U.S. Economy Is Better Than Bonds Think: Joe Davis

than expected growth in wages. The market initially took this as a positive report, albeit pretty much in line with expectations, but subsequently President Trump came out and said that the Federal Reserve should drop rates and stop quantitative tightening, even though the economic numbers were very very good. Joining us now, Joseph Davis, chief economist at Vanguard, We are so glad

that you can join us. Before we get into the jobs report itself, what do you think, Joe, of the idea of the Federal Reserve cutting rates right now at the point in the credit cycle. Well, it's it's not of view that I would um entertain too strongly. I mean, I think if you look at the where the Fed funds rate should be. I think it's the Federal Reserve is is really navigating a global slowdown and trying to

maintain the length of this expansion. And so our view continues to be that the Fed funds rate is close to where it should be. Um. And if there's if you would push me to say where the next move should be, I would say maybe one hike higher rather than cutting rates, because the fundamentals of the economy we're still accommodative. The long story short, I don't see urgent need for the Center Reserve the cut rates. So UM, was there anything in this job's report today that changes

your outlook fundamentally? Now? If anything that you probably a little bit of side relief, to be honest, I mean, you know, we went into the year saying we were going to see gross scares in the market, slowdown in the global economy, but we hoped that the expected that the labor market would show signs a deceleration, but we won't see material cracks. Now. The disappointed number we saw last month gives one pause in that assessment. So to see the rebound in somewhat volatile data today I think

was more of a sigh of relief. Uh, And I think a medication that yes, we will have choppy waters here, but we're not going into recession. I mean, some of the mature early bed would have to happen in the global economy, I think, to take down the U S economy at this point. So here's what I'm struggling with. A lot of people dismiss President Trump's call for the Fed to drop rates and stop q QT as being

a little outrageous at this point in the cycle. People saying that's not needed, that's right now, you're seeing solid job growth, etcetera. Bond markets agree with him. Bond markets right now are pricing in more than a fifty chance that the Federal Reserve will cut rates before year end. And it's it's rising after this job's report, even though people say that it indicates ongoing strengthen the economy. How do you square that well, I think you know the times,

there are differences of opinion. I mean, you know, it's always uh, you always had to be a little bit wary saying that the bond market is wrong. Uh. Uh, it's a very efficient market. But that also doesn't mean the treasury markets accurate. All the time, I think, you know, the financial condition deterioration we saw at the end of last year and in January a significant fall and risky

assets and the equity market. Um, you know that clearly took UH some momentum out of the sales of of of what the FED I think was was hoping to do. And so I think we're closer. I you know, we're closer to where the Fed's forecast is rather than the bond market. And if we're right that we're not going into recession and the numbers we see today, maybe we'll see somewhat weaker job growth numbers, but nothing below on a trend basis, say below a hundred thousand jobs per month.

If we're right, then what what I think could happen is that that anticipation of cuts and rates will slowly be priced out of the of the bond market. I think the key wild card is actually outside the United States. And do we see UH stabilization in China's growth picture, because right now we don't have strong evidence of that. So, Joe, we are now in the tenth year of this economic cycle, which I think is long by most standards. What do

you think is different this time? If anything. Structurally well, I think the one thing that is different has just been the fact that the recovery's pace has been fairly tepid. So um, you know typical expansions, you know that haven't involved significant consumer deleveraging. You've had rapid growth out of the recession. Um, the set of reserve not the only factor, but has clearly then been much more aggressive and tightening.

I think, um the low pace of inflation as well as the low pace of economic growth can in large part explain why we're into the tent Yer recession. Unless things go fundamentally wrong, we could we could still be talking about the fact that's the eleventh year of expansion this time next year. Again, we're not Pollyanna um and and the risks still remain on growth on the downside. But I think it's the peppe paste of growth that

explains the duration and magnitude of it. Just to entertain this idea of a really easy monetary policy or keeping rates UH low or even going lower at this point, I have to look at the lack of wage growth that we've seen and that is ongoing, despite the fact that headline numbers are beating expectations. Even amid and otherwise decelerating US economy. Do you think that that changes the

scenario the backdrop for the Federal Reserve. It means that perhaps past models don't hold true given the fact that they were based on the Phillips curve. Yeah, well, you know, we've done a lot of work on the selfs curve. Is a great question. You know, it's it's still exists, but you have to control for a lot of factors to see that. Your relationship and you know, wage growth.

