2% Inflation is a Ceiling Not a Target, Kashkari Says

of course on the Bloomberg. Now joining us is someone that was way out front. In fact, maybe President Trump read his book The Price of Civilization. Jeffrey Sachs is at Columbia University. He is a guide to world liberal He is someone who does not agree with the president, but he has to see how the president applies policy here. You were way out front on the struggles of this

nation with your book Price of Civilization. The President struck a third rail with the American public, a poorer opulated, the different other issues that are out there that are all in your book. I mean you were at what is the prescription to get this administration to begin a constructive dialogue with liberals, independence, and Republicans. This administration is not having a constructive dialogue with anybody right now. What

happened at the G twenty this weekend was alarming. Actually, they couldn't even make a statement opposing protectionism because Steve Manuk in the Treasury Secretary, held the ground to say, no, we're not going to oppose protectionism. We're not going to make a statement about climate change. It's so nineteen to one. The US Trump is absolutely arraying the whole world against the U S. You watch it step by step, That's

that's what's happening. Would you suggest and just in one issue, the opioid epidemic, Rob Portman, I'm going to suggest doesn't read Jeffrey Sachs. He's a Republican, a moderate from Ohio. He probably is aware of your work, but he doesn't read it word for word. And except right now, you and the senator from Ohio have more common ground than with the president. Can the Democrats co opt a Republican centrist group to oppose this administration? But let me just

say a word about what's happening. Our society is falling apart. This has been clear for years. There's a divide between those who have a college education, times couldn't be better. And those who have a high school degree. Jobs are falling, wages are falling, mortality rates are rising, opiate addiction rising, suicide rates rising. So along comes the Republican Health Plan. It's to cut the tax at the top and throw more than twenty million people off of healthcare coverage. Are

they kidding? Are they kidding? What are they doing? It's dreadful what's going on right now? And we have to say it today. You know you said I'm you introduced me earlier. Is miserable mood because today is supposed to be world It is World Happiness Day and we are releasing the World Happiness Report. The United States is in a free fall right now. Out of the thirty four o C countries, the US Cayman twenty one. We're going

to come back to that. Yeah. But so, Jeffrey, this is why people voted for Trump, right, He's trying to fix a problem. Now you're saying he's fixing it badly and he's focusing on the bad things, or he's going about it the wrong way. How would you deal with this unhappiness or this uneasiness that we clearly saw in the American people to give them something better. We would have rich people pay taxes and we would have poor

people on healthcare. That's simple. We would say, we tell the truth in this country that the rich have never had it better, they've never had more money, they've never had more rise of incomes, and they should do something for our society. And what he's doing is exactly the opposite. He's given every single position in this administration to Goldman Sacks so that they can cut taxes at the top. It's a but he was but he was voted on that platform, right, Yeah, But then it's bait and switch.

It's complete bait and switch. He said I'm going to fight Wall Street and then he gave every top position in the administration to one company. How much more bait and switch can it be? We have to tell the truth about what's happening in this country. It's dramatic, it's a word on the poor. But Jeffrey Sax, do you actually admit that a lot of people in the US voted for President Trump because he was going to deregulate and they voted for him. Again, I'm not saying it's

boutter wrong, but this is what people voted for. They voted for him because he made promises to them and he is lying. I'm sorry, this is the biggest, very very quickly here did Secretary Clinton loses election because she didn't go after Midwest Democrats who are more conservative than the East Coast liberals like you. She lost the election because she was a lousy candidate and she didn't have

a position that people trusted. And Donald Trump said I'm going to help you, and what he's doing is helping his billionaire buddies. It's so clear, it's obvious as long as we look at what he's really doing. Don't watch what he tweets, watch what he says, watch what he's doing. I feel miserable. We're gonna talk happiness to Jeffrey Sachs here in Am. I just had a nightmare thought Jeffrey Sachs playing golf with Donald Trump floor around. That would

