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Right now your most important conversation of the day. Richard Hass, Ambassador has serving both parties. Ambassador Hass, of course always in forever associated with his Consolin Foreign Relations and Writing and Foreign Affairs at magazine. He holds court with Morning Joe on an often basis. Rattner's charts on Morning Joe had been great. They've been like a font of wisdom.
He works at.
It, he works at it. They're also a font of accurate information. And the fact that it stands out is stand it depressing.
This is I can't say thank you so much for attending today. I want to go to Lloyd Austin Foreign Affairs Magazine. The price of principle is dwarfed by the cost of capitulation in Ukraine. I guess we have a new Secretary of Defense and the apparatus around it. Can anybody that you see there based on Trump loyalty work at the level of a four star general.
Well, let's just take a step back. When you read Secretary of Austin's article, he never quite defines what capitulation in Ukraine is, So I was not overwhelmed with the piece. Just capitulation in Ukrainian Anything less than Ukraine regaining its nineteen ninety one.
Borders is capitulation.
If that's the case, we are unavoidably capitulating because there's zero chance Ukraine's going to be able to achieve that militarily. So we feel, first of all, we got to define what's our definition of success there, what's a reasonable outcome? And clearly we're going to have to move to the negotiating table because we can't get there simply on the battlefield.
Will Europe join us at the negotiation table?
How lonely is President elect Trump and get out of Ukraine?
Well again, I wouldn't necessarily say it's get out of Ukraine. At the negotiating table will be Ukraine and Russia. The question is what is US and European policy in the background. Are we prepared to continue to support Ukraine enough so the Russians will see incentive to compromise the Russians have to feel the pain of this war. Unless they do, they won't compromise.
So what has changed for Russia and Ukraine in the last week with this election. Has anything materially changed?
It's a good question. I don't have the answer to it.
I mean, you can see the direction of a lot of the appointments on China, and we can talk about that, secondarily probably on the Middle East. Less clear on Ukraine because if you look at what say Marco Rubio is going to be Secretary of State or the new National Security Advisor, they have been critical most recently arms support for Ukraine, but they're not necessarily let's throw Ukraine under the bus. There's a big gray area in between that.
So I understand why everybody's uneasy. But again, I think a lot of it's going to depend upon what sort of a negotiated outcome will President elect Trump support when he's President Trump.
How much is in our hands, the US hands versus Ukraine and Russia in terms of making the next step to maybe getting to a negotiation, Do we have any real influence in pushing that forward?
Absolutely, we need to be sufficiently supportive of Ukraine. So Putin begins to question his assumption that times on his side he can just wait out the United States on the West. On the other hand, we have to be sufficiently conditional in our support for Ukraine, so mister Zelenski gets more prepared to compromise. So actually we play a critical role, not so much at the table, but in setting the context for the table.
All these people that he's selecting now, I'm going to say, based just a generalization, one hundred percent have been on the outside.
You have experience in this.
When you walk through the doors sixteen Pennsylvania Avenue, when you walk through the door of the Pentagon, how do you change?
How does your message? How does your thinking change?
It reminds me a little bit of Mario Cuomos comment that you campaign in poetry and you governed in prose. When you walk inside the doors, you start governing in prose at a level of detail, at a level of implementation.
When you work on the hill, you can.
Propose this or that resolution or legislation, it passes, and then you're on to the next piece of legislation. The big difference in the executive branch is you own it. When I used to teach at the Kennedy School. We used to say Tom that ninety percent of life is implementation. Ninety percent of life in the executive branch is implementation. None of these people, for the most part, have experience with implementing policies.
Speak to people that voted for President elect Trump but are really not a fan of President elect Trump. It was a negative vote versus the Democrats. Speak to those people about how you perceive this will amend from January to February to lie of next year.
Not sure what you're asking me, Sorry, how the people?
The people, the people, the behavior, the enthusiasm that's reel Now, how will they amend the summer of next year?
Well, again, it's going to be more sobering because what they're going to find out, Whether it's on say, immigration policy, it's one thing to talk about mass deportations, it's something else actually to bring it about. You've got to find people. You've got to then presumably arrest people. You've got if you want to deport people, you've got to get through legal challenges. You then have to find host countries willing
to take them. You've got to deal with the physical and economic, uh disruptions of it, and every.
Conversation we could have again. You know what, right now we.
Have sort of positions that have been staked out, actually making them policies. Translating into policies is going to be difficult. And then also in other areas, like, for example, you've talked a lot here about tariffs and the like, there's going to be consequences to those and ones when one can't just be quote unquote protaph, one's going to have to say, well, what about the inflationary effects of that?
And so forth. So in every one of these areas, we're.
Going to have to deal with the knock on effects of these articulated stances.
What do you make of just the cabinet picks that we've seen this week from the President elect?
What's your takeaway to mix back?
