German Banking Market Needs to Be Restructured, Herro Says

Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course on the Bloomberg Device left which joins us now in our Bloomberg eleven three studio, se City Groups, Chief US Equity STRTUS. Great to have you with this here. Let's pick up the pieces a little bit after what we saw last week in Washington. We're wondering about animals, earths and degree to which they are fueled by stimulated

by what's going on in Washington or perhaps not. What did you make of what happened last week at the conclusion of the debate eight day debate over healthcare reform in Washington. There's so many different people, you know, pinting on this, and and I guess my sense is that

people got either too excited or too depressed around it. Um. We wrote something overnight saying that just like on November ninth or tenth, and you know, people were saying the Democratic Party was done for and you know, stick a fork in it. Um that the same thing is kind of being written kind of the obituaries or of the Republicans now over the weekend, given the failure of the of the repeal deal. UM. I think both of these

are highly exaggerated. Both parties have um splits and factions, and you know, there were even comments that that I thought were pretty well found that the negotiations were kind of going on between the different size of the Republican Party around the repeal deal. And then once they put in this kind of deadline we're voting on Friday, you know, take it or leave it. This kind of hardened positions

as opposed to the compromise. So you can walk away and say, hey, the Freedom Caucus has kind of burnished its conservative credentials and might be more willing to compromise in the future. Endeavor or that's it. They've they've it's worked, and they're going to continue to be that hard I think time will tell. I think these these kind of off the cuff responses and are more I don't know if the right word is filtered by partisanship, and therefore

each side kind of hammers away at it. I still believe the Republicans have to deliver on a number of their promises before they go to mid terms, otherwise they're going to be slaughtered. Um and and they kind of know that. I mean they've been telling people, for example, in Obamacare Affordable Care Act, that's been a horrible deal for seven years, um and then you do nothing to address it and we'll let it explode. I don't think that sells well in Peoria. Fold this into to your

your world the equity space. We've been told by so many people here that the Trump trade really had very little to do with with Trump, the things that had begun to to move before he was elected. After we saw that happen on Friday, did that change anything? Saying the health care sector? Where your your prospects for it?

For the equities markets? Way forward? So as I agree that much of the the activity was already starting before for example, uh tenure break evens it started to turn in February of last year, um, not February of this year. So UM, it's it's hard for people to kind of get their heads around that this started twelve months ago or thirteen months ago. UM. But there's more than that. There's a lot of other piece of evidence that that

suggests things were improving before the president was elected. UM. I do find the the you know, the reactions and markets very again kind of off the cuff. UM. It's not what I would call real investing. It's trading around kind of a news headline. UM. My job is to kind of figure out what's going to likely play out three or six nine months from now, not what's gonna happen, you know, tomorrow morning at that the that the opening

of trading. UM. And I don't think a lot of investors make money on the shoot from the hip type uh decisions. Within you know, a week or two, they find themselves on the losing end of that transaction. So I I get frustrated a little bit by it because I think people are spending way too much time on

it instead of trying to think about it. And what we've seen really in the last two weeks talking to the institutional investors is this extraordinarily my opic kind of what happened in the last week, Will it continue next week? And it's stuff that I just get really annoyed at. Maybe it's I take it to personally, I don't know. On blue gray with the left bach of of sitting here, how worried should we be about a flatter yield curve

at this point? Look, I think people were resisting any form of it steepening too, So UM investors are reacting to it, and they should. It has impact on the financials and how they trade UM, given that the curve determines often that that that net interest margin opportunity UM. I've heard people, for example, the financials worry more about UM the commercial industrial loan growth having decelerating UM. And I think it's interesting to note again the miss on

the fundamental story. The Senior Loan Officer survey from the Federal Reserve Board on C and I lending tends to lead actual business loans by six quarters, so that that deceleration that you're seeing currently is reflective more of the very tight financial conditions we were seeing in late UH when the credit markets were distorted by energy and that's kind of now reversed, and we should see by the

end of the year improving lending activities. So again it's this very myopic to look at what the last data point is, don't look about where we're headed. So that's the same thing going on in the curve. This is really important. It has been written up by any number of people, Ambrose, Evans, Pritchard and the Telegraph doing a great treatment Tobias. Let's get smarter here and we can do this with you because of your securities research background.

