Jay Powell Nomination Ruptures Bipartisan Fed Image, Binder Says

Our next guests argue that that independence is a myth. To begin with, I want to bring in Sarah bind a professor of political silence science at George Washington University, as well as Mark Spindell, founder and chief investment officer at Potomac River Capital, both based in Washington, d C. Co authors of the new book The Myth of Independence, How Congress Governs the Federal Reserve. Sarah, I want to start with you. Can you just explain why it is a myth that the FED is independent and how so

many people believe this myth? Well, there is thanks for having us. It is a widely held notion, certainly outside the FED. UH that Congress created the FED and then throw away the key it gave it autonomy to set interest rates and control monetary policy, and then Congress turns the other way. Right. The argument is that in exchange, Congress conducts oversight and tries to hold the FED accountable

for meeting the goals that Congress gives it. We find, though, in looking at both the history of the FED and contemporary the FED, that there's a relationship between Congress the Boss, and the Federal Reserve UH and that both depend on each other. Right, we call it interdependence. Congress needs the FED to do a good job control the economy and

to have someone to blame when the economy sours. At the same time, the FED needs Congress, right Congress, The FED wants to protect its powers, but it needs support. It needs political support when it makes tough policy choices. Otherwise Congress will reopen the Federal Reserve Act and possibly take those powers away or give it more powers that the FED might not want to have. Mark, why don't

you come in on this and offer your thoughts. Obviously you must have something that is sympathetic to what Sarah is saying. But is there any doubt that this was ever, so I think so, and I think that myth was really propagated in the markets. Uh. You know, part of the genesis for this project stretches back a decade um

at the time of the Tarp Tarp legislation torpedoing. I think Sarah and I began to talk about the possibility that Congress would reopen the Act, and I think in that, uh, what we discovered a reasonably recurring feature of the Fed's relationship with Congress and congresses relationship with the FED that had enormous implications for the way that Congress and the FED could shape the outlook for markets, the economy, and

monetary policy. And I think beginning to factor in the kinds of political risks that we saw at the heat of the crisis, and I think in the in the ten years hence has really been a feature of trying to understand, uh, the outlook for for the FED, for

monetary policy, and for markets. Indeed, I'm wondering, Sarah, you know, is this something that always has been the case where there has been this incredibly political element or has it gotten more so as the FED has engaged in all of these unconventional policies and taken more control over the economy. And I just want to add, you know, in previous years Obama, for example, former President Obama appointed Ben Burnanki,

who was originally appointed by George W. Bush. So this was a bipartisan type of arrangement and it seemed to be an endorsement of just sort of keeping the status quo. Now we're seeing something different. Can you weigh in? Have we seen a shift? Sure? Well, this relationship, the interdependence has been there back to the beginning, back to the early nineteen hundreds. But what's changed here is really at

least twofold. First, the FED as a far more powerful institution over over that century because of the powers Congress has in repeatedly in the responsibilities Congress has given to the FED. So the FED is vastly more important, and the US as a global economic power is vastly more important than it was a hundred years ago. But partisanship in Washington is also far more polarized today than it than it has been the last thirty forty years. You add that up and what do you get, right, it's

crystallized in the Trump nominee uh last week. Right, as you said, for several several decades, sitting presidents, when faced with the opportunity to reappoint the incumbent chair to a second term who was appointed by the other party's president, has gone ahead and made that essentially bipartisan appointment. That was ruptured last week with the Trump nominating a pal who's pretty close I think to the current Chair, Jennet Yellen in terms of monetary policy, at least in terms

of their votes. But that appointment really ruptured this image of this bipartisan Fed, this technocratic Fed. And now with Trump right, he can make up to three, maybe even four appointments to the board in addition to the two he's the one he's made and one he's about to make. Um that that uniformly changes will change the makeup of the FED in a way that the framers of the FED back in the early nineteen hundreds never envisioned one party having that much influence over the makeup of the board.