I thought I was somewhat reassured by Senator Rubio and the fact not quite a cabinet position. National Security Advisor.
Mister Waltsch.
Yeah, he's worked in the executive branch, has working in the pentagons, so he has the most he has the most experience of anybody. They're both internationalists, both very tough on China, though exactly what that translates into being a policy.
It's not clear, but I basically felt that was fine.
Much less comfortable with the choice for intelligence and above all for Secretary of Defense. Again, this is somebody without any governing experience. Pentagons one of the biggest, if not the biggest management job in the government, and to put someone in that seat who doesn't have experience, to me is eyewordering.
We're gonna come back with Richard Hause. I have to ask the journalist a question, would you serve within this new administration?
The odds of me being asked, Tom arebout equal to your being asked.
What are you doing for? Cent of your partners.
Spending a lot of time talking to CEOs about the world and how it affects their business plans, supply chains, markets, name it, and also try to increase our international business. So I've been traveling around the world doing what I can.
There one thing I've learned doing this new project, Richard, is the international nature.
PAULA, Good morning in San Diego, Chile.
Chile offers expats and people leaving America a vibrant and diverse experience. You can benefit from the country's thriving job market, affordable cost of living in rich cultural Hairiness. Richard as on the people out there that want to leave America, Now, what do you say to them.
I'm not big on leaving America. This country is still the greatest experiment on earth. And if you have problems or difficulties, then stay in the system and work block, work against things you don't want to see, work in favor of those things you want to say. There's so many ways to make a difference in government, in the private sector, in civil society. I just don't understand this argument for leaving and.
What people in the punditry I see this, They think we're four years out to twenty eight. We have a congressional election where congress people start running in one year for the election of twenty six, which is basically tomorrow.
You got that.
We've also got a mayor election in this city in New York in exactly a year.
Got to think about that.
We also have the two hundred and fiftieth anniversary of this country coming up. That could be a collective teaching about the value of being a citizen in this American democracy of ours.
Richard, talk to us about the challenges of China. Hear for this new Trump administration where do you think the US is going as it relates to China these days?
What's clear to me is the direction in the sense that we are going to become tougher, particularly on the economic side. I think that's good, and by the way, that had already happened under the Biden administration, which continued the previous Trump administration. I think there the hours are
pretty clear. The biggest question I have is to what extent will be prepared to resist China geopolitically if China does something, for example, against the Philippines in the South China see, which has the potential to be the first foreign policy crisis for this administration. If China ultimately does puts greater pressure on on Taiwan, what tools is this administration willing to bring to bear? Would it just be economic tools, tariffs and sanctions, or would they be prepared
to bring military tools to bear. I think that's a big, big question.
The heart of your book, The Bill of Obligations, The Ten Habits of Good Citizens is our checks imbalances. You mentioned earlier, Ambassador that there's going to be action by the new administration, and they'll be legal pushback.
How will that unfold?
Tommy rais a big question there. For the first time in modern memory, we've become effected a parliamentary system. You've got one party, indeed one individual with the lion's share of control, the White House, the Senate, the House, and Supreme Court that tilts that way. So we no longer really have checks and balances to a significant degree at the federal level. So the real question is how does this president, how does this administration comport itself? Does it
respect any limits? Yes, they won the election, but forty eight to forty nine percent of America voted against them.
And the real question is.
Does our system work with this degree.
Of concentration of power?
And what makes me a little bit uneasy tom is we're beginning to see somehowld I call it extra exstitutional institutional things. For example, this potential board of our military people to look at the political orientation of the of the generals, or what elon Musks and Vivekas are being asked to do postage possibly also a trades our position. What's interesting about all these things? You should you're giving people the authority, but they're not really accountable, and that makes me uneasy.
Legally, a posed can we can someone out there say I don't like doge efficiency, whatever it is, I want to sue somebody is there.
I mean, we've never been here, right.
Right, And traditionally the courts are reluctant to enter into, to step into what they consider to be political disputes, So.
I would be surprised.
My guess is the president will have a lot of authority to create these positions of authority potentially also through recess appointments, but beyond the cabinet, beyond positions that have to be confirmed.
Elon Musk.
You mentioned Elon Musk. I think a lot of our listeners and our viewers are wondering what role was he going to really play in this government?
Do you think at the most.
I understanding he's been down in mar A Lago since election day.
It's it's just when you think you've seen everything, you realize you haven't seen everything. And the idea that he's on this or that phone call and seems to have this brief with no uh with no clear borders to it. Again, I think there's real questions about Elon must Yes, he's genius, what do you what he's done with space launch, with Starlink and the rest is fantastic, but I get nervous when I see this degree of power in the hands
of an individual who's essentially beyond accountability. He's got his own political agenda. We've seen it on X during the campaign. He's got his own foreign policy agenda. So he's clearly going to have a role. Presidents are allowed to have kitchen cabinets. That's happened since time immemorial, but usually it's limited. And the question is here, how operational does he get? I think that's just a question mark out there.