Help me here with what C and eye loans actually are? Are they the car loan for David's new Bentley? So so the FED breaks out there lending Sir of a in three different areas. They look at it in the consumer loans, real estate loans, and commercial industrial loans, which are business corporate loans. So you know, when we talk about the credit card, or we talked about the autois, that's consumer loans. When we talk about you know, real

estate development, it's obvious it's real estate. When we talk about business loans with the IBM s of the world do or what Caterpillar does that, that's that's the kind of thing we're dealing with. How does the CNI loan roll over end if we have a three months moving average of CNI loans rolling over, which is a chart that's ubiquitous now in research. How does it terminate? What where do you see the long growth step in so well, so it's usually used as a proxy for business activity. Right.

If companies are boring money to invest, that's great, um And when they're not, there must be something wrong. And that's why I think everybody's so focused on this business lending growth rate slowing. But again that's a lagging of roll. It's a lagging indicator for those uh our credit if credit standards easing or tightening, and they started easing around May of last year, which means by the end of this year, given that six quarter lag, we should see

that we're going soft duns. You're telling me the soft data n f IB statistics is more indicative future animal spirit only we're going soft dun. It's like the Montreal I'm not going soft dust. I just know that that. I just know from my experience of thirty years that were and looking at data going back years, that this stuff always leads business activity. And you're supposed to look at the lead indicators, not the lagging indicators. Lagging looking

backwards doesn't really help you. I don't know anybody who's driven successfully by only watching through the review mirror. Can we bring us over to an important thing that everybody will understand is p K suban a leading or lagging indicator for the Montreal is a lacking indicator for national predators is a leading indicator. Okay, there we go the proper David, did you get that there was a huge trade to this summer pek su band? What a great

response You've got. Nobody in your listening world who actually has a clue, who peeks say good morning to all of your listening in Canada, and particularly Don CHERRYO, we know tunes in every morning, but come on my fashion, my fashion model. Yeah yeah, And and Shay Webber went over to the Mantra Canadians And it's an example of that bet, that big bet David, you've got to take like you wonder his business going to take a big bet?

And Mr Trump love that tics. Let me ask you just about the compliment there of soft data and hard data? How do you look at them in concert with each other? And there is there a disconnect between the two, not really, um, I think the the because the lead lag factors. They aren't disconnected, they just don't happen simultaneously. UM. And I think investors tend to walk in with a particular perspective and then they choose the data they want to look at.

Um it's I look again, I need to figure out where I think the world will be in the future or not where it is right the second that helps me for trading today, but it has nothing to do with my investment profile over the next six twelve months. UM. So I always look at the leading indicators, even if it's soft data. Is is I'm not going soft. I'm looking at as the lead indicator for the hard data is not certainly not his slap shot. I don't want to stand in front of a hundred eight mile per

hour shot. Um. But the the the notion of you know, every time the n f I be hiring intentions has improved, twelve months later, the unemployment rate has improved. UM. Every time CFO serving from Duke University said they're going to spend twelve months later, spending occurs. Every time I s M New Order Index is going up three to six months later, industrial production is going up. So it's really hard to walk away from that and say, now, let's

ignore this tobias left covicuitous. Let's pin you down on the bull call. Where are we twelve months from now? Are you more than enthusiastic about equities? So we have a year and target the SMP five. We don't have a twelve month specifically target UM. And you know, I could see an overshoot beyond that if investors really got behind us. UM. There's a lot of cash stile in the sidelines. Investors haven't truly committed, and as a result,

you could get the overshoot. It's it's not our forecast, but there's reason to believe that investors have just not gotten there are panicky four you models still stuck in neutral territory. We don't see the four investors generally speaking. But when I visit and I've talked about the hundred and sixty investors in the last four weeks, UM, you know, sitting in front of them, chatting with them around the world,

and I just don't see. You know, I think I found five bulls, that's it now, and then found I want to I don't want to suggest I found a hundred bears on the other side of it, UM, but I don't think people are. I don't think they have great conviction either way. So it's more they're they're they're frustrated they missed the run. They're kind of happy that the reflation trade is kind of weakening because they weren't

positioned there. And actually the biggest pain they might suffer is if the market ran ten percent, because they're not ready for You mentioned energy a few moments ago. We're talking about sectories, So what do you anticipate. We'll see their energy and materials going forward. So on the energy, we break that out of materials in the US, just for people to understand, the SMP five hunded material sector is really chemicals. So when you think of material's, attend