I'm just wondering to both of you all see this as something that is just specific to the Federal Reserve or other government institutions. I think of the U. S. Supreme Court, for example, Sarah or whatever you choose, who's going to answer that one. It's it's it's certainly the case that the FED is not the only political institution with norms and statutes that protect independence. I think what's unique here is the FED is a unique body here. It has far more influence over the economy than any

other the myriad independent agencies with economic powers. Right, Yeah, And I think it's it's important to understand the political similarities, but I think the economic differences between the impact that the Federal Reserve can have on markets, on on the

economy versus versus the Court. Although I think PEM it's a it's a it's an interesting question and an analog that we looked at in trying to understand the nature of of the politics, and I think that goes back to thinking about monetary politics revealed this myth Mark, I want to get your perspective as a long time investment manager. I mean, if we are getting a more more polarized backdrop to the FED, which is already a political animal as you sort of described, I'm wondering, Mark, how that

affects investments going forward. Does this give or reliability to the Fed? Less reliability? I mean, how do you navigate that? So I think I think the selection process, which for lack of a better word, seemed weird, UM, but did result in an institutionalist UH. We we assume a confirmation

of of J. Powell Chairman. Powell will follow very much along the monetary contours that Ben Bernankee and Janet Yellen have put in place, and I think motivating yelling UH to to institute the balance sheet unwind the kickoff of monetary tightening, I think it's very easy baton for for J. Powell to pick up that said, um, we we recognize that the last two downturns in the US have really been financially financially led the certain Certainly the global financial

crisis revealed a a sort of range of issues regarding mac repredential and UH super super supervision and regulatory issues where the FED is really the uber regulator UH. And I think as we think about not just J. Powell, but the whole complexion of the board, I think where we are really paying a lot of attention and as an investor, the financial sector obviously is is integral? Is how that how that shakes out? Thank you very much.

Mark Spindell is UH a co author along with Sarah Binder, professor of George Washington University, of the new book The Myth of Independence, How Congress Governs the Federal Reserve. You're listening to Bloomberg. Will the Murdoch family break up Fox? It's a question that is on every media mobile's mind today. And here to help us understand why they might break it up and who might purchase it is Porter Bib. He is the uh well, I guess, the founder of

Media Tech Capital Partners, and he joins us now. Port are always a pleasure. I think of you as a kind of media guru. If someone came to you and said, boy, uh, there is a uh, you know, movie production facility and television production house that may be up for sale, and it's called twenty one century Fox, would that be of interest to you? Why would you be interested in perhaps buying it? If I be keenly interested in buying it, as are a lot of other people in the media business.

Because Fox has a terrific array of assets that are are firing on all cylinders right now, and they have a global franchise. But they also are very, very undervalued as a public company. So let's talk about this. There was reports yesterday that Disney was in talks to acquire some of the assets from twenty one century Fox. We're getting subsequent reporting showing that those box have ended with no deal. But this has opened up the door for twenty one century to start selling off pieces of its

vast network. And I'm wondering which assets, in particular do you think are most vulnerable to being sold off or

the ripest candidates for for being uh for being auctions. Well, Disney wanted to buy everything except the Fox News, Fox Business, and Fox Sports, leaving uh Mr Murdoch and his sons with a news and sports uh empire of some consequence, But all of the TV production, the cable networks, the the the thirty nine percent interest in be skuy b, all of those assets were of vital interest to Disney. The problem that that the Disney has is that they're

they're low ball players. Bob Iger has been very scrupulous about never overpaying for any acquisition that he's acquired, and Ruper Murhak is on the other side of the table and has never ever uh been willing to sell anything that he owns at at a bargain basement prices. So they're gonna be other people. I think the issue here is Disney came to Murdoch um not knowing whether or

not he was a seller. A lot of UH speculators have said that Rupert Murdoch and his son's basically said, the scale is too big a hurdle for a Fox, So we're gonna start to slim down and keep the assets that we want. He needs to have as long as Mr Murdoch is co executive chairman of the company, the Fox News and Fox Business, those those are his key assets. He's politically connected, politically involved. He talks to the President almost every day, and he's not about sell

those assets. That that's the legacy that he wants to have um after fifty years of building a media empire. But the other assets are really valuable, and they're going to be a lot of people beyond Disney who come knocking. Well, Porter, I was looking at the numbers right and Century Fox stock was a thirty two dollars a share that was less spring Now it's at twenty eight dollars. It's got

