also have the slowdown the your experience experiencing,
Speaker 1: as well as the COVID policies which are much strict
Speaker 1: er than in places like the United States. How do
Speaker 1: you pass through all of this noise and figure out
Speaker 1: how to allocate at a time of such incredible uncertainty.
Speaker 1: The noise is so high right now, the volume is
Speaker 1: extremely high. And I think the trick is not to
Speaker 1: see each thing China says or does as an independent
Speaker 1: development right, It's all a piece of a bigger puzzle.
Speaker 1: And what is that puzzled all about this new phase
Speaker 1: of Chinese development. It's moving from a middle income into
Speaker 1: a high income country over the next five ten years,
Speaker 1: and it really wants to shift from the quantity to
Speaker 1: the quality of growth. And everything that's been doing over
Speaker 1: the past few months is aligned with that long term plan.
Speaker 1: And what's quality. It's growth focused on innovation. What's innovation
Speaker 1: it's not Internet and social media. It's deep technology and
Speaker 1: renewable energy, and it's quality also in the sense of
Speaker 1: the quality of life for workers, for customers, and for mergence. Well,
Speaker 1: you talked about renewable energy there, Gabrielle. China, of course
Speaker 1: is trying to reach net carbon neutrality by and it
Speaker 1: wants to have peat carbon emissions by And I'm wondering
Speaker 1: how you just kind of think about that green transition
Speaker 1: when talking about an economy and a growth trajectory that
Speaker 1: has been powered by the industrial economy. So an example
Speaker 1: of how China, you know, we tend to think about
Speaker 1: China is being really difficult from an E s G perspective,
Speaker 1: and it is starting from a uh, you know, further
Speaker 1: behind in other countries. But this is an example of
Speaker 1: China moving in the right direction here thinking about the
Speaker 1: EVE and China's extremely serious about this energy transition because
Speaker 1: it's focused on reducing pollution and improving the quality of
Speaker 1: life for its people. And this is going to involve
Speaker 1: a lot of carrots insteads right, carrots in terms of
Speaker 1: developing its domestic renewable energy market solar wind, uh carrots
Speaker 1: in terms of busting the penetration of e V auto
Speaker 1: sales China's already the largest ev market in the world,
Speaker 1: and this is just the beginning, and it involves sticks.
Speaker 1: China launched an emissions trading scheme this year to to
Speaker 1: put a price on carbon and increase the cost for
Speaker 1: heavy industry. So it's all about that transition to higher
Speaker 1: quality growth and really navigating the winners and losers in
Speaker 1: that phase. Well, we've seen this borne out in commodity.
Speaker 1: Is this specifically when you look at iron ore features
Speaker 1: in Singapore. I mean they're trying to pull back on
Speaker 1: steel production. A lot of that has to do with
Speaker 1: environmental concern and that has shown up, but it also
Speaker 1: the other side of that is the growth concerns that
Speaker 1: that Lisa was alluding to. And I'm wondering how you
Speaker 1: think about PBOC policy here in a decelerating China. One
Speaker 1: quick comment on the commodities. Yeah, they're losers kind of
Speaker 1: some of those heavy metals like iron ore and steel,
Speaker 1: but they're also winners something like copper for example, which
Speaker 1: is a huge input into renewable energy and electric vehicle.
Speaker 1: So a perfect example there. And in terms of policy,
Speaker 1: I think the way to see this is China, every
Speaker 1: time it has a growth slow down. It's going to
Speaker 1: step on the accelerator less and less um so unlike
Speaker 1: you know China five years ago. So it's very targeted
Speaker 1: easing here maybe a reserve requirement cutter two. Very targeted
Speaker 1: towards credit in high end manufacturing and private industry. It
Speaker 1: is not that old China that lifts all books. Gabriel A. Santos,
Speaker 1: thank you so much there on China, some of the
Speaker 1: optimism within a faraoh like draw down. It's been an
Speaker 1: extraordinary week. I really want to say thank you to
Speaker 1: all of the Bloomberg Surveillance team for starting strong with
Speaker 1: Thomas Barfield of Boston University, and I end my Friday
Speaker 1: here with George Friedman, Geopolitical Futures founder and chairman, with
Speaker 1: me Kaylee Lines as well. Lisa Brammon is preparing for
Speaker 1: the nine o'clock our George, thank you, thank you so
Speaker 1: much for being with us. There is that sentence in
Speaker 1: your essay which in the last century we were at
Speaker 1: war eleventeen percent of the time. What went wrong? Well,
Speaker 1: we started to go to war at a time we
Speaker 1: were hit remembered by al Qaeda. We went into Afghanistan
Speaker 1: on a raid uh to capture al Qaeda. We failed
Speaker 1: in that. They escaped at tor Bora, and then we
Speaker 1: were in Agana. We didn't know what to do, so
Speaker 1: we did what we do know how to do. We
Speaker 1: sent troops in and tried to create a different country.
Speaker 1: Afghanistan is Afghanistan. It has been that way for a
Speaker 1: very long time. Many have tried to change it, and
Speaker 1: in the end we spent a generation there, twenty years.
Speaker 1: We've gotten nowhere in terms of pacifying the country, and
Speaker 1: it was time to leave. And when you leave a war,
Speaker 1: as in Vietnam, it looks ugly and more ugly the most.
Speaker 1: But it looked ugly. George Freeman, I thought of you
Speaker 1: about four or five days ago of my nineteen fifty
Speaker 1: six when I was barely remember and the Hungarian rebel,
Speaker 1: who should you've literally lived, get out of dodge, get
Speaker 1: out of a country as well. How do you see
Speaker 1: the United States assisting Afghans? Who Admirals Tevita say, the
Speaker 1: Taliban one out of one out of Afghanistan. How do
Speaker 1: we get them out smoother and faster? I don't know.
Speaker 1: There are probably hundreds of thousands who'd like to leave.
Speaker 1: We don't have the aircraft to move them. Out, and
Speaker 1: remember Taliban is the most powerful force in the country.
Speaker 1: They won the war. They will impose the kind of
Speaker 1: rules that want to have. We may negotiate with them,
Speaker 1: but at this point we've reached the situation where we
Speaker 1: are not in control of Afghanistan. We don't get the
Speaker 1: option to make decisions. You mentioned complexity. Are we having
Speaker 1: complexity policy complexity, tactical complexity because we don't have a theory,
Speaker 1: we don't have a view, we don't have a strategy.
Speaker 1: The fundamental interests in the United States just to make
Speaker 1: sure that North America secure. Our number one interest is easy,
Speaker 1: keep Canada and Mexico happy, don't alie with anyone else.
Speaker 1: Number two is control the oceans. We control the Atlantic
Speaker 1: and control the Pacific. We're secure. We can get involved
Speaker 1: in Eurasia once in a while, very very carefully. But
Speaker 1: these all in wars like Vietnam, like Afghanistan, places us
Speaker 1: always edit is his advantage. The native population doesn't like us.
Speaker 1: They want us out, and they're going to beat us
Speaker 1: because they're not going anywhere. We're coming in and we're
Speaker 1: never going to have enough force to take it out
Speaker 1: of country like Afghanistan. So we're frivolously involving ourselves and
Speaker 1: things that look good. We delude ourselves that are enormous.
Speaker 1: Power and it is enormous, is infinite, and then it's
Speaker 1: always easier to stay another year than to leave. Longer
Speaker 1: you stay, the uglier it gets. Well. Obviously, the United
Speaker 1: States has power. It's a matter of how it is used.
Speaker 1: Are we no longer going to see the US as
Speaker 1: a global hegemon and as as the police police country
Speaker 1: of the world. A global hegemon is very careful and
Speaker 1: how it uses power, it doesn't fritter it away. On
Speaker 1: secondary issues, Afghanistan was never a strategic issue for the
Speaker 1: United States once a sound in London left. It was
Speaker 1: a country that the Russians were defeated in, the British
Speaker 1: were defeated in. It was a very difficult country. So
Speaker 1: we have to make sure that our cost benefit analysis
Speaker 1: is correct. There is a price in going to war.
Speaker 1: We don't just wave a wand and we saw that
Speaker 1: in Vietnam, and we didn't learn. We did it again.
Speaker 1: And now after twenty years there are people are staying
Speaker 1: we should have stayed longer. We we're not gonna win.
Speaker 1: How long would we stay? George you are experts in
Speaker 1: our machinery as well. Have we finally figured out the
Speaker 1: technology does win? In Vietnam and Cambodia, the technology doesn't win,
Speaker 1: and Cobble are up north on the border with Uzbekistan.
Speaker 1: It could win if you're prepared to afflict horrible casualties
Speaker 1: on the enemy. Extraordinary casualties. Technology is a wonderful weapon
Speaker 1: for killing, but it's indiscriminate. The United States was not
Speaker 1: prepared properly to engage in indiscriminated war against the Taliban,
Speaker 1: and the problem wasn't tech lack of technology. It was
Speaker 1: we fought a war that we didn't have to win,
Speaker 1: and therefore we pulled our punches. Unlike Germany or Japan,
Speaker 1: where we did everything we needed to win, we probably
Speaker 1: didn't do that in Afghanistan. But then we shouldn't be there.
Speaker 1: George Freeman, thank you so much. Sorry, look forward to
Speaker 1: speaking to you again. George Freeman, Geopolitical Futures founder and chairman.
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
Speaker 1: us live weekdays from seven to ten am Eastern on
Speaker 1: Bloomberg Radio and on Bloomberg Television each day from six
Speaker 1: to nine am for insight from the best in economics, finance, investment,
Speaker 1: and international relations. And subscribe to the Surveillance podcast on
Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course, on
Speaker 1: the terminal. I'm Tom keene In. This is Bloomberg.