Davos Ultimately Loves Power, Ferguson Says

let me give you an open question to start. What is the chadow House lead essay for this January? UM? The lead essay for US is Europe UM. I think it's not just about Brexit. It's about the Italian election. It's about whether Macran and Anglo Meracle can get it together, if Angler Mercle can get a government put together to

lead a rejuvenation of European integration. This matters because the United States is self obsessed UM, and where Europe goes I think matters for big questions like the future of the global economy and global cooperation. So Europe is our main focus, well, my main folk. Eric Nelson of the UNI Credit was right out of it that Europe arguably is doing better than the United States. Do you buy that idea, not only economically but almost politically. Um, let's see,

everything is relative. I think the United uh, Europe and the European Union are doing better in the sense that they waived off some of the big popular scares of twenty seventeen. They're seeing some I think, what looks like sustainable growth, which has picked out of the drug program, of fiscal easing of monetariesing um, And yeah, I do think there's some quite deep roots to it. You're seeing it as diverse economies as Portugal, Spain, Italy, some parts

of Central Europe still keeping it up. And of course Germany is just remarkable with the surpluses it's achieving right now and it's on its budget. It actually gives a lot of room. You know, you think the country's in trouble, but here we are sitting, what with the twenty five billion euros surplus on its budget this year and maybe

being up tote incredible. Robin. What's been remarkable about Germany is it doesn't have a government and it's taken Chancellor Merkell over three months, more than three months to get it together. Do you see signs that Chancellor Merkel is finally getting it together. And what are the main objectives of this government this time around? Well, I think it's

uh to your first part of your question. It is getting it together in the sense at least the two party leaderships have come up with a program between the SPD and her cd U C s U coalition. I think there's a long way to go with the SPD UH and the rank and file. The coalition agreement has to be approved by them, so I don't think we're out of the woods yet actually, and her authority, of course is much much less strong than it was when

she created the other governments. If they can achieve it. However, I think their priority is to invest in infrastructure, which is we've talked for some time now, is one of Germany's growing Achilles heels. There's quite a bit of a sense of how do you redistribute the the you know, the positive economic news, and this can be some easing off, as I understand it, of pension tightening up on pension contributions. Instead of that, they'll carry on being relatively generous and

better healthcare provisions. So what you can see here as an effort to say to the German people there are benefits socially too strong economic growth over time, and it's not all about belt tightening, and that would be an important shift of message for Germany to be frank robin their domestic objectives. Emmanuel mccran, the President of France, will

be hoping there will be some European objectives. Does she have the political capital at home to drive through the vision of Emmanuel Macron across Europe to a more integrated Eurozone. I I I try to put my cards on one side of the table. I'd say I don't think she does. Actually, her own party, the c d U c s U, remain very skeptical about deeper integration of the Azern without actually having seen at least real French structural reform in

place and delivering results. The SPD her partners much more in favor, but remember they only polled about in the last election. Um and where the where the growth is on the margins that are skeptical about European integration, much like the Labor Party is skeptical in the United Kingdom about the EU as a whole. So I don't think so. The good news, of course, on the ANA for Germany's I don't think Macron personally is that committed in the

near term to deeper Eurozone integration. What he wants is an ear that can protect him as he conducts really difficult domestic reforms. So I think he's more interested in immigration controls, more intersted in protections against foreign investment by state and companies like the Chinese. You know, he's I think the protection agenda of Europe, almost slightly old Fortress Europe two point oh is more his priority. I look where we are, Robin, and almost what the theory is

of international relations. Now, to Ian Bremer's point, it does seem like every nation and almost every theory for itself, Um, there is. I think there is a theory of change in a theory of good government. I believe that remains in the future applicable for everyone, and I do think that is reflected in the economies of Europe, the United States,

you know, Australia, let's call it the West. The reason I say that is, although there seems to be a lot of competition for these different approaches, um, not all countries at the same stage of economic development. So it's fine for China to run a centralized approach. But China is not yet a fully functioning consumer economy driven by innovation and technology. The demands of the people are not the same. So I still think there may be one theory. The problem is getting there is gonna take a lot

longer than anyone expected before. Let me cut to the chase. How the president we greeted in Davos, freed Zakaria wrote about a post American world. You almost wonder what the post Trumpian world world will be like, whether it's one term or two terms. Um. And actually I had a piece that came out in the Berlin Policy Journal earlier this week where I think I picked up probably on some of that theme that you mentioned. Free Zakaria mentioned

as well. I think we're moving to a stage of the world where America's traditional allies cannot count on America to have their back except on issues of existential threats to their security. We are not on a common agenda right now. America is fixing America first, but I think this is helping other parts of the world, if I may say so, to grow up. Europe needs to grow up and take more care of its own regional security.

Japan is going to have to grow up and find ways to get on better with South Korea so that they can protect themselves against China's rise. Um in the Middle East, we've already seen it. The Saluadis have decided they better grow up and look after that. So, you know, even though they like Trump, I do think they trust America. That's a good place to go. John, It's a tough decision what we should do with Robin Nivlet next. Should we talk about Saudi Arabia and the massive changes in

the Middle East? Or should we talk about the continued collapse of a Milan. I can't. Robert has got to say about that. It's got something to add some value wad for a c Meland. Then then I would love that. Robin Nivlet, I love American football. You know, do you want to do that? We can? We can do that then, Robert, Robin Nivolett, the Chatham House Director, We'll be sticking with us here on Bloomberg Surveillance. It's twenty eighteen, the year

the reflation trade materializes. Brent crude had to push through seventy dollars for the first time in several years. The dollar has weakened to a multi year low, a three year low, unemployment in Germany at an all time low, and unemployment here in the United States, and a decade low. All the ingredients you would think for an inflation pick up. Let's get across the David Page Acts or investment Managements

senior economists. David, is this the year that it actually materializes? Well, yes, we think it is, but I don't think it's going to be a dramatic story, and I think it's something that unfolds over over a couple of quarters. We do expect to see evidence of firm inflation, particularly in the economies that look like they've got tighter markets. We're thinking of the US, we're thinking the UK. I think in Eurozone, where there's more stair capacity, it's going to take more

time to emerge. But as you say, I think the oil price is something that's going to provide a slight list at the start. We don't expect that to run too much more Dollar weakness exacerbates. But I think what really is pushing is likely to come through here is wage inflation. We've been looking for this for so long, but the tightness of the US labor market I think really does suggest that we start see more visible evidence of that cyclical pickup in inflation coming through and offsetting

some of the headwinds that kept inflation so subdued last year. David, at the moment we witness what could be more evidence of a dysfunctional Washington d C over the last several months, though, what we got was the tax built for markets and for the investors that you speak with the fund managers at actor. Is it okay to have a dysfunctional d C again because we've got the tax bill and therefore

investors have got what they wanted and nothing else matters. Well, I think markets have become used to dysfunction from Washington. Bear in mind, this is not something that's just come

along with the Trump administration. We've seen this basically for the last six years of the Obama administration as well, So we now expect this sort of backdrop, I think, to some extent, as long as we see the implementation as the tax reform, which of course requires a budget to be enacted, rather than these continuing resolutions that we seem to be heading towards again at the end of this week. But by and Marge, as long as we get that tax reform come through, then we are going

to see markets broadly satisfied. We don't expect to see too much more come from this administration, certainly not ahead of the midterms. David, I'm looking at my screen May Bloomberg screen equities, binds, currencies, commodities, and it's truly a too good to be true screen. What's There's always an exaginous shark at some point that gets in the way.

What is it? Well, I think in the very short term we can look not only to the debate around fists or spending plans, but also to the possibility of trade or trade wars ramping up the agenda. Again, bear in mind that we've seen the Trumps administration bring forwards the reports it's going to get on steel production, to some expand on intellectual property. We do expect this to be included in the States of the Union. Could that provide the shock? Could we see a shock turning from China?

It's very hard, as you know, to anticipate exactly what one of these shots could be coming for other forwards. But what we see from you know, the period of time that we haven't seen, for example, of correction in SMP over the last best part of a year. That's quite an unusual period. We would expect to see some correction comes through across the course of this year. They're

not balanced. That's something that we think that will probably see the Federal Reserve have to pause at one point, even though generically it's looking to tighten conthropology across the board. I mean, an exager and shock Joan could be Milan went two games in a row. That would be a serious shock to my life. I can tell you that, David Page, Let's talk about trade and then we can

talk about the Federal Reserve. On the trade issue, I can't think of a single subject over the last I don't know eighteen months that has consumed so much time and produced so little. Nothing has actually happened. Those fears have not materialized in any real way, shape or form. Will they well, to some extent they have. I mean we are in naptal negotiations. We are in a naptal negotiation that look continually and increasingly threatened to see the

