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Speaker 1: Who you put your trust in matters. Investors have put their trust in independent registered investment advisors to the tune of four trillion dollars. Why learn more and find your independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene with David Gura. Daily we bring you insight from the best in economics, finance, investment, and international relations. Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and of course, on the Bloomberg David Green. Tom Keene at Oppenheimer Funds Studios in New York spectacular rebounding. You know, David, I have no life, as you know, I never get south of Street. What rebuild in downtown? Yeah, I have friends who live near here in Battery Park City and just explain our places and places to eat. Now, places to shop is placed down here. There's all signs out front on the streets saying avocado toast. It's like the land. I'm may be having some right now, though, that would be We are here again at Appenheimer Funds Studios and we're thrilled to get started on this important job today with Carl Weinberg of High Frequency economics Carla Francie Lacroix in Rome, and as you know, there's a more than important Italian vote. I would suggest the zeitgeist for Global Wall Street this Friday morning is what they do, not what they say, and what Italians are doing, it implies, is moving money out of the country. Is Italy too much like Greece? Italy is different from Greece, but it is in that in the same sense of being different. Is also a much bigger concern because it's total debt burden is much bigger, the bombs are much more widely held, so it has a bigger impact on the investor in the community. And of course its economy is the third or fourth largest in Europe, depending on how you want to count it, so that if their word disorder in Italy's financial system and economy would have a much bigger bang to the buck. But you know, Greece had fundamental problems. You know, Greece is overborrowed, at least at least probably over borrowed as well. But Italy's problem is much more of a political and financial nature right now, a political and financial nature. Will get some some of that sorted out this weekend presumably when that referendum takes place on Sunday, Carl. If it isn't, though, where do we go from here? When you talk about the structural problems, when you talk about the banking sector being in the condition it's in no matter, no matter what the outcome is here, what happens next? Yeah, well, no matter what the outcomes are of the election, whatever, whatever the outcome is, the Italian banks have to raise capital. They're under capitalized. There in trouble, the e c B, that's Bank of Italy. Everybody is on them to raise capital um looking at the possibility of state intervention to support some of the banks, pushing the limits of European constitutional um powers to their absolute maximum. And of course, if we get a no vote, if the president I'm sorry with the Prime Minister resigns, we get elections, we get the risk of an anti European five star government coming in to replace Mr Rensey. Then it becomes almost impossible for banks to raise capital. I mean there are a dodgy proposition to begin with, and that then takes the banking sector crisis to a new level where an ineffective government can't perhaps help them as much as we like them to and where private sector money is unlikely to come in, and then we have a problem. Mary Monty on surveillance earlier this morning, saying he assumes that the Prime Minister rency will stay on the job no matter what, no matter what happens. How much time does he have here to turn things around? Um until until Sunday, you know, the very very shortly. SA. There's just a limit to what can be done. The banking sector is not going to get fixed between now in Monday morning. UM. If the referendum is defeated, then Rinsey has to decide what to do. He said in the past he would resign. He's certainly put his entire political credibility on supporting this referendum, so just like David Cameron, he would have to step away. But then he just came out a few days ago and said he wasn't going to go, So you know, who knows. I don't know what he will do or what he won't do, but there is very much a risk that his government may be forced to resign. He might not have a choice. And then, of course in elections, anything can happen. In it looks as though Five Star would take control of the government if there were in election tomorrow. If I assume zero some political economics, dr Weinberg. If if if Mario Draggy is supporting Italy, if the e c B is assisting Italy, who loses? Who is the one within Europe not benefiting? Is the e c B benefits Italy? Well, I don't think the Bank of I don't think the European Central Bank is at risk here because there's a limit to what they can do to support Italian banks. They can keep them liquid, but they can't make them solving was on the line here, I think is the question of bail in of failed institutions, which will be tested. This has become the Eurogroup solution to problems in Europe that taxpayer money should go last and private money should be taken away first. In the case of the bank insolvency and in the case of Italy, the systemic importance of the institutions is mandating that the government come in and ask the European Community European Commission for permission to pump money into Italian banks, which otherwise they wouldn't be allowed to do so. If the Italians can do it, then why can't everybody else do it, and then what does bail in really mean? So we've got a real test of a conflict between national interests and European interests, and of course that raises live stars rolling all of it beautifully framed. Dr Weinberg, thank you for the briefing this morning. Carl Weiberg, with great assistance to us over the years and through crisis on international economics and now joining us from Jani's Capital, William Gross, Bill Gross, wonderful to speak to you again. Welcome to Bloomberg Television in Bloomberg Radio worldwide, Bill Gross. It's certainly better with a four point six on unemployment rate, but it's not all clear for the American labor economy, is it. No? I don't think so. I mean, four point six is a headline grabbing number. It's getting close to the lowest numbers that we saw in the early part of the century before Layman. I suppose, so that will be the headline. But you know, we're certainly not out of the clear. When I saw the minus point one wage number and the revision or the y O Y coming down from two point eight to two point five, to me, it indicated that things are just not as Huntrey Doria, as the stock market seems to think it is. Bill, I want to fold any of the politics at the moment. You have been critical of some of the statements of the president elect. There is an assumption within trump reflation of higher inflation and a better good for all. Can you state that? Or is there a risk here of bad inflation with no real growth? Well, there is that, and and you know inflation and productivity go together in terms of nominal GDP, and I have a sense that the nominal GDP will be elevated by many of the programs, whether it's Corver tax cuts or infrastructure programs, etcetera. But future growth is primarily a function of productivity, as is and inflation. Um. If productivity is high, then inflation is contained. But the productivity has been flatlined for the last several years. And while you know Cane's in UH programs, and that's remember that's remarkable for Republicans. Is like a degree turn. But while Kanzie and stimulus and the form of tax cuts and spending and deregulation promise a near term boost for productivity, in two thousand, seventeen and eighteen, I thought they're likely to be temporary in my view. You know, the counters to this view is that there's a strong dollar now and continuing structural head ones including aging demographics, deglobalization, trade policies, and accelerating debt and leverages that we've seen in almost all countries, and that promises to contain productivity at perhaps one percent annual growth rates and therefore to me uh GDP growth rated two and perhaps inflation higher than that at two and a half to three, so nominal at five some of it, our majority of it may be being inflation. Bill How much of the uncertainty was allayed this week when Donald Trump picked Stephen manucha to be his his Treasury secretary. I heard Stephen Manuchan says, I'm sure you did hear that he would be willing to explore selling bonds with with the race longer than than thirty years. I wonder what you made of that. I wonder what you make of of what this has done to uncertainty. Well, I think that's the one of the let's put it this way, it ought to be totally critical. It's one of the important ideas that make a lot of sense. Of course, it made since fifty basis points ago and in terms of lower rates, but it still makes sense today in terms of selling fifty to a hundred year bonds, of the theory being that you match the maturity of the bonds to the length of the asset that you're using a liability against. And of course the length of the asset is the strength and the longevity of the U S economy, which hopefully is a fifty to a hundred year type of things. So I think that makes a lot of sense. I don't think it makes sense in terms of his policies of cutting corporate taxes from thirty five to fifteen percent. I mean, the effective corporate tax rate already is twenty four percent, And I see this as a grab bag of special interests cutting corporate tax rates, raising corporate profits, and doing nothing really for main the street America. Right, Bill, Let's cut to the heart of the chase. Have you've written on this for janis any number of times the basic idea of it's a better job economy labor participation is a little bit off the mark this month, folks back to where it was in June. We need incentives from Washington. Does that come from a good old nineteen sixties tax credit or can we really trust the secretary designate and the president elect to effect a broader tax policy? Now to me, Tom, tax credits, well, they've been effectively used to ten years ago. Now these days that they don't make as much sense. They don't have the multiplier effect that they used to have. And the reason is is that, you know, corporations have ample use of money. They've been able to borrow at near zero percent interest rates now for several years, and if they were going to invest or wanted to invest in a thriving economy, then certainly they would have by now. So a tax credit, you know, we'll do little, to my way of thinking, to generate economic growth far and above what we're seeing now, which is really a two percent or one and a half percent type of growth rate. I think the government has to get more involved, has to be more Kansian, has to be more um uh jobs oriented themselves as opposed to the private sector. David, I just want to mention we have minimal market reaction to this Job's report. Yields are in ever so slightly not enough to make Bill grossers there. Phil, let me ask you about the international space here. When I know you watch so closely. If we take this incoming administration at its word that it's going to label China as a currency manipulator, Uh, I know you've reckoned with what the consequences of that might be. We could see a China that stops buying bonds, one that perhaps dumps bonds. What globally would the effect of that be and how likely is that to happen? Do you think? Well, I think it has had an effect. I mean China has been liquidating bonds for almost twelve to sixteen months now, and so undoubtedly that's type of had an effect. And uh yes, um, you know, global conditions are important conditions in terms of US interest rates. Let's go to the other other side of the South China Sea to Japan and recognize that they still pen their tenure j g B at zero percent. Now what does that mean. It means that Japanese investors can sell j gbs. They haven't got many of them left, but they can sell them, you know, basically buy treasuries for our currency adjusted the sixth year seventy basis point pickup. And so what Japan does, what the e c B days does next week in terms of their policies, um you know, are quite critical in terms of the overall global bond market and the effect that they have on U. S. Treasuries. Still thirty seconds here, I want to come back on Italy and the drama of this weekend. But right now, do you just assume stronger dollar and could you go with Mr Triche that we may get a brutally strong dollar, not a brutally strong golarm And it gits up depending on when you start six or seven percent against the majors, and obviously much more against emerging market countries. And it's there where the brutal I think comes into effect, Tom, because emerging market countries have taken out three to four trillion dollars worth of dollar denominated debt over the past five, six, seven years, and now those liabilities denominating dollars are coming to roost. Not only that, but higher interest rates by the Fed, which are are coming sure basically allows that or mandates that they'll pay higher interest rates, and they are in much of a pickle. Put it that, Bill Gross. I want to turn to Italy and the moment for the Italian people and frankly for Europe. You've been a great student of European political economics, Mario Draggy has to react to what we will see on Sunday. How would you expect the ECB would react to a note vote from the million people. Well, the prospects suggests on that drugging will buy Italian bonds to support the Italian credit and I think I think that's reasonable. You know, perhaps a lot of that is already built in in terms of the spread. Ita least been doing a little bit better in the last few days because of the expectation that um, you know, hands would be open in terms of buying by drugging and the e c B. So you know, they've been on whatever it takes type of policy, and I would expect in terms of the referendum that whatever it tanks will work for the short term, but it may not work for the long term because ultimately Italy is uh approaching a basket case and in terms of its banks and potential bankruptcy. But Bill, you've been doing this for years. The singular distinction right now is Italy can't go to the Lira. They cannot depreciate or devailue themselves out of this disaster. What is the gross solution, the bill gross solution for all of it, and frankly for the European experiment, if currency depreciation is not available, well there. The point is is that they're they're very little in terms of a solution because the experiment, the euro experiment, which tied them all together and unfortunately Tom and my view, you know, tied the lira to the market at a most unfav rate, which made Germany more competitive than Italy, you know, to the extent that they're stuck in that euro currency, then there's very little they can do other than the standard auntives, which are structural change, etcetera, etcetera. But Italy is not good at structural change. They like things like they are, and that's why they've been behind the eight ball for so many years, in so many decades, and so um. You know, I simply think that, you know, the way things go in that type of situation is that ultimately, uh, you know, bankruptcies leak out, whether it's in the financial institutions are in terms of a low low growth rate for Italy itself relative to its new ring countries, um, not much to do there other than to break out of jail or to stay in jail and suck up read and water. Thinking about what we're seeing Italy, what we've seen here in the the U S. You've written Bill that the populist sunrise has barely broken. What does the zenith look like? If? If this is what we're seeing now, what does that What does populasm bring to the U. S economy, the European economy, and the global economy. Well, to my view, that's that's down the road, is it not. I mean, we have four years of Trump policies, and to my way of thinking, as they're unfolding, they're certainly not populist oriented. Uh. You know. They may be populist oriented in terms of trade policies, which I think got him elected in the Midwest, But to the extent that trade policies are anti growth, then they may not necessarily be job productive. So, you know, I think the populist movement is a global movement. It's a dissatisfaction with corporations relative to labor. It's an expression of the need for higher wages or jobs. Period Um. You know, will that go away? To my way of thinking, No, it won't go away, because the situation will get worse over the next four years, and so ultimately, how has it resolved? Um, you know, it's resolved with populist policies or the friends you know, unrest that UH that continues to express this fat and dissatisfaction and as a result by continuing to vote down current administrations in terms of their existing policies whatever, they are still to speak to our viewers and listeners worldwide on your adamant statement that financial repression will continue for many years, including even a decade, can you reaffirm after the election of Donald Trump that we will continue to see financial repression? Well, that is a question mark. You know, the Trump has been anti FED, but not necessarily has he expressed his specific views in terms of what he thinks the FED should do. Now, we know the FEDS independent won't listen to Trump, but aside from that, he's got the ability to appoint the three, four or five members and that should greatly influence FED policy to my way of thinking. You know, Trump's view on the FED will be a very easy monetary policy to accommodate his very strong UH fiscal deficit type of spending. And so, um, you know that's financial repression, is it not that it's it's it's a implementation an interest rate that's far below what has been earned over prior decades. I want to move up to Stanford, then, Bill gross by your beloved San Francisco forty niners. We won't talk about the forty niners. Well, stick with Stanford. Ken Rogoff of Harvard University suggests that John Taylor of Stanford University would be an appropriate FED chairman given the politics of the moment. Can you live with the Taylor rule and Taylor economics at the Fed? Well, no, I can't. And I admire Ken Rogoff for his historical research, but not necessarily John Taylor. You know, the Taylor rule was implemented in the mid nineteen nineties. That made lots of sense back then when the economy