The heart of your work.
I think of Ambassador Harmance as well as we need to be strong and structured and responsible at home before we look to a proactive foreign policy. In this election, I would suggest crime was front center off of immigration migration. It wasn't Nixon sixty eight or Nixon seventy two. But how do we deal domestically with clearly a nation's worry about crime.
Well, first of all, you're right, I think the border had tremendous impact, along with inflation and so forth. The first thing I say, Tom is not to have less foreign policy. Our problems at home are real, but they're not caused about what we're doing or spending in the world. As a percentage of GDP, all of our defense is still only roughly half what we did during the Cold War. Look on crime, there's no one thing, but I would basically say it's where the Democrats got it so wrong
with defund the police. We ought to fund the police, We ought to train the police, we ought to expand the police and make them more professional. And yes they've got to be accountable, but we need more police, so we need better police.
This just across a headline in the Bloomberg The US Ambassador to Kenya, Meg Whitman, says, she tenders her regulation. What will become of her resignation? Tenders her resignation is Ambassador to Kenya. What will become of a conventional state department?
Well, again, Marco Rubio is not a revolutionary. On the other hand, he inherits a much weakened state department. The best in the brightest no longer are joining the foreign service. State department has lost enormous influence to the National Security Council, which has grown topsy turvy over the last few administrations. So Marco Rubio is one of his big challenges. In addition to the world addition to wars in the Middle East and war in Europe and the challenge of China.
Marco Rubio is going to look inside this building and he's going to say, oh my god, I do not have the horses I need, and that's going to be a real problem for.
What you going to hold him back?
Migration?
In reality, what should be the policy here for migration in this country?
We want to have I think a large amount of legal immigration. It's been the great strength of America, over a million people of the year.
We ought to look goough at the criteria.
I think there's too much family unification, not enough getting the people in who bring the most talent and skills. I want well over a million people a year. Helps the economy, helps us demographically. We've got to fix the asside system. The idea that someone comes in here says I'm coming here for asylum, we can hear their.
Case for six or seven years. It's crazy.
I think basically we're going to have to reintroduce some version of remain in Mexico or remain outside the United States while you press your asylum case. But basically immigration is going to take a combination of a good legal program, but tougher border, and we've got to deal with those. We got to create the capacity to vet the people who want to come here.
One final question, what is the tone?
The number one question from chief executive officers when you speak at Centerview Partners.
I think the biggest question right now is about China. So many of them are one way dependent on investment in China, China influenced supply chains. What particularly those in the technology space time, they want to know is what is the political environment they're going to be operating in, whether it's regulation, tariffs, sanctions. Also very concerned about what about geopolitics and how might that affect the US relationship. But I think for a lot of Americans that's issue
number one. I would say for a lot issue number two might be Mexico, and that's where working out a relationship with the new leadership of Mexico. Can we figure out something where we can manage our border in a way that doesn't cause a massive trade crisis. At the same time, with Mexico, you.
Can't say enough about the Bill of Obligations, the Ten Habits of Good Citizens, many other efforts, including the World which was my book of the summer I believe years ago.
Richard Hawes, thank you so much. With Centerview Partners, and of course.
The former president, he's he's very emeritus president, emeritus, absolute consol.
One day you'll step down from the show and YouTube.
John says, I'm emeritus every day. Jeh. Thank you, John, Thank you for that as well. Richard Hawes, thank you so much.
You're listening to the Bloomberg Surveillance Podcast. Catch US live weekday afternoons from seven to ten am Eastern. Listen on applecar Play and then Broo with a Bloomberg Business app, or watch US live on YouTube.
Jim Carron, he is with Morgan Stanley. Can't say enough about the holistic approach he takes. Jim, I saw today completely aside from the CPI report, JPL is laying off like five percent of their employees.
You may actually darkened the door there, right. I was shocked by that. What does that say about science in America? Right?
So the jet propultionon laugh, Thank you.
Tom.
Always surprised with some of the questions. I get, Oh, but it's a shock.
I mean they're like.
Iconic, Yes, it is iconic.
It's it was viewed as welfare for Caltech students because you could always get a job there. But look, I think science and technology at least may be there from what they're doing. It could be a slow period, but let me tell you, it's it's not going away.
Is inflation going away? There seems to be some angst about that.
So I'm in the camp that we do have an inflation issue. That doesn't mean that I don't think that inflation's coming down right now, and I think that it is. I just think that we're going to have a hard time keeping it at target levels around two percent for an extended period of time. Therefore, any uptick or failure for inflation to come down materially creates more anxiety for me.
And I think that's the way the markets are going to think about it, and certainly that is the way that the FED is going to react to it as well.