In our mind for the past year, we said that wage growth should be around three percent because that's based upon where productivity as we estimate it at best around one in the US, and then you overlay an inflation target around one and half to two percent, and so you should be around three percent. Now you can you

can also like clearly above and below that. But um, you know, we we expect wage growth to maybe modestly inch up of the rest of the year, but we would be hard pressed to see four percent wage growth. And unless we see a material rise in productivity, I think eventually we'll see a rebound there. And when I say higher proactivity, it means workers are even more productive than they currently are and hence they see, you know,

higher wage increases in firms reward that productivity. But we're not there yet, and so I actually think wages are where they should be. And a great example of that is to look at places like Japan, where you have record low unemployment rates, yet given their inflation expectations and productivity, wage growth is even below where it is in the US. Joe Davis, thank you very much. Joe Davis is chief Global Econmerce for the Van Guard Vanguard Group, joining us

from Malvern, Pennsylvania. And I think it's interesting, Lisa that you bring up that day on the Bloomberg terminal about the high percentage almost uh probability of a rate cut in kind of consistent with what we just heard from the President. Yet uh, there certainly are some economists out there, most notably our Carl, Ricka Donna and others, that think that, given the relative strength of the US economy, that a

rate hike UH is probably more likely. So we'll have to see how that plays at And obviously the FED is data dependent, as we heard from Carl, and they will be looking at a future data points coming up to push the agenda forward for the fed well. The Eurozone continues to deal with slowing growth. The uncertainty surrounding Brexit certainly is not helping, and there is ongoing concern in the European banking sector that there may be too much supply of banks in the banking sector in Europe.

To help us deal with some of these issues, we welcome our guest. Geneve Fillon is the CEO of BNP Parry by U s A. He joins us in our Bloomberg Interactive Broker studio here in New York. Johnny, thank you so much for joining us. I wonder if we could just start off by getting your sense of how the European economy is doing, and maybe specifically dive into the European banking system under pressure. Certainly I would love to get your thoughts. Well. Thank you for having me.

By the way, it's always a pleasure to be here. Um. Well, you said it well. The European economy is uh showing some slowdown. In the Eurozone is expected to grow g d P groles at best one uh, it's only Europe, by the way, there is a slut in Asia or slut in in China. And even though the US economy is doing really well. It's not you know, running in a vacuum and it's being impacted by by what's happening there. Um, then it's it's just a factor. Um. You mentioned European

banking industry. I think it's important to uh highlight the fact that since the eleven crisis and under the leadership of the Central Bank, the European banking industry has been better, you know, uh capitalized, is probably more liquid and has made progress. Having said that, UM, this is an environment

the industry has to deal with. So Johnny Feel, the CEO of BNP Pariba in US, I would love your perspective on negative rate policies and the low rate policies that we have content on an ongoing basis in the US. How much has that been the root cause of a lot of the weakness we've seen in the European banking system. Um, we should go back to the fundamentals here, because the low rate environment we have today and maybe to an extreme in Europe with negative rights, has been a major

contributor to creating stimulus. By the way, in the United States and in Europe at a time it was really need in this sense by the way, we've seen convergence between what the FED has been doing here and what the ECB is doing there with the lack of time, because the status of these two economies, you know, have

not been exactly the same eighteen months. Europe is about eighteen months behind the US and recovery very true, and this is what we've seen, you know, the FED taking measure on stopping QUI here and probably the e c B being still in a you know, stimulus mode, not through QUEI, but on winding the banalance field at a probably you know, slower pace and really coming back with UM.

I would say tools like you know, the t l L t R row which is a way to inject liquid it directly in the banking system that you know might still be required as we probably need to support growth UM even further, maybe to the excellent point you

made UM. You know, monetary policy UM is initially made to support economies, not so much to support the banking system, and the banking system I think has to a app to make sure that you know, whichever the goal for supporting the economy is, we we can be there to help and support and help clients. Is a negative right

environment sustainable for the many many years. Probably not, but I just wanted to highlight the fact that the lower environment you have here as well as the FED is now UH contemplating basically not hiking anymore and potentially cutting is UH is something that has actually probably helped industries because of supporting the growth. What a politically correct answer, Paul, Because basically, at a time when a lot of people say the negative rate environments killing banks, a nuance to