a fifty one billion dollar market cap. Have you been able to do with some of the parts, I mean, you know, what are the division's worth twenties century Fox Film, You've got the television business and so on. What do you think is a is a going price for this? Well, we's it's not just a going price, it's what people

are willing to pay. UM. One of one of the most interesting buyers standing in the wings right now is A T and T. Their deal with Time Warner and billion dollar deal looks like it may not happen right now. They the rub is that the President and CNN or at daggers drawn and President Trump has asked the Justice Department to do a new review of that transaction of Fox. The assets that Disney wanted to buy from Fox and that Ruper Murdoch was willing to sell would be exactly

what a T and T could use. And and in terms of evaluation, UH, Fox does not break out all of the numbers of the different entities that are under twenty first century Fox. But I think you're looking at it somewhere in the same valuation UH as as the the Time Warner deal would be for a T and T, somewhere in the in the eight million dollar billion dollar range. Porter I'm wondering what this UH, these discussions mean for

Foxes proposed acquisition of Sky Networks. I knew that European British regulators just so reviewing that transaction, and it seems as though Rupert Murdoch was willing to ditch that deal in order to sell most of the assets to Disney. Does that mean that he's rethinking this deal or that it's on shake your ground at this point? I think the latter is what what really caused Rupert to sit

down and talk to Disney about selling Fox assets. UH. Just in the last several weeks, the British regulators have decided that they have to take another look at at at Fox's attempt to buy the majority interest that they don't now own in Best Guy B. And it is not a question of whether there would be too much

consolidation of power in one media company. Really was an issue of whether or not in the British vernacular, Fox is a fit and proper purse and to control a media asset like the skuy B and the the most recent problems that they've had with the on the sexual molestation the issue UH and and and a lot of

that is still ongoing there. There's litigation in the UK as well as in the US that caused the government in London to say, we have to look at this all again and there's a major long term review that probably is going to come out negative against the box. So Rupert said, let's start to bail out. Well, we will be following this. Porter Bib thank you so much as always for joining us. Porter Bib is managing partner of Media Tech Capital Partners in New York, also the

first publisher of Rolling Stone magazine This is Blue. When I think of debt negotiations, I don't think of a cartel, a drug cartel. I think of office rooms where people in ties or people who are wearing you know, suits,

sit around and talk about how to restructure debt. That is perhaps not going to be the case in Venezuela, because, uh, the President of Venezuela just appointed a drug kingpen to lead the renegotiation of the nation's debt, which is sort of a mystery as to exactly how much there is anyway, but here to understand exactly what this means for the negotiations that affect a lot of big money managers in

the United States is Damien Sassaur. He's fixed income strategist for Bloomberg Intelligence with a deep knowledge of emerging markets over time, Damien, What was Nicholas Maduro, the head of Venezuela, thinking with this appointment. Yeah, and Nicholas was thinking about getting reelected next year. So I mean effectively what what he did by by now saying that the negotiations would be run by Alisami, who is the drug the drug kingman you're alluding to. He's no fact, Memories been sanctioned

by the government. Technically, US creditors cannot negotiate with him, it's legal. So what he's effectively doing is forcing UM, forcing effectively creditors to basically they're going to go into default. It's a it's a given now because you can't talk to somebody like that, you can't deal with them. And more importantly, he's doing this because the bonds UM that are held by US creditors are you know, they're effectively you know down here at twenty cents on the dollar.

They could go as low as ten cents on the dollar. He really doesn't care. He's just basically trying to solidify his power base ahead of next year. So I'm so okay, let's back up. Let's talk about the fact that many, many money managers, the biggest ones in the United States own Venezuela debt. It accounts for nearly two percent of the benchmark broad emerging markets. Well not anymore. It actually only accounts for ninety basis points of the bench markt