So should the Fed sit on the sidelines here? Are they kind of done for the near term?
Do you think?
No?
I think the Fed is on a mission to four percent, because if you listen to their last policy statements, what they said is that they're lowering interest rates, they're not easy, which means that they still believe that.
They're very tight right now. Okay, so if anything they want to get to.
Neutral, are they very tight?
So the last guess, no, Yeah, So I was going to say, like on financial conditions, if you look at credit spreads, if you look at what's going on in equity markets and what have you, it wouldn't seem like they are very tight. But based on their own models where you think of the neutral rate, what they're worried about is if you get a slowdown in the econom I mean, you could get what's called reflexivity, which is
a sudden rise in the unemployment rate. So if you don't get rates to the proper levels today, which is around neutral, and if you do get this slow down in the future, you could get a surprise accelerated rise in the unemployment rate. That's what they're trying to stay in front of right now.
Is the FED restrictive for the America that just voted for Donald Trump?
You know, that's a good question.
It really depends on who you ask, right So if you if you ask you know, you know, middle to lower class earners in the US, they would say that it is because effectively, you know, the price of goods has just gone up and maybe even the job situation is starting to slow down a little bit, and that
and that we need more help. Mortgage rates are high, But what I think people are missing is that with the FED lowering interest rates, will it actually lower your mortgage rate or does that create a yield curve steepener, meaning that the longer term rates that you borrow at may stay elevated because if the FED cuts rates today, it may send an inflation impulse into the future, and that could bring up those higher term rates that people
actually borrow at. So I think there's a lot of misunderstanding around that in terms of just you know, the broad American nobody.
Cares about the deficits.
Nobody cares about the national debt, should they?
Well I care about them. I care intensely about them.
And I'm not one of these guys that's a deficit hawk that's always been talking about it for his entire career. But I do think that we're at a level right now that is not very good. It can be sustained for a period of time, but the growth rate of the deficit cannot be sustained.
So we do have the things growing three four five percent a year.
Well, I mean in nominal terms, as long as nominal GDP is higher than the deficit itself, then we can actually sustain it. And that's where we are today. The problem is is what if we have a shock and we need to have a fiscal response, then we're limited in terms of what we can do.
Jim Karen, Morgan Stanley on the little g the growth rate, which is the bl and end all the debt and the deafth So.
We have a great charts.
Just unbelievable bar chart that shows the pieces of inflation, energy, food and the rest. And the answer is we used to be at two point four ish percent on a gobbledygook of Jim Karen moving averages, and then we exploded up for a cup of coffee, cup of senka. Yep, can't afford coffee senka at nine percent. And the whole heart of the matter, Jim Karen, is we haven't come down to two point four percent. What is the distance between three point three percent and two point four percent?
Besides some basic math?
Yeah, so I mean effectively, this is what this is.
One of the things that the FED has to worry about is that we're getting these numbers like point two point three percent month over month, and inflation we need to start getting point ones. And that's the issue here because essentially we need to get not just down to that target level, but we have to believe that we're going to stay there. It has to be durable, meaning that the way the Fed would say it is that not only does inflation have to come down, but it
has to stay anchored at lower levels. And you know, look, today's number is a friendly number in the sense that did bring down yields. You know, it didn't surprise to the upside. I think the markets were worried about that. Effectively, this keeps the Fed on track to cutting interest rates in December.
And Paul, what's interesting here within the colors.
Of the wonderful Bloomberg chart, Good morning in a one all the great people putting these graphics together for Bloomberg, it's service sector just sustains period yep.
So I mean, Jim, what do you think this Federal Reserve looks at this data today?
Is this data in.
Align with what they want to see or coming back of the mind. Is still a little bit of a tinge of inflation out there?
I think there's still a tinge of inflation that's out there. I mean, you know, one of the things that we have to also continue to look at is the housing sector. Household related sector services is another aspect of this. Look, you know, wage inflation has come down, but it's not down enough in order for the FED to be convinced that the decline in CPI inflation is likely to stay durable at or around lower levels. The next question that they have to ask themselves is is it worth the
cost of pushing inflation down to two percent? Meaning that do they just stay at high rates for a while.
I mean, you know, as we piece this together, I do want to point out it's engineering our well, got Jim Caron and physics, and then we go over to the aerospace engineer Neil kush Carrie. Let's do some math here the first and second derivatives of our disinflation vector. I mean, I forget about convexity to disinflation, that's not there.
So what are the first and second derivatives? Look like? Oh Newton?
Yeah, so the rate of change in acceleration is what we're talking about in terms of the first.
And sec square.
Nailed, Yes, Okay, So look that they're both pointing in the right direction. The problem is that the second derivative, which is the acceleration, how fast are we moving down towards low lower inflation, is starting to become concerned because it feels like we're petering out here a little bit.
