Global Growth Isn't Sustainable, Silvia Says

in New York City. John, always great to catch up with you. Thank you. Is this peak growth? Can it get any better? Oh? I think that peak growth for this year eighteen, But I don't think it gets better and it's not sustainable going into I think you've got a big jump here. You've got a good would gain equipment. Uh,

spending in the United States housing starts has improved. Also in the United States, and as you just mentioned, Uh, the European economies have surprised US in the last year, and they continue to surprise us, but they will settle down to a more longer term trend. But it is good to see those positives. John, What do you see is more sustainable. What's happening in Europe or what is happening in the United States. Well, I think for more sustainable,

I would go with Europe. I think there there have been some changes there. They continue to do fundamental reform for different nations, and I think they've got their story together. With respect to trade, I am more concerned Jonathan with trade, as Tom and I had discussed earlier today. Uh, you know, what are we actually going to do to NAFTA? Do we understand the importance of naftal the United States? So I like the European sustainability. Do you see reason for

that to be enthusiasm in the equity market? With the Dow set to go through twenty five thousand today for the first time ever, the SMP northred yesterday for the first time ever, we keep grinding our old time highs. Does it make sense to you, John right now? It does because you've gotten changes in fiscal policy, You've got the p M I s that have done really well, sustainable gains and employment means the consumer continues to move forward,

and you have relative peace in the world. Good morning, everyone, John farre and time Keene thrilled you with us and We've got some really constructive news here. This is the micro news. It's made John Sylvia's career in particularly with his work of the National Association for Business and Pharmaceutical Economics. Walgreens Boots. What's boots? John Boots is um like Dwayne

read here. Okay, so it's like British Walens. Yes, so you go and you can buy like what you need for the bathroom to have a wash and brush your teeth.

I just had the December teeth brush. Walgreens Boots out with important numbers and in the one headline and want to with their upgrade the one headline, I want to mention John Sylvia, which folds into your economics reach l Pharmacy comp sales four point seven percent, which is away from fed mombo jumbo nominal g d P shows corporate indications of picking up absolutely and for a traveler who does go to London least twice a year, Boots is

essential for all those little things. Honestly, Boots fantastic, Tom, It is fantastic. When I go into the airport at JFK and I don't see a Boots. There is a Boot to every airport in the UK and it's got everything. Thank you for that important information, Mr Fer. But it shows you consumer strength. That's what it's telling you. That people are going into those stores and actually communing things ahead.

So I'm working with Dr hass In, the President of United States, and I'm saying, all this doom and gloom, look at the animal spirit. How much bigger will the animal spirit be? Do we go from the gloom of four percent nominal GDP? Can you get to a six percent nominal? I can't get get to six percent, and

maybe someone else can get there. The President would do that. Wow, But I'll give you a two and a half percent g d P. Let's say a year from now, and I'll give you two two and a quarter percent, So maybe four four and a half to five is a six percent is a little bit too. But these corporate Honeywell, Walgreens and many others, I'm beginning to see the lift and you know organic absolutely yeah, I mean we can

see that. For the last four or five years, it's been economic growth around to two and a quarter and now we're moving up to two and a half maybe two and three quoters. That's great. Give us a briefing before we go to Jim blast One and Bill Gross Tomorrow, Dr Sylvia give us a briefing on what we need to know about the immediacy of wage growth. Our wages actually going up adjusted for inflation. Yes, that's a point

point time that's overlooked. It's real wages. But total real compensation has really improved because once again people care about their benefits, particularly healthcare benefit. Company station is not part of the unemployment number. That's plain to our audience. How that's published, Well, it's published again by the federal government in the United States, but it takes into consideration the pensions, takes into considerate healthcare, life insurance, disability insurance, all those

other things that Tom are not taxed. So the wages attacks and workers have realized over the last three or forty years, if I'm getting the compensation through insurance that is not tax then my total income actually goes up. It's a really good point, John. Before we let you go, can we get to the economics of cold weather. It's snowing outside. Tom doesn't want to talk about the hysteria.

But Q one after Q one, after Q one after Q one in the United States of America, we have had soft growth after soft growth, and economists continually missed the story to your important observation, what we have around at John Farroll is a big asterisk every first quarter. And are you it wasn't like that. Now we've got this and it feels like we're going to do it

all over again, and we are. How many economists, including yourself, John, are going to come out of the next couple of weeks and say with downgrade and knock Q one estimates because of the weather. I would say the majority will again because this again, when you're impacting New Jersey, New York, Connecticut, Massachusetts, southern New England, that is a huge economic powerhouse in

the United States. You know, as as Tom was mentioning earlier, if you have an earthquake in San Francisco, that's a minor earthquake, okay, but if it's significant, that economic impact is significant. We got one minute left with you. No one cares about this. How did the Boston Red Sox respond to the New York Yankees? The Yankees have going to Aaron Judge is gonna lead off. They've got this guy from Miami, this piece of meat from Miami. It's gonna win a hundred and forty baseball games. How does

Team Red Sox respond? Uh? Pitch around the opening Uh? Eight intentional walks per game? Eight intentional walks per game? Just walk them and deal with all the rest of the line up. You don't see any strategic thing like in a case of there against lager beer or anything. Now he's coming back, is coming back. It's coming entrepreneurial spirit of New England, right, John Sylvia, thank you so much.

With Wills Fargo now living in the Carolina is our last conversation with the amble from Toughs Lector School was most distressing. James Tavitis has been a student of our Navy, of our military, and now teaches students on international relations at Tufts. Admiral stevinus, wonderful to have you with us this morning. Our men are in danger, or sailors are in danger? Are women are in danger? Off boost on South Korea? Where it's a chilly thirty five degrees this morning.

We've got boats out at sea, UH doing what our military show the flag, et cetera. How damaged are they by the silliness the discourse of Washington? I think they are able to tune it out. Tom and that's kind of the good news. First of all, particularly our worships at sea. Uh, don't gather around and watch CNN seven. They're so busy. They've got contacts in the ocean around them, they've got planes overhead, they're tracking missile flying. They are

not focused on Washington. And if they did, I think they would still tune it out because they have that kind of ethos that says, we're out here, we stand on the wall to protect our nation. We're not going to get caught up in the day to day. So on that score, I feel pretty good. Give us your update on the adult nous of the adults our General Kelly, our General Madis, and other adults of Washington doing this morning.

Uh Well, I would say on a scale of one to ten, they have a job that's about a thirteen. This is a tough operation to effectively put guard rails around a presidency that is too impulsive, too erratic, too unpredictable. I would say they're still in the game, particularly the two you mentioned or four star US Marine Corps. General's seen a lot of combat. Uh, you know, they've seen worse.

They'll they'll stay with the program. We also ought to be concerned about three star General hr McMaster national Security Advisor. He's just done a very good job getting out a new national security strategy which is actually shockingly shockingly normal. So I think that team is doing pretty well. The one to watch that I'm worried about is Rex Tillerson over at State. I think his stock is very low. I think his morale is very low. I know his

department's morale is very low. I suspect we'll see that change earlier this year. And I'm really you worried about Rex Titterson, the Secretary of State? Are you worried about the State Department? The latter um secretaries come and go. The department is a generational operation. You have to bring in young foreign service officers who are willing to devote themselves for ten twenty thirty years to create that cadre

of professional ambassadors. At the far end, the State Department is down fifty five zero percent in applications this year. That's shocking. There is a concern that the State Department is being gutted. There's a lot being written about it and reported about it over the last twelve months. Key individuals that should be in key areas of the world representing the United States no longer there animal. What are the consequences of that? Are they immediate? Are they around

the corner or they slow burning over several decades. You know, they're all three and I'll give you a practical example of each. In the immediate term. What this does is it overweights us in the military instrument. Believe me, We've got all the generals and admirals we need um. If we don't have ambassadors to kind of put balance, our program overweights towards hard power in the if you will, medium term, we don't have the expertise on the ground.

In the long term diplomatic efforts in the Balkans, in Afghanistan, and long term, as I said, we lose that cadre of professional ambassadors twenty thirty years from now. So I'm very worried about State Department and Stavids. Were you ever on a p T boat. I never was assigned to the crew of one time, but of course I've been on the many many times all over, particularly in the Caribbean for example, doing counter narcotics. I mean, folks, that

it resonates so much. Of course, with President Kennedy, I think of a close quarters p T boats in the United States Navy. Robert bots a classic text Admiral Stevidez. Here's the latest tweet I guess on p T boats by the President United States. Well, all of the failed quote experts on quote, he doesn't mention you animal weighing in?

