Who's on the Short List for Fed Chair?

in bond markets. Are we on the precipice of much higher yields in the US bond market much lower values? Aren't we going to see this bond route develop and deepen? And to answer this, I want to bring in Chuck Lieberman, chief investment officer and founding member and Advisor's Advisor's Capital Management LLC. He's also a Bloomberg profit He writes for UH. The website Bloomberg View maintains Chuck. Thank you so much

for joining us. Right now, I'm looking at longer dated treasuries that have lost more than three percent over the past month. Do you think that this sell off is going to deepen? A sure? Do? Um. The economy is doing pretty well, the labor market is tight. Um every measure we have on the labor market indicates that we've got a progressive tightening of the labor market to a

level that is tight historically. Um, it looks like the Phillips curve has flattened, which means that we're not paying for that decline in the unemployment rate yet with higher labor costs, at least significantly higher labor costs. But ultimately I think we will, and so it's imperative that the Fed get interest rates at least back to a neutral level.

Chuck Liberman, I wonder if you could just step back for a second and maybe just opine on the idea that you need to separate all the bad news that is a constant torrent from all of the information necessary to make decent investment decisions. Sure, well, it really comes down to what determines the value of equities UH and fixed income UM and UH. Theoretically, equity valuations are discounted values of future expected earnings. Notice, I haven't said anything

about politics yet, I haven't said anything about climate. I haven't said anything about a lot of other issues. Correct, you're trying to keep it straightforward and simple, right, And UH, that's really the issue when you look back in the last thirty years, there have been lots of awful things that have happened, and yet the equity market is at

all time high. How come it's because the companies have grown, profits have grown, the companies are worth more, and cumulatively that means the market is worth more and at a record high. Chuck, why is now different? I mean people have been saying that the economy has been looking better steadily over the past few years. People have been expecting higher yields for a long time. Now you have an

economy globally that's a wash with central bank cash. The Bank of Japan and the European central banks are still printing money. What's going to make the situation turned so dramatically in the US? Well, I don't know that anything has to change dramatically at all. I think we're on a trajectory of pretty stable, almost systematic growth. Uh And that growth rate, while lower than in the past, is

nonetheless more than fast enough to drive unemployment down. And so we've pushed the unemployment rate to a level at which it becomes a problem for labor costs. When you survey firms or look at how firms feel about the labor market. They're very, very consistent in reporting that it's difficult for them to find the workers they need. Right.

But but all of this is sort of sort of flies in the phase of the idea that with such high valuations and stock markets, you have investors saying, look, the second that the ten year treasury gets to three percent yields two point eight percent yields, I'm buying because you can't get that kind of reliable yield anywhere. I mean,

in other words, fundamentals don't make sense at this point. Well, I would say that the stocks would even be attractive if if thirty year treasuries or ten year treasuries for that matter, we're three percent. When you can buy US equities, quality equities that have dividend yields up close to three percent, you really don't should not have interest rates as low as they are. Uh. Stocks are clearly going to continue

to grow over the next decade and at a decent rate. Uh. And you're getting that yield on many of those high quality companies. Uh. Something is wrong. Stocks are miss price compared to bonds, and I'll entertain a number of possibilities. Bonds are badly overvalued. I would accept that proposition stocks are somewhat undervalued. I am tempted to accept that proposition because when I do dividend discount models, the interest rates that prevail in the market today imply much higher valuations.

We typically ignore those valuations because people would be embarrassed to suggest that the stock market is undervalued. And yet if you look at interest rates compared to bonds, stocks are cheap. So you can have it anyway which way you want. Bonds are expensive, stocks are cheap, or some combination of the two. Well, Chuck, let's say that you adhere to the idea that it is a market of stocks and not a stock market. What stocks or what

kinds of companies should you be invested in? Well, it, I think we still reflect the trauma of two thousand and eight. So the stocks that tend to be most expensive are the ones that are typically considered safe or safer, and the ones that are cheapest are the ones that are traditionally considered riskier. So among the ones that I considered cheap or the financials, the banks are very cheap

in my mind. Uh, energy, when you hold on when you say banks are, you're talking about big money center bank like JP Morgan Bank of America, as well as Stanley City Group, City Group absolutely all of the above, um. And then the regional banks were also pretty attractive. They're not quite as cheap as the money center banks, maybe because people were burned more in the money centers than they were in the regionals. But I consider the regional's

attractive as well. UM. That's on the financial in the financial sector, and then in uh energy, I consider the pipelines very very cheap. UH. People got burned because of the drop in oil prices, but you know, we're produced. We're almost back to the record high production levels for crude oil in the United States. The pipelines are caring more. UH. The expectation is we're going to increase production going forward. Fracking is becoming progressively more efficient, lower costs. Um, we're

going to consume more of this product. Somebody's got to carry it, and yet the stocks are cheap. Well, So here's what I'm struggling with. A lot of people have said that the loose credit conditions has enabled the stock market rise. And if you start to see tenure treasuries at thirty year thirty three yields and above, that's going to increase the borrowing costs of a lot of companies.

