Capital Spending is Soaring, Kevin Hassett Says

Macro Risk Advice is founder and CEO. Joins us Now, Dean, what a quarter it's been for vol We have the technical vol shock of a month ago, and we still seem to be trying to clear that shock of a month ago. Why, Dean, Yeah, I think that's a That's a great way to frame it, is that this inverse vis meltdown that occurred right at the beginning of Februar

worry has come and gone. That trade is de de leveraged UH and so you've still got a tremendous amount of a volatility UH inequity markets specifically UM and it's just so much different than two thousand and seventeen. So it's telling you that there's just a lot of tension. I I would frame it as follows, Um, you talked about bond yields just before UM, so, so you've got bond prices rallying as stock prices are now faltering a

little bit. But in the in the days before the inverse vix unwind UM, one of the sources of instability was rising bond yields. Remember the days before the x I v U imploded. You had a couple of sessions in which bond yields went up a lot, and folks were getting very, very worried about inflation the Fed's response,

and that was destabilizing for stock prices. So all in all, you have a situation where um movements in bond prices either to the high side or the low side seemed to be uh not a good thing uh for for equities. And when one of our core tenants at Macro Risk Advisors has been that the equity market is is basically short volatility on the bond market. If you if you have a situation in which bond bond yields are stable, UM, that's probably good for risk assets. It suggests a uh

an environment in which you can take risk. But if UM either there's too much growth or too little growth, equity markets have in trouble digesting it. Dane, There's a really interesting thing happening though, that the equity voul has has remained isolated to equity vol It hasn't led out into other asset classes. Now, I would have expected one of two things to happen, for it to either bleed or settle down UM, neither of which has happened. So so how is this going to evolve in the come

in months? As you see things plan out right, It's a great point that it's this is a incredibly US centric risk environment. So if you look at all the cross asset corollarias, whether it's fex vol or if you even look at UM certain spread relationships, look at SMP volatility versus eurostocks implied volatility, there's actually a premium for and P. It's very rare to have this happen. So, as you know, very US equity centric. UM it can

settle down. Uh, you know, if if the daily moves in the SMP start to settle down, then the VIX is gonna come down. Those those two things are gonna act in tandem. UM on a on a less optimistic note, you could say that um, the old adage when the US catches a cold, uh, when when the US, the rest of the world catches the cult. So if you're seeing something UM start in the US as a as a lack of stability, it tends to at least potentially

broadened to other asset classes. In geography, does a guy like you game gauge judge the distance of the dots from the market, the FED dots? Yeah, yeah, I think it's important. I think is it moving right now? Because to me, John Farrell helped me here because John Farrell is the star of the TV show The Real Will we see that he's plugging my Bond show. You will see it like today, you will see it. Demeandbers so great.

They shift from Friday to Thursday. They did that. But the fact of the matter is the debate shifted the last two weeks. Yeah, and so I think back to the sort of FED dots and the FED response UM and it's and and to the recent sort of counter trend rally in the In the tenure, UH, you have this scenario in which folks were worried that, uh, the inflation was moving too quickly and that the market was sort of trying to adjust to an environment where the

feds rhetoric would change. UM. I personally thought Powell was was masterful in his non answers, which is what the FED is, which was surprising because we thought he might not bake it was. It was a an old pro uh. You know, if you look back at Bernanke's first press conference, a couple of them and and saying with yelling. They were not as skilled at saying nothing yell and learned to say nothing over time. But Pale did a very

good job. And uh. The the recent inflation data has cooperated, and I think this is where I would say the market is especially vulnerable right now is we have a small reprieve from the worry about higher bond yields and higher inflation because we got an NFP where non farm payrolls, where wage growth was uh more contained, and then the

cp I was also a market friendly number. Um. If those return as market worries, given some of the other sources of of concern, I think this is gonna be challenging because John one of the great themes of a Thursday before we you know, do our reading through the week show and John, even though you're in America, are you off Monday because you're British together together we are? Um, yeah, whatever, But anyways, John, seriously, we're within the range. We're not

out of the range. On the tenure. We did break out of the range just in the last couple of days, and I thought it was interesting that we broke out

