Erdogan Responds to Pressure, Cook Says

Good morning to James. Good morning. Why the optimism, why the preference for global equity still because of growth? I mean we have we have global growth running above trends. It's been doing so for two and a half years, and that should continue. I think the big problem has been dollar strength and policy concerns and bad Paul see in in a bunch of specific countries. To what degree do you think the U s economy has decoupled from

the rest of the world. Well, when you look from a short term perspective, industrial production growth recently in the US has been running above four and the rest of the world, you know, significantly lower. Europe and China have slowed a little bit um in the last four or five months, but we actually expect them to rebound. We

expect the rest of the world to rebound. We expect the US to actually slow a little bit, so that differential that you see in p M I S, for example, over the last six months, we actually think it's gonna start going the other way now, and that above trend global growth as a whole is set to continue. Does that shape or define how you allocate capital in the

back haunt for this year? Yes, it does, I mean the yeah, I mean we're we're always thinking ahead on where the next turn is on industrial production, in particular because we expect all of the lead indicators at the market overreacts to p M S and such to move that way and the surprise and disease to follow that way. So that's very important. We expect positive data surprises from

the Euro Area. It's just seems that the big triit so far in twent is by America, and we saw in the Bank of America Mary Lynch survey, the fund manager servant that was released yesterday that certainly the fund managers are allocating to that story. Do you think you need to reallocate elsewhere and drop your exposure to the US. I mean, there's the first element of buy America is

that the tech sector lives here. And when you look at what's happening in the tech sector, you're getting explosive returns because you're getting explosive earnings and you don't have valuations really going crazy at this at this point. So if you could look at America X tech, uh, then you know, maybe allocating a little bit away from America and towards the rest of the world right now would would make some sense. But um, but I but I think you can't leave tech out. But that gets to

the FED. Any idea of the meny America's Chery Yelling clearly had slack as a lead describer of an American economy. We have a FED that has to deal with the tech boom and its tangential excellence and the rest of America given the political tone, flat on their back. That's not in able bernanc or or in uh, you know the other core macro textbooks. It's not a manque right. Yeah,

it's true, but it's also not new. I mean, we've had we've had kind of meager wage growth, lower down the income distribution for some time and what we've seen lately is that the labor market has tightened up at the kind of middle and the and the lower ends, but it has not led to sharply rising wage growth. And if you're getting two three percent wage growth at a level of wages which you're not very happy with, the chances are you're not thrilled, and that that's where

it is right now. But income growth, labor income growth for the US as a whole, is strong and has accelerated. That's very important, and that's what the is gonna respond to. This is so important what Dr Sweeney just said. There there's this distinction between an aggregate analysis and the individual analysis. I think of Jason Furman's wonderful work on this. Explain to our audience how we can say wage growth is terrible and yet gross labor income is Is it a

a great vector to and a great level. Yeah, labor income is simple. You add up everybody's paychecks and you say how much money is the household sector getting paid? The the that has been growing at around four point four percent nominal terms. Since the audience listening this goes you're out of your mind. Well, it's been growing at four and a half, as I said, and recently it's

actually accelerated a little bit. Now, wage growth or or aggregate labor income growth comes from wage growth, and it comes from growth and hours worked, and hours worked obviously is driven mostly by jobs growth. And so what we've seen was we've had good jobs growth for a time that's now tightened the labor market, including a from low end. So you may be expect to see more wage growth, but we've seen a little bit more wage growth. We

haven't seen that wage growth. Just so you know, oh wise, one that this is called the pharaoh effect, where hours work takes over is a partial differential, and Pharaoh's I mean he's working like a ninety two hour week, and that alone moves the needle along with you only work just just the eighty nine hours. Well, that's because you've got other properties, including the real yield. James, James Sweeney

doesn't care about any of this. Well I do, actually, because it's one of the things that happens late in the cycle is that ours were working, James, So what will happen at at some point you'll get so good at your job, you'll have so many job offers that you'll just your wages will go up and you're working, he'll leave. No, No, you have to give him the race, James. You don't have to give him a race because of his offers. Hang on a minute, I like where this

conversations going. You trying to negotiate for you. There's an email from the Brooks Falls in Alaska from Alfred new James. We should say, don't turn away from the grizzly bears. I mean he just dropped his cell phone. Take if I could afford to take you away from credit sweets and how you was my agent, I would before we let you go. I want to give I want to get your dollar cool and we're close to a ninety seven handle this morning. Want the x Y. What's your