X and that's but you're right. Yesterday it was one point four percent. On Friday was two percent. So they're plummeting. The market value of these bonds are definitely plummeting. I mean the yield, the average yield for Venezuela debt went from something like thirty on Friday close a business to over I think last night was the last time I checked. So the numbers are just off the charts. So who's

solidifying their losses right now? So, you know, in terms of fund UH, I mean, look, we can only capture FUN filings right so they're a little bit dated. You know, we're looking at stuff, you know, in arrears. But for the most part, FUN holdings in Venezuela and Petivisa debt, which is the the oil and gas company that is effectively a quasi sermonant, is effectively an extension of the government. You're talking about um black Rock, Goldman, sachs Ashmore, Tiro

price GMO. Those are the big fund families that are holding that debt um and you know, effectively in the case of black Rock, you know, passive investors like the black Rock I share et F. It's really it's not a very big position within the index. But and the index is up I think, I'm sorry, the et F is up something on the order of nine percent year to date, and I think negative attribution for venezuel alone is something on the order of a hundred and forty

basis points of that. So yeah, I know it's had an impact, but it's now at what if it's only ninety basis points of the index, that's your floor. You can't really lose any more than that technically, right, So so the impact on broader emerging markets is going to

be constrained to that point. Damian Venezuela is already overdue on interest payments for debt that is due in twenty six, right, I mean, they've they've got foreign currency reserves, but it's like what about ten billion dollars and I understand that most of that is in gold. Um, well, you know, we don't actually know what the Central Bank of Venezuela is doing when they're calculating their reserves, to be completely honest with you, But the reality is you're absolutely right.

I mean, you know, they've got UM roughly sixty billion plus in loans that they received from the China Development Bank in China x him and we looked at that because that's where I wanted you to go. Those Russia and Russia and roseen aft right. So so first, starting with China, the big government agencies, the big government lenders lend sixty billion over the better part since two thousands whatever called the mid two thousands to Venezuela, and those

loans are outstanding. We don't know how much of those loads are outstanding. We don't know what assets were pledged against those loans. We don't really know much about them, and we don't know their seniority. And I think creditors don't know where they stack uh you know where they stack up relative to China. So here's what I don't understand. Okay, So basically Venezuela is all but guaranteeing itself a default. At this point, why has this been something that Muduro

has avoided for so long? And when people were saying this could lead to regime change, and now it's not been There's been a lot of speculation on that. You've just hit the nail on the head. I mean, everyone had kind of been playing this game where the next the next principle, you know, the next bond that was set to mature. You know, you want to you know, you're hoping that they gonna make payment on that. If they do, it's a home run. If they don't, we're

in this situation we are now. And many people felt that Maduro was paying back the people that helped him secure his power base initially by telling them to get along those bonds effectively, and I'm gonna make you whole. That's the way I'm gonna be able to pay it back because I quite frankly can't pay back any other way because I'm sanctioned by everybody else. And so that's the speculation that's been out there. There's no way to prove it, but certainly that's that's that's been kind of

you know what we've been like focused on, um. But yeah, no, I mean China, Russia, I mean you just again, creditors don't really know where they stack up, and that's the mystery. Thanks very much for helping to dispel at least some of that mystery. Damian Sassaur, fixed income strategist for Bloomberg Intelligence, Well, we're going to have a focus on fixed income, which has brought to you by PIMCO for investors who demand more than the markets deliver. All investments contain risk and

may lose value. Consult your investment professional before investing. And if you want to invest in the European bond markets, and it's important to listen. It's to what Simon Ballard has to say. He's our global credit strategist for Bloomberg and he comes to us from London. Simon, you know today I'm watching the gap in yields between Italian tenure and German ten year government bonds. It is shrunk to the narrowest this year. Why is Italy so much better

in terms of economic outlook? I mean still their banking system has some challenges. Can you explain the dynamic right now that's sort of driving this? Yeah, no, absolutely, so

good afternoon. It's a it's a great question. But yes, that is one of the one of the trends that we've seen, not only with Italy but with with peripheral with higher yielding risk generally over the course of the last couple of years has been the compression towards the core risk towards Germany um as as investors have chased yield um in what is still a very low interest rate environment what will remain a low interest rate environment. So yes, you know there has been a compression in