to think of medals and mining. That's true if you're looking at Asia, if you're looking at Europe, Latin America. But in the US it's really chemical. So we have a different, you know, it's slightly different animal in that regard um energy, we've we've we've and I know Tom's had had Morrison. Um, he's just great as a commodity research guy. He's still looking for sixty two dollar loyal at the end of the year. On that basis you really do want to own energy and take advantage of

the pullback here that we've seen. UM. We had anticipated there would be some weakness in the first quarter and then we'd see strengthening through the balance of the year. UM. You know, the Saudis have vested interest here and getting prices up, that Russians have an interest in getting it up, and we might see some you know, shale cost development inflation, as you've got to bring people together here to to

develop these new fields. UM. But they were laid off the last two years and they've got to be brought back, and probably some higher costs to doing this than maybe some people are anticipating right now. How about the forecast for the dollar and dollar strength's that affect them? So our guys are fairly neutral on the dollar. UM. I think they had better expectations going into the year than

what we've seen play out. UM. And part of that I would say this, I'm not an f X expert by any by any measure, but the thing I would watch, for example, in dollar euro is more about the spread between the tenure bund and the tenure treasury as opposed to just looking at the tenure treasury and a vacuum as if the yield you know, has no competition around

the world. And if you go back, let's say summertime of of UM last last year, you were looking at a one point three six one three seven tenure yield, but are looking on minus point for bund yield over the same time your timeframe. That's changed as well. As we've gone up, so has the BUN yield. So I think people forget that at times its dividend growth a proxy for yield. Help help all of our listeners with this. They're addicted to dividend growth. It's worked like a charm.

But you and I know the party ends one day, doesn't, so dividend growth. Look, we spent thirty five years in a bond bull market, so at some point the bond bull market ends and the dividends bond bull market ended.

Our senses, yes, but if you if you think in those terms, loss of the work done on Wall Street over the last thirty years has been in this kind of nice declining interest rate backdrop, and if that were to change, then many of the analyses done it's probably going to not be as benign as they thought it would be. So you know, it made sense to look for income growth when you had no alternatives, and dividends

are one of the ways to generate it. But I was talking to our read analyst UM after it and just said, you know, the resector has been the worst performing sector since it became a sector. And part of the reason is UM that yields have shifted from that one point three six one point three seven low last summer, and there is competition for income. Let's bring this full circle. You are frustrated with those who have that myopic view of the markets right now, what do you say to them?

What should they be looking at? What are you looking at? What's your vote of encouragement to them? So we look at a lobriety of things. We look at what are the early indicators of earnings growth? And and I know this surprises so many people, and we showed them the tightest fit that we're going to find with earnings growth is industrial production. And that shocks people. In of um of the economy is tied to industrial activity, but it

is the most cyclical components. So who I describe it is you don't buy ten boxes of detergent when the economy is good. In one when it's bad, right as you need to launch your clothing. So you know what what vacillates is industrial activity and that has every indication of getting better. David, you didn't bring in full circle. Sorry. Anthony from New Jersey sends in a photo of p K Suba and doing a Don Cherry invitation. I'm gonna put this out on Twitter. Don even were the same

quote code. I guess the next to night. But it's great, uh and we you know, shout out to all of Montreal and I did particularly for Montreal medicine. Uh in his tenure with the Canadians. And that's too much hockey for you. Good news. It will continue, Tobias Loveki, thank you so much. With City Group. This is Bloomberg brought you by Bank of America, Mary Lynch, dedicated to bringing our clients insights and solutions to meet the challenges of

a transforming world. That's the power of global connections. Mary Lynch, Pierce Feeder and Smith Incorporated Member s I PC. It is now a great, great pleasure to bring back someone we talked to too many times, David Harrow of Harris Associates. And we'll do a little bit of politics here on the backside. David, what a great conversation earlier this morning with Kathy Matsui of Golden Sacks Equities in Tokyo and talking with her enthusiasm about obonomics and about the potential

lift of dirt cheap Japanese big stocks. Are they dirt cheap? Um? They are cheap in price, But value just din't uh described or defined by price. You have to look at what you're getting for what you're paying. So if you look at low on the surface multiples for Japanese stocks, you have to compare it to low returns on equity and returns on capital, which when you add that to the formula, they don't look all that cheap. Some are. But the problem with Japanese companies in corporate Japan as