Does anybody really believe that talks and dialogues would be going on between North and South Korea right now if I wasn't firm, strong and willing to commit our total quote might unquote against the North fools? But talks are a good thing. What is what is an amateur like Tom Keane or President Trump or John Ferrell? What do we know about? Might you lived it? What? What is

the might of our military? How would you lecture civilians? Well, first of all, I think this is part of the pattern of a president who thinks he's the reason that airlines are not crashing out of the sky. Um, it's just he is living in a fantasy world. And I would say that the might of the United States is certainly part of this. But the real driver of the chain of events were in the middle of is Kim Jong Hunt And he is the one that is step

or two ahead of US tactically. So I think the president ought to get some balance in his rhetoric, rely on the professional US around him, build a coherent deterrent, you cyber offensively, put up maritime interception operations. He's done none of that um so far. What we see as a chain of events driven by a young, unpredictable dictator in the North. In our own unpredictable president needs to up his game if we're going to succeed diplomatically in

resolving this. John, and on the plane flight back from the Old World, thank you British Air for the great flight. I watched one of the recent Churchill epics yea, and there was Churchill being lectured by the general from the United States in a kind way, Dwight David Eisenhower about excuse me, sir, you're a civilian. I mean, John Ferroll. This this is not just about America now, its every institution,

about the world response and global institutions. But Adam Well, you've touched on something really important, and that's the overweight of hard power, the over dependence on hard power. Is this an administration that you think fails to understand seft power or is it an administration that has said, well, it hasn't worked for the last twenty years to deal with the threat of North Korea, so why should we

continue down this path? I think the former John and if we think about where we've used the mix of hard and soft power, that's where we succeed. And that's the subtlety that this administration thus far has not grasped. For example, in the Balkans, we use hard power initially, but it's been soft power, the economics, the private public partnering, the development aid that's brought to Balkans where it is

same in Columbia for example, same in Sri Lanka. It's that balance of hard and soft power in that Back to your earlier question is why worry about a lack of the State Department in the case of the United States, where we don't have influencers who drive us towards balancing hard power when you need it, but soft power for the long came to win. In the scenario, I'm gonna

assume it's not the Philippines. You're not going to line up the Missouri sixty miles offshore of North Korea and bombom what is a quote unquote might attack that the President would envision. I mean, how do you attack North Korea? I don't understand tactically, how do you attack You cannot conduct an attack that does not escalate into a war on the peninsula, which will cause at a minimum a million but somewhere in the range of two to four

million casualty stomp. And that's because of the geography where Soul sits right under the guns of North Korea, and because we have a dictator in the North who already has tactical nuclear weapons that he can use in the immediate context of the conflict. So any kind of military response is highly, highly fraught. Edmill, thank you so much. Here into the lecture, unlike this morning with animals, David, is the Tufts in the Fletcher School, m Let's said.

The longest joint is now port folio manager over at Oppenheimer Funds. As we see, what did you say, Tompson Warmth on the tape future is positive at five points on the SMP five Dow futures up a six twenty five K and site nor hundred on the SMP five hundred yesterday, Alessio, is this as good as it gets? With the data on both sides of the Atlantic looking very very nice Good morning, Tom and John. Yes, I mean we we couldn't wish for a better global economic outlook.

I mean, we've seen the recent data literally over the last couple of days, especially with the business services such as the p mzing IM survey, really suggesting a continuation of this very strong momentum in the development markets. But also we're seeing good news in the emerging world. So we continue to see what looks like the best global growth synchronization, the best global growth acceleration we have seen

in over a decade, So peak growth. When we start talking about peak growth, that that's a very important point because we m we begin to see, particularly in the US UM the flattening of the yield curve um which and we're very early stages, but that's flattening of the yield curve. Is a reminder, of course that the FED has been tightening rates now for a while. I'll date at the at a gradual pace. I think it's still

early to talk about growth peak. We we seem to be in a solid fooding throughout the first half of the year, and you know, of course the economy always go through some some soft patches, but I think we we can't really start worrying about a serious downturn for at least at least another year. What is your calling dollar? I mean, it's really a way from your remit, but I want to go there. I mean, you look at dollar dynamics and and John and I saw a lot

