Sen. Warren Would Defend Dodd-Frank to the Death, Eisman Says

of course on the Bloomberg. Let we begin this morning with Steve Eisman, familiar to anyone who's read or seeing The Big Short, of course, now he's a portfolio manager with new Burger Berman Group. He joins us here in our Bloomberg eleven three O Studios and New York right to see you here. Thanks for coming on the show.

You focused on You've paid so much attention to the integrity of the strength of the financial sector in the US, and I want to just start there if I could, asking you about what you make of the rhetoric we've heard from this president, indeed from any Republicans about the future of financial reform and regulation in this country. How worried, are you about the the integrity of that apparatus going forward? You know, I'm really not that worried about it at

this point. I mean, let's just throw some numbers around. You know, when pre cry Let's use City Group as an example, just to get some numbers. You know, pre crisis, City Group was levered thirty five to one. You know, five years before that, in two thousand and two, it had been levered twenty two to one. Today it's levered ten to one. You know, the last time City Group

was levered ten to one, I probably wasn't alive. So, I mean, I can honestly say that what the FED has accomplished via the auspices of Dodd Frank and the Stress Test, which is how the FED regulates the banks, is that the United States banking system has never been the safe in anyone's lifetime. Now what I think is going to happen, and I think the odds of Dodd Frank being changed is extremely low because you need sixty votes.

And I think Senator Elizabeth Warren will probably get on the Senate floor and say, you're gonna have to kill me if I've performing let anything happen here, now they may kill her, but that's what almost it's going to take. So let's put aside changing Dodd frank Um. The FED regulates the banks, and the person who has been the chief regulator is Governor Daniel to Rollo, and he's resigned. So President Trump will appoint someone to replace him, and

that person will not be Daniel to Rollo. They'll have a very different orientation. And I think what's going to happen is UM via the stress test starting in two eighteen, because it's too late now, UM for the two thousand and seventeen stress tests. Uh, this test will be let's just say, graded on a different curve, and the vocal rule will be reinterpreted. Today it's interpreted extremely strictly, tomorrow

will be interpreted less strictly. So I think the leverage will start to go up, and we're not going to go back anywhere to where we were so many maybe city group goes from ten times over the next several

years to twelve, thirteen, fourteen times. That's more leverage and more risk in the system, but it's still significantly significantly lower than we've ever seen anyway, So it's not it's not a calamity, and the returns will start to go up because they'll be able to do more things on their balance sheet via or like I said, the reinterpretation of the vocal rule, and the profitability of the banks

will go up considerably. When you look at the softness of the thickness of that cushion, that capital cushion, do you attribute it exclusively to the work of the FIT or do we have banks and and executives here on Wall Street who learned a lesson from from what happens this way? Um, the what the FEED is accomplished has been with the banks kicking and screaming. They have not done it willingly. They've been ordered to do it, and

they haven't had a choice. When when when you look at the FED, when you look at these stress tests they've changed over the years. Are we closer to getting perhaps not a perfect stress test? And again we note the departure of Mr Tribula, But how good is the FED now at assessing the integrity of these banks? Yeah, no one ever actually gets to see what's in those tests. What's very hard to say. All you can just see is the net results. And you know, like I said,

going from thirty five to one leverage. To tend to one leverage is like discussing the difference the distance from Mercury to Pluto. It's just it's so it's so different, you know, for people in my world, it's it's even hard to describe what that means. It's just so unbelievable. Steve I's been working with his cell phone. It's part of being the guests. You're allowed to come into the studio with cell phone blaring. He's making cell phone adjustments right now. Help me here is you get out your

the bad phone to work here on it. And you know, I know you want to go back to banking as well. But that the speed of information, the speed of flow, everybody glued to their cell phones, everybody with information flow. Has that changed the game? I actually think it has not. Um you know, if you go back to you know where I made my name in two thousand and seven and two thousand and eight, there wasn't a lack of information flow. It's just how you interpret that flow. So