base case now, James? Yeah. We we actually think that the dollar is going to sell off because global growth is going to stay strong, and we expect upside surprises coming from Europe, and we think European interest rates are going to rebound and uh and and that the dollar move is basically overshot. We also see this as a as a e M crisis. We're in a panic, and usually in a panic, you know you're gonna go the other way. So the market pressure honor to one to

make some of the correct economic choices is high. But what you just said, they're so important. You're assuming the panic gets solved. That has worked before. Stan Fisher's classic book Out is an example. Can it get solved now given the realities of American politics and their extension abroad. Well, I mean, you know this is this is a Turkish issue,

not not a US issue. I mean, and and really what Turkey needs to do is to tighten fiscal and monetary policy and take some orthodox policy steps in order to step in this crisis. So, um, I'm not sure the political theater between our leadership and their leadership is the same as what the bond market wants. And I think that's a very important distinction. Are you surprised to

see you wrote dollar down here at one? Yeah, I mean I think it's a it's a sharp move, but it's it's Um, it's related to the fact that we're in a little Turkey crisis at the moment. I'm just trying to work out what drives European and Asian growth higher, what delivers the upside? Surprise? Is it a policy resol

when you look organic? Just tell me it's organic. I mean, the bottom line is if you look at the underlying pace of capex in Europe is in real terms, and you look at the underlying pace in retail consumer spending, um, they're strong, They're they're strong. And so what we do is we compare in detail what's happening to manufacturing activity to those sources of manufacturing demand from businesses and from firms.

If the demand sources are fine and manufacturing activity has recently been very weak times out of a hundred, industrial production is about to rebound. And so in the three months to March or April, European industrial production actually contracted by three or four percent. So demand is running well, factory activity has slowed. It's a short term moment to move.

P m I has come down with it. The market overshoots, the ECB overreacts and gives you forward guidance for a year, and then factory activity picks back up again because the consumers are spending money and the businesses are investing, and when you look at the hard data, that's what's happening. James Sweeney with some real optimism, they're sophisticated optimism, thank you so much. With credit sweets. Their chief economist, Stephen Cook is at the Council on Foreign Relations out of

Vassar with parchment from JOHNS. Hopkins and his doctorate at the University of Pennsylvania. We are honored to have him for a half hour this morning to really dive into some of the nuances here Bay, basically to slow the show down and actually talk about the underpinnings of what's going on in Turkey. His must read is False Dawn, just simply because of events, it's become the book of the moment. Stephen Cook. Wonderful to have you with us. If you wrote False Dawn on this Wednesday morning, how

would it be different than when you wrote it? Well, I couldn't write it in a Wednesday morning, but thanks Tom. I think that many of the arguments that I set forth in False One, particularly when it comes to Turkey and the and the transformation of Turkey into an elected autocracy, are our strengthened by what's been happening with the lyric crisis and the and the and the related crisis in

US Turkey relations um. What has happened in Turkey is essentially self inflicted wounds as the result of a leader whose political calculations and political interests are UH bound up in UH pumping up the economy with low interest rates and then blaming the United States when the day of residing comes. Dr Cook John Ferrell has got all sorts of wisdom questions, But I want to cut to the American chase. What is different this time is the posture,

stands cadence dialogue of our American president. What what's the change you need to see from President Trump to affect a better outcome in Turkey? Well, I think we are seeing a change in Cone and Um from one perspective, certainly for the better. The previous two administrations, the George W. Bush's administration and Barack Obama's administration, had been too passive, too willing to overlook Turkish bad behavior for the sake

of a strategic relationship. I think that President Trump has taken a look at the accumulation of things that the Turks had done to undermine American policy and in American position in the Middle East UH and decided that the Turks have gone too far with the taking of Pastor Andrew Brunson as well as something that gets lost in all the commentary fifteen to twenty other Turkish Americans. Those are Turks with American citizenship who are in Turkish jails

on trumped up terrorism charges. Uh. So, I think that this issue has become a flashpoint for the broader relationship and the problems in the broader relationships. Steven, is hard for some people to reconcile that a NATO ally is

not a reliable partner. How do you reconcile those two things, Stephen? Well, Uh, Turkey is not the only problematic NATO partner, but it is I think an outlier in how far it has gone in UH development of its relations with Russia, how far it has gone to undermine, uh, the American fight against the Islamic State in Syria, how far it has gone to help the Iranians evade sanctions that are designed

to contain and arrest the development of its nuclear program. Um. Those are just three of larger issues, um that are roiling the relationship. I think they're the most important ones,

but of course there are others. Everyone has been able to capitalize in the fact that, because of his rhetoric, a stupefying eight of Turks believed that the United States was complicit in the failed Coupe Deta in July, and large numbers also believe that the current dispute between the two countries that in the current dispute between the two countries, the United States is engaged in economic warfare on Turkey.

So to your point, with the last two administrations being perhaps far too passive and ignoring the behavior of President Urduan, what is the correct tool to use to address the behavior of Turkey And does economic sanctions get it done or does that just fuel this nationalism that erupting at the moment in the country. UH. I think that it's important to recognize that aired One responds to pressure. The Turks shot down a Russian bomber that had briefly crossed

its airspace and route to Syria. In President Putin really put the screws to the Turks. Angela Merkel, the Chancellor of Germany, was quite upset over the arrest of a German Turkish journalists and threats to German journalists in Turkey. UH and threatened President air Duan with business ties and business ties between Turkey and Germany are extremely important. This UH encouraged President ed One to do the right thing

on a variety of issues. I think that with the politicking that aired One is doing, he is seeking to buy himself some time politically and cushioned himself from an insulate himself from these problems. But I think that the logic, while the logic of Turkish politics right now is outstripping the logics on the market, at some point he's going to run out of nationalist rhetoric and the market is

going to force changes on the Turk. Stephen Cook, with as a constant for relations, thrilled to have him here for a length the interview this morning, Dr Cook the Boss versus twenty miles long. It seems longer than that, But it's not if you go out the north side that nobody in the West pays attention to. There is a black sea. What's the dynamic right now that Mr Putin can take advantage of given this crisis? Oh well, certainly President Putin has sought to take advantage to the

tension between US Turkey relations. They've He's been doing that for some time, as the as the Turks were forced to respond to him after shooting down their plane and after the United States made it clear that it wasn't going to get more deeply involved in Syria. The Turks went to Moscow to secure their interests. Certainly, President Putin is seeking to take advantage of the problems in the US Church relations as well as problems with the U

S relations with other countries. Uh. The Black Seed, though, is something that makes the Turks very, very very nervous. That may still be an area of cooperation between the

United States and Turkey. I don't think anybody's really looking at a breach in the relationship between the two countries, but I think a change is uh, and it's it's it's it's the kind of relationship where we will be able to cooperate where we can get out of each other's way in other places and have to avove each other when our interests dictate very quickly here and we'll come back in a more general discussion to percolating today

is Turkish capitalism, Turkish business advising. Mr Erta Wad, let's get going from where you sit in international relations. What is the relation of Turkish big business to the Erduan regime. Well, it depends on which big business in Turkey we're talking about. If we're talking about the kind of traditional big business based in the western part of the country's associated with

with big families. UH. That is a business community that has had UH a wary, mistrustful, more difficult relationship with UH with President aired One because they are considered to be kind of old establishment and air Duan is distrustful of of those people. Then there's a big business that has grown up around uh Arduana over the course of the last fifteen years or even pre date the emergence

of the Justice and Development Party. UH. These are the kind of core constituency of the Justice and Development Party emerging from Central Anatolia. Those people have very good relations with the Justice and Development Party. Here's the deal, though, you have to have good ties with the government in order to do business in Turkey. So everybody, everybody understands that they can't openly cross UH one. Well, let's do this. Stephen Cook with us with the Council on Foreign Relations.

I can't say enough about his effort. The False Dawn John of a year ago, A long, long, long year ago, just a spectacular book, linking all of the Middle East, not just Turkey into UH. The disappointments that we've seen across the political economics. We'll come back in a broader discussion with Dr Cook here. We are thrilled to bring

you on the Stephen Cook of the Council on Foreign Relations. Stephen, at all studies I've seen the Middle East is about demographics, in the overwhelming reality of the youth and the lack of understanding of history of so many millions in the Middle East. Does Turkey have the same problem? Does Turkey have the same demographic structure is the other countries in your book the False Dawn? Turkey is a very young

country as well. There are only two countries in the region that have average days that is even approaching thirty. Uh So, the difference between Turkey and other countries is that Turkey actually has a real economy. It has problems with its economy, but it does have a manufacturing base. It does it is connected and integrated to Europe, which is one of the concerns that people have right now. A lot of these other countries don't really have much in the way of an economy. Thus you have young

people who who are quite idle. Uh not so much the case in Turkey, Okay, but in Turkey and the stereotypes here, folks, come on, let's admit it, folks, as we talked to Dr Cook. People listening is knowledge of Turkey is from Russia. Would love the James Bond movie from a few years ago, Stephen, take us away from our silly stereotypes of Turkey. If I go west from Istanbul, when do I hit Europe? Or is Turkey Europe? Well,

it depends on where you're standing in is Stumble. You can stand in is Stumble and you are in Europe, and then you can stand in another place in is Stumble and you're in Asia. Istanble is an extraordinarily cosmopolitan city. People from all walks, all parts of the world, all kinds of cuisines. It is a city of great history. It's the former imperial capital of the Ottoman Empire, which ruled the Middle East as well as parts of Europe for about six hundred years. If you move east, you'll

see changes in the country. Less development further out east, but still more developed than a lot of the other countries that are are neighboring Turkey. One of the things about the Justice and Development Party era the last sixteen years in Turkey is that there has been an explosion of development of infrastructure, of transportation, options of business, of a development of a middle class, so there has been some good economic management. This is a more recent problem

with an overheated economy. Me based on the fact that President air Duan needs low interest rates and growth in order to get reelected and re elected and re elected so he can affect the transformation of Turkey for better or worse, and Stephen, as we know through history, this doesn't end well. I think some people sort of waking up if they've missed all of this. At one point, several years ago, Turkey was on course to being an EU member. Something politically went very very wrong. Stephen, what

was it? Yeah, it's a it's a stunning irony. Um. By this time Turkey was to be by Turkey was to be on the cusp of European Union membership and joining the ultimate club of liberal democracies. Now it looks like an elected autocracy, and I think what has happened Now there's a debate. There's a debate within the Turkey

watching community about what happened. Some people will argue that this was air Duan's plan all along, that he was an authoritarian out to accumulate power from the very beginning.

Others have a more nuanced view, and I include myself in that group, which is that a number of things happened around two thousand seven two thousand eight in which the Turkish establishment made it very clear they were going to try to prevent the Justice and Development Party from ruling and governing in the country, and as a result you had this very harsh authoritian turn in which everyone has tried to pulverize opponents that even one final question

unfortunately too quick. If I go down to the Mediterranean, ismir, what is this depreciation of a lira mean? If I walk into the Dennis restaurant, world famous, it's been there for thirty years, what is the lyric depreciation meant to the people that run and work at the dentist restaurant? And Ismir, Well, everything is more expensive for the Dennis restaurant owners uh and managers. Everything that they have to buy to run that restaurant is much more expensive for them.

In addition, this, this tension with the United States has the potential to depress the number of tours who are visiting the Dennis restaurant, and tours to are carrying dollars or euros you would buy much much more in Turkey these days. But because of this tension, because of tension with Europe. Uh, there are a few of you were towards in the Turkey these days. See if kindly brought that up because Farrell and I are doing a road trip. That's what you did. I knew that we're pitching off

roducers to allow us to go around the world. Stephen Cook, two countries where the currency has been battered, So we're going to do this food currency tool. This has been wonderful. Stephen Cook the concert for Uscis folks. I can't say enough about his false tone. I'll put a major push on it out at my book side this weekend. Spending money to make money, getting ways for people to have

thirty off their big home and furniture. Let's find out more about how Macy's is doing with Sarah Hall zach Oar Bloomberg opinion columnists, who knows everything about shopping at the flagship store. Sarah, So what about Macy's. What's wrong with spending money to make money? Well, I think that investors maybe just realized today they got a bit ahead of themselves. This stock had been up sixty six percent

year to day. It was one of the biggest movers on the SMP, and you've got to be thinking to yourself, this is a company that's right at the center of the retail apocalypse. How is this possible? Um? And I think it was. They had these improved results in the holiday quarter in the first quarter, and investors got a little carried away and they realized that today, as you said, these improvements that they're making to survive cost money. Uh.

Free shipping is not free to retailers. It's free to you, the shopper, but not to retailers, and they're feeling some of the weight of that. And I think what we saw today is that Macy's as a company that's making modest progress but still has these existential questions about how sustainable the department store format is in this retailing era.

I mean, you don't know whether people are actually going to buy things in order to pick them up at the store free or get off if you use their app, or get off if you use a Macy's charge guard, right. And they're trying to do some different approaches to discounting

and loyalty as well. So for example, they've revamped their loyalty program, trying to encourage more people to join that and to get discounts in perks through that format, and they're trying to get away from this thing where you stack coupon on top of coupon on top of coupon, because they're finding that people just find that to be confusing and befuddling, and and try to go to a more clear, value oriented message and hope that that goes

a long way towards improving sales. Tell us about Macy's backstage. So Macie's backstage is their effort to capitalize on this real strength that we've seen in the off price retail sector. T J Max Ross stores, these have been strong performing retailers because we're seeing in the brick and boarder in mortar environment, shoppers like this treasure, they like this uh, you know, fishing around for a unique find. And this is Macy's trying to put a little bit of that

DNA within their store. So they're seeing stronger spending in the backstage departments from their existing loyal customers, and that's helping drive comparable sales growth. My question for Macy's is is this pulling in any new shoppers? Exactly right? And so I worry that while yes, it is perhaps drawing stronger spending from the customers they already have, and that's improving comparable sales in the near term. If again, ma see that's just survived. For the long haul, they're going

to need to bring in new new people. Sara, as usual, you nail it to me. This is a top line exercise. The word of the moment for corporate world is scale. I don't see any scale here. The way they did this was to open stores by other companies, Marshall Fields, the whole wrap up, the whole, the roll up thing, you know it all. I'm looking on the Bloomberg it's zero percent revenue growth blended out. Can they actually a

legit revenue scale? I think it's going to be really difficult to do with the format that they currently have. And look, I think there are some interesting weapons in their arsenal. They bought this Blue Mercury beauty chain, and beauty has been such a hot area. You look at the performance of uh Sephora and Alta, really strong performing retailers, and I think Blue Mercury could easily play in that

space if they expand it more quickly. But yes, it's really hard to envision a future where they can post strong revenue growth based on the traditional Macy's format. Well, just here to give you that perspective. In ten, they were doing over twenty eight billion in sales. In the last twelve months they did five and a half billion. Their market cap has been cut in half. This was a billion dollar company back in and it is now eleven.

But and Sarah, the heart of pim's good numbers there is this is a four cents on the dollar business. This is not Dominion Electric, you know, with a regulated eight, nine, ten twelve net clean. I mean you can't, I would suggest, Sarah, you can't do this flat revenue, shrinking revenues given those ending margins. So then what does the legacy of Mr Lundgren? What do they do? Yeah, so I think they're trying to become a healthier business in some other ways besides

growing sales. One is through real estate transactions. So they hired a senior executive whose sole focus is to free of value from their real estate. In particular that Harold Square property in New York is a real Crown jewel that they could get a bunch of money for if they were to then enter into a sale wee stack agreement. So they're trying to do things like that to become healthier.

But it's all complicated. You know, they've closed a hundred stores, and in some ways that makes them more productive, but in other ways they say they even see on online sales retreat in a given geographic area when they close the store, and so it's it's certain be a complicated they have at their door right now, Sarah, Now you and I are going to listen to this question to

Mr Pim Fox Pim. What was Harold Square like? Well, it had another store across the street called Gimbals, And indeed that was always the joke that they both lost money on everything they sold because they were in such intense competition, but that they made it up on volume. What was what was the holiday season? It was like was it like that? I mean, Sarah, this it was like the movie. It was like that. It was a Miracle Street. Isn't that cool? Sarah? Yeah? But that's you know, antediluvian,

that's like the place the scene era. You know, I think they still have one escalator in that Macy's Harold Square store that it's from that area, right, the wooden escalators, right that she used to get caught on as a child or your father would say, if you don't behave the escalator will eat you. Right, you were not allowed to walk backwards on the exactly precisely what did you get beaten at the same point as me? Sarah? Thank you so much. Sarah starting off seriously retailer with Macy's

with a really interesting story. And I believe there's a small combody in Arkansas reporting to borrow. Yes there is Walmart, but even just to put a little cap on this Lord and Taylor, which is also another big flagship store up the street. Yeah, you know they're shutting the store. I did not know. Yeah, they're shutting the store and it's going to become a we work project where people can at work. Well the building we're sitting in here

at the Mr quorback Alexander's all this, Graham and stress. Yes, An s Man. 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.