Would Jerome Poll say, we don't want a fast second derivative, we want for the total economy and for our political society, we need to be a little more gentle in our acceleration.
Yeah, I think that's probably right.
But it's got to have enough impact to give people confidence that inflation is coming down and staying down and it's going to be durable so that it doesn't change the mindset. So I think Powell is happy with this number, not thrilled, but I think that he gives it a passing grade.
Paul features five. We reversed a moonshot, So Trumpian moonshot.
Jim, what are you talking to your clients about in the last seven days since the election and kind of.
Where we're going from here?
So look, I mean, you know a lot of things going on right now. People talk about the Trump trade and what have you. I think a lot of this and I know there's a lot of consumed talk around tariffs. I think the discussion should really be more about deregulation, and I think I think that's really where the animal
spirits live in the broader economy. Now, it's hard to put a fine point on this, but if you think about people being policy and depending on who Trump appoints to all of these different positions, which you could have, is a less regulatory environment. Now, think of all the fiscal stimulus that's still in the system, the Chips Act,
the IRA Act, and everything else. If that starts to become deregulated, that money starts to go towards more productive use and could generate a higher multiple, higher earnings, and everything else. So what's happening in the markets today is we're starting to see more of a broadening. So small caps, for example, have actually done really well. Mid caps are doing very very well. It's the mag seven now all of a sudden that's making us a little bit concerned.
But you know what, that's a broader market, and the more people participate in and the more stocks participate in the rally, the better off we are.
And that's what we're seeing.
How about in fixed income market here, I mean, where do we go here for opportunity. I know, folks tell me that spreads are at all time tight levels here.
Yeah, US high yield.
Has been the best performing its I've made a lot of money this year, so it has been the best performer.
I will give you that.
Now, Will it be the continue to be the best performer going forward is another question. I am in the camp that we have a soft landing, which means that I think that default risks stay relatively low. So I do like the lower end of credit. So I do like high yield, but in particular I like bank loans. I like leverage credit. At this point, the reason is is that I'm uncertain as to where the interest rate
movements are good are going to go. And bank loans tend to be a floating rate instrument, so I think that's good.
So that's where I wanted to go, floating fixed. You say it's a floating twenty twenty five.
At this point, I'm going to say floating just because I think that the markets have already priced in this terminal rate for Fed funds, which is somewhere around three and a half percent. I won't disagree with that too much. I'm a little higher. I'm at like three seventy five or four. So I think the FED cuts but not as much as what the market's pricing. So therefore I like the more floating versus the fix.
Explain that to mere mortals out there, community, go, who's this carrying dice?
Floating fixers? Fix is when I got a coupon, I.
Know what I'm going to get on a semi annual basis right, right, How often does floating float?
So it depends, but generally every three months. So generally every three months.
We don't know your yield, but you're gonna get.
Something exactly right, it'll float with the short term.
Interesting, how many how much percentage point yield do I get from taking floating versus fixed?
So so relative to if I look at fixed high yield versus versus floating rate loans. Now, now both of these are both high yield instruments. You know you're looking at probably about one hundred and fifty basis points extra carry one and a half percentage because because essentially the curve is relatively flat to inverted, so therefore it's so so you're not getting the extra duration and yield pickup.
But Paul, people are driving off, I do, right.
Now that is what am I supposed to be doing here?
All right?
So where is just just.
The best value that you see out there and your cross asset that makes me think you're a remit you can go anywhere?
Right, Where are you going?
So a couple lays, you know, let's say on the fixed income thing for me, non agency mortgage back securities, non non agency mortgage back example, that would be so these are loans that are non conforming in the sense that they are larger loans, So this would this could be residential mortgage backed securities. They're trading wider than investment grade credit spreads, and they still have an investment grade credit rating, so therefore it's good, has slightly less duration.
On the equity side, what we're broadly going to say is that the mid cap sector is where all the value is. So we're talking about twenty two pe multiples as being too high. Many of these mid caps. These are companies who you know, you know the names, they have real earnings and everything else, that are trading with
PE multiples in the mid teens. If we get more of a rotation towards the cyclical sector of the economy, which I think we will we have to start looking about we have to start looking at materials and industrials.
Tom, When was the last time.
Somebody came in here, sat in the seat and said, I'm really excited about these material stocks.
Right? Never, right, It hasn't happened in a long time.
And I think the time is right right now to think about the reindustrialization manufacturing sector, you know, onboarding of manufacturing in the US, particularly under a Trump administration. These could be interesting cyclical stories.
Jim, I love you. On YouTube. They're talking to you.
They're asking me where I put my statistical analysis in differential equation of books of on my bedside table. No, there's a hallway at home, sort of seventeenth century, and there's a hallway, and the phobosi's down at the bottom where the dogs.
Chew on it. Yeah, that's what we got. Twelve miner page. There's a lot. Jim Carron, brilliant. Thank you, don't be a stranger.