was less leveraged, and you inputted unemployment, and you inputed the potential real interest rate, and you came up with some magic formula as to where it should be. I think, you know, the Tailor rule reflects what's been wrong with the Federal Reserve for many, many years, is that this model driven in the models are based upon twenty or thirty years or forty years of history as opposed to the current day in which there are high debt levels, which is the primary factor. There are aging demographics, there are technology advancements which displaced people, and so unemployment rates and real interest rates that used to be the two percent real interest rate of the tailor rule, you know, are no longer exist, and so the minute you start to use it, um, that's when you start to lose it. Bill Whether or not we get a John Taylor in a position at the FED, it sounds like his legacy is going to loom large in Washington. If you listen to the conversation on Capitol Hill Republican lawmakers saying they want a rules based system at the FED reserve. They control both Houses of Congress, where they will control the White House as well. What is the FED going to look like from that perspective and from a personnel perspective here in two thousand seventeen and beyond, Well, it depends on the rules, does it not. And I dissed the tailor rule as as one of the rules, or the Phillips curve as another one of the rules. But they need to come up with a neutral star type of rule which zeroes in on the neutral real interest rate which at the moment, the FED seems to think of somewhere around zero. I don't dispute that what I see next week in terms of an evolving policy is a FED that probably won't lower those dots anymore. And and at the moment, the market is expecting, you know, a FED funds increase over the next twelve months of perhaps forty basis points and then another forty basis points. But believe me, the dots in two thousand and eighteen and two thousand and nineteen or expecting more like something like eighty or a hundred basis points of increase. So I would think that at the next meeting, if the dots don't come down, and they probably won't come down because of the tremendous influence of the stock market and fiscal spending, and you know, the potential inflation ahead as opposed to behind, then uh, you know, the front part of the curve, the two threes, fours, and fives, you know, could be significantly affected. So that would be the thing i'd watched with a FED near term bill. Is it your sense here that the markets have priced in some sort of infrastructure package, some sort of tax cuts, tax or form at this point we saw the excitement over the prospect of that on the heels of the election. Is it priced in at this point, um, yeah, yeah, I think so, to the extent that the stock market has gone up by five, six or seven percent on the basis of it. Um, you know, I think you would have to say that it. It certainly has begun to be and it is almost culminating in terms of the pricing in of a of a fiscal package of you know, an amount that is still unknown, but which will certainly be significant. My problem with that, of course, is that the fiscal package, you know, to my way of thinking, may be oriented towards tax incented programs from the private sector and not from the the government sector. We talked about that five minutes ago, and to the extent that it is, perhaps it won't be as effective as the market is beginning to anticipate. The other thing, of course, is the lowering a corporate tax cuts. We're going to see the grab bag there and corporations probably will benefit. So markets have I think correctly anticipated a grab bag of good ease over the next six to twelve months. Phil, Thank you so much. Bill Gross is what Jani's capitalist Jobsdale who you put your trust in matters. Investors have put their trust in independent registered investment advisors to the tune of four trillion dollars. Why they see the old is to serve, not sell. That's why Charles Schwab is committed to the success of over seven thousand independent financial advisors who passionately dedicate themselves to helping people achieve their financial goals. Learn more and find your independent advisor dot com. Get weird Oppenheimer fund Studios and we saved the best for last here wandering through the door Brian Levitt senior investment strategists, and he dragged along. Ira Jersey, of course, has given us such great assistance who particularly on our FED day over the years. On interest rates, Brian, it's a bond route. I made a joke of it three weeks ago. It's not a joke anymore. Price down yields up. How painful is it for Oppenheimer Funds? Well, it's not necessarily painful from Oppenheimer Funds. I mean, if you think about there's obviously a lot of ways to generate income in these markets, and still attractive ways to generate income in these markets. What investors should realized though, is that the tenure Treasury rate has actually not gone up significantly this year. It started the year at today it's around two forties. So we believe that earlier in the year the Fed rate isn't raised interest rates too early signaled four rate hikes flatten the yield curve Breggs. It happened, and now the markets starting to price in some optimism, some inflation expectations of rates. You too, You're not even on speaking terms. I mean we understand here Steve Major at HSBC is saying, Okay, I had low rates for a while. Here I'm gonna get Trump high rates. And then Steve says, we're gonna see some form of glide path over quarters and years back to the lower terminal rates which everybody saw on dance has been for X number of years, which is a new permanent yield. Or do we migrate back to what we knew pre November eight? Well, I think ultimately we wind up with a cyclical uptick in yields which stays here for you know, to three years perhaps, and then um you can potentially have yields go down again. You know that the key pivot here for me, as you know, looking at the treasury market will be what does the five year treasury do? So I've been looking a lot at the five year treasury and how it's performed against twos and tens, and how it's performed, uh on a forward basis, And what you see is we're back to where what we were pricing in two thousand fourteen. It wasn't that long ago that we were here this it's just, you know, we got used to the idea that maybe we're going to remain under two percent yields forever because you have zero yields in Japan, you have zero yields and negative yields in Germany, and so everyone thought that was a permanent fixture. And obviously it's not a permanent fixture because you know, yes we are do have global markets, and we live in a global world. But the US impacts its own treasury yild obviously, right, So between inflation and growth and growth expectations changing, it just it makes a lot of sense. So bearing that relativism in mind, do you use the word route to describe what we're seeing here. It's not a route. I mean, I I know, you know, I not to criticize Bloomberg but there was a headline yesterday on the terminal saying it was one point seven trillion dollars of value was destroyed. Well, you know, unless Anya yourself, unless any bonds, unless any bonds actually defaulted in that hime period, and I'm pretty sure that the U. S. Treasury didn't. Um, then you know the par value, that the amount of bonds outstanding remain the same. It's the price that moved, and that that relative price movement is painful for investors who might have gotten in at the top, but it's it also just suggests that, um, you know, we were actually going to be more optimistic. So you know, you want to be in things like corporate bonds and and equities and an environment where you're gonna have better growth. Fran Levitt help us understand here, how Janet yelling at all, are going to be processing what we're seeing here today. You look at FED futures, it's all but a given here. We're gonna see right hike in in December. Tom has been keen here to look ahead to to February. You think that's the meeting to look forward to? What do you see is the path? What are you expecting to hear from cheer yelling with regard to forward guidance in a couple of weeks, Well, I expect that there they are going to raise interest rates in December. But I think that they if you look at today's earnings number, you look at the labor force participation, right, this is still not at a in excessively inflationary environment. I mean, for years people have asked us, is this all inflationary? We've always responded, we hope so, because deflation is the worst of all outcomes. So we continue to climb out of the financial crisis, we continue. We're seeing wages pick up. This is a good thing. But to raise interest rates aggressively in this environment, all of what Stanley Fisher seemed to signal at the beginning of the year um would be would be problematic. Critical question. If we go from vice Chairman Fisher's alter accommodative out to something that Ira Jersey would call normal, I believe we're gonna see yield up, price down. And you know when a bond bear market, the way it goes is people look at their bond statements. One month, oh, that's harsh, two months, that's really harsh. And there's some point