ANSWER's a corporate banker. He knows that this question. So, Johnny, if you know, when we think of BNP Parry Bats obviously one of the major French banks, a major European bank, but maybe people in the US don't know it as well. Tell us about your business here in the US. What is your focus here in US for BNP Pariba. We love the US. We've been here for quite a long time, you know, destinies and the platform we have here. He

is actually well balanced between retail. We own a bank in California, Bank of the West, which makes us part of the fabric of this country in one of the

most vibrant states in the United States. California as big as France, by the way, in terms of size and the wholesale activity we have out of New York where we serve large institutional clients, corporate clients domestically in the products which we have here, which is fairly large, and obviously our value proposition in cuizes when it's time to

serve these corporates. You know, outside of the US and particularly in Europe where we lead in the yoga bound uh market, we have fourteen thou people in the US one four and this is the largest balance sheet allocation of BNBPI by group after France. It's close to groups P revenues and it is really strategic and probably more strategic today as this economy is still benefit from a

strong momentum in terms of expansion. So I'm wondering going forward where you see the best opportunity for profitability in the US. Is it in the trading and sales area particularly I know on the on the dead side, is

it on originally glans? Where are you seeing opportunities? Well, um, I think that I've served the practice and the platform in the US is to be very centraled around clients, and my growth and expectations for expansions is around the client base one well, and this is very good point,

because clients there is a nest, right, it's prural. Then if you look at Bank of the Ways, they have two point five million clients, c IB has d strategic clients, and uh, the more we can continue to support this broad base of client in a growing economy, serving individuals, entrepreneurs, small cat meatcaps with mancos the west and serving large caps with CIB there, with convergence here and somewhere somewhat

or white spaces inside. All right, So they basically it sounds like, uh, there's going to be a pretty widespread effort to just get clients in uh one one word answer. Do you think the next move for the Federal Reserve is a rate hike or a rate cut? That there is no one world answer here. That's a good try. No, no, But in fifteen seconds, you know, central bankers are evidence based and react on data and quite independently and quite well.

And I think the FED and the CB are doing going to go exactly the same thing onward, look look at data and try to continue to support this economy the best way they can to benefit all industries, including the banking industry. John, you Pion, thank you so much for being with US chief executive Officer of BNP powered by USA and Chairman of the Central Aspect the c i B America's for VNP Party by joining us in

our interactive broker's studios. Today is Jobs Day. It also is a day in which President Trump is discussing FED policy and ongoing talks with China. So very much UH Washington d C Front in focus today Chris Lee joining us, now senior fellow at the University of Virginia Miller Center, also former Deputy Secretary of Labor under President Obama. Chris, thank you so much for being with us. We want to get to a piece that you wrote for Newsday

that is really interesting. Before we get there, do you have an initial read on today's jobs report and the idea that the Fed should cut rates as President Trump said going forward? You know what a couple a couple of months that we were talking about the said raising rates, and now we're talking about said cutting rates. You know, Look, I don't we always say don't read too much into one month. I think last month, you know, was a blipped down. Um, I want to see a couple more

months of job growth. We've seen over the first three months of this year. Uh the economy is averaging about a hundred and eighty thousand. That's pretty good. That's kind of right where we ought to be. Uh. So I would if I were advising the set, I would just tell them to keep things where they are, see a couple more months before we make decisions on interest rate

hikes or cuts. Chris, I know, a couple of days ago you wrote an opinion piece in Newsday talking about security clearances, why they matter, and just security protocols overall, why they matter in the White House, any white House. How is the Trump White House different in terms of traditional security clearances and protocols. Yes, So let me give you a little bit of context. Before I was the Deputy Secretary of Labor, I managed President Obama's cabinet. Before that,

I managed his presidential transition. So I've seen the security clearance um both coming into office in two thousand nine and then processing all of the people who served in the White House. This is a process that's handled by career professionals who work in the White House and the different UM intelligence agencies. It's exhaustive. UM. I was cleared

three different times when I worked for Barack Obama. UM it's not only you know, exhaustive information about your job history and financial information, foreign contexts, drug use, alcohol use, UM. They go out and talk to your associates, friends, colleagues, neighbors, UM, and they gather a lot of information. And career professionals

make these decisions. And the reason they spent so much time on this is that when you're cleared for you know, top secret access to information, you have access to some of the most sensitive information in the US government. These are this is information that's been gathered at great financial costs and often at a cost to the people that collected. So you want to make sure it gets in the