to the downside and not to the upside. The other thing I think that's really been interested about the quarter that we've just had Dean, is that actually, despite the Voal shock, people haven't taken out their expectations for hikes, And that's what's really played into this flatty yield curve story, because treasuries have acted as a shock absorber, but only further down the curve in a ten year space, So yields have come in, but a two year notice remained

really really rather rancord, and yields haven't come down at all. No one is pricing out rate hikes despite the Voal shock, So I guess we end up with a spread of fifty basis points on two s tends. How much should I read into that based on the fact that the Voal shock and the idea that actually no one's removing their rate high expectations. Yeah, so I think the two S turns spread is something we should all be watching.

It's it's had a um correlation with future changes in in economic growth and a looser correlation with stock prices. But it's certainly something to to focus on. The feed is is commenting on it itself. I'll tell you, I look at the two S turns spread, at least for now, is something that is has been a part of the bullmarket story. In other words, the fetest tighten because it can. And so here's what I would say. Actually, one of

to me, you know, Tommy asked me a lot about hedges. UM, the vix is up at you know, north of twenty. These hedges are not cheap right there. They're not only they're they're difficult to carry. There's a lot of things that you're fighting when you buy a put on the equity optional. So what I would say is, and this is again a focus for us, is trying to find those hedges that carry better and have a couple of different ways to win. And so here here's what I

would say. One of the things to really look at is UM is the move index. So this is the Merrill Lynch VIX UH index of of bond volatility. This is retraced most of its increase from early February. UM. These options are actually quite cheap, and so if you want to real tail trade UH, you can buy essentially a call option on two your bond prices. UM basically saying things get so bad that the FED actually the the FEDS timeline of tightening actually gets distrust. No one's

actually betting on that, right. And what you touch upon there, which is so important is if you're going to do a hedge, if you get protection, you have to pay for it, and right now in so many areas that really eats into potential total return, right And I would say that this, this is what makes these risk transition periods so difficult, is that, UM, there is a recency

bias that that everyone has. When you stare at a VIX and you were staring at a ten VIS last year, and you say, wow, how could I do it now? How could I buy a hedge that's so much more costly than it was? And so you get anchored to what was instead of looking forward in terms of how the risk environment is changing. Oh, very good, Dean CURNI thank you so much. Macro Risk Advisors greatly appreciated. John

Faro and turnkey John. Why don't you bring in kept the nearras of Aby Bernstein, who's in the business of courage, which recently has been increased and needed. She's in the business of time horizon. Kathy Fishing, I'm not I don't have that because I'm in the triple leverage or cash yes, which means nothing really matters to you. Just sit there, Remind me again, what are you paying to be in one basic Gathy is great to have you with us. Talk to me about the importance of time and rising

for a really noisy quarter. How do you just look through this and look ahead. I'm really glad you started that way. Time horizon is clearly the most important thing for anything when you look at your money in that if you're going to spend in the short term, of course, you've got to have your money very carefully, safely managed. But when you go out five, ten, twenty years, which really most people are managing their money for, that's when

you want to make sure you're taking enough risk. And risk means you're going to have periods like now where you have increased volatility. But even today we have to remember volatility is coming back to more normal levels. It's not shocking. We just had a ridiculously calm period in two thousand and sixteen seventeen when volatility was abnormally low,

and now we're getting back to more realistic kinds of volatiles. So, with markets swinging all over the place, when the clouds start calling you up and saying, Kathy, I'm scared, what are you saying back to them? Well, actually our clients are not, because we've been talking about how low volatility was and the fact that it is now more normal.

So you know, I think setting expectations and reminding the way markets do work long run is the most important thing for long term investors because there will be ups and downs all the time, and this this period is unusual. We've got a lot of change. We talked about rates, we're talking about the risk of trade wars. Is something no one would have thought we'd be talking about in this in this day and age, when globalization has driven the strong economy of the past twenty years. So these

are surprising events. Can I This came up earlier this week and something Alliance Bernstein's famous for can I get a globalization proxy by buying US multinationals or do I

have to go abroad to get that globalization? You still need to buy overseas stocks because part of part of the reason it's currency, right, you do want to have currency exposure in your non U S stocks as opposed to just buying multinational And obviously all companies are going to hedge their currency risk as suits them, so you're

you're getting multiple ways of getting currency exposure. But we would certainly argue very strongly you want to have stocks that are domiciled in foreign countries and and listed on different markets. And it's hugely different Kathy, and that a few years ago you bought the telephone company and if you were bold, you bought the concrete company that was that was all international. And yeah, yeah, we've pushed clients to tou to about a fort exposure to US for

zero for zero. As you know, the world the world is is moving towards fifty, so that would still imply and overweight to U S stocks. But certainly the world is no matter what happens with trade policy, the world is not going to get less small. But well, I don't know about you. Okay, Hong Kong. Fine, Europe, let's talk Europe. The stock six hundreds down over the last

twelve months. I don't think many people in the United States actually realized that if they listened to the amount of people that said by Europe, by Europe over the last twelve months, they might be under water. What is going on? The economy is better, yeah, the equity markets under performing, Yeah, it's it's it's it's a great question.

The europe economy is doing much better. Yeah, you were talking early today about the German unemployment rate, so all parts of Europe and southern Europe, right, there's there's it's a it's a very strong economy. But but all the worries concerns that are percolating here have certainly been manifested to some extent in a lot of the valuations of European stocks. We do still find them attractive and um.

The real issue, of course is the is the strength of the euro right, so that has hurt the perception of m where things may go down the road. Um. And also some companies have had less robust earnings than they would have had if not for the strength of the euro are we going to get more euro strength? Because the story for the United States over the last twelve months and more has been dollar weakness. The last few days, the dollar has gained some strength, But are

we going to get more dollar weakness? Is that going to be the story from here on out? It's a very interesting question. Um. It's actually been surprising that the dollar has been as weak as it has been given the perception that US rates would rise faster than the rest of the world. In particular, I do think there's a little bit of political concerns baked into this. I think, you know, we talked to some of our European colleagues.

They often remind us that there's a a concern that the US is just a little less certain than it used to be, and that has caused some lack of interest in owning a lot of the currency. Cathy Fisher, it's been great to catch out with you. In charge of Time Horizon at a lance Burn state with an investment had great a catch out. I have been waiting and waiting and waiting for this interview. The quiet story across the years of Middle East text, the Harani history

of the Arabs people. I think of Lacy writing about the House of SAUDA is the Saudi Kingdom. The author is Ali al Shabi, is a really interesting take on what's going on, and it isn't. We're thrilled to have you in our studies. You live, you live in Portugal right now. I live in Washington, d You live in Washington now. Okay, that's you've moved on from that. The Saudi Kingdom is a must read for anybody looking. This house is sound, but this is a new house is sound?

What is the distinguishing feature of this charm offensive of Saudi Arabia versus the old House is Saud? Well, the old House of Saud was a an extremely um conservative monarchy ruled by old men. You know, the average age of the rulers was like seventy years old. And one of the problems with that was that, you know, the elderly tend not to want to take bold steps, so important issues that had to be addressed kept on being

kicked down the road. Under the new Saudi Arabia, where you have a thirty two year old conference and Chief Executive h he has in the last two years taken on a lot of key difficult issues and address them, whether that was the conservative religious establishment and extremism, where he's attacked that head on, whether it was empowering women, he's attacked that head on, whether it was subsidies of the economy that were encouraging tremendous waste and energy and

water he again has so he's attacked a lot of difficult, politically controversial issues within the charm offensive a visiting here, visiting there, He's going to meet with Oprah, I think at some point and all that come on. There's a backstory here. There's got to be a lot of the difficulty of bringing a Ramco public. What's the backstory that a pro like you sees that's not covered within the

media coverage. No, I mean the backstory is that he is very interested in connecting with global business Sargirabia is. He wants to tell the business community that they're open, they're open for business, and he wants to encourage them. That's simple. It really is that simple. There is no secret, There is no secret source that's hiding behind anything. Um. He wants to open up the country. He wants people to invest. He's connecting and personally, he's connecting with the