US pull out. Certainly, Nahal negotiations at this stage aren't making progress. We have seen the U s but let's be David, Eighteen months ago we were worried about a trade war between the United States and China. If I told you eighteen months ago that it's sitting here January eighteen, trade relations between China and the United States would be exactly the same, and for that matter, trade relations between the United States and pretty much the rest of the

world would be very much unchanged. I think some people would have been surprised. Some may have been, but I don't think many. I mean, certainly we weren't. We suggested that the first outlook was going to be for the administration to deal with tax reform. They've done that. I think the trade issue is something that now comes into play, and more dramatically, could come into play if we see a significant deterioration in Republicans control of Congress at the midterms.

Then you look to a president that still wants to talk to his base, and that looks to some of the remaining pools that he may have in the absence of control. I look at the Apple computer nine hundred and one billion dollar market cap, amazonic course over to standard deviations higher as well. David Page, you look at all this good feeling in America, do you believe within

your economics? Do you believe in trickle down theory. Is all that I'm seeing on the Bloomberg screen as all that I'm witnessing here in London is a trickling down to the greater Republic. Yes, of it surely is. And what's been the remarkable thing as the last fifteen months has been the sharp pickup in sentiment and now that has delivered firm and growth. We were surprised to the upside to see two point three growth across the course of two thousand and seventeen. We forecast growth of two

and a half percent in the US acceleration eight. The Bloomber consensus is for eason more than that, is at two point six. So yes, there is some growth coming through um and part of that, obviously is is the tax reform stimulus that we're seeing coming through. But I think the key question that we have is how sustainable is this? Do we see this seeing a pickup in business investment that raises sustainable growth in the States, And the answer to stay is no, we don't see that

coming through. We still think that sustainable growth is somewhat more subdued. And I think this period of very welcome robust growth coming from the US is something that's like to fade over the coming couple of years. I mean, I'm looking Jannsfu, I did not realize that, David Page brilliant on this Bloomber consumer Comfort index is above where it was in the spring of two thousand and seven. I didn't know that. Should I put that chart out and do it? Radial sees it first, do it? We

should do that. The soft data and the hard data really picking up in the United States. David, I think something that's a confused some not many, A lot of people in the markets kind of understand what's happening in the effects market. But for you, David, can you explain this dollar weakness? Well, I think there's a couple of things. I think in the short term, there are some risks and we're thinking again, trade, were thinking again, government shutdown.

But I think it's much bigger than this. I think what we're seeing is a sickly call development come through. Here is a consistent scene that as we move towards the later stages of global economic growth, a point where we start to see commodities starting to pick up, that

the dollar tends to underperform. Many of us and looked the sort of short term relationship between the dollar and interest rate differentials, and that of course leads us to suggest both the Federal Reserve is tightening monetary policy other jurisdictions are only considering this over the medium term, so surely the dollar should rise. But think back to two thousand and four two thousand six, the last time we went into a sort of to war to the end

of a cycle. Here we saw the Federal is a consistently tightening monetary policy, and yet trade weighted dollar fell by about five and a quarter percent from the start of A four to the end of O six. This is a consistent theme. It reflects the fact that yes, the US is doing well, but to some extent that's in the price that dollars appreciated markably over the last

four or five years um and looks relatively expensive. Now many investors are thinking that other regions of the globe may actually be doing better as well, and so it's a relative story coming through. David. Thank you so much, David Page access accent indefinitely. Managers really appreciate his attendance. John Farrell in New York, I'm champ Keen in London and with us and Lindsay Pieza joins us DR Pieza, where's your run rate and g d P. Can you get to a Trumpian three percent or are you more

subdued for the fourth quarter. I think we're still looking for something below three percent, and we did see the consumers still on very solid footing, but there's several other pieces that just seemed to have lost momentum as we did a final quarter of the year. So I think three percent is very optimistic. I think a strong two ish percent is really what we're going to be seeing.

Where are those momentum dampeners? I mean, it's Steve Nicholas, You've got a great pulse of a huge body of the nation away from the three zip codes on Global New York Wall Street. Where where have we slipped or stumbled? Well, I think a good lost momentum surround what we saw out of Washington. There was a lot of euphoria, a lot of excitement built into the marketplace. Consumers were actually going out and spending an anticipation of receiving larger refund checks.

But I think there was some disappointment when we actually saw the numbers of the amount of additional after tax income that consumers can expect to receive uh come with those refunds, and so I think some of the realization that the tax reform will not be a silver bullet, will not be a flip the switch scenario to five or six percent, as the President I believe I promised at one point. I think that alone is starting to eat into some of this confidence, both on the consumer

side as well as on the business side. Within that lindsay is I guess the consumer John and I are looking at the screen down thousand eleven on futures, SMP, it's a melt up. Why are we seeing the melt up? As you look through the prism of economics, Well, the equity market seems to benefit regardless of what the outcome

of tax reform is. If we do in fact see organic growth companies taking that additional cash, putting that to work, growing their business, increase hiring, which eventually will lead to upward pressure on wages. And GDP does seem to see a sizeable increase maybe of one to two percentage points above this trend rate, Well, that's fantastic for the equity market.

On the flip side, if we see inorganic activity with this increase in cash for corporations, meaning they keep the cash on the balance sheet, or corporation it is debt or buy back stock. Well, guess what. That's also fantastic for the equity market, at least in the near term. It does seem as if it's a win win for equities.

But longer term, unless we see the underlying momentum of the economy pick up to justify where these levels are, we would expect at some point a correction back down to the more realistic two ish economy that we're seeing out in the marketplace. Lindsay, away from equities elsewhere on the screen, you've got all the ingredients a recipe for a pickup in inflation. You've got crude approaching seventy dollars a barrel a US dollar, that's the weakest has been

in about three years. You've mentioned some of the economic indicator's unemployment, et cetera, pointing to a really tight labor market, not just here in the United States but elsewhere as Wow, how does J. Powell at the Federal Reserve guide the market through that? This year? Just three are protected? Three hikes moved to four. Well, actually, I think the risk

is to the downside. I think we're going to see fewer rate hikes than the SET is promising, and it's because of that inflation conundrum and the idea that we've seen this this equation that that's perfectly which should be perfectly baking inflation into the cake, has not been and I don't see any evidence that that's going to change.

Particularly from the labor market standpoint. We've seen the unemployment rate well within the sets target range of full employment for years now, and yet that hasn't translated into wage pressures. Why because the civilian unemployment rates, in our opinion, no longer captures the true health of the labor market. And when we look at all the structural changes that are occurring, it's actually more keen to eight or nine percent unemployment.

And I don't see that evaporating and don't see corporations absorbing that pool of available labor anytime soon. Even if we use the investment pick up, it's mostly the structural or equipment side as opposed to the employee side. So I do think inflation is going to continue to invade us for making it very difficult for a power fed to push through three rate hypes. Lindsay px stay fold the chief Economists joining us to discuss the economic in the United States of America and what it means for J.

Powe and the Federal Reserve. It is our pleasure now to introduce Neil Ferguson. He is a noted author, but his most recent book is entitled The Square and the Tower, Networks and Power from the Freemasons to Facebook, and he joins us here in our eleven three oh studio. Neil, thank you very much for being here and congratulations on

the new book. Let's begin with a part of the sort of thought I think that runs through this, which is the lesson of history and this is your writing, is that trusting in networks to run the world is a recipe for anarchy. I wonder how you could connect that with your desire to actually write the book. Well, we live at a time when the people who run giant online social networks, people like say Mark Zuckerberg, have been arguing everything is going to be awesome if we're

all connected. I mean, that has been the riff out of Silicon Valley for the better part of twenty years. And yet we saw in Sien that if you allowed giant online social networks to play a big part in politics. What you end up with is far from the global community that Zuckerberg has talked about, and you actually end up with polarization, extraordinary polarization between left and right. That's

a characteristic feature of Facebook and Twitter. And you end up with crazy stuff going viral because the social networks that we've created don't really care if something is true or false. They just care if it's engaging two users. So I think simply looking at the recent history of very large online social networks, you can see how disruptive

they can be. And if you imagine a world that is organized around network platforms, and some people have argued for this, there's a kind of utopian streak out there arguing that we should we should run the whole world this way, then I think you end up with something closer to anarchy. So the book is an attempt to teach some history to Silicon Valley and people who work in the tech industry, but it's also an attempt to teach some technology, some network science to people who are

interested in history. Because actually that's a that's a ven diagram where the two circles basically scarcely Overllow speak if you can about the concept of hierarchy. I got that far into the book over the weekend, and I'm just wondering if you could explain the historical antisty eadments for hierarchy and how they fit into our modern understanding of it. Well,

most of history isn't very networking. I mean most of history, these distributed social networks are quite weak compared with hierarchical structures like governments, states, armies, bureaucracies, churches. Most of history is quite hierarchically organized. There's in most human organizations somebody in charge. This may even be true of Bloomberg. I have heard of have heard tell of a very powerful man in this building. So most institutions are pretty hierarchical.

It's unusual for distributed social networks to be more powerful, to be able to disrupt hierarchical order. That has happened really only a couple of times in history, and I talk about not only our own time, which is is familiar, but also about that time after the printing press spread across Europe, when a network created by the printing press was so powerful that it was able essentially to disrupt the power of the pope and a great many monarchs. So this is the kind of story. There are these

periods where networks get empowered. It's usually because of a technolog technological change, and at those times the hierarchical structures can be weakened and even overthrown. Neil Ferguson with his folks on his wonderful, hugely thought provoking book The Square and the Tower. This is a book where all the sertitude of Silicon Valley goes right up the window. H Neil, you dovetail at nicely chapter forty five, Henry Kissinger's Network of Power. You've written a definitive one volume and the

young Kissinger in his path. How do you dovetail dr Kissinger into the modern day certitude of Silicon Valley? Well, Tom, I think it was partly writing the Kissinger biography that made me start thinking about networks. I have a hypothesis about my second volume, which I still have to write, of his life, and I don't know your breath, it

could be a few years. The hypothesis is that the reason Kissinger, who was clearly a powerful intellect by six and a very fluential public intellectual, became so politically powerful to the point that he really became the most powerful man after the president in two administrations had to do

with his extraordinary skill as a networker. And despite his relatively academic background, Kistener proved extraordinarily adept at networking when he got to Washington, not only within the government, but more interesting outside the government. So I was thinking a lot about networks, and I decided, look, before I can write volume two, I have to get my head around

networks as a general phenomenal of it. I mean, I've seen you Neil work, the Belvedere Hotel, the bar, there were the twenty six dollar barley soup and the meat loaf. Like nobody, I believe the President United States is gonna wander up Happy Valley. You talk about the triumph of Davos Man, Well, the president triumph in Davos, Well, I don't think they're going to pelt him with rotten eggs or even bread rolls. Because although Davos can't what Donald

Trump stands for, certainly on policy. They can't bear the protectionism, they can't bear the nativism, they can't bear the lapses into racism. On the other hand, he's the most powerful man in the world. Sorry, he jan Ping You're not as powerful as the president of the United States just yet, whatever the economists may tell the world, and I think

that's ultimately does love power. So I suspect he'll get a kind of frosty but polite hearing, and if he gives a speech like the one he gave in Wars or last year, it'll be hard for them to to boo and hiss uh. The other other points to notice is that you know, when Trump makes his anti globalization arguments,

ordinary Swiss people are nodding their heads. So whatever they may be saying in the conference room, and you and I know the kind of people who end up there out there in German speaking Switzerland, I think most people basically agree with Trump's critique of globalization, and especially with his line on immigration. Neil, just to follow up, you mentioned China and j Ping. Let's begin by your thoughts on how networks have developed within China, both politically but

also culturally. China's fascinating and I just got back from there, actually went on a on a trip to hang Jo to see Ali Baba jack Mars headquarters, and what's very striking is that the Chinese have evolved a completely different model of the relationship between giant technology companies and government. Here we basically have the separation of powers. Silicon Valley hates the Trump administration and the feelings pretty much mutual no matter how much the president uses the network platforms.

There's really quite a tension, I think, and I think that tension will will grow. But in China, essentially the big companies by Do Ali, Baba, ten Cent, the so called b A t or Bat companies are subordinates to the government. And when you see Jack mal together with Shiji and Ping, there's no doubt who the senior outner is. So that's a completely different model and it's going to be fascinating to see how the two co exists. Neil Ferguson. He is the author of the latest book called The

Square and the Tower. Networks and Power from the Freemasons to Facebook. 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