Fed Will Struggle to Cut Balance Sheet to $3 Trillion (Podcast)

billion dollars. They are based in Newark, New Jersey. He joins us here in studio. Nathan Sheets, thank you very much for being here. Maybe you could just give us your reaction to yesterday's Federal Reserve activity and what you think the Fed will do in T nine. So it's uh,

it's a pleasure to be with you this morning. Uh, the Fed took a careful look at the US economy and I think on the one hand, they say, well, the consumer looks pretty good, and uh, the unemployment rate in the labor market they're looking pretty good, and there's ongoing fiscal stimulus. So the near term growth look outlook is is pretty solid. Now at the same time, they also see a housing market the softening and a substantial increase in market volatility and concerns in financial markets about

the medium to long run outlook. And consistent with that, the Fed notch down its expectations as to what it would need to do for monetary policy and the number of rate hikes next year. And uh, you know, I think most likely they'll do what they're suggesting in the dots. So I'm prepared and expecting a couple of a couple of rate hikes next year. But the Fed will be very data dependent. Oh, look and see where the economy is and whether things are evolving as well as they

think they will. You know, the focus really after the press conference was on the balance sheet and the fact that Fed share Powell seemed to dismiss concerns that a rolloff of the four trillion dollar federal reserve balance she was having a disproportionate effect on markets. Now he seemed to say, you know what, this has been put on a preset course. We're fine with it, and we're going to just focus on rate hikes. Is he wrong? Is

he too sanguine about the effect here? So? Uh, certainly there have been pressures at the short end of the yield curve this year, and my reading is that bills issue once and some of the after effects of of the tax reform are at work. But I think the fact that bank reserves in the system are steadily falling and likely to continue to fall are also a factor.

But I think what we're seeing here is the Federal Reserve has meaningful political incentives to try to get the balance sheet down to the three trillion dollar range that the j. Powell told car Wait hold on a second, three trillion dollars. If we found that out, that would be news. If he confirmed that that was their end target,

that would actually be even more hawkish for markets. So I think that they want to get as close to that as they can without creating disruptions in that market now in order to to to continue to lean into it. I think he's got it for now. Say we're going to continue to reduce the balance sheet now. As two thousand nineteen unfolds, I'd expect there will be a conversation. But the make no mistake, a big balance sheet is

a political risk for the Federal Reserve. I think they're very worried about an interview with the Senate Banking Committee where let's say there's a trillion and a half dollars uh a bank where reserves out there, and the Fed funds rates at three percent, and the members of the committee are saying, Mr Chairman, why are you paying the US banks forty five billion dollars a year? That's money out of the pocket of the U S tax beer. That's the that's the downside with the big balance sheet?

Is there a downside that we enter a period of even greater dollar shortage because of the way that the Federal Reserve is unwinding the balance sheet? Uh? And that is what they're monitoring so far. The Federal Reserve is kind of uh pointing at and say, don't look at us, look at the treasury because of the fiscal situation in

the bills issuance. But I think during two thousand nineteen, UH, we're likely to see some further stresses and I think ultimately, just to be clear, I think they'd like to get to three. I don't think they're going to be able to get back all the way And there will be a discussion of this as markets feel some continued pressures at the or in of the curve in the year I had. You know, it's I love that you have the experience that the Federal Reserve. Uh, you also have

incredible experience at the Treasury Department. You are the under Secretary of the U. S Treasury for International Affairs, and that is very much in the four especially as we were just hearing about the prosecutors going after hackers in China. I just want to read this quote FedEx Chief executive Officer Fred Smith saying most of the issues that we're dealing with today are induced by bad political choices. Do you think that the economy is slowing to the degree

that it is because of bad political choices? When I look at the global economy and I think about headwinds that it faces, I mean trade war has got to be number one on the list, and that is a discrete political choice. I think it's increasing uncertainty. It's likely weighing on investment in the United States and probably abroad as well. UM I think Brexit is weighing on the outlook, and that's a different kind of political choice, but very much a political choice. And you could go around the

world and point to other examples. What's going on in France, what's the uncertainties and rests in Italy, UH, the in the emerging markets, the new the new administration in Mexico, and there's a you know, it's it remains uncertain as to what an Omlo government's going to do. But there's more uncertainty there than has been the case in the past. So I very much agree these geopolitical rest these these political decisions, some made by those elected and others quite

frankly reflecting the outcomes of elections. And I think that's a very important point, is what we're seeing in some of this is the discontent of the body politic. In many countries, are many people that are saying the global economy isn't working for me the way I expected to. So just give you about twenty seconds. I know it's tough to do this. What would be the investment position

you want to assume whom going into so? Uh. On the one hand, I think we have to bear in mind that there is a strong there is a strong case for that kind of baseline view that the fat is articulated that the US economy will be slower next year. But by the same token, you've got a hedge against you've got a hedge against these kinds of extraordinary tale rusks Nathan Sheets. It's always a pleasure having you here.