their return structures are persistently low. And I thought you you'd be willing. You shouldn't be willing to pay any kind of a premium. In fact, you should pay a discount. They deserve their law valuations because of the low returns

companies suffer from. In folks, I sort of knew where the answer was going, and I set Mr Harold up here, can they finally become more Anglo Saxon, Like, that's what I asked, miss Massou MASSOOI let me ask you as well, are they you know you talk about returns in r o E. Are they going to deploy more cash to a shareholder centric company or is it the same old same Hold? Oh, Tom, this has been you know, I've

been doing a since and I first Brewers. One was that one of the Brewers go to the World Series. I wasn't undergraduate school, so I think that was like eight two anyway. Anyway, I mean, here is the problem that the Japanese managements and boards often do not view the shareholders as a very important constituent. And when you add to that the way these boards and managements are

protected from hospital takeovers, you don't see activity. Even though when this GP if the big Japanese pension funds stated they're gonna start coming down hard on Japanese companies unless they earn an eight or nine percent return on equity, which is almost laughable because what's wrong with thirteen, fourteen or fifteen percent return on equity, especially given the nature of the inefficient balance sheets in corporate Japan. So this is a huge problem, and I would love to say

that we're making huge progress. It's slowly going in the right direction, but it's ever so slowly, and it's not broad based at all. I mean, you just have companies that have of their market cap sitting in cash earning zero. That is value destructive in our view. And when you have these low returns drip even by poor capital allocation, and they're also not so good on expenses and profit margins, then you know you deserve these low prices. And I

really don't know what's going to change it. I'm in Japan once or twice a year and you sit there and you're literally harp on these people and then not to go yeah yeah, yeah, yeah, thank you, thank you, thank you, and then they just turn around and do the other things. So I don't know. I I wish I would be seen better progress, but you know, it's it's frustrating, actually very frustrating. This is a remorseful data sad.

Let me let me pivot to ask you. But I know, I know you're investing in emphasis now, and I wonder if that is if that is an outlie or company. Other words, when you look at the kind of opportunity, degree of opportunity in India. Is there a lot there or are you taking small steps in? Well, again, there are things happening there, but it's so pricey. It is so pricey. The government is trying to do the right things. Uh.

Corporate India is pretty good. Uh. They have some good competitive advantages and certain things like what the business InFocus is in this outsourcing, which, by the way, the reason why prices are lowest. Persives questions about H one, b

vs as, etcetera. That's a whole another story. But UM India is trying to do the right thing, and that is really have a more open economy and be have more liberal economic policies conventional historical liberal economic free market policies and and the UM government was helped there with another big election wins, so so hopefully you will start

to see more of these policies. I mean GDP per head in India is still a fraction of that of China, and a lot of this is the result of their inability to drive through infrastructure projects and to get higher productivity in their economy based on simple things like Rhodes highways, plumbing, etcetera. I mean, there's a fascinating statistic about just the lack of plumbing in India as an example. So, and there's

so much potential. You have a two to three hundred million people middle class there um, but then you do have this large, large lower class and large very low GDP perhead which they're they're trying to do something about. What's your advice to an investor who, like you, sees that opportunity in India maybe hasn't played in that market before.

What are you looking at? What are you advising they look at before they get in, But you have to look at prices and what they're selling for because a lot of times the big picture euphoria just attracts money for that very reason without looking at the price you are paying. And then it becomes the momentum market, a market that just trades on headlines. And again that's just

kind of counter to how we do things. It might work in the short term, is our view, but you know, in the medium and long term, you buy quality at a low price and you be patient. That's how you make money. And the problem with I think that the public is they just they see these big themes and they want to jump on them, and they do it irrespective of price paid. It's like getting out of train that's moving, but not knowing where that train's final destination is.

Let's take the train up to Europe. And we've we've seen these capital raising schemes with Credit Swiss and Deutsche Bank. That's it. That's why he's still remorse today. It's dilution.