This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at seven am Eastern on applecar Play and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa playing Bloomberg eleven thirty.
This is a joy.
There are people that have studied the failure of the American retirement system. I think of Roger Ferguson, of course, all that he did with the FED and with Tia Krafft. I think of Peter Orzagnaut Lazard his work at Brookings. But no one has studied this. From Marissa nineteen seventy four. Like Alicia Manel, her title is the most prestigious title and management science, the Peter F. Drucker Professor of Management Sciences, Boston College. And we're thrilled as she retires that Alisha
Manel will join us. Alisha, thank you so much for joining today. It Boeing Boeing employee screamed, give us back what was there before nineteen seventy four. We want to go back to old stodgy define benefit programs. Should we go back to define benefit programs from the mishmash of for O one k.
Wet.
I'm delighted to be here today, and my basic answer to that is no.
But I do view the whole debate.
About four one ks versus defined benefit plans as sort of a detour and diversion. From what I've view, is the most serious problem with the retirement system, and that is that we don't have universal coverage. So there's some people who just don't have either the old fashioned to find benefit plan or a four to one K and so there are people are going to end up only on Social Security, and then there's some who weave in and out of employers with plans and they end up
within adequate balances. So I think coverage is the main issue. And this DBTC debate, which has been going on for decades now, is really not too profitable and I don't really understand it. The defined benefit plan was great for its time when you had large, hierarchical companies where people spent most of their careers. But we're mobile workforce and it just wouldn't work right.
I am fascinated why reform is so hard to do. Why it takes so darn long for Washington to common sensely reform our retirement plan. Why does it take so long?
Well, I mean there's some things that are good.
I mean, the basic part of our system of social security, it is a pretty well designed program, given that it was enacted in the nineteen thirties and we're in the twenty twenties and it still.
Is very appropriate for today's workforce. We do have a shortfall in that program.
We've known we've going to have a short fall in that program for forty years, and it's taken us a little long to get around to fixing it. But we are now going to be looking at a precipice and we're going to have to fix it so that that's
a good base. In terms of the employer provided system, I actually I was skeptical for one K plans when they started, but for people who have them, they when you introduce automatic enrollment, target date funds, all the things that make it sort of automatic and easy, they work fine for the people who have them. And no one has in the private sector really has the defined Benefit plan anymore. We were just looking at some data, so only five percent of people approaching retirement have it.
To find the wow plan.
Wow Wow, Alicia.
Many of our viewers and our listeners are thinking about social security. What can you tell us about the viability of Social Security system in twenty years, thirty years, forty years.
I can tell you a lot. It's going to be there. We do have a shortfall.
We have high costs and are higher than our tax revenues coming in. We have a trust fund that we're using to bridge that gap. That trust fund is going to be exhausted in twenty thirty three for the retirement program, and at that point benefits WI will have to be cut about twenty one percent and if nothing is done. So that's the bad news I think for people who were in about Social Security not.
Going to be there. The good news is there's.
Enough money coming in forever to pay seventy nine percent of benefits.
Now.
I would like to see them at one hundred, not at seventy nine percent. So I would like to see more revenues getting in, but you know, they'll maybe some compromise in between, but there's a base amount that's guaranteed going to be there ten years, twenty years, thirty years, forty years.
I look, Alicia Manell at the mistakes you've all made in retirement, and so much of it is is Peter Orzagg emphasize it Brookings years and years ago, automatic sign.
Up when you're employed.
What how do we get people to save more within the algebra of simply doing it? It's get more into equities, but also you just got to put in more. How do we incentivize people to put in more when they've got bills to pay?
I mean no, I mean that's the thing.
It has to be realistic amounts. People would be nice if people could contribute fifteen percent, but not everybody can do that. So I think you want to make sure that people have some base on which they can save automatically at work, no matter what their income level.
And then people at more income.
Levels simply cannot say that those percentages.
Now you're retiring, but I don't believe you. What are you going to do with You're a gyro? Alisia Manelle? What are you going to do in your non retirement?
I don't. I have absolutely no clue.
I'm going to stay on here a service senior advisor that may be wonderful, or maybe I'm become Ana.
Can you you could be a ballerina like at Wellesley. I know you were a Queen of Ballerina.
Wellesley years ago. Can you save the red Sox? I mean, can Alisia Manell help them?
I wish I could. It's not my sweet spot.
Okay, well, your sweet spot has been informing us about retirement and the collapse thereof in so many people's retirement planning. Alicia Manell inventing the Center for Retirement Research Boston College. But I can't say enough about when she started this, it.
Was like what are you doing? Exactly what are you doing? And it's now just I.
Mean it's a huge issue. I mean, people are living longer, they need more money they made through You're to go about their retirement?
Probably not no valid.
This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at seven am Eastern on Applecarplay and Android Auto with the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal.