Thank you so much for being here, Nathan. She's chief economist for Peacham Fixed Income, which oversees more than seven billion dollars in Newark, New Jersey, formerly of the FED and the Treasure Department, uniquely positioned to talk about the current environment. We were just hearing from FBI Director Christopher Ray. Before that, we had heard from US Deputy Attorney General

Rod Rosenstein. Uh, some pretty pretty dramatic language. They're accusing state sponsored actors in China of hacking into corporate and state Frankly, Uh, you just use the US agencies, including some military agencies, US Navy, UM and you know, basically, one of the most interesting parts of their words was when they really tried to emphasize that they are working

shoulder to shoulder with American allies. It's not just the US unilaterally going after Chinese state sponsored bad actors that are hacking into and stealing information from corporations and governments,

but that other nations are working with them. Really a strong language and really highlights a broad based, multi year, multifaceted attempt to break in to to to US companies, and yes, these folks specifically about the increased enforcement activity that would be necessary over cipher mergers and acquisitions as well as how to protect our own telecommunications infrastructure. I want to bring in Rob Lefforts, Microsoft's corporate vice president

of Security. Rob. We're so glad to have you today, especially given given this news understanding that you don't necessarily know the details of this particular indictment that was just unsealed moments ago. Does it come as a surprise to you that state sponsored activity from China hacking into US entities is as widespread as they were making it out to be. Well, without making a specific comment about China, it unfortunately does not come as a surprise at all.

This kind of activity is ongoing, uh. And there are many organizations, some state sponsored, some purely criminal, who spend a great deal of time and investment to break into companies cyber infrastructure. And so that means if you have a company today, you had need to have a really modern security stance thinking about how are you going to protect yourself and how are you going to detect when these kinds of cyber criminals and experts break into your organization.

Does that expertise means something different in a world where companies are migrating much of their data and operations to the cloud. It does. And Uh, in some ways this actually creates an opportunity because we're able to bring more cloud technology to bear to actually provide more sophisticated protection. It just opens up new fields like machine learning, where we can really monitor a lot more of what's going

on and be faster to detect and respond. I gotta say, especially when you think back at um what was the hotel chain Marriott that the breach about half a billion user, right, but it happens over years, and it makes me think that just sort of the detection is part of the issue. It's hard to detect this, it's critical detect and actually gets back into a conservative, old school security stance would say, I'm going to build castle walls around my organization and

make sure that nobody ever gets in. The sad truth is people will get in, and so a modern stance says, I acknowledge that, and I am ready to detect them how and when it happens. In the Marriat case, I heard, I wasn't directly involved that they were there in the network for four years, and so having modern tools like Microsoft Threat Protection is actually the way to think about how am I going to be more alert and watching the whole ocean of behaviors going on in my environment.

One of the focus focuses that the Christopher Ray FBI director mentioned has to do with who are the people behind these attacks? He mentioned hackers, uh, perhaps business people in China or around the world that maybe working on behalf of Chinese state sponsored entities, but he also mentioned the co opting of employees at the very companies whose secrets are being targeted. UH. Based on your experience, what kinds of procedures or what kinds of activity can companies

do in order to forestall that? There's two things you really need to think about. One is at the hiring time when you need to think about how do I screen and monitor employees in a way that respects privacy and that's honestly hard for all companies to do. It is something that cloud companies like Microsoft can do in a more robust way. The second thing is you also need tools that watch what goes on in your network,

what employees are doing. Are they trying to gain access to servers and data that they wouldn't normally use as part of their day job. As far as Microsoft's effort to secure the networks of the various customers, one of the the Rod Rosenstein mentioned that it was managed service providers, and I'm wondering if you could just sort of exp and on what technically that means, because he said that this was something that is not just about the United States,

this is throughout the world. Now, well, I'm honestly not sure exactly what he meant by that phrase, because it is a phrase that could be used to apply to

a number of different things. But the one comment that I will make is that for a modern organization, there's lots of moments in the life of your digital data as it flows through a network, as it's stored in some service, maybe even if one of your employees puts it out on the public Internet, and having a big picture about all of that, not just what happens to laptops and file servers, is a huge challenge and a

lot of complexity. Uh. The other point I'd like to get across is, uh, you talked about the sophistication of the attackers, and they are very sophisticated and moving quickly. And this is a space where you need to make sure that you're taking advantage of good guys and defenders who are just as focused on moving quickly and tracking what they do. That was actually exactly where I was going to head, which is talent and the difficulty finding the people who can move just as quickly. You know

how difficult is that for you? Well across the globe. Finding great cybersecurity talent is a crisis h And every time I hear a statistic about it, the numbers seem worse. I think the last one that I heard was by the planet will be short three point five million security professionals. They'll have that many more jobs than people who can

capably fill them. And so as we think about that, we think about having a pool of incredibly talented researchers at Microsoft and then using tools like machine learning in the power of the cloud to bring those talents to bear to help companies around the planet and to help governments around the planet. Which countries are producing the most cybersecurity professionals who are the best? Uh, it's pretty distributed. I will say the United States has some great programs

and we work with research organize stasions there. England Israel happens to have a lot of cybersecurity talent. Uh. And in places where you find bad guys, you also find the potential for talent that wants to help and do the right thing. Just to put it into perspective. According to your notes, thirty million attempts on average a day to log into Microsoft accounts by adversaries. Thirty million a day. Yeah, you can't handle those one by one. You need you

need machines. You need machines and tools that help handle that for you. One thing that I'm wondering passwords, Yes, password security. I mean, part of the problem with password security is that they can become so secure that you don't remember any of your own passwords, and then it just becomes a huge mess. What's what's sort of the what what's the progression here? Yeah? Uh, passwords are bad for the planet. Like, let's be clear, people can't remember them.

They can't. Let's fossil fuels and passwords. Yeah, it is true that continuing to use passwords is the easiest way for any organization to get in. I don't know how these attacks were carried on, but over the attacks on any organization are very simple. I'm going to trick you into giving away your password, and then I'm just going to log in and do a whole bunch of bad

stuff on your behalf. And so getting people away from passwords where they log in using more than one thing at a time, So use your phone and a password, or even better, get away from passwords all together, where you just log in with your phone and biometrics on your phone and that's registered to you. You didn't have to remember your password, and not only is your experience better, but under the covers it was way more secure. Is

it hackable? Everything is hackable. Everything is hackable if you cut off someone's finger and stick it on there. I meant once once the information is stored in in some kind of device. Uh so, the most of the techniques for biometrics keep those biometrics on the device. That's true for Windows Hello, So you'd have to have that laptop and the finger. So anything is doable, but that's pretty hard. One thing that I'm wondering is how well prepared do

you think that American corporations are against hacking? They are not very well prepared. I mean, is it is it sort of would we be shocked if we knew how unprepared they were. We, the whole industry, and Microsoft as a responsible part of that industry, need to push a lot harder on making everything much more safe. Do you believe that it's going to take some kind of incident in order to wake people up in their individual industries. Those incidents are happening every day and we read about them.

You talked about Marriott. If you just look back Sony and Target people experience, people are way picking up and there is a huge focus on this. I think that's why we talk about things like the huge demand for talented professionals to help. Thanks very much for being with us, Rob Lefforts, appropriate you're here today. Rob Lefforts is corporate vice president of Security for Microsoft, telling us about the efforts on behalf of corporations and the US government to

secure our networks. President Trump did decide to pull troops out of Syria against the advice of some of his closest advisors, creating something of a pushback from even some of his staunchest Republican allies, Lindsay Graham writing it is not fake news that Russia, Iran, and Assad are unhappy about our decision to withdraw from Syria. They are ecstatic. This was via Twitter joining us now Toby Harshaw, national security writer and editor for a Bloomberg opinion, joining us

here in the Bloomberg Interactive Broker studio. Uh, Toby, what do you make of this move? How do you interpret President Trump's decision to do this? Uh? There are a few explanations. The first is that this was simply a campaign promise, UM, that he's making good on he you know, he went against the advice not just of the Pentagon, but also of John Bolton, his national security advisor, who had really been, you know, the voice in his ear