hands of people who deserve it. So earlier this week, UM, there was a whistleblower who indicated at least twenty and at least twenty five cases in the White House. UM career officials denied the security clearances for White House officials, and then those were overruled by political folks above them. And so you know, look, this is it's sometimes hard to keep track of what really matters in Washington. This should really matter, and this should matter regardless of what

party you're a member of. Why what are the potential consequences. Well, look, part of the reason why, UM, this process is so exhaustive. UM, if you want to make sure people don't have vulnerabilities, they don't have weaknesses, because foreign governments, foreign adversaries are looking to exploit those weaknesses to get access to this information. And if you've got something in your past personal issues, financial issues, if you've got to set the foreign context, UM,

that makes it easier to manipulate you. UM. And so again, as I said, this information comes at great cost to the US government, and we want to make sure it gets into the hands only of those people who can be trusted. So, Chris, I know this, uh, this report that came out and sited quote to senior White House officialist, I guess they were presumed to be uh Trump's uh daughter Ivancantre and son in law Jared Kushner got their clearances only after the intervention of President Trump. How common

is that type of arrangement. Well, it's incredibly unusual. I mean, I look, I'm not aware of a single instance where UM a security clearance denial was overturned during the Obama administration. I know that, UM, subsequent reporting is indicated there may have been one or two, and it dealt with, you know, an initial denial based on drug use that was then overturned. But these are overturned like at a very low level, you know, and you know, different administrations sort of look

at particularly drug use in sort of different ways. I am not aware, and I don't think I've seen any reporting indicating that a previous president has overturned one of these rulings. Uh. And obviously doing it for your family member raises a whole other set of issues, and so, um, yes, it should be concerning. What's interesting though, with regard to Jared Kushner is that while his top secret clearance denial was overturned, now his top secret clearance UM. There's an

additional level of clearance the the CIA offers UM. It's called s c I clearance. Apparently they have not given him that clearance. So one of his parts, one of the parts of his portfolios to negotiate Middle East peace, and he's doing that without with access to some information which is sensitive, but not to all of the information. So that's a little odd. We're speaking with Chris Lew

Senior fellow at the University of Virginia Miller Center. He also has a twenty year career in public service in the highest echelons of the Obama administration and before that eight years working for Representative Henry Waxman is Deputy Chief Council. I'm just wondering, given your extensive experience and your extensive roots in Washington, d C. How many old timers are there left? In other words, given some of the institutional knowledge that is built up over time, how much of

that remains in Washington today? Well, not much of it. And I think it's the challenge in a social media environment to sort of try to put the context what is happening, and what matters and what doesn't matter, you know, Um, I mean, if you think about sort of the news of this past week. Um. The other one of the other big news items is that House Democrats requested um,

President Trump's tacks returns. Well, it's worth noting for history purposes that president's going back to Richard Nixon, have either disclosed their tax returns when they are running for office or shortly after becoming president. And so yes, I know, in the kind of the swirl of social media, we love to say everything is unprecedented, but sometimes you have to look in the lens of history and say, Okay, really what is where are the norms? And where is

this president's actions conduct words outside of that norms? And and so it's sometimes hard because, as you say, there aren't a lot of people now in Washington who have that historical uh knowledge. Well, Chris, the you know, the House Oversight Committee is looking at the security clearance issue. What's the endgame here for them? Can they affect any change? We revoke anything? Do they have any power? Well, look, they've issued subpoenas to the supervisor who was in charge

of overturning um a lot of these denials. Uh. They've also asked for copies of memos on this subject. According to news reporting, former Chief of Staff John Kelly um put in writing his concerns about Jared Kushner getting a clearance. So it'll be interesting to see where they get all that. So there will be a fight back and forth about whether these witnesses testify, about whether those documents are turned over. Ultimately,

Congress can legislate on this issue. I mean, it is true that the president has the authority to grant a clearance to whoever he wants, but I suspect Congress will try to put greater checks into that and at the very least require some kind of notification to Congress before that happens. Chris Lew, thank you so much. Chris lewis a senior fellow at the University of Virginia Miller Center, and he's also a former Deputy Secretary of Labor under