Won't that hit the stock market? Uh, it will to some degree because stocks are not independent the bonds the tour are integrated, and so if interest rates rise in the in the bond market, bonds will provide more competition for stocks. But I don't think the stock market is priced at a level that reflects prevailing interest rates. So I think the stock market can handle rising rates surprisingly well unless those rates shoot up a lot more. Thank you so much for joining us. It's truly a pleasure

to speak with you. Chuck Lieberman, chief investment officer and founding member and Advisor's Capital Management, also a Bloomberg profit who writes for our Bloomberg View website, Carl always a pleasure. Um. I noticed that there's a story about the final list, the short list. It has people such as X board member Kevin Walsh, Jerome Powell, who is a current Fed governor. Tell us who you think is at least in the running and maybe just throwing some wild cards for us

to kind of understand. Maybe the president's thinking. Sure, absolutely, so the shortlist is getting shorter, as as being leaked to the press and whatnot. Uh, So we know that we are zeroing in on a decision on a reduced number of candidates, and that decision could be coming in the next two to three weeks, maybe sooner. I think that, uh, you know, there's a litmus test being applied to the candidates.

And so Donald Trump has said, how he's a low interest rate guy, and he wants a low interest rate FED chair. Uh and that's all. Find it nice. And I think that is an important prerequisite which does disqualify folks like John Taylor, because pretty much every iteration of the Taylor rule that you look at would point to higher interest rates and where they currently stand. So I think that the Hawks are being crossed off the list.

And the other part of that litmus test is that he basically wants to be sure that whoever's FED chair is not going to stand in the way of his economic agenda. And more specifically, that means if he is passing tax reform, which could maybe not be so comprehensive in terms of tax reform, but more of a a sugar high from a tax cut that may not necessarily be revenue neutral, at least in the short term. He does not want a FED Chair to step in front

of that economic benefit. So if you're going to raise rates as the president cuts taxes, you're probably not going to be in the FED chair seat next year. All this makes me question why Kevin Walsh is even in the running. Well, the uh the Worsh family has some connections to the president. Uh and he is well liked among Republicans and conservatives, but uhh and he certainly is a bit of a maverick, even though he was a

former governor. He's been highly critical of the Fed. Uh So in those regards, I think he does appeal to the President's sentiments and instincts. However, he was very dismissive of the Fed missing on the inflation target earlier this year in an interview with Mike McKee. Actually uh and also he's concerned about financial stability risks, so he is someone who also wants rates to be higher. Uh and

that again is not consistent with Trump's economic agenda. So Bloomberg's shortlist that we've put out includes Kevin Walsh, also Jenny Yellen, who is the current FED Chair, Also Jerome Power Powell, who is a current FED governor. Um Neil kesh Kari has gotten less attention, and yet Jeffrey Unlock, the head of Double Line, came out and said that he expects Kashkari to be the likely next FED chair.

Is he wrong? Well, we'll find out soon enough. I think he is potentially on the short list, and he's definitely the dark horse candidate does a bit of an outsider, somewhat critical of the FED, UH and certainly dissenting at several meetings over critical exact opposite standpoint than Marsh saying that it's moving too quickly. Absolutely, so he's a low rates guy, and he's saying until we see inflation hitting the FEDS target, we should stop raising rates. UH. That

is music to the ears of the president. I wonder called does this highlight the contradiction that seems to follow President Donald Trump, which is that his previous statements and many of his previous positions seem more liberal and more a dovish in general, whether it is interest rates, whether

it is social policy, many topics. That is a divergence to the Republican Party which he now leads, is that the facto president, he leads the party, but he is by no means a conventional Republican and so as he's looking at FED chairs, that absolutely is the case as well. Don't forget the President Obama chose Janet Yellen for the job. Um, so he is not conventional I think a conventional Republican. If it were Pence picking the FED chair, I think

Walsh would be very high up on the list. But because of this focus on really labor economics, right seeing if you can push that unemployment rate down and improving the the status of the middle class and the working class, those are democratic initiatives traditionally, uh, and that is a priority of this president. And don't forget it's a lot of Reagan Democrats that crossed over and voted for him in those industrial Midwestern states, uh, that he's looking to

help out. Although President Trump himself isn't going through pages of economists and trying to pinpoint the perfect FED chair, So he is surrounded by some more traditional Republicans. Who are his advisors on this? Who are they and how much power do they have in selecting the next FED chair? Well, I think Minuchin and Cone have both been influential in

this regard. I think that cons chances because he was originally considered to be on the shortlist diminished after the Charlottesville, Virginia violence and the you know, the president wants uh loyalty in that FED candidates, so he wants a low interest rates person. He also wants a loyal person, uh,

and I think those are the priorities. So the committee shapes to some degree, but the final say will absolutely be his and arguably this will be one of the key moments for a FED chair to really dictate the direction of policy going forward, considering that the FED is about to start unwinding its balance sheet and conceivably they could speed that process up for low it down. Carl Orgadana, thank you so much for joining us. As always, Cargadona's

chief US economist for Bloomberg Intelligence. Return our attention now to Argentina. Argentina's benchmark stock index, the Marvel, down about one point three percent today, and that concludes a winning streak of thirteen consecutive sessions where the stock market moved higher and the polls a show that there are is

a friendly attitude towards Mauricio Macri. The government is likely to maintain its position in the October legislative decisions, and the Marvel index is up fifty eight percent year to date. Here to tell us more about Argentina is our own editor in chief emeritus for Bloomberg News, Matt Winkler. Thank you for coming in. What does Asians has mockery made that would encourage investors? Thank you, pim pleasure to be with you. You know, there are two things that he

had to address immediately and he promised to. One was runaway cost of living otherwise known as inflation, and the other was the peril of default, the kind of yin and yang of modern times for people living in Argentina and uh not as you would expect UM anything close to a developed economy. And so far, so good. He's almost two years into his presidency and the inflation rate

is collapsed. It's down from a hive about to twenty And if you look at the Bloomberg and look at what economists anticipate over the next year, it's gonna get to eleven percent within twelve months, and even some people are saying single dig it's UM by two thousand nineteen. So that's one thing. And the other thing is the debt market. You know, in Argentina is UM outperforming most emerging markets, and UM that's a real turnaround. So those

are the two things he's done. They're both big, and he's brought Argentina actually to the forefront of global investors by making it the best performing market in Latin America. And that that wonderful streak that you referred to at the outset here, Um, that's the longest winning streak for the stock market since it's it's just shocking, really the rally here, especially considering the vitriolic decade long battle between creditors in Argentina after its latest default. It has defaulted

numerous times in its sovereign debt. And here you're looking at Argentinian bonds price in US dollars that have rally nearly thirteen percent so far this year. Matt, can you give us a sense of what President McCree said to you that gave you confidence that they could continue on a rather auspicious path. So there are two things that make him um, if you will, a unique um. One is he's the first leader president elected who isn't a parnast in a hundred years, nor is he affiliated with

any of the left wing alternatives. So he's right in the center, and he's a bit of a pragmatist and very practically. He's an engineer by training, so he looks at things very analytically. Um. So that's one thing. The second thing is he said to us, you know, I'm committed to reducing poverty. Now you wouldn't necessarily expect that from someone who is in the center, and yet he's managed to embrace a very um pluralistic, diverse constituency in Argentina.

You know, both people who are well off and people who are the opposite. I think that's what sets him apart. Does he it was there any conversation or does he recognize that there are a lot of rules and regulations about the kinds of investments that made in Argentina and the reciprocity that exists. So, for example, BMW how to export a certain amount that equal the amount of automobiles they sold. I mean, they're all these wacky rules there.

He would given his brothers, he would eliminate, via many reforms, most of the bottlenecks that you've just identified that prevent the economy from performing as it should. And he's committed to doing so. But he recognizes, and he says as much when we speak with him, that it can happen overnight, and he has to essentially bring people with him, and he can't do anything that would be considered too abrupt because he would lose the opportunity to do the big stuff.

So he's got to focus on a kind of gradualistic approach to reform. I was struck by an article on the Blueberg earlier this month where or actually it was last year, but Lawrence Fink, the head of black Rock, was talking about meeting with President McCree UH and that this convinced black Rock to be long term investors in the nation. And this struck me as particularly interesting that McCree was aligning himself with Wall Street even after what happened.

How important is that to his success? Very because you know, Larry Fink is UH running, if you will, the largest money management concern UM. And Argentina needs global investors because so much of its financing is done through the liquidity that comes out of the global market. So as long as the global market is UH poised to do what

Argentina needs, that's good for Argentina. It does not have at the moment anything like the financial system domestically that would enable it to do what it needs to do so. Global investors are all important in having Larry think um, cheering you on is a good thing. The government budget deficits. Did he speak at all about trying to reign in

the government. His priority is to reduce what is known as the fiscal deficit um, and he is very public about that that it's an essential part of getting Argentina to be um economically and sustainably prosperous. How popular is he at this point popular enough? You know, he's not charismatic in the traditional uh peronist Argentina politician. However, having been through, if you will, so many disappointments, the people of Argentina are prepared to accept somebody who's a little

bit less charismatic and more pragmatic. And that's how he has managed to be credible even after almost two years in office, where he is essentially said, I'm translating a bit um. You know, no gain without pain. Well, I'm just struck by the idea that in emerging markets we're seeing the moderates taking a more prominent role, where as in developed nations you're seeing populists. You know, you can't make this up. Um that among the top leaders in

terms of respect and credibility in the world today. This man uh Macary is right at the top. I mean, and if if any of us thought about it just fifteen months ago, we just said that's that's impossible. So um, you know, this is a big surprise. Met Winkler, thank you so much for joining us. Always a pleasure to have you. Met Winkler, Editor in Chief Emeritus of Bloomberg News. 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 at Lisa abramowits one before the podcast. You can always catch us worldwide on Bloomberg Radio.