where they move funds. Are we going to see bond outflows? And do you just presume they go into an equity alternative? Well, we certainly hope so. I mean, if you look since the financial crisis, seven hundred billion dollars out of equ funds and equity e t F a trillion dollars into bond funds and bond ETFs. And you know, General Patton told us, if everyone's thinking alike, then somebody isn't think we interviewed so. So we certainly hope so. And there is a little bit of irony in all of this because we were getting ready to write another outlook. It was gonna be president Hillary Clinton more years of what we had seen. You were up all Monday night right that we did away and um, and it was gonna be slow growth, you know, benign inflation, not a lot of stimulus, limitations of monetary policy. And the irony now is the base case is more optimistic, but the tail risks start to get a little bit fatter because you start to see some moves towards inflation, some moves in higher rates. That doesn't mean that the cycle ends, you know, in sen Or twenty eighteen, it just means that some of the rest is arising. We're gonna try to get a look at that report that ditched draft here in a little bit here, But I let me ask you about the expectation here, so that the presidential election didn't go in the way that many people predicted it would, how about the reaction we've seen since then? If if you allowed yourself to think of a Trump presidency to three months ago, would you've expected the reaction in the markets to be what we're seeing today. Well, maybe a little bit more dramatic in the bond market then we would have thought generally, But but it makes it makes sense given that the missing piece from growth and it has been the idea of fiscal stimulus. So the idea that we're gonna get fiscal stimulus is raising inflation expectations. And when you look at what's caused the bond market to move higher, it's a little bit of risk premia from the Trump presidency and and and turn premium, but most of it has actually come from inflation expectations. So we started before President Trump was or President elect Trump um was elected. Was for ten year for for inflation average over the next ten years, one point five today it's at two percent, So that explains most of the moving tramps. Continue our Jersey with us and Brian love it as well from Oppenheimer Funds and we joined them. Were their mit avocado toast. You're at Oppenheimer fund Studios. Era help me here with Europe with the international dynamic, and I believe it's negative rates to the election of Mr Trump. Take away our worries about the distortions of negative interest rates. Not in the near term. I mean, Mario drag and the ECB are likely to keep interest rates low. In fact, we're expecting um next week for the e c B it actually to extend its spawned buying program by nine months. UM consensus perhaps is around six. There is a risk that they try something a little bit different as well. But but that just shows you that globally there's still a very low interest rate environment, regardless of what the US does, and not only in Europe, but you have other countries, how yielding countries like Brazil, Indonesia, India and countries like that that we particularly like, where interest rates are likely to come down over the next twelve eighteen months, and and so there are good opportunities and when you can get you know, mid single digits like seven percent yields in India and ten percent plus yields in in Brazil, if you're willing to accept some volatility. There are still places globally that you can get income. But you don't want to be everywhere. So it's not saying oh, by emerging markets because they have higher yields, because South Korea now does not have a higher yield in the US. So you have to be very selective when you do that. Probably Vet, looking back at the election and all that it's changed, did it change the role of the Fed Reserve in this economy? Right now? We see what's happened as a result of what happened in November eight, is the Fed Reserve of getting the back seat that perhaps it's wanted here for for a little while. I think that's true. I think the focus has shifted appropriately from the f O m C to the Trump administration. And while the f O m C was the biggest game in town last year, you know, with apologies to Janet Yale, and that now changes. So as we look for it, you know, we we again we expect an interest rate hike in in December Um. But as we look forward with the markets really need to digest is just how possible or how effective will stimulus be. And you know, I think some of the things that the market has a difficult time understanding is that, for one, gridlock never really goes away. So um. You know, even when even when Bush one re election and No. Four on this idea that they were going to privatize Social Security and he had both houses of Congress, they were unable to do that. We also know tax reform could be very ugly, right Ronald Reagan one forty nine, fifty states and eighty four and it took two years to get tax reforms. So the markets, um, rightfully so are pricing in some inflation expectations this idea that we can make America great again. Um. I think it was already great, but we can make it greater. Um, And that we could do better than what we're doing. But at some point the markets probably have to bring back their expectations a little bit. On all of that, I think when looking at the bond market's important to note that, you know, and I mentioned this in the last segment as well, we're basically back to where we were in two thousand, fourteen. So it's not really that long ago that we that yields were at these kind of levels, that we had two and a half percent ten year yields, that inflation expectations were about two percent, and you know, so it's not we're not saying that, look, the world's gonna be like gangbusters, but it's just going that a lot of the tail risks or growth at least have perhaps diminished a little bit in the US as you're looking for clues here as to what policy is going to be when it comes to infrastructure spending or taxes when it comes to the Fed Reserve, uh something. So that to me, when Stephen Minach was on television for his first interview was he had praise for Jennet Yellen. He said that he thought she's done a good job. And I wonder how that changes your calculus, your sense of where this administration, this incoming administration might be head when it comes to the Federal Reserve. Well, that's a that's a good question, and we don't know. I mean, we have debates all the time, and you know, Brian and I have talked about it, have talked about it with the our international debt team and our our domestic debt teams here. And you know, we don't know if if the person people that Mr Trump will appoint are going to be hawkish or dubbish. Like, we're not really sure where he wants to be in terms of of of who he's going to appoint. Will you point someone who's an economist or or not? I mean, you know, will you appoint someone who's you know, been on Wall Street or not? We don't know, Um, And I think that that's that's that can't be his first priority because the first priority is to a point that thous of people he has to and to his administration, and then you know, and then he'll probably start thinking about the FED once he has his economic policy team in place, and folks at the UM, at the OMB, they'll they'll start talking about who's going to be the next fedup. The reality of it, though, um, you know, if we if we were to move forth with a different makeup of the f O, M C and A and makeup that is more dubvish than what we've seen over the last number of years, which would be hard not to do, right, Um, you'd have to watch the currency and you'd have to watch. There's only so hard. You're only so hawkish. You could be watched the currency watch, the shape of the yield curve, because the world hasn't changed simply because we elected a new President's still a slow growth, benign inflation world. We saw earnings come down from two point eight percent year over year to two and a half percent year over year. Labor force participation rates still, all of that hasn't changed. Aging populations and parts of the world, slow productivity growth, all of that hasn't changed. So even if you appoint someone more hawkish than Jenny Yelling, the odds are it's gonna be very difficult to be so nificant. You are a charter member of the bond Vigilante Club. Are the bond vigilantes and control here? I don't think quite yet? Um, you know, so you know Bond. I think the bond vigilantes will come out when you say, hey, we're going to either issue way too much debt or we have policies that are distinctly to tip point on that quickly. I think it has to be. I think probably has to be even over three, um, probably closer to all, closer to four. Thank you so much. Ira Jersey, Brian Levitt where us from their Openheimer Fun studio. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm out on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us world line at Bloomberg Radio. Who you put your trust in matters. Investors have put their trust in independent registered investment advisors to the tune of four trillion dollars. Why learn more and find your independent advisor dot com.
Speaker 1: Who you put your trust in matters. Investors have put their trust in independent registered investment advisors to the tune of four trillion dollars. Why learn more and find your independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene with David Gura. Daily we bring you insight from the best in economics, finance, investment, and international relations. Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and of course, on the Bloomberg David Green. Tom Keene at Oppenheimer Funds Studios in New York spectacular rebounding. You know, David, I have no life, as you know, I never get south of Street. What rebuild in downtown? Yeah, I have friends who live near here in Battery Park City and just explain our places and places to eat. Now, places to shop is placed down here. There's all signs out front on the streets saying avocado toast. It's like the land. I'm may be having some right now, though, that would be We are here again at Appenheimer Funds Studios and we're thrilled to get started on this important job today with Carl Weinberg of High Frequency economics Carla Francie Lacroix in Rome, and as you know, there's a more than important Italian vote. I would suggest the zeitgeist for Global Wall Street this Friday morning is what they do, not what they say, and what Italians are doing, it implies, is moving money out of the country. Is Italy too much like Greece? Italy is different from Greece, but it is in that in the same sense of being different. Is also a much bigger concern because it's total debt burden is much bigger, the bombs are much more widely held, so it has a bigger impact on the investor in the community. And of course its economy is the third or fourth largest in Europe, depending on how you want to count it, so that if their word disorder in Italy's financial system and economy would have a much bigger bang to the buck. But you know, Greece had fundamental problems. You know, Greece is overborrowed, at least at least probably over borrowed as well. But Italy's problem is much more of a political and financial nature right now, a political and financial nature. Will get some some of that sorted out this weekend presumably when that referendum takes place on Sunday, Carl. If it isn't, though, where do we go from here? When you talk about the structural problems, when you talk about the banking sector being in the condition it's in no matter, no matter what the outcome is here, what happens next? Yeah, well, no matter what the outcomes are of the election, whatever, whatever the outcome is, the Italian banks have to raise capital. They're under capitalized. There in trouble, the e c B, that's Bank of Italy. Everybody is on them to raise capital um looking at the possibility of state intervention to support some of the banks, pushing the limits of European constitutional um powers to their absolute maximum. And of course, if we get a no vote, if the president I'm sorry with the Prime Minister resigns, we get elections, we get the risk of an anti European five star government coming in to replace Mr Rensey. Then it becomes almost impossible for banks to raise capital. I mean there are a dodgy proposition to begin with, and that then takes the banking sector crisis to a new level where an ineffective government can't perhaps help them as much as we like them to and where private sector money is unlikely to come in, and then we have a problem. Mary Monty on surveillance earlier this morning, saying he assumes that the Prime Minister rency will stay on the job no matter what, no matter what happens. How much time does he have here to turn things around? Um until until Sunday, you know, the very very shortly. SA. There's just a limit to what can be done. The banking sector is not going to get fixed between now in Monday morning. UM. If the referendum is defeated, then Rinsey has to decide what to do. He said in the past he would resign. He's certainly put his entire political credibility on supporting this referendum, so just like David Cameron, he would have to step away. But then he just came out a few days ago and said he wasn't going to go, So you know, who knows. I don't know what he will do or what he won't do, but there is very much a risk that his government may be forced to resign. He might not have a choice. And then, of course in elections, anything can happen. In it looks as though Five Star would take control of the government if there were in election tomorrow. If I assume zero some political economics, dr Weinberg. If if if Mario Draggy is supporting Italy, if the e c B is assisting Italy, who loses? Who is the one within Europe not benefiting? Is the e c B benefits Italy? Well, I don't think the Bank of I don't think the European Central Bank is at risk here because there's a limit to what they can do to support Italian banks. They can keep them liquid, but they can't make them solving was on the line here, I think is the question of bail in of failed institutions, which will be tested. This has become the Eurogroup solution to problems in Europe that taxpayer money should go last and private money should be taken away first. In the case of the bank insolvency and in the case of Italy, the systemic importance of the institutions is mandating that the government come in and ask the European Community European Commission for permission to pump money into Italian banks, which otherwise they wouldn't be allowed to do so. If the Italians can do it, then why can't everybody else do it, and then what does bail in really mean? So we've got a real test of a conflict between national interests and European interests, and of course that raises live stars rolling all of it beautifully framed. Dr Weinberg, thank you for the briefing this morning. Carl Weiberg, with great assistance to us over the years and through crisis on international economics and now joining us from Jani's Capital, William Gross, Bill Gross, wonderful to speak to you again. Welcome to Bloomberg Television in Bloomberg Radio worldwide, Bill Gross. It's certainly better with a four point six on unemployment rate, but it's not all clear for the American labor economy, is it. No? I don't think so. I mean, four point six is a headline grabbing number. It's getting close to the lowest numbers that we saw in the early part of the century before Layman. I suppose, so that will be the headline. But you know, we're certainly not out of the clear. When I saw the minus point one wage number and the revision or the y O Y coming down from two point eight to two point five, to me, it indicated that things are just not as Huntrey Doria, as the stock market seems to think it is. Bill, I want to fold any of the politics at the moment. You have been critical of some of the statements of the president elect. There is an assumption within trump reflation of higher inflation and a better good for all. Can you state that? Or is there a risk here of bad inflation with no real growth? Well, there is that, and and you know inflation and productivity go together in terms of nominal GDP, and I have a sense that the nominal GDP will be elevated by many of the programs, whether it's Corver tax cuts or infrastructure programs, etcetera. But future growth is primarily a function of productivity, as is and inflation. Um. If productivity is high, then inflation is contained. But the productivity has been flatlined for the last several years. And while you know Cane's in UH programs, and that's remember that's remarkable for Republicans. Is like a degree turn. But while Kanzie and stimulus and the form of tax cuts and spending and deregulation promise a near term boost for productivity, in two thousand, seventeen and eighteen, I thought they're likely to be temporary in my view. You know, the counters to this view is that there's a strong dollar now and continuing structural head ones including aging demographics, deglobalization, trade policies, and accelerating debt and leverages that we've seen in almost all countries, and that promises to contain productivity at perhaps one percent annual growth rates and therefore to me uh GDP growth rated two and perhaps inflation higher than that at two and a half to three, so nominal at five some of it, our majority of it may be being inflation. Bill How much of the uncertainty was allayed this week when Donald Trump picked Stephen manucha to be his his Treasury secretary. I heard Stephen Manuchan says, I'm sure you did hear that he would be willing to explore selling bonds with with the race longer than than thirty years. I wonder what you made of that. I wonder what you make of of what this has done to uncertainty. Well, I think that's the one of the let's put it this way, it ought to be totally critical. It's one of the important ideas that make a lot of sense. Of course, it made since fifty basis points ago and in terms of lower rates, but it still makes sense today in terms of selling fifty to a hundred year bonds, of the theory being that you match the maturity of the bonds to the length of the asset that you're using a liability against. And of course the length of the asset is the strength and the longevity of the U S economy, which hopefully is a fifty to a hundred year type of things. So