be quite around, to say the least. Jeff Sex, thank you so much. Feel l joining us some p K burlicer on oil. Phil. We've got your new research note and folks, we protect the copyright of our guests. I'm not going to send it out to you, and you go right to gasoline. Why does a pro like you look at gasoline dynamics, Well something, Gasoline is probably excuse, probably the most important component of petroleum demand, and it's also the one that's most influenced by economic cycles and

by expectations. UH. And and this report, UH what I've been writing about for a while. I've been looking at the failure, essentially of most following the market to recognized the consumers respond in an anticipatory fashion. You know, I take take my cues from my gold class making good friends. Stand Fisher of the FED Monitorists talk about expectations and how consumers adjust ahead of time when they hear news about changes in the FED. Right, consumers have done the

same thing. In the case of gasoline. We had strong growth and gasoline on a year over year basis every month UH in two thousand and fifteen and two thousand and sixteen until OPEC said, oh, Saudi Arabia said we want to raise oil prices. And then consumers heard the news and immediately began changing their consumering pattern. Nothing surprising here. The big surprises that those who follow the market, follow oil markets totally ignore this. And gasoline is you know,

a good portion of petroleum demand. How tight is this market getting right now? How tight is the gas market getting? Gasolene market is getting a little tighter because people produced a less less and because a good deal of gasolene has been exported. Uh. The gasolene was flashing around the East Coast two or three weeks ago to uh maybe a month ago, and large volumes were sent to other parts of the world because the prices just couldn't be

held up. But you know, gasoline supply is getting a little tight, but gasolene demands looks to be down relative to UH last year by about two three. I know you're paying close attention to that Sarah conference in Houston a week or two ago, the h s Market conference. And what's the biggest news that came out of there is you listen to all those speakers on stage in Houston.

Um I was. I wasn't there. Uh you know you're gonna and I haven't spoken since uh and the but the news that came out to me was the attempt by the oil exporting countries to try to get US producers to cooperate. Uh. They had a dinner, UH, they

had the Nigerian delegation. I had had the dinner, and uh, every anti trust lawyer in the country must have been squirming, because you know, the idea of a group of producers getting together to talk about controlling production any place in the world is scary, but doing the United States is really dangerous and it shows opex desperation, the producer desperation. Uh. With essentially the change in technology and drilling and finding oil. Uh, they are working. Uh. You know, the U S producers

are working extremely hard to drive costs down. And and More's law the more from Intel that technology doubles every uh, with every new generation or speed doubles applies to oil fracking. So suddenly people are talking about being profitable with twenty barrel. So we had a real moment ten days ago. Edward more Stark on the door the acclaimed oil or theologist

at City Group and basically said, oils stupid. Maybe it works higher, but he said, given a longer time frame we go to the land of Phil Verlager, which is cheaper oil, what will be the catalyst if we have stability, if we go to somewhat of a higher per barrel, what will be the catalyst to get us to the Verlager vision? Well, it'll be it'll be a the same sort of catalyst, the catalysts technology. Uh, the fact that every every time we drill another well, we're finding new things.

One of the stateless lumber shades president out there came out with a statement that the amount of data one uses right now for a well, uh, is the amount of constitutes the amount of data on to high definition television, tell of movies. I mean, big data is just beginning to arrive into the oil business. And when did it arise. We're just going to have an overwhelming falling calos and an overwhelming expansion and opportunity. And it's gonna happen here.

It's gonna happen in Argentina where there's a great opportunity. It's gonna happen in Russian where there's a great deal of shale. Uh, we're gonna you know, two years ago or a year and a half ago, Spencer Dale of BT came out with a thing, and I think I came out with about the same simultaneously. But is the oil is no longer a finite resource? Uh, so much oil is gonna have to be left in the ground.