on these issues before this. UM. In addition to that, I think that UM, he he wants to be very careful about Turkey. UM. Turkey had said that they will send troops in UH to remove the Kurds who have been our allies, the Syrian Democratic Forces. UH. And I don't think that, you know, Trump wanted the possibility of Tornado allies getting in shooting fight. You tell us the disposition of US military assets in the Middle East. UM, I can't give you the exact disposition because the Pentagon

is not releasing UM. The breakdowns from how many troops are in which theater. That's a new thing that they're doing. Actually that's made a lot of members of Congress unhappy. But we know that we have military assets in the United Arab Emirates, in Turkey, Saudi Arabia, Qatar, as well as in Oman, Kuwait, Jordan's Summon, Israel, Iraq, Egypt, Djibouti.

The list goes on. At what point does the effort on the military front just become a zero sum game and the President says, we're not getting anything out of it, let's leave. Yeah, I mean most of those uh, most of those troops are actually stationed there. I mean Cutter is where the giant airbases, Bahrain is where the giant naval bases. Those are permanent presences. Um. But yeah, we've got we've troops well beyond Iraq and Uh and Syria.

We've got them in North Africa, We've got them in Jibouti. Um, we've uh, yeah, at some point we have expanded too far. Um. This war is you know, is based on legally on something Congress passed in two thousand and one that they've never updated. Uh. And and what we're doing goes way

beyond the authority that the White House was given. One thing, there was a Lumur editorial out today that I thought was really interesting talking about how this particular move is a little bit different because it comes as something of a rude shock and not a pleasant one for our allies. Yeah. Um, I mean the Kurds are you know, a rag tag militia that we've armed and trained. Um, they're you know,

not important on the global scale. But if we hang them up to dry, if we let either the Turks or the Syrians, um simply run over them, as the Turks have promised to bury them in the holes they have dug. Um, that sends a signal to our bigger allies that the US you know, doesn't have our back.

And that's you know, that plays right into the rhetoric that Trump has been using with our NATO allies and our allies in in the Far East, um using, you know, threatening to to pull away the security blanket unless they change their trade policies. Um. It's a it's a whole new level of Uh, it's an entirely different foreign policy. I think that's very, very scary to the allies. And that's one reason that the French are talking about starting a European army. What has been the reaction, if any,

so far from the Saudi Arabian government. Um, there hasn't really been one. UM. The Audies are being very quiet, uh for obvious reasons. UM. The Saudis have have helped in the coalition against ISIS UM, but not dramatically. In fact, the u A either very close ally and neighbor UM has been a far bigger part of it. Could some people say that that the pulse that President Trump just sort of demonstrated is actually absolutely the right one. That we're not going to win. This is a messy kind

of situation. It's unclear what our role there is. Why are we there? Um? Well, the mission was to defeat ISIS UM. Defeating ISIS isn't something you can do entirely. UM. But it's not true that that they've been entirely defeated. They no longer hold any territory. They were forced out of Hygiene, the last city that they held. UM. But there's about two thousand fighters probably who slipped away. They're

they're fighting in the little villages UM. They're probably gonna slip across the border into a rock where there are a lot of sleeper cells um that have been carrying out you know, attacks and bombing, attacks and kidnappings and things like that. Based on your reading of the situation and the relationship between the United States and Turkey and NATO ally, do you think this will have any effect on Turkeys per just of of Russian made anti aircraft missiles. Yeah, um,

the Turks. Right as this was happening, the Turks agreed on a three point five billion dollar package to buy Patriot missiles from US. UM. The big problems with the S four hundred were a that it was giving money to the Russians um, and be that they are not combatible with with NATO's hardware UM and couldn't have been a part of that common defense. The Patriot missiles, which are American obviously are. The difference is is that Patriots are very short range and the S four hundred, the