I wanted to ask him about delusion. Let me let me get your perspective on that, David, if I could, well, in the case of Deutsche Bank, I think there's there was a very solid reason because of you know, relatively low capital ratios and and a bit of a patness in the whole Deutsche Bank situation, and I would say a lack of profitability in their core home banking market Germany. You know, I've said before on this show Germany is one of the worst markets to be a banker, and

it's it's just hyper competitive, a low returns. They have these things called landa spank in which ruined prices and give loans to anyone, and you know you're not a good place. Do you own German shares? We don't own any We don't own any shares in German banks. And in fact, we looked at it into Italian Bank when any credit came around. You know, one of the problems we didn't invest in that bank. But they have a big presence in Germany, and they're big, huge presence in Germany.

Doesn't make any money. You have all these assets deployed that make no money, and it's just it's a very difficult market that needs to be restructured. UM, So deut your bank. I think that there was a reason why they raised capital. Now, don't forget credit suite. On the other hand, they did have a capital race, a relatively small one a couple of years ago, um, about a year and a half ago when Mr Tim just started,

a few months after he started. And I think there was as a result of the UM Swiss national banks changing capital requirements and a result of all find they had to pay. You saw the RMBS fine they had to pay. Um. There's a question of whether they have a strong enough capital position. From what we can't see here, it appears they appear to be in decent shape, especially if they continue to improve their earning stream, which they

could then build upon capital. I mean, I would rather have them look at their dividend policy, for example, before they look at raising capital. Shareholders and see what happens in the next year or so in terms of earning. Should they should? Should? They? Should? They? Should? They just get through the pain and actually do M and A. I don't think there's a lot of M and A they should be doing right now that could be additive.

There might be a little something here and there. As we know in Switzerland, a lot of these small private banks are suffering because of the inability to have the money to comply with new rules and regulations. Let to the state might make sense rolling up some private Let's come back and continue this discussion on credit Sweeze with David Harold Harris Associates on credit Sueeze, it's a smaller

transaction than Deutsche Bank. Clearly they're not a comparative to Deutsche Bank, but one of the similarities is this desire to expense control if they expense to the bone or is there more to go from where you sit? I think this is the beauty of the new managements approach

at credit suits. Is this to borrow what you happen East term kaison continuous improvement and and their business constantly looking for new ways to do business processes better and cheaper and by the way, this is how every business should function, and unfortunately people can just get a little complacent.

And I think what what t JAM is doing is really putting a focus on being creative with with running the business and making sure that we're looking at new ways to do things at a lower cost space is so I think they will continually be pushing expenses down and productivity up. And whether that means doing creative things as far as outsourcing some back back office stuff or or doing it collectively with some of their peers. Uh, They're open to all these things. And I think this

fresh look at things. You know, historically these investment makes it made so much money, they treated as if it were just you know, it was coming from the clouds. And now I think it's it's not that easy to earn money consistently, and so this expense management is a good way to help create a nuity like earning stream. One more question before David Gura gets to the politics

of the moment. David Harrow helped me here with the gamesmanship of mergers where people talk about credit squeeze and Morgan Stanley mating or you can name any other peers that you want. I can't get Credit Squeeze to be in Peace size or Deutsche Bank size or maybe some of the UK bank size. Where do they fit in and who would they bolt onto to make a bigger bank? Yeah,

I don't know if bigger's naturally better. I think what we want them to do first and foremost is to cement their strength and private wealth management, and the private bank is specifically with their franchise in Asia, and I believe they do have strong franchises within their investment bank and equities and fixed income and even in doing some deals, and so the two have to kind of work together, and especially in Asia where there is a stronger link

between wealth management and investment bank with the rich wealthy family groups, the billionaire family groups with their businesses aligned with their family wealth. So I don't know if big is necessarily better. I think let's get better first and then look at size and scale, and I think there's still plenty of room to get better before you look at any kind of major m and a as I that some small emanate maybe in the works might make sense with some, especially the Swiss and the Swiss private

banking sector. With this, in these smaller banks, we just don't have the funds that can beat anymore given today's compliance costs. We've talked an awful lot about what what happened with healthcare reform portends for taxi for let me just ask you about regulation instead. More in your your wheelhouse there when when you look at what might become of Dodd Frank, what do you see happening and how could that affect banks like a credit suite in Deutsche Bank.

I think there will be changed. I mean clearly and clearly, and I think it was Robert Barrel and time. You probably remember this very good essay he wrote in the Wall Street Journal a year ago about the cost of regulation, and perhaps this is one of the reasons why the economic recovery was so weak post the O eight oh nine. I mean, it's the old pendulum story. The pendulum, the regulatory pendulum swung too swiftly to the wrong side, to

the overregulation side. Good, transparent, easy to follow regulation is important, and it helps businesses can be able to conduct commerce. But when you have overly burdensome regulation that it's just layers and layers and pages and pages, it prohibits commerce. It prohibits people from taking risks because you don't know whether what you're going to ultimately do is going to be cost effective or if the regulator is going to regulate your profits away. And whether it be healthcare, whether

it be energy, whether it be financial services. All the major sectors of our economy were bombarded by the previous administration and regulations that often, in my opinion, were senseless. No one looked at cost benefit analysis, no one looked at, you know, really what the impacts were. They just did it because, as our European chairman once told me, regulators do what they do. They like to regulate. David, we've run out of time. Help me here with speaking Ryan,

you're with Wi consin. You know, the gentleman from Wisconsin. Uh, what does he need to do to write the ship. It's a setback, And what he needs to do is just find common ground with the people in his own caucus. This has always been a rambunctious caucus that he's had to deal with. Remember he kind of made a deal with him to get elected speaker to begin with. And

I think you just have to find common ground. And you know, people can't forget that if everyone gives a little, no one has to give a lot, and this is what he has to push with that rambunctious, rowdy caucus. Now he has not enough time. David Harro, Let's do it again. David Harrow with Harris Associates UH this morning, particularly David Girl that the thoughts on Japan. Always a pleasure to be joined by Yakum Fels. He's the Global Economic advisor at PIMCO. He joins us now here on

Bloomberg Experience. Great to have you with us, And I was taken by your latest March outlook here you're write about how there is a theme too Pimco's March two thou seventeen cyclical form that's scaling it back, and the inspiration for that, perhaps indirectly from the Fed chair Jenny Yell. And it's something that doesn't just extend to monetary policy. It's it's a broader theme. Yeah, that's right, David. So

scaling back doesn't only refer to monetary policy. But we we also, you know, we looked at the risks that we talked about going into the year after our December forum, the left tail and the right tail risks. Back then we had talked about fat tales and we reassess them, and we said, hey, we think it's time to scale back a little bit some of those risks because we've learned some things over the first few months. You know, Trump didn't get aggressive on on protectionism, at least not yet,

and he could have done so by executive order. So at the margin, we thought that is good news. UM. Also, it's unlikely that we get a huge, big fist could boost anytime soon, which could have led to an overheating of the economy and a very aggressive fat response. So in that sense, we thought it was time to scale back some of those left tail and right tail risks. UM. The same also applies to the China risk, where the focus really is on stability ahead of the nineteenth Party

Congress in October of this year. UM. And so overall our assessment was, well, let's scale back these left and right tail risks a little bit. We've slightly increased our outlook for growth this year. But then here's the bad news. This means central banks like the FED, like the ECB will feel encouraged to scale back accommodation maybe a little bit earlier than previously expected. And I think that poses

some risks for markets going forward. Politics in Washington is playing a much bigger role on our program for sure, And I imagine that you're quarterly four when you've got a Marie Slaughter there from New America and Ben Berniki of Brookings. There is a spirited debate about the change going on in Washington, d C. How much how much of your time we spent talking about what's changed? Well,

we spent a lot of time on this UM. I would say about a quarter, maybe even a third of the forum of the economic forum we spent talking about the policy outlook. Yes, with Ben bernanke with and Marie Slaughter. Gordon Brown also weighed in with his perspective UM not only on the US politics, but also on European and in UK politics given Brexit. But then UM, at the end of the day, politics is only part of what drives markets. There's a lot of focus on it, but

there are other things like central banks. Uh, there's China where we had a massive credit impulse last year, a positive credit impulse that really lifted all the global boats, not only Chinese financial markets but also global financial markets. There was a rebound in global trade that we've seen over the past six months, probably sparked by this credit impulse. So there's a lot more to talk about than just Washington.