President Obama. Well, there are a bunch of I p o s lined up the initial public offerings that we've seen so far. We've seen LIFT, we've seen trade Web. They've generally been pretty well received, although LIFT has been a little bit rockier. But Blue Apron might be sending a very interesting and perhaps inauspicious message to the I p o s that are lined up for later this year. Sarah Ponzack, crocess, reporter for Bloomberg News, joins us now uh to discuss why that may be. So discuss what

happened with Blue April. So Blue Apron can be a cautionary tale. If you look at Blue Apron, since it's I p O. I mean, this is a stock that trades at a dollar, it's down, and when you consider the fact that they originally we're talking about pricing at a much higher level and the only reason they didn't was because that was right around the time that Whole Foods and Amazon we're talking about teaming up. Then it would be about drop for Blue Apron, and it has

not been that long. It's only been since. So the way you can look at this is that Blue Apron, interestingly enough, yes it is a meal kit service, it's a food delivery service, but it's also very much grouped in with potential high growth companies, also with tech companies, because it's supposed to be disruptive, it's supposed to be a disruptor, and that's along the lines of a lot of the companies that we are seeing come to market

this year potentially. I mean take Lift for example. No, Lift has nothing to do with food, but they are a bride sharing service and that's supposed to be disrupted to the auto industry potentially. Um same thing with Uber, and then you think of other UH companies like maybe Pinterest, Slack coming out later this year. They all are very

niche in a way. So some are saying you can look at Blue Apron, and yes, you have to say it is clearly a very different type of company, But look at the rough year and a half about that it's had, and what does that mean for all of the unicorns that we have heard are going to go public this year. I think what it clearly says is if you don't just in case of Blue Apron, if if you don't deliver on what you say you're going to do in your I p O road show, this

market will absolutely pound the stock. And I think for Lift, just you know Lisa mentioned Lift in the intro, it is we have to note it's back above the seventy two I p O price at seventy five and change here today, So maybe it's maybe this one's found a little bit of a footing. But what I did here in the aftermath of the Lift and be interesting get your your sense, Sarah, is for Lift, for example, you know, here's a company that lost a billion dollars last year.

It's really unclear about when they're going to actually achieve profitability. So yes, I get the top lines growing, but I don't have a real path or a real good sense of a path to profitability. That could be a problem. I think for not only Lift that we've seen, but maybe some of these other companies. Well that's the common denominator here. Blue Apron has never had a quarter of profits.

Lift has not either. Uber hasn't either. So these companies, they have to believe that investors are going to take a bet that, no, they're not turning profits right now, but they will eventually be profitable and it's going to be worth it. But a lot of investors are starting to realize that maybe it's going to take a little bit longer for these companies to actually grow into their profits, actually turn profits then they believed at the start of it.

And that's why a lot wait, wait, wait, wait, wait, I'm sorry to interrupt you. Is there any evidence of that of investors actually showing skepticism here? So some that I've spoken with, I mean, the issue is they're having a hard time with valuations. I mean a lot of people are looking at these companies and saying, I honestly

don't know what to value Lift at. Yes, we're trading back aub of the I p O price, But it's difficult because you can promise on your road show, you can promise when you I p O that you're eventually going to be profitable, but there's a little skepticism. So there's skepticism, but they're still buying at the very high valuations, and they're still sending stocks higher. So even with this lack of conviction around the company's outlook, they're still actively

pushing up prices. They are, but we also have to remember we're only a week into lift trading. UB essentially lots of broad assumptions about the broad market about this. Yes, no, it's only been a week, so it's hard to take away exactly what's going to happen. But UBS, interestingly enough, they put out our report this week that kind of dived into the typical on average trading reactions of I p o s and they found that the first day, the first week, you typically have really good play because

people are excited. Still, people are still really pumped up about this new company that has so much hype around it coming to market. Where you start to see it really start to potentially lose traction is in the six month mark out to three years, because on average, typically an I p O is actually lower the market return, the risk adjusted return over that period is lower than the market because people start to become a little bit more skeptical, the excitement fades away. So it's hard to

really take this all away from Lift for example. Right now, it's too soon to tell. We're going to have to see what actually happens. And with the other Uni corns that are supposed to come out this year too, because they are names that have so much push and so much support and hype surrounding them that it's also kind of hard to live up to that, right, We'll have to see. Sarah pon SEC. Thank you so much, Sarah's across asset reporter for Bloomberg News, joining us live here

in the Bloomberg Interactive Broker Studio. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa A. Bram Woids. I'm on Twitter at Lisa A. Bram Woods One. Before the podcast, you can always catch us worldwide on Bloomberg Radio