Russian system, has much greater range. Uh So the fear is that the Turks are gonna go ahead and buy both. Thanks very much. Toby Harshaw as always expert when it comes to the world's national security, particularly the United States. Are national security writer for Bloomberg opinion. I encourage you to read his most recent column. Trump's Syria pull out is another grave mistake. Thank you very much for being

with us. SpaceX is eighth and final Iridium Next launch has been delayed until January seventh, and here to tell us all about the satellites that are circling the globe is none other than Matt desh. He is the chief executive of Iridium Communications based in Washington, d C. Matt Dench, thanks very much for being with us. Tell people about these Iridium Next satellites. You've already got sixty five of them in orbit, and tell us how this is going to connect the world in a way that maybe people

don't expect, for example, Internet of Things. Yeah, thanks Tim to talking to you again. Um. We have spent the last two years getting our three billion dollar network in orbit, and we're within two and a half weeks now pleading that, which is pretty exciting because it really will be a complete new network that's much more powerful than the original

network that we launched about twenty years ago. Uh. You know, the probably the most exciting new service that we've that really has driven our growth over the last few years has been the Internet of things. Um. A lot of people remember us as a satellite phone company, and we still sell those. That's a that's a great business for emergencies and first responders and adventures and and that sort

of thing. But the primary growth really on the network or the number of subscribers, is in connecting things, connecting trucks and trains and ships and buoy's and oil and gas pipelines and all the things outside of cell phone coverage, which you know only only is about ten to fifteen percent of the world. Given that we cover one of the world, we're really the way to connect any of

these things when they're outside cellphone coverage. Yeah, Matt, one thing that I find really compelling about your business is you take this sort of theoretical and sci fi aspect of space exploration to a very concrete and earthly place. I mean, the whole SpaceX SpaceX launches, you've benefited from them, right, Well, you know, we kind of grew up at the same

time if you will. They they're about, I don't know, fifteen years old, and when we were looking eleven twelve years ago for a launcher, UM, we couldn't really afford frankly, the the traditional launch vehicles that were out there. They had not changed much in thirty or forty years, and I think the cheapest deal we got was over a billion dollars, which made it very difficult for us to

consider replacing our network. And along come space X with a lot of innovation and says we can offer it to you for almost half the cost or less than half the cost of what you're getting before. And we took them up on it. And it took us a few years to get our satellites ready, but took them a few years to get ready as well. And now we've had seven successful launches together and we're gonna have

our eight there in a few weeks now. These satellites are in low Earth orbit and they provide data services as well as voice service on the L band. Is there a financial change that has happened? In other words, how do you make money now versus in the past, because you also host payloads for other companies, like you said,

flight tracking services and maritime ship tracking businesses. Yeah. Are these new satellites are much more powerful than our old satellites and they can do many more things than than we've been doing over the last twenty years. Uh, we've we've been growing rapidly really more on the data side, as we've connected many things using using the Internet data

things technology. But with these new satellites, we're going to move into the broadband realm, being able to provide higher speed services on airplanes and ships and trains and that sort of thing. Um, faster really than anything in our frequency band has ever been able to do it before, and much more global. Uh. The other new thing with these satellites is this what we call a hosted taiload. So we basically created a whole new business that's not

communication based but take some space on our satellites. Uh, and in in our case, helps track airplanes everywhere in the world. So we created a new business called Aaron, got some partners in the air traffic control world. Um, that's all been put together and now for the first time with these new satellites, we're going to be able to see where every airplane is in the world in real time and relay that information to an air traffic controller so they can put it on a scope. And

that's really really powerful. Matt. How do you make money? Well, Um, in a case of you know, our communication business, every subscriber which we have over one point one billion or one point one million of them. Uh, you know, provides a uh you know, get service and provides money for the service each month, whether it's based upon the packets they use or the voice calls that they make. In the case of that new Arean facility, new are in service, UH, they actually pay us sort of a rental fee to

use our satellite network. They pay us to bring back the positions of airplanes in real time to those controllers, and and we own a piece of that business which is going to be quite valuable. So UM, you know, we're we're really kind of an innovation engine, you know, because nobody else has sixty six satellites and lowers or but all connected to each other, and it's really not like any other satellite system. UM. And that's that's one

of the reasons a lot of innovation and partners. We now have something like four hundred atty partners today who are technology companies, UM that have built us into their solutions for their customers, and they're the ones out selling us. It's nice because we sort of have a fixed cost basis. Each new customer they bring to our network really falls to the bottom line. And that's why we've been growing and become so profitable over the last couple of years.

Matt Desh, thank you so much for being with us. Matt Desh, chief executive officer of a Ridium Communications based in Washington, d c UH. They use the space x rockets, the re usable rockets to get their satellites into space at lower costs, and they track all of our flights in real time and give us access to the Internet all sorts of things. Thanks for listening to the Bloomberg

P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter or at Lisa abramoids one. Before the podcast, you can always catch us worldwide on Bloomberg Radio.