Right now, joining us David Salem. He was hugely popular last time he was on with me. At least I've been out a bit hedge eye risk management here this morning. Do you change your investment outlook with a new administration or do you try to get onto the beginning of spring training when the Red Sox.
Say this is the year.
Our approach is data driven. So if the data change is a result of the election, then we will change. But if they don't, then we don't.
If nominal GDP is goose, I'm seeing lots of animal spirits in an amateur way.
What is the most productive.
Nominal GDP real growth, or even a little bit of an inflation.
Pop Well, probably a little bit tom because it's not this.
It's not the case.
That the market dislikes relatively high rates of inflation compared to history. What the market really dislikes is volatile inflation because it's hard to price, it's hard to manage, it's hard to set up longer term positions.
For what it's worth.
Our view of we look at everything in real term, so real GDP, we see it growing modestly through the end of our planning horizon, which, due to model limitations, is probably through the end of the third quarter of
twenty twenty five. So you're talking about, you know, two point two two point three real GDP against an inflation backdrop that we think will be a little bit higher than the market is still discounting all the market's been moving toward our inflation outlook, if you will, of sort of low threes between now and the end of the third quarter of twenty twenty five.
Wow, So what should this Federal Reserve do you talking about growth rates like that, an argument can be made that this federal reserves are just maybe sit pat a little bit.
But what do you think this federal reserve should do?
Yeah?
I hope Paul this answer doesn't frustrate you or a TK, But I don't think the Fed's mandate is sufficiently clear. And I think with the utmost respect, like you hadnon earlier today, I just saw I'm in the lobby cash carry. They're just making it up as they go, and they're making up not only the mandate but the means that they pursue that they employ to pursue. However they define the mandate, and that's because they're mandate from Congress is
insufficiently clear. So you asked me what should they do? I don't think anybody can honestly answer that question.
Tell me what the FED should or should not do? Is it December? You go into the next Yeah? All right.
So just to finish the point, I'm going to just put myself into the mindset of the people at the FED who have a different definition, definition of the mandate, and different models than we ourselves employ. So to answer the question, I think that that they ought to be very very careful about cutting rates too quickly because the out look for inflation. Look, what is inflation. You talked about it earlier today when you talked about calculus first
and second derivatives. We focus intensely on first and second derivatives at hedge eye. And when you look at that,
inflation is essentially a computation that's a ratio. You have to look at your base effects, and the base effects tell us that it's going to be very difficult for them to move this gigantic Supertanker called the US economy towards inflation and anything close to the target over the next year, and that suggests that they ought to be very measured and patient and further reductions of the rate of the policy rate.
One of the key issues with this new administration is going to be kind of how they're thinking about global trade. One of the first orders of business is China, and I know you have strong views.
On Yeah, how do you think about that? Well, my strong views on China are limited exclusively to the perspective of like a chief investment office or somebody stewarting a large pile of money. And I've held these used for a very long time, because when you're allocating capital and taking risk, you obviously want to be cognizant of what is the worst case for the risk taking and what's
the best case for the upside. And when you do that and look at, for example, publicly traded companies in China as this thing from private equity in China, I don't see an upside Paul that's even remotely close or commensurate with the downside. And the downside we saw obviously with Russia's invasion of Ukraine, where either through Fiat regulation or law or just by market movement, basically your wealth gets taken away at least confiscated for a time period,
you get wiped out. So the expected return has to be very high. And I don't think you see that in China publicly traded Chinese companies.
Yes, I want to come back and focus on the equity markets. But let's just begin with the character of our exuberance. Yard Denny says, it's the roaring twenties. What is the character of our exuberance after the selection?
Yeah, I actually think to some important respects, it's what we might call rational exuberance, right, because you see the market is starting to discount. Obviously, policy changes. I think probably the single most important policy change that might affect the te trajectory of say the US economy and in turn the global economy for the next few years doesn't
emanate from either the White House or Congress. It emanated from the Supreme Court with the Chevron Doctrine decision recently that basically said to the independent agencies, you don't have as much power as you've had in recent decades, and you need to go to greater lengths to justify anything that you're doing. And I think if that gets taken to a kind of logical and prudent extreme by actors in the economy generally, particularly those in the agencies, that
could be very productive of a stimulus to growth. That's why I say something some things Tom that are going on in the markets today strike me as rational rather than irrational.
And David Salem joins us here in our Bloomberg and Actor Broker studio. He's a Managing Director Capital Allocation for hedge Eye Risk Management. David, literally a week ago today the market woke up to a pretty big election. Did that change your view hedgeys view of investment outlook?
Yeah?
First, I want to just cite a stat that I think you guys will find intriguing. We hear a lot of talk in media that the markets at an all time high, and I did a recomputation of it this morning. Roughly one third of all US stocks publicly traded are trading at or below fifty percent of their.