titans of industry and finance. That's also good for him. It provides him with exposure to what's happening um and it allows him to explain, not only explained, but allows them to see the sort of enthusiasm and energy and drive that he has. We should just mention on this idea of opening up the Saudi Arabian economy. Yesterday the Footsie Russell said it's classifying the country as a secondary

emerging market, making its equities eligible for broader indexes. This just sort of builds on this international interest in investing in Saudi Arabia. Are there any downsides politically? This is very interesting example because Saba should have been included in the index is ten fifteen years ago. It's the largest market in the region, but the authorities had been too slow and they had not put in place the laws, etcetera.

So again under this new government that has been accelerated, so things that should have been done fifteen years ago and ten years ago are being brought in. Now are there specific political issues with this? I mean among among sort of the population. I mean traditionally, traditionally the bureaucracy in Saide Arabia was afraid of opening up the markets for sort of old fashioned approach, concerns of hot money coming in and things like that, so they delayed the

structural changes that were required. It didn't have anything to do with outside investors trying to assert kind of cultural norms on them are dictating what was okay with market really, but I'm just saying, the stock market is a very very very uh soft way of investing in the market. You can go in and go out quite quickly. So I don't know, I think it was just really you know,

laziness on behalf of the bureaucracy. Frankly, and and and I mean I I started my career in the Central Bank, and I remember that these discussions and and you know, the Saudi Arabia should have been included in these indexes fifteen years like culturally have they moved on? At the end of your wonderful book the Saudi Kingdom, you have appendices, and one of them is the hobby movement. His this new generational shift removed the family from an austere religious

belief dating back to about seventeen. Well, it is it is starting to temper. That it's temporary. It's tempering because these things take time, Okay, you know, They're not something that you can snap your finger, of course and and doing in one year, but he has the Crown Prince has certainly begun this process of softening and also reducing the influence of the reactionary right wing, if you want to call it that, the religious establishment on daily life?

Then how does President Trump fit into this? If the if the absolute nexus at your princeton is an analysis of Iran Saudi Arabia is the is the at the border of Iran and at the border of that debate When you hear the President's comments on it and Mr Bolton's comments on it, how do you respond to that? Well, I mean is very much on the same page as the White House on this, uh and and that's why the relationship is quite close. The White House sees the risk from Iran in very much the same way that

size generational leadership does. Absolutely absolutely so. As a crumb Prince Mohammed bin Salman does this charm offensive tour which is under underway right now. How much support with respect to sort of a backdrop of bureaucrats behind him does he have and sort of you know, is he is he engendering support politically at home, and he's engendering support, but also obviously he's engendering resistance because change brings winners

and losers. So you know, there are there are there are there are losers within the royal family, there are losers in the religious class um, and there are losers within the business community. So that all you know, there will be resistance, and there is resistance, but he seems to have really overwhelmed that resistance so that there is no public manifestation of any resistance. UM. And you know, he's a very determined and powerful personality and he's steamrolling

everything through. Frankly, we look forward to speaking again. Thank you so much for coming in. Thank you Running Awash a h with us of course his book from a few years back. The Saudi Kingdom greatly appreciate his attendance this morning. Lisa Bramwinson, Tom Keenyan with us. He is the Chairman of the President's Council of Economic Advised as a gentleman from the University of Pennsylvania. Kevin Hassett, Dr Hassett,

good morning. Oh, it's great to be her time. And if you don't call me Kevin, then I'm gonna have to get rough with you, Kevin, I'm gonna I I'm gonna give you a massive victory lap. Here. Three quarter moving average of g d P is a Hassett trump like three point one percent there is. The capital ending is soaring, just like we said, right, Kevin, you know I'm I'm equal opportunity. I'll tear in a viral part when i have to, and I'll give him credit when

it's there. You are delivering three g d P. Everybody on the street says we're gonna ebb in fade as we move forward, push against that. How do we sustain hass GDP has GDP, I don't know it's Americans GDP. But what's going to happen this year is that there's going to be a surgeon capital formation that is a supply side push that drives growth higher without putting upward pressure on prices. And the capital formation is already visible

in the advanced durables data. And it's a massive turnaround from what happened at the end of the Obama administration. Because at the end of the Obama administration in capital spending was actually a negative for GDP growth because it was such an anti business climate. And so what you're basically doing is seeing in part a return to normal, a normal attitude towards business, and in part benefit of this large tax cut. Alright, Kevin, So move us forward

with respect to spending. We just have passed this tax cut. By most estimates, it will add more than a trillion dollars to the deficit. Is their oxygen in the room left for infrastructure spending? And if so, is there anything concrete in the works right now with respect to that initiative? Oh? Absolutely, and the President's talking about that today. Uh. In fact,

the President's infrastructure plan is very well developed. We have an economic report, uh that this count of Economic Advisors put out yesterday that goes through the opportunities for infrastructure investment and the different ways that we could possibly do it.

Although something that you know, we discussed on a call with Turtleist yesterday is that you know, if we take half to take a victory in every bill, you know, and so for example, we've got a workforce plan to make it easier to train people to work on infrastructure checks and if there's some bill where we can get the enforced plan, and then we're going to do it. But but I mean the president's preference would be, you know, a big, huge bill like the tax bill that solves

it all at once. But we're going to be fighting, you know, in the trenches every day to get every little bit of this infrastructure. Just fix the potholes on West End Avenue over on the Upper West Side. That's all.

We come back to. The thing, Tom, this is the thing that surprised me the most about our own ce A study, which is that, what's the one thing that you have in your mind the idea that the Obama administration did write its infrastructure right because they had all these shovel ready projects they spent all this money on

and they talk about it all the time. Right, Okay, do you know that the contribution to GDP growth from public capital went negative in the second term, And I'm telling you that they dropped them all on it, and so you got these pot bubbles everywhere because it's been allowed to rot. What are you gonna do when CBO and others start modeling one point four and one point five trillion dollar budget deficits, how are you and Mr

card Logan to respond to that? Well, you know, if I'm not sure that we expect to see anything like that. But I can tell you that the President was very disappointed in the spending increase. You know, I was head dinner with mcmilvany a couple of signed the bill. He is going to take a much stronger attitude next time. I'm quite sure you're right. But then, how are we increasing spending on infrastructure? Oh? How because we're cutting spending

on other things. But we're the president's open spending on the president. If you look at the President's budget, it's listed left and right. But the other thing that we liked that our report yesterday is that the President's open to other funding opportunity, but increased the gas tax or user fees and things like that. Kevin, when you were in the think tank racket down in Washington, you had the Grand Banks forty two on the Potomac and the name of the boat was guns and butter. That's what

we just got. We just got a guns and butter fiscal policy. How are you at the White House going to respond when Mia McGuinness or some one like that, or critically CBO say we've got a one point for a trillion dollar chronic deficit. What is what is the White House going to do? With that. Well, well, first of all, you have to recognize that we have a

spending problem. That's something that we recognize, and but there's also been in the first year uh CBO estimates of increases in deficits associated with the tax bill that we just don't believe, and so that you have to sort of break it up into different components. Absolutely, we need to be tougher on spending in the future. It's clear in our budget, but not in the omnibus that just passed. And on the tax side, I think what's gonna happen is you you and I started by your status the

hasset economy. That's because we're getting a lot more growth right already, we're getting more growth than the critics, including the can you give me the Tax Committee said that from the tax bill, Ken, that's got to give us more revenue. Okay, Ken, I got twenty seconds. Is all give me a single point g d P number which allows for your program to move forward? Is there two point nine set run rate? Is at three point one run rate? What is that number? Well, our program will

work for it with whatever GDP growth is. It's not like the President's going to reside if all of a sudden, there's one bad number. The fact is that the economical part of the president. We go through all the things that President Trump is doing to lift GDP growth, the average over the next year ted years is three percent. If there was something percent lower than that over the next three or four years, I'd be shocked. Kevin Hassen, thank you for the briefing. He's a chairman of the

President's Council of Economic Advisors. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio s