Populists Manipulate Fear, Vinjamuri Says

Federal Reserve in more ways than one. Joining me to discuss this Bruce Chasma, JP Morgan, chief economist and managing director of Global Research, and he joins us here in New York. Good money to Bruce. Good morning, big week, big, big week ahead, and let's begin with the Fed. This administration thinks we can have sustainable GDP growth of three

plus percent. The Federal Reserve says otherwise, how does that tension materialize over the next couple of months, Well over the next couple of months the Fed moves in September. I'm not sure there's a lot of reason for the administration that criticize the Fed, but maybe we continue to get it. I think the issue for the Fed is they're not quite yet at neutral. Uh. They see an economy that is gonna likely deliver growth close to three percent over the next couple of quarters. But labor markets

keep tightening, inflation continues to drift up. It's telling them we're growing above where the sustainable paces, and policy needs to be more close to neutral. Did you see anything in fridayce print that gives you confidence that this could be sustainable? Um? Well, I think in the short term yes, because you have an economy which, yes, that number was juiced up by a big trade contribution that's going to go away. But we have good solid underpinnings in terms

of both business spending and household spending. The fiscal stimulus is still kicking in. And boy, that was a very weak inventory number, which sets you up nicely for the second It really interesting that a lot of people focused on the contribution from trite, but the contribution of try

it was offset from inventories. Yeah, so I think in the second half you lose the trade and you gain the inventories, and there's a there's a little bit of a negative probably on balance there, but not a big negative. So we think the third quarter is going to be something like three and a half, which isn't a big step down and we think the second half is probably gonna average at least three percent. So we're still doing well. But we're doing well, and we're gonna have a tightening

labor market. One thing we haven't mentioned is we've got an employment report this week, and we think we're going to get another two thousand gain, a dip in the unemployment rate. I think what's interesting is we're not seeing wage pressures build very rapidly, but I think there is a sign that underneath the surface labor bargaining power starting

to firm here. What it also fun interesting is that that's a renewed focused on the participation right started to creep higher, and whether this administration starts to communicate towards the federal Reserve, perhaps with even more sort of conviction that hey, guys, white, look, the way you're thinking about the labor market of the last five years is dead wrong. Because people are started to come back in well, people have and the prime age participation rate has moved up.

But if you get the noise around month to month data, the participation rate has done nothing but stay stable here. And I think the basic point here is there are too many people like me in the workforce. The baby boomers who are gradually starting to move into retirement age, and that's off setting the benefits of bringing those workers back. Well within that is the labor participation rate and some

of these other dynamics, and it goes. I don't know if John gets this mail, John gets a lot more mail on um, you know, World Cup and all that. I get mail that says when Bruce Casman says the economy is great and we're fully employed, no one believes it. And you know, Washington Post had a whole series of charts a week ago, you know, from Bloomberg that underscored that are we fully employed? Well, I think we have

to be careful what we mean by fully employed. Fully employed doesn't mean that we can attract more people to come into the workforce. What it does mean is in order to do so, you have to incentivize them more by paying them a higher way age. Isn't that happening? Well,

it's happening, but very modestly. I think the question around that is how much of it is due to bad things, which is that labor bargaining power just structurally weak, and how much of its productivity weakness, which has been a key theme in the economy and how much of it is just that the pressures of brewing here and we're gonna start to see it reflected it It takes time. Maybe the unemployment rate can get into the high threes

before we start to see that pressure build. Um. I think there's a lot to debate on that, but I think I think there's no doubt that somewhere between a four percent unemployment rate and zero we're gonna have problems. And I think there's no doubt that at a three percent growth rate, the unemployer rate is going to keep falling. John nailed the savings. To me, the biggest deal was the revision of savings. Was that a gain to the elite. Did the savings charts swing up to more savings in

America just because of a statement that the rich got richer? Um? I think the savings rate, by the way, is one of the worst measured pieces of economic news. The average revision to the u S savings rate over the last thirty years has been from the first print to where we are now is four percentage points. So anytime we have a conversation about the savings rate, we should realize it's poorly measured. Yes, we had a lot of proprietary

income of people who are working self employees. You may you can debate where that shows up on the distribution of income um, but I think the basic point is do not have a debate. I think in any short term horizon over the savings rate level telling you something

about where households are for what it's worth. The revision does suggest there's more fuel in the tank for households, and I think we are seeing household behavior uh look better today than it was over the most of the past expansion where some of that saving was built up. Caught up with a series of sources of mind on the buy side on Friday and asked them just a

very basic question. If I offered you the outcome of even the Federal Reserve meeting this week or the Bank of Japan meeting this week, which one would you like, right here, right now on Friday? And they all said to me the Bank of Japan. Obviously the focus seems to be the b J overn. What are you looking forth from the Bank of japanas we gotta sleep in New York and wake up tomorrow. Well, I think part of it is if we don't quite know what the bo J is going to do. The b o J

has attention the Fed doesn't have right now. Uh, the b o J is not hitting its inflation target. The last inflation report was actually very disappointing, So there's every reason for them to hold the line. In fact, you could argue they should be doing more, but they're sitting there watching the flatness of the curve a road bank

profitability and they're not happy about that. So there's a at tension here between financial stability and macroeconomic objectives, and certainly the the newsflow has suggested that that is going to actually get them to give us a rise in the yield control target with a doversh signal about forward guidance. Somewhat strange then that they've stepped in three times after the last week to cap yields. Can you reconcile that

with a shift overnight? Because I struggled to well, I think I think part of the issue here is that when you're dealing with a control tenure yield, any time you want to signal changes, even if they are very small changes, you have a really hard time controlling in the market. And I think they're doing that. They haven't made the change, yet yields have already moved up to ten basis points. Their target is zero at the current point. If they don't come in and uh stabilize that, they're

gonna have a much bigger problem. First, thank you so much, greatly greatly appreciated. First Castell with JP Morgan with I think some optims what I heard there, we didn't talk about it here about on television earlier was the fiscal stimulus coming along with a half percent calculation by his shop Leslie Benjamurra with his chadow mouse, Leslie, this is all below the radar. The leader of Italy and controversial

is going to visit with the president. What will occur? Well, I think you know, this is been Trump recognizing that this is a leader who backed him at the G seven when he said we need to invite Russians in. Who's you know looking uh, you know, for Conte, this is wonderful for his position domestically. So I think, you know, the affirmation of it of an ally, of a partner, of a friendly, friendly voice in Europe at a time

when things haven't been great with Europe. But somebody who has it takes a similarly you know, his country's taking governments saying a similarly hard line on immigration, it's open to Russia. Um, I think this is you know, forging his his his populous network. And in John I should mention this is Prime Minister Giuzeppe, well done, and this is not the Deputy Prime Minister mcdeo Silvini. Wow, you spent the whole weekend practical I would save me save

I can't get why not the worst? I'm gonna put you in touch with my youngest sister who speaks beautiful, fluent Italian. And maybe if you said a love BiblioTech and that got me nowhere in the court. Okay, let's be let's move on. If if you chance to Angela Merkeley, you worried about today's mazing Oh, I think yes, I mean, I think inevitably everybody is worried about what's happening in Italy. It doesn't the optics of you know, the Italian PM going across uh To to talk with Trump on the

back of those comments about Russia. You know, things of in the short terms gotten a little bit better with the EU on trade, but there's still this this broader conversation. What are Trump's real objectives when it comes to Europe and who does he feel closest to him? Right now, it still looks like he feels closest to the wrong part of Europe. Rachel Donadio in The Atlantic has a really timely article Italy's voters aren't anti immigration, but their

government is. And you know, whether it's the United States or it's Italy, that's a huge tension, leslie Vinjamuri, isn't it between sort of the humanitarian kind of thing and voters saying enough and governments that have taken a stand. Yeah, but you know, voters are divided. There's of course, I'm in the US, right, and this is an immigrant nation. People understand and have long understood the important of immigrants to the economy and just morally and ethically to the country, um,

to the you know, the fabric of the country. At the same time, the rhetoric has been very powerful with a certain segment of the population in Europe. It's powerful on the back of you know, is Italy and effect being a frontline state on the immigration crisis, on the migration crisis, and in the US, um there's certainly a very certain contingent that is that Trump is speaking to So it's that forging, you know, at the elite level,

right Trump and Um and Conte. It's it's very it's it is playing a certain kind of politics that you're right to point to. But Leslie, we do often confuse too really important issues and one is a refugee crisis and the other is an immigration crisis. Can you just talk me through why those are two very important distinctions to make well, because you know, there's refugees have a right under international law to be protected, to be given um access and but but leaders in the current in

the current context are reluctant. You know, there's a there's a playing on the there's a desire to kind of talk to us about themigration crisis and not to differentiate because the numbers are so vasked, it's complicated to differentiate. It's not that easy to differentiate between a refugee who has legitimate right to be protected under international law and

a migrant. So Leslie, for a lot of people and for a lot of the electorate in a place like Italy at the moment, they looked to the likes of Mattea Salvini and Giuseppe Conte, who heads this government as those that are actually a weight to the reality of what is happening in a country like Italy on the front line of both the refugee and immigration crisis. And I'm just wondering, for those with a more liberal view of the world, what is the election winning argument, how

do those individuals get into power? And what is the argument on an issue like the refugee crisis and on another issue like the immigration crisis that actually resonates with the electorate. Well, I mean, I think the reality is that it's it's an argument, but it's got to be

backed up now there. You know, it's clearly the case that even for those who are very sympathetic to the plight of refugees, who want to um keep keep some sort of protection in place, there's got to still be a very effective regime in place that can maintain borders otherwise inevitably right, the space is open towards populace to manipulate the the language of fear and um and are successful in doing so so cooperation with Europe emphasizing the

importance of protecting refugees while while not denying the very real problem of of managing and sharing uh the immigrants. What would you call the international relations foundation of the US right now? I mean it's not you know, is free to would say a post American world, or maybe it's not a clash of civilizations, Thank you, Mr Honeyton.

What is the underlying theory that drives US international relations? Well, you know, the big debate, as you well know, Tom, right now is whether this is just an aberration, whether the US will get back on track and start supporting the institutions that it has created and and supported and short up for seventy years or more more, whether Trump is really about Trump is m about an under underlying social economic change, and that we're just going to see

more of this. But I think right now people are very worried, and I'd say I would really point in not at the last eighteen months, but really at the last two or three months, where those who thought that America was just going through a bad time are now starting to think that we're in this. This is a permanent change that the US has been in the fine and it's and it's now saying we will no longer

and show up these institutions. We need to renegotiate our role in the Well we mentioned the Italian leader today visiting what on your eight calendars the next thing? Or have you checked out until Labor Day? I mean, what's

what's coming up in international relations? Well? I think the reality, right is that a lot of what the US is going to do going to push for it on this this trade war with China, and but a lot of what's going to be driving US engagement abroad is Donald Trump looking back at Congress and looking to the mid terms and trying to play very carefully and very strategically to make sure that he comes out of those mid terms looking like a strong president. And this is tricky.

He's not necessarily doing his his own party any favor by threatening to shut down the government if he doesn't get you know, um, the immigration plan through. Yeah, but your studying, your study. This leslie as we're inside a hundred days, and that's a big deal because that's where I am. I mean, there's just something about a hundred days. There's something about a hundred days, but it's a very significant one days and unfore sinnately, right, it pulls everybody

into a very short term focus. Now, this is when wonderful LESSI Vin Murray, thank you so much. I really appreciate those comments. And Italy, John, I think it's really below the radar. And you know, I'll be honest, John, I watched R A I two the Italian TV just to listen to the language. Like I'm serious, you're trying to learn It's it's it's excruciatingly difficult, But without exaggeration,

every other news story was an immigration immigration. Try growing up in a household that when you went to the south of Italy, they didn't speak Italian. They spoke dialect, and a dialect that was nicknamed the Italian Chinese. It was so difficult to understand my grandparents because they wouldn't speak to each other in Italian. They'd speak to each other in the local dialect, which was another language entirely,

and it was abruptly difference. My father grew up down in the south of Italy, and you learned to speak dialect first and your second language. It's the language of the country, Italian, and this would happen across the whole of it as well. Yeah, so we're gonna teach you some southern dialect in pulia Um after you've mastered Italian. How do you like that? It's I can see the excitement sort of just sort of oz from you this morning.

For those of you that have kids, particularly for those of you older and your kids go, well, yeah, I'm not fluent in Arabic yet, but I'm getting there. And this new thing in America, John, which just say, no, three languages and and one of them one of them Mandarin, is I'm in awe. I am truly the ugly American and I'll be honest, I'm not proud of it. Let me tell you what I'm proud about. John. Afterthought, it's just gone nuts over this song. This is what I'm proud.

We need to listen to what I heard all weekend, loving it total. That's nice. You know everything you've played in this slot. This is nice. I don't want to do that. You don't know the song, not the song that's next, folks, your favorite song? Do need a media update? We're thrilled to christ mo Angie's with us with Gabelly as we look at media, and of course Chris to explain this with the vailue investment proposition of Brio, Gabelly and your team. You've always been in media. How much

of a vailue is cable TV? After the Fox, Disney, Comcast soap opera, Good Morning, Toma, Jonathan's great to be here. Um. Yeah, the cable companies Comcast, Charter, amongst the others are a bargain today, more of a bargain than they were before. The counterbit for for Fox, um, these are good cash flowing any recurring cash form, returning cash flow to shareholders, and that's why we like them. Comcast did that shift

from huge build out to use of cash. On the Bloomberg their five year dividend growth, there's a lofty four point I'm assuming they can't sustain that, but can they actually deliver double digit dividend growth? Is the the cash

flow that persistent? Yeah, The the return on capital on the cash flow are growing substantially as the business make shifts from video where they're giving up sixty cents of every dollar to the program to the content companies UH to broadband where they're keeping both that money and have a lot of pricing power. What's interesting here, folks, is we were talking with Craig Moffatt and Maffatt Nathanson with his really important work on Comcast, Reason and then Marange.

It's sort of on what's called the bi side, which is where he's actually making portfolio decisions and acquiring shares as well. If comcasting cables cheap, what's rich in media? Well, you point statistically to the to the fang stocks obviously, and there's been sort of a saying anti fan trade. When the fangs are strong, some of the traditional media companies tend to be weak. I think that's starting to

break down a little bit. But um, you know, doesn't mean that that Google and Netflix and others don't have outstanding businesses. Netflix and particularly just you know, appears to trade and with a minimal margin of safety. Yeah. I thought it was interesting last week, Chris, and the performance came from the old economy equities and the underperformance came

from the technology stocks. And I just wonder whether that's a one off week or whether we're starting to transition to a world where we can build some confidence around what's happening in the global economy. Is Europe appears to have stabilized, China appears to be shifting towards easing, and we had that great growth here in the United States in a second quarter. Yeah. I think it's an interesting point, Janathan.

The I think that the big tech names were viewed as safe havens in some ways as UM growth elsewhere started in the soul. So yeah, I think as we've a little bit of stabilization, um, the trend of value should, uh should persist. Chris. The trend of value has been a very difficult one to buy into the last year and many of our listeners have going to have heard that again and again and again over the last couple of years. Why is it different this time? Well, we're

hoping it's different this time. And you know, at the in the end, we think that value um will always win out. And uh, you know again with a kind of a they're good places to be with maybe a choppy political environment, but a stable economic environment. Does that lift financials then, Chris, it should? You know. Obviously we watched the curve and what's happening with the with the finding of the curve, and I think that's been a little bit of an issue. But um, yes, the financials

again statistically look very cheap here. It's something that's dominated psychology. Is it dominated profitability? And I'm talking about the yield curve here, Chris? Has it dominated profitability because I didn't see it? Will it? No? I think you know, the banks are able to make money, that they're in a better regular tory situation, that they have been a long time, able to return a lot more capitalist shareholders. Uh. So, you know, I think there's I think maybe we're overly

focused on the shape of the curve. Well, okay, we're overly focused on the shape of the curve, but it's DETERMINANTU to some extend forward. What about the shape of nominal GDP? I mean, if this is if this GDP is as good as it gets and it ebbs away? What ebbs in the Christmas Ange world? The revenues ebb Yeah. So you know we've been talking about actually uh peat margins for years. Uh and you know, margins just continue to go up. I think we continue to find um

companies continue to find ways to save money. Obviously, one of the themes from earnings the first two weeks has been increased costs input costs, steel, energy, labor, freight, and so we're starting to see some of those signs of inflation which may which may impact margins. But you know, we could get into another gear where we where we

see an increase in productivity. Again. Well, Chris Antists come station with Jeff Rosenberg of Black Rock on Friday, and we kept asking this question, is this as good as it gets? And it may well be the highest right of growth for any given quarter for this administration. But I think a bigger question, and this is something that Jeff was pushing over at blank Rock, is whether we've broken out into higher trend growth away from the low twos and something closer to three. Do you have the

confidence that we've done that? Chris, you know, we're we're we're bottom up guys. And um. We look at individual companies and and the other companies that we listened to on these earnings calls. Um, you know, they see for the most part, pretty clear skuys ahead. Um, you know, absen some of these input class and absence some of the risks of trade wars. But the consumer seems to be in good shape. Housing Um is okay. And UM

you know, globally you're seeing some some pick up. It's funny that we've just had a quarter of north of four percent, and I've heard so many people talking about whether we get a recession at some point the back end the next year or early twenty I've heard a lot of people discussed trade wars, and then Caterpillar comes out this morning and raises four year guidance, full year guidance, raising a core that was dominated by discussions about trade

wars and tariffs. How do you reconcile those two things? Chris? Yeah, well, you know, uh, make farmers great again. I guess it is the hat that I saw and um yeah that that certainly helps some of the agricultural companies. And you know, the demand, global demand is there, John, I think that's Chris giout the Funds Co Chief investment officer and that

stock up this morning and doing really well. Tell me fim Fox in time keening on Monday, lots of different themes and mean jobs Day and Friday, b o J the Fed. We're gonna talk Bank of England here. But wandering into the studios, I just assumed she would mean he'd struck London enjoying the coolness of the London of I noticed the BBC map over the weekend where the weather came in. It was like very cool. Here is Stephanie Flanders, she's senior executive veditor for economics. It really

has moved forward holistic economic coverage region to region. So let's just sort of a UK vamp here right now? What's the biggest conundrum for MROs Thomas Simon Kennedy in our vast Brexit team, Like, what's the July mystery into August on Brexit? Right now? Look, you have, you know how many question masks there are around the deal, whether we'll even have one? Is a second referendum now on

the table. I think the whole sort of mood around Brexit has changed in the last month in a way that puts a lot of stuff up in the air, raises the real prospect of a complete standoff in Parliament where you can just start to imagine people turning around and saying, you know what the in Parliament they've messed it up. They haven't been able to do anything. We're

going to have to go back to the people. So you one of your themes is there could be another reference something that's in the air in a way that it wasn't a month interesting And I think, but then I think for me, the thing that gives me pause around that is, Okay, if they're deadlocked on what kind of deal or whether they're going to agree to the deal that they're getting from the EU, how are they possibly going to agree on the questions for a referendum.

I think that's one of the reasons I have for thinking it won't happen, because how could you get an agreement on what are the two options you give to the gift of the public. Do you say no deal is actually an option that people could choose, with a risk that people would actually choose that and really get the economy. It's a it's a tricky upper left corner of the Telegraph today One B. Johnson is writing on Mr J Corbin as well. Who is Boris Johnsen writing too?

On his new platform? He is writing to his I think dwindling band of fans. You know, he's one of those people we feel like we've seen peaque Boris, whether

regardless of whether he was Foreign Secretary or not. But even though he could still have commanded a lot of support even without even while having left the government, but I think there is a feeling that he's sort of gone gone too far in some directions and ended up rather losing his way because he was stuck kind of um not sort of semi supporting Theresa May and then backing out the last minute only because somebody else had then had left before him, so he lost a lot

of credibility around that. But I think the problem I have, I think the problem for the Bank of England and Mark Karney, who I interviewed for the cover of special issue Special Economics issue we have of Bloomberg Markets this month. Um, you know, the trouble for him is he's looking at a weaker economy but also one that is probably going to be affected long term by this Brexit uncertainty and by the future deal. He's the cover story of Bloomberg Markets.

Mark Kearney, this is your your story. And what is he going to enjoy more lenient immigration rules when it comes to the European Union than most of the people that he oversees At the Bank of England. I suspect they would let him in. I mean, but what I guess there is a question. He's from Canada. He's from Canada. He and of course we're looking for a kind of Canada plus deal. I mean, the Canada is one of

the models for the future relationship. I think the interesting question has been that that whether or not he would go back to Canada. And I did try and push him on that a little bit, and he was he was dodging the question. We don't know what he's going to do at the end of next year, and we really don't know who's going to replace him at the bank. Do you see increases in prices? Look, you're seeing inflation, but not the kind of wage growth. You know, it's

the same story we've seen elsewhere. There is some wage pick up finally, but not the kind of growth that you would say, Okay, inflation is now on an upward path where the Bank of England is seeing the potential for inflation to pick up is more from this again the sort of question marks around the potential of the economy if we're going to have a long term hit and productivity growth on wealth growth from whatever deal we

get post having left EU. You know that is something that they have to bear a man, because they're thinking of two or three years out now when they're setting policy. Do you see prices increasing its stores you shop with, You know, we're not seeing we're not seeing a big pick up in inflation. As ever, when the UK he with such an open economy that a lot of what we've seen in the last few years has been driven

by the pound. If the pound took another tumble in response to the kind of shenanigans we were talking about earlier. You know, that's probably the biggest single driver of inflation. What did you know? You know, the cover is striking, you know, it's an abrupt, an abrupt photograph of Mr Kearney and the title of its stress tests is actually important that because of Brexit and all that, but just the banking system as well. How is the Nanti Kingdom's

banking system? You know, I was struck by talking to him that how much of our conversation was around the financial system. I mean, obviously it's it's often in those kind of sit, sit down interviews, it's a less painful conversation than when you try and get them to say anything about monetary policy. But he is someone who came in as the head of the Financial Stability Board, a global board that was helping to push through the kind

of post crisis reform. So he's apt to it his neck in this considerations around the stability of the financial system. And as he says in the interview, the you K was at the forefront a lot of the reforms and analysis around what do we need to do around stress tests and what do we need to do about capital. I think the biggest concern coming out of Brexit for

the financial system, which he did we did. I did manage to push him on, is you go back to a system where the Europeans kind of have Brexit as an excuse to beat to look inward. You know that the UK has forced the European system to be much more open, global, cosmopolitan financial system because it had the

London at its center. If you have London now in a more kind of semi detached relationship, their instinct, the French instinct, the German instinct is to bring activity on shore and that gives Europe a less healthy, less global financial system. Did you open I mean, it's such a such a genuine interview where he really gives out a lot of information. Did you open this by talking to him about giant virus going to the Maple Liefs. We didn't amaze. He didn't do that, but I was talking.

You know, we know he's he ice hockey was actually the thing that he most when when all the school chill and interview him in in London, they said in Britain, and he does these sit downs with twelve year old who asked the great questions, but one of the questions. One of the questions was, you know what would you be if you were in a central bank governor. He said, Oh, I'd really prefer to have been exactly professional ice hockey

players always the number two. He was the sub Exactly, you're gotta get the surveillance phone out and call me. And I would have said, just sit down with him and say to virus maple Leaf. Stanley Cup right, Steph Flanders cover article Business Week with Mr Kearney. 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.