And I think, um, it is very dangerous to only watch the wheats um and only look at the political headlines. If you look at how markets have done, we've had amazingly low volatility despite all the political volatility coming out of Washington. You have come help us here, and I say this about the United States with your expertise and the continent of Europe. And I guess it's a form

of eurosclerosis, but maybe without the negativity. Do our listeners in America do they need to get use to damp phenomenal g d P, dampen animal spirits in some American form of eurosclerosis. Well, Tommy, you could you could argue that this is actually what we have seen in this entire economic expansion, which is now in its eighth year. We've had very low nominal GDP growth, We've had very

dampened animal spirits. So this is in a way the story of this economic expansion since the Great Financial Crisis. So we've had an American sclerosis for a long time, and we hear at PIMCO called it the new normal and the new neutral, And I think the big debate now is has been since the election, whether we can break out of the new normal, and we can break out of the new neutral and really move back to the old normal, higher growth, higher inflation, higher interest rates.

That was a debate we had in at the December Forum. That was a debate we had again in March. But our conclusion is no. We think we are still in this new normal of low growth, low nominal growth, not quite as low as we had it in the last few years, but we're way We're far away from going back to the old normal. At this stage we spend all of our time and I'm hugely biased and wrong

about this, folks. Is the basic idea of ken Europe become more Anglo Saxon, Let me flip it on its head, thinking of the great Conrad at an hour in the social fabric he established for Germany. Does the US need to become more continental European? I think what you've seen tom over the past and fifteen, maybe even twenty years, is that there has been a certain convergence between the US, or what you call the Anglo Saxon model and the

continental European model. So you could argue the US has become a little bit more continental, right, We've built out the welfare state also here in the US with Obama Care, etcetera. UM and Europe had some market based, market oriented reforms at least in the early days of the euro back in the ninety nineties. Then sparked by the crisis a few years back, some countries in Europe, like Spain for example, also became more Anglo Saxon by making their labor markets

more flexible, allowing more wage flexibility. And you know, Spain has been quite successful in regaining growth and regaining competitiveness. So I think there has been a convergence that has been going on for quite a while. David Gara and Tom Keene in New York, this is Bloomberg surveillance on bloom Burgardier with Yakum Fell's globe like an armic advisor

at Pimcogne. You mentioned China a few moments ago. We had that meaning a couple of weeks back, and I wonder how cognizant the Chinese government is right now of its economic situation. Are we see more transparency here, we see more of a movement in that direction. Well, I think At the moment, we're moving in the other direction because the key focus of the Chinese authorities is really to ensure stability, both financial stability but also economic stability

ahead of the Party Congress President. She wants to consolidate his power, so the last thing he needs is either disruptive markets or too sharp and economic slowdown. So what we've seen is they've clamped down on the capital outflows quite successfully, at least in the near term, and it

shows up in a stabilization of the currency. That also helps to stabilize domestic financial markets because all the savings, the excess savings are bottled up in China, Chinese investors have no choice but to invest domestically, so this is supporting Chinese assets. And I think what we'll see in the economy is just a continuation of relatively decent grow It's slowing over the medium term, but they have the fiscal wherewithal to stabilize it at least until the end

of this year. We are more worried about the medium and longer term outlook because there is a credible bubble credit bubble in the making, and eventually it will be very difficult to stop the capital outflows. But for now, the buzzword is really stability within any given moment. There's some back stories that are percolating, and one of them right now, YAKAM is loan demand from banks. See and I loans have rolled over. Some people are making a

big deal about it, and others frankly or dismissing it. Folks, what's the spirit the dynamic that you see now in banking loans? Yeah, it's quite interesting, Tom, Yes, we have seen quite a significant slowdown and see ANI loans here in the US. What's behind this, Well, if you look at it in more detail, banks have lent less to companies for M and A activity. So what has happened is M and A activity has somewhat slowed down here

in the US. We think this probably also reflects uncertainty about what exactly is going to happen in terms of tax reform. Also, you could argue that for many companies it just pays to wait and see what happens on

tax reform before they put in place business investment. So we have this paradoxical situation where business confidence is up in the expectation of reforms, but companies don't actually invest a lot We have some cyclical rebound of investment in the energy sector, but that's related to the oil price. But otherwise we see caution and this is why we continue to think that three percent or even four percent growth anytime soon. It's just unachievable. Yeah, Fell thank you

so much with PIMCO. Always a great Now you look forward to speaking here, particularly your next visit to New York. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm out on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio, brought you by

Bank of America Mary Lynch. Dedicated to bringing our clients insights and solutions to meet the challenges of a transforming world. That's the power of global connections. Mary Lynch, Pierce Federan Smith Incorporated, Member s I p C.