All time high.
Not a broad based.
Yeah, yeah, and I own them all.
Globally. It's an even more laggardly situation in present, with more than half of all stocks traded globally x the US trading at least fifty percent below their all time high. So that now let me segue over to your good question, Paul, like, does an election change the outlook? My work at Hedge Eye is an interesting because we have a lot of people doing fantastic work that, for better or worse, I think it's mostly for the better, focuses on short term opportunity.
In parallel in the market, I.
Don't capital allocation was I was brought in to build a business takes a medium and much longer term view, and in that context, I just want to share with you just a few observations. Because we had the election on Tuesday. On Wednesday, and Thursday, and because we were subject to Chatham House rules, I can't say who I met with, but we'll just say a dozen CIOs of
very large funds from around the world. And the focal point was just take a step back, let's all take a deep breath and ask ourselves a question, in light of everything that's going on in the world, including but not limited to yesterday's election, to what extent and how should we change the approach that we've been employing for some time now. These are institutions that have approaches that
are idiosyncratically suited to their missions. So one of them is frankly the largest fund in the world, so it knows that asset size is the enemy of investment success. It cannot pursue the strategies that some of the smaller funds but nonetheless large funds that were in the room are pursuing. And the bottom line poll is that they're not inclined to modify the approaches what they're inclined to do, which by which I mean the policies and to some
extent the strategies. But there is acute agony in angst about the overcrowding of some particularly some of the alternative investment niches that have enabled these institutions to do better than the norm until quite recently.
Agony and Eggs, It's right where I wanted to go.
Janet, Lauren and Bloomberg driving the ship on this endowment failure recently because of alternative investment failure. Is it a thing or is it just a moment that we've seen this under performance.
It's a it's a big thing. I think it's even though there's a lot of talk about it, Tom, I don't think it's sufficiently recognized. The problem that is problem that is looming. And one again Chathamhouse rules, so I can't say who said it, but one of the CEOs.
You don't have to do chattermouse. We do chattamouse here.
We ignore talker as much as we can't continue, I will.
The point I'm driving at is simply that one of the ceo is one of the largest funds in the room said, look, we now have actually two distinct sets of books. We have our accounting books where we have to use the nads provided by all of our alt managers. But for risk management purposes, which is what really counts, we're.
Using our own marks.
And there's a wide and growing gap between the two. Again, it's been widely reported on. The question is when will that problem come to the four No organization can be better than that.
Come on, I just read I don't have the details in front of me. Somebody I'm going to pick on Princeton. It may be wrong, but people are putting out debentures or bonds of some type because they can't cash out of alternative exactly.
Yeah, and that'll problem will grow worse.
You have a permanence to this about three years, five years more.
Well, the word permanence, that's a noun. You can use the word the adjective permanent. Right, these are permanent posts of capital. But nonetheless there are time horizons for measuring performance and assessing the of the higher guns that deploy their capital is much shorter than that. But the problems
haven't all bubbled up at the same time. What you're going to have to see, I think this is my own opinion, which I'm labeling as such, is that as one institution after another finally throws in the towel and says, look, we don't actually have as much money as we've been professing to control, then the pressure gets unbearably acute on others to take reasonable marks, which means marked downs.
Well.
In twenty twenty two, when everything went down, everything stocks, bonds across the board, I was shocked that we didn't see more markedowns of private equity and private credit, the endowments, the university endowments, which I have some experience with.
I didn't say anything.
So is that a problem for the market, the fact that the marketing marked the market rules aren't more maybe stringent or timely.
It is.
What's even perhaps greater, I think, Paul, for a lot of institutions that are loaded to the gills with private stuff, is that they've actually made forward commitments. Right the way an institutional fund works, you commit the capital gets drawn down over time. The question now arises as the capitol calls flow in, where do these institutions get the capital of the dollars right to meet those capital calls? And the answer obviously is they have to sell something. What
will they sell? That's that's the real elephant, unrecognized elephant in the room in my judgment.
So that what do you think of it? I don't know a professional institutional portfolio, what percentage should be? Alternatives do you think these days?
Yeah, it really does depend on the skill of the competence of the people that are deploying the money. Right, So there's way too much sort of Yale wannabes in mimicry, right, and this is a problem.
Again.
I won't name names, but one of the major university endowments that competes certainly at the board level in terms of performance comparisons with Ale itself, has done a computation and said, look, our asset size is such a handicap. Even if we had the most talented staff. Driving right back to the main thread, we can't deploy enough capital in a manner that will enable us as well plausibly to capture the return premium that induces us to invest in private stuff to begin with.
You got to come back one hundred percent agree that David Salemer out of time.
Thank you so much. With hedgeye risk management. This is not a.
Small matter of folks, Paul way better than me on private credit, private equity.
And alternative yes, alternative investment.
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