of different opinions at the end of the year. Is it a flow story with money flowing into Euro money flowing into the American system as well? Well, you know, the dollar question is is a particularly interesting one given the anomalies that we've seen last year, that we expect a dollar to continue to UH, to continue the weakening trend that has experienced in sev outbet maybe at a more gradual pace and some more rangebound price dynamics. But

why that dollar weakening? Because the first question is why is the dollar weakening when the FED is raising rates? UH. There has been almost an unprecedented disconnect between rate differentials and currency performance, and you see it particularly with the

euro last year. We expect that to continue somewhat. This environment is very reminiscent to me of what we saw in the early two thousands, say two thousand, two, two and four, where despite the FED raising rates and the c B not raising rates the or of strengthen the dollar weekend. Why we are seeing that late cycle dynamics for the US where the current account differential between the US and the Eurozone is extremely wide. The Eurozone and

Japan have very wide current account surpluses. And and those are some of the structural flows that you Tom are referring to, some of the structural frows in the background that are supporting UH foreign currencies. On top of it, we believe that the biggest driver of capital flows will

be the equity side. We continued to expect our performance of European and emerging market growth versus US growth, and that typically leads US capital US investors to deploy capital into foreign markets, which we know is typically unheedged unless you know, there's a point where bond market dynamics really and abruptly folds into stock market dynamics. Review for US, how does that work? Rising yield? How does it fold

into stock market effects? UM? I would say there's a two three channels here to to keep in mind, there is the the and and bond markets effect equity markets with a with a long UM lead UH. The The first and most important channel in my opinion is the is the tightening of financial conditions that is represented the first and foremost by the flattening of the yolker. Right, so as the as the yelker flattens gradually that these

incentivizes the banks from credit creation over time. Right, they borrow in the short end and they land at the long end of plus a credit spread. As as the availability of the term premium over time in the long term um gets reduced. Banks of course have less of an incentive to to land, to extend credit, and most

importantly in some cases, to even roll over credit. So what happens is then towards the end of the cycle, if banks stopped rolling over their credit, highly level companies UH, towards the end of the cycle find themselves with an economy they're explowing and with credit not being rolled over. And that's how then it translates. I would say, the transmission mechanism is from the yield curve to the bond market and credit spreads and then eventually to the stock market.

But unless yeah, that's not happening yet. Because deposit better is so low for many of these banks, the the interest that they pay on deposits to depositors is incredibly love. It hasn't been picking up. So the net interest margin, despite the flat yield curve, has been picking up because they're passing on the higher rates over at the FED

two loans that they create. Do you see that dynamic staying in place over the next couple of years, really low deposit beta, and that essentially means that net interest marches at banks hold up. Yes, and you see some some some continuation of death for quite some time. And actually if you look in Tom you were alluding to the two stands, but if we actually look at the three months of ten year, we're still about a hundred

hundred and ten basis points. Uh so. And also to the point that John was making, so three month rade are are much lower than than two year rates, and I think for the purpose of the credit transmission, the three month a ten year is more indicative. Furthermore, I would say that the first confirmation of that transmission mechanism is still be seen in lending standards. And at the moment, all the set surveys show the lending standards remained very generous,

both for large firms and small firms. So that's where we're not worried yet about the flatting of the yield curve. N should we dazzle Bloomberg Radio audience and put the threes tens chart out on Twitter place? I think we should. You should absolutely do that. What you're doing that, I want to make the horizontal line that beautiful Appenheimer Funds. I'm going to ask the lessie an important question. Now. We just talked about really strong data, really decent a

d P report. We had our sam yesterday, the strongest sense I believe, two thousand and four. Yet we're reconciling that with a flatter yield curve. Why is it only the front end of the curve of the s adjusting to a better economy. Why are we not saying you'll to pick up further down a curve unlessia Because the three month is really controlled by the set. The two year part of the curve is really driven by market

participants anticipating FED hikes. The three months is really ultimately the fat funds rate, and it's a reflection of the fact that the seed is hiking at a much much more gradual taste than historically we have seen with this strength in the economic data, and there reason being as we all know the puzzle with the inflation picture. The latest FED minutes revealed again the puzzle that the steadies facing.

They have clearly upgraded their growth projections, even incorporated the common fiscal expansion, yet they have still revived higher their inflation numbers. They are taking with this puzzle unless you've got to leave it there, unless you're the longest. Thank you so much with that, m 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 Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio