Labor Is Moving Towards Obsolescence, Henry Kaufman Says

Policies and Institutions. He's the president of Henry Coffman and Company. Great to see him once again. You uh. The waiting continues here we we we await a decision from the president. Who will be the next fed Share. Perhaps they'll be fed Share Jenny Ellen renewed for a second term, perhaps it will be someone else. What should a president, what

should a Treasury secretary? What should a chief of staff be considering at this point as they make this to decision, as they pick the next FED chair, what what should they be considering? Broadly speaking, Well, they want the first of all, have an awareness of the candidates experience. Financial experience is very helpful. Having an academic background in banking, finance,

and economic theory is also extremely helpful. Being able to manage others around the chair, meaning the other members of the Board of Governors or the f O m C, who are usually PhD s. Those people have to be led, they have to be managed, to have to be influenced, and someone coming from the outside with limited experience will have some problems in doing that. Is that the hardest

thing to assess in advance. We talk about John Taylor, the professor at Stanford, with a lot of government experience. Kevin worsh It's hard to estimate how somebody will be able to interact with others on the board, or bring them on board, or work with them. How do you just begin to to figure out how somebody might do with that. Well, some of these people, uh John Taylor, of course, who was Under Secretary of the Treasury, so he has had considerable government experience. When you go back

through the history of the Federal Reserve chairs, uh. Bill Martin, who was the first prominent one in the postwar period, began in nineteen fifty one and served for the longest until nineteen sixty eight. He had been at the Treasury. He had been chairman of the New York Stock Exchange. He had also been the head of the Exploit Import Bank. He had considerable background and knowledge and took a lot

of courses. On the other hand, Uh. There thereafter you had Author Burns, who was second, who was the chairman of the the Economic Advisors at one time, was an expert on business cycles and saw it. And but nevertheless, I can recite all of these for you with their background and experience, A good many of them had to check it experience. As chair we have all that experience, with all that knowledge and managing, they didn't perform as

well as they should have. I want to talk one more question the fed that we got to get to extremely important headlines for Global Wall Street and we're honored to have you here. Uh. Dr Kaufman, let me reducts the question from television earlier. Can John Taylor be a dove or is he so rules bound that we're going to be hawk hawk hawk? Uh. The little I know about John Taylor, you can only be a dove if

it fits within his formula, within his formula. Uh. And you don't think there's enough fungibility in the formula or within his Boston speech recently to calm those that worry about a restrictive John Taylor, there there is a certain amount that can give within his formula. And as I said to you before, here we are in two thousand seventeen. The unemployment rate is four and a half but below four and a half percent, and labor compensation hasn't got up.

Isn't that an extraordinary event over the last eight nine years. One of our things to talk about here are the headlines in all of global Wall Street. We say good morning to you in London on Radio London, of course, in Awakening East Coast and at New York, but truly to all of our listeners worldwide. David, why don't you run through these important headlines from the Securities and Exchange Commits.

We were speaking with Ben Bayne that last week about what the SEC was considering with regard to these Miffed rules, and we're getting some more clarity on that this morning. The SEC is saying it's going to ask for public comments on the market impact of these new MIFED rules. The SEC is going to give a thirty month reprieve to u S firms on EU research rules. And here the annoucement addressing me fed conflict with EU on on

payments issues in particular. So those are the main headlines here that we're getting from the Security Exchange Commission in Washington. Of course, Henry Kaufman, with his legendary work and modern work, I should say it's Salomon Brothers some years ago, is a perfect person to speak about the ft. Had the article yesterday Robin Wigglesworth. Uh, the the idea of Bank of America becoming an investment advisor to accept hard dollars, to accept cash because they've got to worry Bank of America,

New York, San Francisco. Uh, the Carolinas has to worry about their London clients. This is a real international issue, isn't it. It is an important issue. But the issue is how do you maintain the independence of research? How do you hold research accountable to be always objective? Can you have two regimes? A New York regime of compensation to the south Side, etcetera, and a separate regime in Europe and particularly in the city. I think that's exceedingly difficult,

really auditorialized, David. But we're going there right now. And as I told you, the only way research can be objective in a cell research environment is when the head of research sits in the senior management with all the other leaders on executive I'm going to hope that James Diamonds listening to this conversation this morning. What is your advice to Mr Diamond? He's got four hundred and twenty two reports and he's got to figure out what to do with a dynamic between London and New York. What

is your advice to Jamie Diamond? I advise is bring the head of research into the senior management so that he oversees the extent to which objectivity is maintained in analysis. Because if you sit on top of the other four or five, if that who comes up but defended, but come on off of vocal rule and Dodd Frank. The Europeans want to police global wall streets intellectual output. That's irrefutable. That's what they want to do, and we see that

through MEFO to this is absolutely critical. Do you agree with the Europeans that we should police research or should the SEC stand up and say no, we're not going to do this longer than the thirty month headline this morning? Well, I I would say, research should be policed for its objectivity, otherwise it doesn't serve well the client, and it doesn't serve well the institution ultimately, and it will always be

then looked at as being sell side research. And the definition of sell side research is to push the product, to push the item, to push the underwriting, to push the sale or the purchase of stock, and the the the investor ultimately becomes aware of this very quickly. We'll come back up with you in just a moment. But how seismic it change? Do you think this is gonna be? There so much concerned about what it's gonna mean for for jobs and for this part of the economy as well.

How worried are you about the implementation of these rules? Well, I I really think, uh, the number of people in research is going to diminish. It's going to diminish, not only because of what you're talking about, but we were we're creating more exchange traded funds. We are at the same time doing much more. We've got much more money going into Van Gone and all of the passive investment. Let's do this. Let's come back and talk about this.

We're honored if Henry Kaufman with us. With these important headlines from the Security and Exchange Commission, they will ask for public comments on method. Uh. They don't put it down. They don't pump the ball down the street. They go the thirty months three zero thirty months reprieved the U S firms on European research rules. I think that's a critical headline and they make clear, uh, Wall Street firms can accept research payments from EU clients. Much more on

this important issue with Dr Kaufman. I think the doll was like twelve points when Henry Kaufman started his career. Where was the doubt when you walked in the Wall Street door? Oh my goodness, I walked into Wall Street door door in January of nineteen sixty two, I walked into Sottomon. It must have been in the hundreds. Hundreds, Yeah, I would say the middle. We'll look that up with

David Wilson has that statistic available. He has actually memorized. Um. I sure everybody wants to know that you just celebrated your ninetieth birthday. What is the key to Kaufman longevity? As people know as we go through this, I don't do this, doctor Doom Bologna. You've always been an upbeat guy forgetting about the cliches of another time and space. What is the Kaufman longevity formula? Gura and I are

taking notes? Well, I suspect it's have good genes. Uh, and it sound like a glass come out help me here? Is it like a glass of tomato juice every morning? And and stay active, stay active, don't retire. It would be one of them. Stay active, David, Why don't you jump in here with Henry Kaufman after these SEC headlines too many other topics. Yeah, we're looking ahead to the

CCB meetings. They've been listening to what that policy makers have been saying, and I noticed that more and more of them are talking about the role the technology is playing when it comes to productivity and wage growth and all of that. As you see what's what's the role the technology is playing in the economy, And when you look at the data, that is a very key issue which hasn't been appreciated. There is a tectonic shift occurring actually which I didn't bring out in the book. And

that's the and and that's the following. We have seen very little increase in wages in the last eight nine years, but we seen an extraordinary increase in corporate profits, I bill, and it's I believe what is occurring is a great obsolescence in labor, in the value of labor as the result of automation, robots, UH, factories that can be built all over the world rather than in one place, and the technological increase that has occurred with such rapidity that

it is marginalizing labor. Much in the old days, in the nineteen fifties, in the nineteen early sixties, there were unions, unions that of course UH got higher wages for their members and they constrained corporate profits somewhat. That has gone here, and it's a really long term social problem. As is widening up occurs. Ask yourself the simple question, has labor compensation remains modest? What kind of corporate pensions going to

be there years from down to help in retirements? Well, we're there right now, Alicia Mannell up at Boston College, has of people not actually justified in their retirement. Within these broader issues is our quest for hard data. You are one of the leaders of looking at hard data. Do you observe in service and goods inflation? The hard data that can let a set of good central bankers raise rates. Now, I I think, as you know, Mrs ms Yell raises the question, and she hasn't got an answer,

why isn't the inflation rate higher? So here's a policymaker at the highest level is highly uncertain for this relatively modest growth in abric compensation. And I it comes from really the fact that labor is becoming more obsolescent. Robots are replacing labor. Uh. I saw recently a garbage struck. In my days, in garbage struck used to be manned by a driver and two men. Now I saw a garbage struck with a driver moving along. There weren't the

two men. And what happened there was a crane that picked up the garbage pail, dumped it and put it down. As now, in about twenty years there won't even be a driver on that on that car. And if you you don't have to split your imagination far, in twenty five years a lot of taxis will be driven without

a driver. And this goes on and on. A friend of mine who was just in Japan told me of a robot walking into a patient's room gives the patient a pill if the patient doesn't take the bill, an attendant comes a little and then the robot picks up the patient and puts him in a wheelchair. Now this is really but in this replacement that's going, well, we've got a circle back. Here's the point. You're ninety years old,

you're not in a wheelchair. We want to know why. Well, let's leave with your Henry caufin with us and what will happen and again uh soon. It is a wonderful book. I can't say enough about tectonic shifts in financial markets, people policies, and institutions, and I would really emphasize the people part of it. It's a beautiful book. You just want to buy the book because it feels so good.

From Paul Gray McMillan as well. But the real issue here, for particularly those of you of a younger vintage, it is a beautiful way to get a sense of history of where we were and how we got the two thousand seven in beyond, it's even got a lot on Walter Riston, which is a very good thing as well. Henry Kaufman, of course for years with Solomon Brothers and with an association with Lehman Brothers, which we didn't have time to talk about, but we'll do that another time.

We do uh economics, finance, investment, international relations, we do politics, and we do our military, and I think, David, we get more misinformation and we struggle more to get informed guests on the military than any other thing we deal with. And that's why we were on a day of Admiral James Travitis with us at Tufts and General Kimmitt comes on as a really interesting guy in general with a

c f A, an important financial degree. And it's also why we have George Friedman on because he read James as a kid. He knows every book, every ship, even worse, you knows where every boat is. And literally, David, it could be a three hour conversation. Absolutely. George Freeman here with us in our eleven three studios in the Earth, the founder and chairman of Political Future. Let's get to that in just a minute. First, let me ask you

about the news of the day. We've been following what's been going on in Northern Spain, waiting to hear from the president of the region a little bit later about the path forward. There could be a call for for new elections there. What do you make of of what's playing out there. Where do you think this is leading to, not just in Spain, in this region and in Spain, but in Europe generally? What is it? What is it? What's the message about the integrity or the health of

the European experiment? Well where this comes from his two thousand eight. This is the really important part of two thousand and eight. I hate to say this the people in the market, but that was a preface. What has happened is that it has created massive inequalities in Europe, failed economies, um a lot of pretense by the elite, and now you're seeing fragmentation. Scotland almost seceded from the Okay, now Catalonia. These are two three hundred year arrangements that

are coming. Apart the Italians, there will be others coming. So what we're seeing here is what economic is all about. It becomes politics, and it becomes politics where the whole you know, you're talking about tectonic shifts, Mr Kaufman, this is a tectonic shift. We think two thousand and eight is over because interest rates are savalizing. Oh no, Catalogna is two thousand eight large. Our politics playing a greater role in the economy in policy than they have in

the past. I think of just what happened with Brexit, what happened with the U S election, the rise of populism that we saw. When when you look at the economy, how big role is politics playing at this point? Well, the economy is politics. The tax code, the regulations of the political pressures all affected. Uh when things are rolled, the stable is is feeling that did the markets operate

on their own? But historically, I mean, what made the Great expansion possible was World War Two and that was pretty political and that's set the stage for a generation of growth Vietnam intern I think we should rip up the scripture. Dr Kissinger, among others, has talked about the refugee migrant moment in Europe is to be almost transcentry, to go across centuries of historical experiment, and we've seen recently the politics of Austria, the politics of the Czech Republic.

How does George Friedman filter not so much the fact of migrants and refugees in Europe, but the scale of it, the amplitude of the last twelve months, and the breathtaking indifference by the elite to the entire process, because from a European point of view, the Germans and the German elite were very generous, but they weren't going to live

in the same neighborhoods with them. The people who wanted I thought the migrants should come in were very kind, but they weren't going to be the ones paying the price of social dislocation and everything else. Like when I moved to the Bronx from Hungary. Uh, everybody was very kind to me, but they weren't living there and it was a tough neighborhood. So the issue here is I came here fifty two, I was wek united. They think

you are a communist. I mean, was it the enough a shift that you were the little kid that was a comy because that's how we felt, were the kids in fifty six and the debris after that. No, we were afraid of the Puerto Ricans, and we were afraid of the Italians, and we were afraid of Irish and they were afraid of us. So when you have immigration, you have social instability. And so the people who didn't want it were regarded as immoral, you know, you know,

dark people who don't understand that they're evil. This ripped here of apart. It wasn't the migration, but the manner in which the same people have out of Trump we're presented. So we have a massive split between the elite, who sees themselves as moral judges, and the working class and poorer who see themselves bearing the burden of the generosity of the elite. Let me ask you about the negotiations over NAFTA, and we're talking about politics being the economy

and perhaps vice versa. There, what do you make of the signaling that we've seen here? You have negotiation teams from these three countries working on rehashing that deal. All the while you have one of the three nations set of states raising the spectrum terminating the deal. Uh, there's some political signaling, if if any, how optimistic are you that this process is going to play out? And how destabilizing would it be to have no trade deal for

any period of time between these three countries. I'll give one fact. The largest export partner of California is Mexico. The card largest export partner of Texas is Mexico. You've got the largest Republican, the largest Democratic UH representatives in Washington and the last thing they want is anything that screws up NAFTA. So every doesn't matter what the negotiators do, and it doesn't much matter what the President wants. This is going to be decided ultimately in Congress. Can you

say this about tax reform? Can you say the same thing about Texas. It doesn't have that kind of coalition. It doesn't have that. It doesn't have California and Texas the first and the second largest delegations pulling in others saying basically, we don't want a basic change. Okay, Texas guy other than Austin, Good morning Austin Texas. Good morning, Mr Dell. Other than Austin, Texas. How many Democrats are

left in Texas? Would all be je No? The state? Uh, he would devel the state because all the Democrats became Republicans. This was always a conservative state. It was a conservative democratic strait, and now it's what it was. Really changed. It somewhat is the tension between Senator Cruz and Senator Cornyn. But the Trump movement itself hasn't changed the safe that much. You don't see a shift in the Trump I mean, I just saw an MSNBC banner talking about the overnight

polling and the president's at new low. And in all of that, do you see in your neck of the woods? Uh, people walking away from the president or is he still had that core base? They don't know what to walk to. So the problem that we really have is, Okay, my neighbors in Hayes County, I have problems with Trump. The problem is the system hasn't presented an alternative. The alternative is going back to Obama. They really didn't like Obama. So in Texas you've got them locked in and the

party has marked in very quickly. Here one more question to the Democrats. Have anybody that understands the five sided walls of the Pentagon? Are there any William Cohen or John Carries out there that actually understand you gotta budget this stuff? Well, I think the basic problem of the think tanks in Washington. They're really smart people all work the think tanks. The think tanks are funded by various

corporate interests there. They're going to put that out. The days when you had independent defense analysts in both parties were limited. The best people there you have with the former generals. They're not working for the think tanks. They do know the budget, and that's I think one of the most smart things that Trump did. He reached down, got a group of generals to run it, and they hadn't spend their time at Berking's, in Heritage and everywhere else.

Gideon Rosa's Foreign Affairs magazine leads off with an article on Afghanistan. Does George Freeman have an Afghanistan policy? Leave? Look? We can't wait, That's what David Girl's policy is. I mean, look, we we can't. We can't. We have no strategy, we have no goals that are achievable. We are there because it's harder politically to leave than to stay, So we leave a token number of troops that aren't gonna do anything. So George Freeman, thank you for letting me monopolize a conversation.

Girls over there doing his taxes while on the gird doctrine. The news slow this morning is extraordinary and too short to visit with Arthur love At, the former chairman of the SEC, Arthur I was amazed at the forty eight hour news slow of an SEC really saying something about the changing of how research gets paid in London. Henry Kaufman said this morning there has to be one model. Do you agree there needs to be one global model for research, intellectual and sell side compensation or could Wall

Street in New York go to loone. I think it would be spectacular if we could have one model, but just judging from different cultures, it is unlikely that we will wind up with one model. I think as far as myfort is concerned. The flashpoint obviously are on research payments, which ends the practice of asset managers receiving research were free from banks and brokers in return for placing trades with them. Now, how are you going to make sure

that that really holds? And I think the whole question of the responsibility that goes with becoming an investment advisor, which is what the Bank of America Merrill Lynch has done. I suspect that if they go ahead on this, we're going to see all of the major players file as investment advisors and that carries with responsibilities that they've never had.

To say, exactly a big change or what does this say to you about timing and out the the SEC's ability to reckon with what's happening here in just a matter of months this no action relief. Jake Layton says the chairman. The SEC designed with input from a range of market participants to reduce confusion and operational difficulties. We're looking at thirty months, a period of thirty months during which we could get common from participants in the marketplace.

Why did this happen sooner? Uh? This is such a difficult area and a mistake has implications not just for US markets but for global markets. I think Jay Clayton has done a superb job of responding to many of the issues that have UH acted the SEC. And I think he's taking the right steps here because if he miscalculates, as I said before, the implications to global markets conclude great.

I think done exactly what he should do. Arthur, you mentioned the cultural realities of a transatlantic global Wall Street, the city, and and the rest is well. One final question, if we may in two rushed a morning, there is the cultural difference of just stay and American at Barclays, a British British British bank. Just think of Premier football, folks. Is Jeff Staley's tenure under threat because of the miserable

results this morning in the stock down seven? You'd have to say that about any CEO of a company with that kind of stock performance. I don't know enough about the culture, the management culture within the company to say one way or the other. But in these days any company that Joe's results and disappointing such as this, the CEO has got to be very, very careful and look

behind Arthur. Thank you so much on short notice this morning, and really on it to me an historic day for the Securities and Exchange Commission honor to speak with their former chairman, Arthur Lovett. 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. David Gura is at David Gura. Before the podcast,

you can always catch us worldwide. I'm Bloomberg Radio.