It's really a race to see who loses. You are you very kindly quote and praise our colleagues that Liam Denning and Halfier have bloss here of Bloomberg News on the issue of technology. And what I find fascinating is how the old hands, the oil producers are processing all of this technological change. Talk a bit about that, how they're how they're facing this change. Well, it's not the it's not really the oil producers, it's the companies like Slumberge and so on. Now I'm a visiting fellow at

the School of Minds. We've just moved here to Denver, and the School of mind produces some of the best engineers, uh in the world. It's been recognized for years. And what what what's happening is all these young engineers are

coming out knowing all these new technologies. So a woman I know is working uh for for slumbers j I think down in Texas comes out is totally trained in new technology and everything, and they bring all this technology to the to the drilling companies, and then the drilling companies apply it steadily, uh, to the to the wells and and just essentially bring along these the companies who are are developing. It's it's in many ways. It's like

the agricultural business. It's the farmers are the customers for the John Deere's and the Monsantos, the Montsando's producers of the new the new UH seeds, and the farmers by the seeds and double the triple their their products. So it's it's it's that sort of relationship. And the universities and the companies like Slumber, J. Baker Hughes are just all developing these technologies and driving costs down. What do you do in Golden Colorado? Is this like a big

salary and a six pack? Of course, every time it comes out of the faucet. I've moved down their UH. Friend of mine who's teaching there, I was supposed to teach their back in the early nineties and had a medical issue. Um asked me. They have a new research institute,

the Pain Institute. And what I'm looking for is is an opportunity to work with some of these younger students and and spread the economics and and and as I said when I was talking about the demand here in Gasolene, is the monetary economists have moved ahead with rational expectations.

And you just read their material and Stanley's and I've watched therely for years and that this whole economics, the way of thinking about backing out demand for petroleum has Let's come back soil f earliger with this on the Colorado school of mind. What have we learned about the role of OPEC now and going forward in light of what we've seen since that deal was inked a few months back. Well, OPEC has been struggling to be relevant

for several years UM. In the early part of this decade, we had a series of disruptions of supply in Nigeria, Libya, Syria and the tight oil market, and you know, OPEC essentially ignored what was going on and produced at full rate, so it was no different than the market for week uh.

When the production disruptions essentially passed and the US oil supply came in, the organization looks to try to reorganize and this is the way Cartel's work and cut production and the sustained prices, and what they have found is that essentially in today's world they are at best a very marginal player as an organization. The reason is that demand is now a good deal more price sensitive. Who spoke about the consumers responding quickly to news of higher prices.

Consumers are more astute. And secondly that the supply response is much quicker and the costs again as we were talking on the previous segment, are falling much more rapidly.

So OPEC I think is opex day has passed? And UH the organism attempts by groups of countries such as especially high cost countries producers like Venezuela are waging a regard war that they are not ultimately going to be successful, but they may hold prices up a little bit and just provide a much greater incentive for UH lots of small producers, relatively small problem producers such as E G, E O G and others, and UH pioneer just to

keep pushing ahead and expand supply. UH. You know, if you want to say, put it bluntly, UH, they've been overtaken by technology. I'm still confused here about the metrics that we use to gauge how these countries are upholding their ends of the barn. With Saudi Arabia in particularly, they released their own figures. We had figures from the International Organization as well. What do you prize more when you're when you're looking for for outputs, say what are

you looking at? I very rarely try to do that. What I do is I turned to the market. I turned to the futures market. Uh you know. I was when the company called Drexel Burning was around. I was helping create this market. And today we have over five and almost five and a half billion barrels of oil outstanding in futures contracts. And what you do is you look at the shape of the forward price curve and how the companies are responding, and you look at the

cash prices. It is you know what OPEC says it's doing is it has become irrelevant. Now I know this is this is what people have watched for fifty years. And as I'm moving into this new home, we got a hundred boxes of file cabinets and books and you look at all these old books and so on where people talked about OPEC and how we had to follow production and so on, and and it's all quaint. It's it's like filing away old train schedules when you used

to use the train to go across the country. I mean, I look still at where we are, and we've gone from a hundred dollar framework down to twenty nine and back up to fifty ish. When you think about it every day, what is the thing our audience should watch in the oil market? If I were what, you know, if i'm I thought, I'm an investor, I wouldn't be watching so much the oil market because it's it's it's not going to move dramatically. Uh. What I'm watching is

uh North Korea. Uh so you go act of political analysis that if somebody does something that takes a lot of demand off the market, which is what an attack on North Korea would do, or takes a lot of supply off the market, you're going to be in a very different situation. And every commodity market is this way. You know, you look at copper. There's this big strike down in Chili that's changed the dynamic copper market. It

is something like that. You know, I picked North Korea because that's the highest scary thing right now, but it is you know, it is not in the oil market right now. Okay, so we gotta leave it there. Feel really good, Thank you so much, and congratulations on analysis of gasoline. Is the dynamic going into the warmer season brought you by Bank of America. Mary Lynch dedicated to bringing our clients insights and solutions to meet the challenges

of a transforming world. That's the power of global connections. Mary Lynch, Pierce Federan Smith Incorporated Member s I p C. On the Spectum Enterprise phone line. Jack Bogo, Mr Bogo, wonderful to speak to you again. What has changed is not so much the migration of billions of dollars from active to passive, but just in the last six months we are now it what appears to be a crisis moment for active managers, mergers, mergers, mergers, cutting of costs,

et cetera. Where will active management be in five years, Well, it will almost certainly be a smaller proportion of the mutual fund industry and than it is today. And today passive is around mutual fund equity mutual funds, and you know, it could get it gets very tough to build these numbers, these share numbers. But I would say probably five years from now it would be maybe maybe over forty five.

There's a very strong tide out there, tom as you know, and amazingly, I mean the the e t F I'm sorry, the Total Index fun business. I was doing a bad forty billion last year and this year forty billion a month a month, and this year in the first two months it's something like sixty seven billion. That's a huge increase in UM in index fund close. I haven't seen all the data for active management, but they're still very, very, very negative. I want to quote a letter here from

one Warren Buffett of Omaha, Nebraska. Quote. If a statue is ever erected to honor the person who's done the most for American investors, the hands down choice should be Jack Bogel. What's your relationship like with with Warren Buffett? And how how closely, how in sync or your two investing strategies. Well, are in many accidentical. And I first met Warren probably in about five out of the State

Securities Commissioners meeting and in San Diego, California. We had a nice chat and we stayed in touch really a little bit. Ever since. He's written forwards to my books. He's done a great blurb if you will endorsement of the tenth anniversary edition of my little Book of Common Sense Investing, which will be coming out in the ball and it's right there in the cover of the book and that book has been He greatly admired that book, greatly admires it, and every time he speaks about it,

up go the sales. He has a lot of a lot of effect. But you know, it's so close. He he recommends the S and P five just about every regular investor. He's leaving a trust for his wife and he has directed that invested in the Vanguards seven s and Index fund. You know, decades on he gets a shameless plug in. There again, you got the plug in for the Vanguard funds. Jack there with Mr Buffet, I get there's David continued, I. I can't avoid the plug. He was the one that plug there you go, there

you go. We were talking with Arthur Levin a moment ago about the passive versus active debate, and I asked him how close we are to settling it? What's what's your sense of that? Well, we've seen something very very few people have talked about this, but what we've really done has moved active to a different section. Exchange traded funds, which are the big driver this year. They haven't always been in recent years, but they are right now. And that is people who are doing a lot of trading

a lot of activity in their index fund investing. And you know, you can buy an index fun and bet whether the markets going up or down today and get three times leverage. I'm not sure exactly what sense that makes, and I would recommend nobody do it. But there's some very aggressive e t s out there. There's a very undiversified e t s out there, and there's a lot

of trading. These e t s are turning over it while the Spider, the most popular stock in the world every day, the Standards and Boors five under e t F run by State Street has an annualized turnover at the moment of two thousand percent a year. Two percent a year. I mean, I'm the kind of guy Toma thinks three percent a year is pushing the envelope. Yeah, I mean, I I look jack at this debate, and again I look at the M and A, and it really just comes back to the theory, which you know

your expert on among others of modern portfolio management. What did they get wrong the act of tom Let me respectfully disagree with that. You know, I had never heard of modern port folio theory. And when I started the first FUN back in back in nineteen seventy five recommend into the board of directors and got it approved here at Vanguard, the first index fund, And all I did

was look at the record. I'm the pragmatic indexer. The record shows very clearly, and it showed the same thing to the great economist Paul Samuelson, that the record shows clearly that most managers, if not all managers, cannot consistently beat the stock market. And when you think about it, Tom, how could they. They're all average, They're competing with each other,

and the market is the average. So if you take out a little bit every year, you'll do better than the guys that are taking out the great hunks of money every every day. Very quickly. Here, I'm just I'm disappointed, sir, you don't have Princeton the champion of the final four. Gonzaga. What is it about Gonzaga that Jack Bocal likes. Well, they're they're little, they were pretty unknown four or five years ago, and they've gone from being a constant underdog

to you know, a rising star. And one of these days that the star will will be aligned with some pretty good things. So that was my guest. That's good, Jack Bogel, thank you so much greatly appreciated. Mr Bogel, one of the celebrities that we have within our Bloomberg brackets today, the aerospace engineer at the Minneapolis Fed, Neil at cash carry Um, the president of the Minneapolis Fed.

In a recent UH dissenter, Neil, I want to get away from the four questions you've been asked in the forty seven interviews you've done sense of descent, and I want to get a little Matthew, as you put in your wonderful note with a lot of good charts on why I dissented. You talk about linearity, and you talked about the vector of inflation in this worry that we get convexity or acceleration or a second derivative move in

inflation at some point. Discuss the evidence from your PhDs that we can get an acceleration of inflation at a certain tipping point. Well, first of all, Tom, I'm good to talk to you, and thanks for having me. Well, that's the thing I'm pushing our PhD saying, show me the evidence of this downlinearity, and there isn't any. I mean the question is all of our models work and are based on the premise of inflation expectations being anchored.

If inflation expectations get unanchored, they break somehow, then all sorts of bad things can happen. We don't know what causes inflation expectations to break or to become unanchored, but all the data right now suggests they are rock solid anchored, and investors appropriately really believe the Federal Reserve that we're committed to not letting inflation take off. And so if that's the case, then I don't see this big concern that inflations all of a sudden going to go above target.

Help me with horse and cart, David Gara, This is an extreme, a complex economic model of the horse before the cart. When you showed up at the University of Illinois Urban a years ago, Champagne, I thought you were you know, maybe it came on a horse and a cart or something equivalent to it. Can the FED be the horse or by definition is the FED the cart? And must act ex post in light of visible evidence? Well, I don't know how else to behave and conduct policy

other than the look at the evidence. Otherwise we're just guessing. Because for the past five or six years, the Sutter Reserve has been consistently guessing the form C participants that inflation is around the corner, and if they had acted based on those guesses, they would have hurt the economy. And so I'm saying, we've been guessing wrong for five or six years. Let's stop guessing. Let's just focus on the data and let the data guide us present cast car.

I look back on the speech that FED your Janet Yellen gave in Chicago ahead of the last meeting, and something that she said a couple of times is the FED has not fallen behind the curve when it comes to inflation, when it comes to the labor market. I understand you're very concerned about their being slack. How worried are you about the FED falling behind the curve? I'm not. I agree with her about that, and not in terms

of we're not too late, because here's the thing. From a risk management perspective, we have very powerful tools to raise rates to bottle up inflation if it starts to accelerate. We have far fewer tools, as do other central banks around the world to deal with very low inflation. And so from a risk management perspective, that also tells us we should be patient, allow inflation to build back towards targets.

So I agree with her. I don't think we're behind the curve, but if we are, we have the tools to and the will to deal with it. At the end of the last statement, it says voting against the action with Neil cash Car who preferred at this meeting to maintain the existing target range for the federal funds. Right, you go on and write a very extended medium post explaining why in fact that you did that incredibly valuable

to somebody like me or does somebody like Tom. You also note that of the medium term inflation forecasts in the semi economic projections have been too high. What's wrong with the Fed's ability to forecast right now? And is there a way to change the forecasting mechanism? You know, people are doing their very best, and we have some of the best economists, the best PC's in the world,

helping us to think through these issues. I think we all have this desire to go back to normal, that we just think in a couple of years things are going to return to normal. And after the financial crisis, it has taken the economy a lot longer to return to normal. You know, remember over time, the FED is

really just following what the economy is doing. Over the last thirty years, real interest rates have been falling all around the world, not because of the FED, not because the central banks, because there broader economic forces and we're adjusting around that overall trend. And so uh, I want to return to normal to Let's let the data guide us. Let's stop guessing. The other thing I put in that piece is I think we're behaving as though two per

sent as a ceiling rather than a target. If we really truly believe the two is a target, then we should be behaving that way. Within this is a working paper, your Minneapolis Fed folks, if you're just joining us, Neils carry with this President of the Minneapolis Fed, Amador Bianchi, Pacola and Perry about exchange rates and dollar dynamics at the zero bound? What's wrong with getting away from the

zero bound? Did share yelling? And can we have a few measured rate rises to give us some wiggle room if we've got to go back down at some point? Well, you know, I don't find that argument compelling. It's like saying you're driving down the highway and you think there might be a hill coming up so let's let off the gas now so that if a hill comes up, we can floor it. You know, you're much better off just maintaining your speed, and then if you reach a hill,

give it what remaining gas you have left. So this preemptive raised hikes just so we can turn around and cut them. I don't actually think that that makes sense. I think we just need to allow the economy to continue to perform, allow inflation to gradually go up to target, allow the labor market to continue using up slack, and then raise rates when the data call for it. You mentioned the data. What's your preferred set of data when it comes to inflation? What are you looking at? What's

Neil cash Car looking at? You know, there's the number one thing that I look at is twelvemonth core PC personal consumption expenditures. At the prior f MC meeting, it was around one point seven year over year. It's now ticked up to one point seven, but it's still well below our two percent target. And the reason we focus on core is because core is the best predictor we

know of of future headline inflation. So we do care about headline inflation, but we know that energy and food bounce around a lot, so we focus on Core as a forward indicating give us an update on too Big to Fail? Are you and James Diamond on speaking terms, Well,

I haven't spoken of it quite a while. UM I would hope that he would admit it that JP Morgan and Goldman Sachs and Bank of America are still too big to fail because if they got into trouble today, the Federal Reserve and the Treasury would have to step in to stabilize them, not for their own sake, but because of the damage they would do to the U. S economy. And I think Republicans and Democrats agree we need to do something about that. President cash Curry, thank

you so much. Neil cash Cary with a miniapluis fed uh with with a different view and an important view. I can't say enough about their website. All of the FEDS have distinctive websites, and the mini appus FED as a terrific Lincoln sure of their district including agriculture, along with the independence that's been seen for decades from the Minnieapolis uh fed Uh. Neil cash Curry today on the Spectrum Enterprise phoneline is what do we learned to David.

You know, I'm really glad that he did write this, this piece of the medium, and I don't know if he's going to do that after every meeting, but it is certainly insightful. You know, we listen to the speeches, we look at the trans to the speeches, but to have this sort of considered assessment of why he voted the way he did, I thought was great. So agree and with great charts, which you would expect from engineer Cash carrigs Well, a real different take on how to

do monetary transparency. Thanks for listening to the Bloomberg Surveillance Podcast. Subscribe and listen to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm out on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio, brought you by Bank of America Mary Lynch. Dedicated to bringing our clients insights and solutions to meet the challenges of a

transforming world. That's the power of global connections. Marylynch, Pierce, Fenner and Smith Incorporated Member s I p C.