I think that makes a lot of sense. I don't think it makes sense in terms of his policies of cutting corporate taxes from thirty five to fifteen percent. I mean, the effective corporate tax rate already is twenty four percent, And I see this as a grab bag of special interests cutting corporate tax rates, raising corporate profits, and doing nothing really for main the street America. Right, Bill, Let's cut to the heart of the chase. Have you've written on this for janis any number of times the basic idea of it's a better job economy labor participation is a little bit off the mark this month, folks back to where it was in June. We need incentives from Washington. Does that come from a good old nineteen sixties tax credit or can we really trust the secretary designate and the president elect to effect a broader tax policy? Now to me, Tom, tax credits, well, they've been effectively used to ten years ago. Now these days that they don't make as much sense. They don't have the multiplier effect that they used to have. And the reason is is that, you know, corporations have ample use of money. They've been able to borrow at near zero percent interest rates now for several years, and if they were going to invest or wanted to invest in a thriving economy, then certainly they would have by now. So a tax credit, you know, we'll do little, to my way of thinking, to generate economic growth far and above what we're seeing now, which is really a two percent or one and a half percent type of growth rate. I think the government has to get more involved, has to be more Kansian, has to be more um uh jobs oriented themselves as opposed to the private sector. David, I just want to mention we have minimal market reaction to this Job's report. Yields are in ever so slightly not enough to make Bill grossers there. Phil, let me ask you about the international space here. When I know you watch so closely. If we take this incoming administration at its word that it's going to label China as a currency manipulator, Uh, I know you've reckoned with what the consequences of that might be. We could see a China that stops buying bonds, one that perhaps dumps bonds. What globally would the effect of that be and how likely is that to happen? Do you think? Well, I think it has had an effect. I mean China has been liquidating bonds for almost twelve to sixteen months now, and so undoubtedly that's type of had an effect. And uh yes, um, you know, global conditions are important conditions in terms of US interest rates. Let's go to the other other side of the South China Sea to Japan and recognize that they still pen their tenure j g B at zero percent. Now what does that mean. It means that Japanese investors can sell j gbs. They haven't got many of them left, but they can sell them, you know, basically buy treasuries for our currency adjusted the sixth year seventy basis point pickup. And so what Japan does, what the e c B days does next week in terms of their policies, um you know, are quite critical in terms of the overall global bond market and the effect that they have on U. S. Treasuries. Still thirty seconds here, I want to come back on Italy and the drama of this weekend. But right now, do you just assume stronger dollar and could you go with Mr Triche that we may get a brutally strong dollar, not a brutally strong golarm And it gits up depending on when you start six or seven percent against the majors, and obviously much more against emerging market countries. And it's there where the brutal I think comes into effect, Tom, because emerging market countries have taken out three to four trillion dollars worth of dollar denominated debt over the past five, six, seven years, and now those liabilities denominating dollars are coming to roost. Not only that, but higher interest rates by the Fed, which are are coming sure basically allows that or mandates that they'll pay higher interest rates, and they are in much of a pickle. Put it that, Bill Gross. I want to turn to Italy and the moment for the Italian people and frankly for Europe. You've been a great student of European political economics, Mario Draggy has to react to what we will see on Sunday. How would you expect the ECB would react to a note vote from the million people. Well, the prospects suggests on that drugging will buy Italian bonds to support the Italian credit and I think I think that's reasonable. You know, perhaps a lot of that is already built in in terms of the spread. Ita least been doing a little bit better in the last few days because of the expectation that um, you know, hands would be open in terms of buying by drugging and the e c B. So you know, they've been on whatever it takes type of policy, and I would expect in terms of the referendum that whatever it tanks will work for the short term, but it may not work for the long term because ultimately Italy is uh approaching a basket case and in terms of its banks and potential bankruptcy. But Bill, you've been doing this for years. The singular distinction right now is Italy can't go to the Lira. They cannot depreciate or devailue themselves out of this disaster. What is the gross solution, the bill gross solution for all of it, and frankly for the European experiment, if currency depreciation is not available, well there. The point is is that they're they're very little in terms of a solution because the experiment, the euro experiment, which tied them all together and unfortunately Tom and my view, you know, tied the lira to the market at a most unfav rate, which made Germany more competitive than Italy, you know, to the extent that they're stuck in that euro currency, then there's very little they can do other than the standard auntives, which are structural change, etcetera, etcetera. But Italy is not good at structural change. They like things like they are, and that's why they've been behind the eight ball for so many years, in so many decades, and so um. You know, I simply think that, you know, the way things go in that type of situation is that ultimately, uh, you know, bankruptcies leak out, whether it's in the financial institutions are in terms of a low low growth rate for Italy itself relative to its new ring countries, um, not much to do there other than to break out of jail or to stay in jail and suck up read and water. Thinking about what we're seeing Italy, what we've seen here in the the U S. You've written Bill that the populist sunrise has barely broken. What does the zenith look like? If? If this is what we're seeing now, what does that What does populasm bring to the U. S economy, the European economy, and the global economy. Well, to my view, that's that's down the road, is it not. I mean, we have four years of Trump policies, and to my way of thinking, as they're unfolding, they're certainly not populist oriented. Uh. You know. They may be populist oriented in terms of trade policies, which I think got him elected in the Midwest, But to the extent that trade policies are anti growth, then they may not necessarily be job productive. So, you know, I think the populist movement is a global movement. It's a dissatisfaction with corporations relative to labor. It's an expression of the need for higher wages or jobs. Period Um. You know, will that go away? To my way of thinking, No, it won't go away, because the situation will get worse over the next four years, and so ultimately, how has it resolved? Um, you know, it's resolved with populist policies or the friends you know, unrest that UH that continues to express this fat and dissatisfaction and as a result by continuing to vote down current administrations in terms of their existing policies whatever, they are still to speak to our viewers and listeners worldwide on your adamant statement that financial repression will continue for many years, including even a decade, can you reaffirm after the election of Donald Trump that we will continue to see financial repression? Well, that is a question mark. You know, the Trump has been anti FED, but not necessarily has he expressed his specific views in terms of what he thinks the FED should do. Now, we know the FEDS independent won't listen to Trump, but aside from that, he's got the ability to appoint the three, four or five members and that should greatly influence FED policy to my way of thinking. You know, Trump's view on the FED will be a very easy monetary policy to accommodate his very strong UH fiscal deficit type of spending. And so, um, you know that's financial repression, is it not that it's it's it's a implementation an interest rate that's far below what has been earned over prior decades. I want to move up to Stanford, then, Bill gross by your beloved San Francisco forty niners. We won't talk about the forty niners. Well, stick with Stanford. Ken Rogoff of Harvard University suggests that John Taylor of Stanford University would be an appropriate FED chairman given the politics of the moment. Can you live with the Taylor rule and Taylor economics at the Fed? Well, no, I can't. And I admire Ken Rogoff for his historical research, but not necessarily John Taylor. You know, the Taylor rule was implemented in the mid nineteen nineties. That made lots of sense back then when the economy was less leveraged, and you