Italian spreads over Germany. Has the fundamental picture in Italy

improved to that extent, No, it has not. It as a function of the underlying liquidity in the market, and there in lies probably one of the risks for investors going forward that as that spread compression continues and yields continue to to to fall, investors are increasingly sort of not being compensated we say, for the risk they're taking on board, but they are obliged, for want of a better term, to to to buy into high yielding in inverted commas risk the lower quality issuance in order to

just get a little bit of incremental yield over Germany. So yes, you've seen a compression with with with Italy. You've seen a compression with with with Spain, and with Portugal, and to a certain extent with Greece, although probably more question marks with Greece going forward. Um so yes, it's it's not a story about improving or dramatically improving fundamental stories within Italy. It's more the chase for yield exacerbated

by the e CBS as it purchased program. Well, well, Simon, I wonder if you could just help me out here to understand that. You know, it seems as though we use a lot of this information to describe what happens to a constituency that, as you just use this word, is obligated, is obliged to buy. So if you have

captive buyers, what's the difference, what the prices? And if you have a ready audience and you know that there is a backstop, well, if you're the issuer, of course you don't wanna uh, you don't want to pay, You don't want to end up having your debts, uh, you know, paid in higher interest paper. So it seems as if you have this obligated buyer, then all of the information is window dressing because they've got to spend the money

on these specific kinds of bonds. Well, to a certain extent, that's correct, and that's been one of the reasons why you've seen, you know, such a dramatic compression trade in in yields and spreads within the fixed income market over the last couple of years because investors have increased single sort of wanted to replicate what the central banks are doing, and the FED has been doing the asset purchased program on your side of the Atlantic at the same time,

of course, and they want to be on the same side of the traders central banks. That is one of the reasons why liquidity within the secondary market is poor, because investors do not want to sell their existing holdings in order to try and buy you know, new issues or or new bond deal should I say, because they'll probably get crowded out and won't get completely reinvested. And that just again pushes yields and spreads, you know, further

and further into into towards negative territory. Simon, there is a calm in the Financial Times today that cut my attention because you you mentioned the European Central Bank as it purchased program. In the past nine months, the European Central Bank has actually purchased a disproportionate amount of French and Italian bonds, and I just wander from a political standpoint,

this comes at the expense of German bonds. This alone could be withth driving the dynamic of the trade of the tightening yield gap with peripheral debt versus German government boons. I'm just wondering politically, how does this fly? Well, politically, you know, the e CBS asset purchase program there is there to stand behind the Eurozone economy and trying to inject recovery into the economic growth dynamics, and to a certain extent that it has done that at at some cost.

Whom one might add over the over the last year or so since the since the corporate bond program was was initiated in June two thousand and sixteen, Yes, they've been buying disproportionately. Perhaps um I haven't haven't got access of course to Financial Times is analysis. But from what we see, you know, the the utility sector is the largest sector of holdings within the CBS purchase program. They've got about two hundred and seventy two utilities deals, but

those are spread broadly across the Eurozone. But you know, the ECB will be buying the areas of the market where it believes it needs to one add support and more importantly, where it can find liquid assets to purchase, because of course the more it buys, the more investors chase the CB and want to be on the same

side as the trade. The few of the ones there are too for everybody to buy, so that they're they're chasing liquidity, but also chasing the volition of what they're what they've set out to do um with the program in the first instance. So yes, disproportionately, probably looking at prooferles. But that's not to say that they're not buying core Eurozone bonds as well. Assignment I confess I don't know whether there's the same term in the UK or in Europe,

but we have this term. It's called the open book test right where you're basically you're given the answers to whatever the test is, whatever the test questions are, and you just have to go out and find the answers because it's available to everyone. That's kind of way it

sounds in terms of this marketplace. If it's if If that's true, then don't you see a lot more American companies like I don't know, Worldpool, for example, borrowing in the European markets because they can take advantage of your version of the open book test. Absolutely, the open book test of my my, my time living in the States, I'm very familiar with UM. But yes, you know, from a certain to a certain extent, it is an issue that's paradise at these sort of levels, particularly in Europe.

We had the UK today issuing bonds at a minus one point five percent yield. The investors buying that obviously have to have a conviction about the need for capital preservation. But from a general issue as perspective, yes, in Europe, but these sort of yields, it is a funding boon at the momentum, and I'm sure we'll continue to see more overseas issues coming to the European market over the coming months. Thank you very much. Simon Ballard are global

credit strategist for Bloomberg, joining us from London. Thanks for listening to the Bloomberg p m 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 at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.