inputted unemployment, and you inputed the potential real interest rate, and you came up with some magic formula as to where it should be. I think, you know, the Tailor rule reflects what's been wrong with the Federal Reserve for many, many years, is that this model driven in the models are based upon twenty or thirty years or forty years of history as opposed to the current day in which there are high debt levels, which is the primary factor. There are aging demographics, there are technology advancements which displaced people, and so unemployment rates and real interest rates that used to be the two percent real interest rate of the tailor rule, you know, are no longer exist, and so the minute you start to use it, um, that's when you start to lose it. Bill Whether or not we get a John Taylor in a position at the FED, it sounds like his legacy is going to loom large in Washington. If you listen to the conversation on Capitol Hill Republican lawmakers saying they want a rules based system at the FED reserve. They control both Houses of Congress, where they will control the White House as well. What is the FED going to look like from that perspective and from a personnel perspective here in two thousand seventeen and beyond, Well, it depends on the rules, does it not. And I dissed the tailor rule as as one of the rules, or the Phillips curve as another one of the rules. But they need to come up with a neutral star type of rule which zeroes in on the neutral real interest rate which at the moment, the FED seems to think of somewhere around zero. I don't dispute that what I see next week in terms of an evolving policy is a FED that probably won't lower those dots anymore. And and at the moment, the market is expecting, you know, a FED funds increase over the next twelve months of perhaps forty basis points and then another forty basis points. But believe me, the dots in two thousand and eighteen and two thousand and nineteen or expecting more like something like eighty or a hundred basis points of increase. So I would think that at the next meeting, if the dots don't come down, and they probably won't come down because of the tremendous influence of the stock market and fiscal spending, and you know, the potential inflation ahead as opposed to behind, then uh, you know, the front part of the curve, the two threes, fours, and fives, you know, could be significantly affected. So that would be the thing i'd watched with a FED near term bill. Is it your sense here that the markets have priced in some sort of infrastructure package, some sort of tax cuts, tax or form at this point we saw the excitement over the prospect of that on the heels of the election. Is it priced in at this point, um, yeah, yeah, I think so, to the extent that the stock market has gone up by five, six or seven percent on the basis of it. Um, you know, I think you would have to say that it. It certainly has begun to be and it is almost culminating in terms of the pricing in of a of a fiscal package of you know, an amount that is still unknown, but which will certainly be significant. My problem with that, of course, is that the fiscal package, you know, to my way of thinking, may be oriented towards tax incented programs from the private sector and not from the the government sector. We talked about that five minutes ago, and to the extent that it is, perhaps it won't be as effective as the market is beginning to anticipate. The other thing, of course, is the lowering a corporate tax cuts. We're going to see the grab bag there and corporations probably will benefit. So markets have I think correctly anticipated a grab bag of good ease over the next six to twelve months. Phil, Thank you so much. Bill Gross is what Jani's capitalist Jobsdale who you put your trust in matters. Investors have put their trust in independent registered investment advisors to the tune of four trillion dollars. Why they see the old is to serve, not sell. That's why Charles Schwab is committed to the success of over seven thousand independent financial advisors who passionately dedicate themselves to helping people achieve their financial goals. Learn more and find your independent advisor dot com. Get weird Oppenheimer fund Studios and we saved the best for last here wandering through the door Brian Levitt senior investment strategists, and he dragged along. Ira Jersey, of course, has given us such great assistance who particularly on our FED day over the years. On interest rates, Brian, it's a bond route. I made a joke of it three weeks ago. It's not a joke anymore. Price down yields up. How painful is it for Oppenheimer Funds? Well, it's not necessarily painful from Oppenheimer Funds. I mean, if you think about there's obviously a lot of ways to generate income in these markets, and still attractive ways to generate income in these markets. What investors should realized though, is that the tenure Treasury rate has actually not gone up significantly this year. It started the year at today it's around two forties. So we believe that earlier in the year the Fed rate isn't raised interest rates too early signaled four rate hikes flatten the yield curve Breggs. It happened, and now the markets starting to price in some optimism, some inflation expectations of rates. You too, You're not even on speaking terms. I mean we understand here Steve Major at HSBC is saying, Okay, I had low rates for a while. Here I'm gonna get Trump high rates. And then Steve says, we're gonna see some form of glide path over quarters and years back to the lower terminal rates which everybody saw on dance has been for X number of years, which is a new permanent yield. Or do we migrate back to what we knew pre November eight? Well, I think ultimately we wind up with a cyclical uptick in yields which stays here for you know, to three years perhaps, and then um you can potentially have yields go down again. You know that the key pivot here for me, as you know, looking at the treasury market will be what does the five year treasury do? So I've been looking a lot at the five year treasury and how it's performed against twos and tens, and how it's performed, uh on a forward basis, And what you see is we're back to where what we were pricing in two thousand fourteen. It wasn't that long ago that we were here this it's just, you know, we got used to the idea that maybe we're going to remain under two percent yields forever because you have zero yields in Japan, you have zero yields and negative yields in Germany, and so everyone thought that was a permanent fixture. And obviously it's not a permanent fixture because you know, yes we are do have global markets, and we live in a global world. But the US impacts its own treasury yild obviously, right, So between inflation and growth and growth expectations changing, it just it makes a lot of sense. So bearing that relativism in mind, do you use the word route to describe what we're seeing here. It's not a route. I mean, I I know, you know, I not to criticize Bloomberg but there was a headline yesterday on the terminal saying it was one point seven trillion dollars of value was destroyed. Well, you know, unless Anya yourself, unless any bonds, unless any bonds actually defaulted in that hime period, and I'm pretty sure that the U. S. Treasury didn't. Um, then you know the par value, that the amount of bonds outstanding remain the same. It's the price that moved, and that that relative price movement is painful for investors who might have gotten in at the top, but it's it also just suggests that, um, you know, we were actually going to be more optimistic. So you know, you want to be in things like corporate bonds and and equities and an environment where you're gonna have better growth. Fran Levitt help us understand here, how Janet yelling at all, are going to be processing what we're seeing here today. You look at FED futures, it's all but a given here. We're gonna see right hike in in December. Tom has been keen here to look ahead to to February. You think that's the meeting to look forward to? What do you see is the path? What are you expecting to hear from cheer yelling with regard to forward guidance in a couple of weeks, Well, I expect that there they are going to raise interest rates in December. But I think that they if you look at today's earnings number, you look at the labor force participation, right, this is still not at a in excessively inflationary environment. I mean, for years people have asked us, is this all inflationary? We've always responded, we hope so, because deflation is the worst of all outcomes. So we continue to climb out of the financial crisis, we continue. We're seeing wages pick up. This is a good thing. But to raise interest rates aggressively in this environment, all of what Stanley Fisher seemed to signal at the beginning of the year um would be would be problematic. Critical question. If we go from vice Chairman Fisher's alter accommodative out to something that Ira Jersey would call normal, I believe we're gonna see yield up, price down. And you know when a bond bear market, the way it goes is people look at their bond statements. One month, oh, that's harsh, two months, that's really harsh. And there's some point where they move funds. Are we going to see bond outflows? And do you just presume they go into an equity alternative? Well, we certainly hope so. I mean, if you look since the financial crisis, seven hundred billion dollars out of equ funds and equity e t F a trillion dollars into bond funds and bond ETFs. And you know, General Patton told us, if everyone's thinking alike, then somebody isn't think we interviewed so. So we certainly hope so. And there is a little bit of irony in all of this because we were getting ready to write another outlook. It was gonna be president Hillary Clinton more years of what we had seen. You were up all Monday night right that we did away and um, and it was gonna be slow growth, you know, benign inflation, not a lot of stimulus, limitations of monetary policy. And the irony now is the base case is more optimistic, but the tail risks start to get a little bit fatter because you start to see some moves towards inflation, some moves in higher rates. That doesn't mean that the cycle ends, you know, in sen Or twenty eighteen, it just means that some of the rest is arising. We're gonna try to get a look at that report that ditched draft here in a little bit here, But I let me ask you about the expectation here, so that the presidential election didn't go in the way that many people predicted it would, how about the reaction we've seen since then? If if you allowed yourself to think of a Trump presidency to three months ago, would you've expected the reaction in the markets to be what we're seeing today. Well, maybe a little bit more dramatic in the bond market then we would have thought generally, But but it makes it makes sense given that the missing piece from growth and it has been the idea of fiscal stimulus. So the idea that we're gonna get fiscal stimulus is raising inflation expectations. And when you look at what's caused the bond market to move higher, it's a little bit of risk premia from the Trump presidency and and and turn premium, but most of it has actually come from inflation expectations. So we started before President Trump was or President elect Trump um was elected. Was for ten year for for inflation average over the next ten years, one point five today it's at two percent, So that explains most of the moving tramps. Continue our Jersey with us and Brian love it as well from Oppenheimer Funds and we joined them. Were their mit avocado toast. You're at Oppenheimer fund Studios. Era help me here with Europe with the international dynamic, and I believe it's negative rates to the election of Mr Trump. Take away our worries about the distortions of negative interest rates. Not in the near term. I mean, Mario drag and the ECB are likely to keep interest rates low. In fact, we're expecting um next week for the e c B it actually to extend its spawned buying program by nine months. UM consensus perhaps is around six. There is a risk that they try something a little bit different as well. But but that just shows you that globally there's still a very low interest rate environment, regardless of what the US does, and not only in Europe, but you have other countries, how yielding countries like Brazil, Indonesia, India and countries like that that we particularly like, where interest rates are likely to come down over the next twelve eighteen months, and and so there are good opportunities and when you can get you know, mid single digits like seven percent yields in India and ten percent plus yields in in Brazil, if you're willing to accept some volatility. There are still places globally that you can get income. But you don't want to be everywhere. So it's not saying oh, by emerging markets because they have higher yields, because South Korea now does not have a higher yield in the US. So you have to be very selective when you do that. Probably Vet, looking back at the election and all that it's changed, did it change the role of the Fed Reserve in this economy? Right now? We see what's happened as a result of what happened in November eight, is the Fed Reserve of getting the back seat that perhaps it's wanted here for for a little while. I think that's true. I think the focus has shifted appropriately from the f O m C to the Trump administration. And while the f O m C was the biggest game in town last year, you know, with apologies to Janet Yale, and that now changes. So as we look for it, you know, we we again we expect an interest rate hike in in December Um. But as we look forward with the markets really need to digest is just how possible or how effective will stimulus be. And you know, I think some of the things that the market has a difficult time understanding is that, for one, gridlock never really goes away. So um. You know, even when even when Bush one re election and No. Four on this idea that they were going to privatize Social Security and he had both houses of Congress, they were unable to do that. We also know tax reform could be very ugly, right Ronald Reagan one forty nine, fifty states and eighty four and it took two years to get tax reforms. So the markets, um, rightfully so are pricing in some inflation expectations this idea that we can make America great again. Um. I think it was already great, but we can make it greater. Um, And that we could do better than what we're doing. But at some point the markets probably have to bring back their expectations a little bit. On all of that, I think when looking at the bond market's important to note that, you know, and I mentioned this in the last segment as well, we're basically back to where we were in two thousand, fourteen. So it's not really that long ago that we that yields were at these kind of levels, that we had two and a half percent ten year yields, that inflation expectations were about two percent, and you know, so it's not we're not saying that, look, the world's gonna be like gangbusters, but it's just going that a lot of the tail risks or growth at least have perhaps diminished a little bit in the US as you're looking for clues here as to what policy is going to be when it comes to infrastructure spending or taxes when it comes to the Fed Reserve, uh something. So that to me, when Stephen Minach was on television for his first interview was he had praise for Jennet Yellen. He said that he thought she's done a good job. And I wonder how that changes your calculus, your sense of where this administration, this incoming administration might be head when it comes to the Federal Reserve. Well, that's a that's a good question, and we don't know. I mean, we have debates all the time, and you know, Brian and I have talked about it, have talked about it with the our international debt team and our our domestic debt teams here. And you know, we don't know if if the person people that Mr Trump will appoint are going to be hawkish or dubbish. Like, we're not really sure where he wants to be in terms of of of who he's going to appoint. Will you point someone who's an economist or or not? I mean, you know, will you appoint someone who's you know, been on Wall Street or not? We don't know, Um, And I think that that's that's that can't be his first priority because the first priority is to a point that thous of people he has to and to his administration, and then you know, and then he'll probably start thinking about the FED once he has his economic policy team in place, and folks at the UM, at the OMB, they'll they'll start talking about who's going to be the next fedup. The reality of it, though, um, you know, if we if we were to move forth with a different makeup of the f O, M C and A and makeup that is more dubvish than what we've seen over the last number of years, which would be hard not to do, right, Um, you'd have to watch the currency and you'd have to watch. There's only so hard. You're only so hawkish. You could be watched the currency watch, the shape of the yield curve, because the world hasn't changed simply because we elected a new President's still a slow growth, benign inflation world. We saw earnings come down from two point eight percent year over year to two and a half percent year over year. Labor force participation rates still, all of that hasn't changed. Aging populations and parts of the world, slow productivity growth, all of that hasn't changed. So even if you appoint someone more hawkish than Jenny Yelling, the odds are it's gonna be very difficult to be so nificant. You are a charter member of the bond Vigilante Club. Are the bond vigilantes and control here? I don't think quite yet? Um, you know, so you know Bond. I think the bond vigilantes will come out when you say, hey, we're going to either issue way too much debt or we have policies that are distinctly to tip point on that quickly. I think it has to be. I think probably has to be even over three, um, probably closer to all, closer to four. Thank you so much. Ira Jersey, Brian Levitt where us from their Openheimer Fun studio. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm out on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us world line at Bloomberg Radio. Who you put your trust in matters. Investors have put their trust in independent registered investment advisors to the tune of four trillion dollars. Why learn more and find your independent advisor dot com.