you know, people have more access in information. That's true, But there are no naked facts in this world. You have to interpret them, and it's how you interpret them that really matters. How do you interpret President Trump. That's a dangerous question. That's why we're here Friday. We wouldn't ask this rtion on Wednesday, but Wednesday the doors over there. I mean, I look at it. Let's leave aside the social stuff, which is always dangerous to talk about, just

from a pure economic perspective. Um. You know, I do think we need tax reform in this country. It's long overdue. Hopefully what they'll do will be good, but we don't know what. They haven't presented a plan, so there's nothing to criticize yet. UM. But you know, my hope is that with lower tax rates, you will see companies be more willing to invest in the United States. UM. I think that, you know, some of the criticisms that the

President has gotten about trade are misplaced. And the reason why I say that is, you know, if you go back to NAFTA in the ninety nineties, NAFTA was sold to the American public as it's going to improve GDP and it's going to create millions of jobs. And now whether or not have to improve g d P not we could debate, but there's no question that we lost millions of jobs. And so I think the president's um critique of the whole way that free trade has been

done in our country over the last thirty years. He has a very valid point, and you know, maybe hopefully they'll make changes that are helpful. When you hear him talk about making changes, about pursuing these bilateral deals and doing it rather quickly, is he demonstrating to you optimism or naiveness about the way that Washington works in the way the way that you can get a deal like that. That's just political rhetoric to me, What do you what

do you think he's going to say? You know, we're gonna try and do this, but we might fail, so you know, he's got to position it so that things look hopeful. Is there opportunity for you in the ambiguity and when it comes to taxi form that we don't know what's going to happen as an as an investor, is somebody who's who's watching the market? Um? Is this a a? Is there any opportunity? Is just a wait and see to see what I mean? There's more than ambiguity.

We don't know anything. No one's proposed, hasn't imposed anything yet, So it's more than ambiguity. I don't know anything. Is there too much money chasing distress debt you mentioned earlier on our television. It's not my area of expertise. I don't have to stress have an opinion. You mentioned subprime autos, right, I mean, is there is there? Is there just like

in private equity and the rest of it. Is there just such a wall of money that you can't get advantage or is there so much dumb money chasing after opportunities in the Matthew securitized world that it creates a huge opportunity for you because they do dumb things. You know, it's a it's maybe it's an opportunity, but in a zero right world, it's it's an opportunity that you can't really take advantage of yet, because I mean, you know, when you take a step back, you know, how do

you value any asset or or company. You know, in theory, it's a discounted cash flow And and and the question and the discount of cash flow is what discount rate do you use? And in the world of zero rates, discount rate is heres are gonna We're gonna continue with Steve Weisman and and this is the third or fourth time this morning he's mentioned the great distortion about the complete linkage of central bank to fixed income distortion that

we'll see. Let's come back and talk about that and the path as we get out to where he wants to be, which I believe he said earlier was three or four rate increases out. We'll do that with Steve

Eisman and new Burger Berman. Steve I just put out on Twitter, it's a log normal world after all, and there's something about being in the finance business where we're smart, well meaning people outside of finance start lecturing finance people on a log normal world, people get a little moved, which brings us to the president of the Minneapolis Fed. Right now, Neil cash Carry has ideas about how to fix the banks, and many in your world go maybe not.

What's he getting wrong? Well, I mean cash Car seems to think that the banks are um still too levered and that they should have three times more capital than they currently have. Um. So, let me say, as politely as I can, I think that view is ridiculous. I mean, he's outswissing the Swiss. It's insane. I mean, let's let's do some math. City group today is leveraged ten to one and has in return equity of eight. So if you triple the capital, City group is going to have

a return equity of two and a half. Bad things happen to banks when it is mathematically impossible for them to achieve uh their costs of capital. And let me elaborate on that for a second. That would mean there's only two eventualities that could happen here. Either spreads on new loans would have to explode so that the banks would be able to make their return on capital, which would not be good for anybody, or all banks would have to shrink because every single loan that you would

make would destroy capital. You know, the point of a banking system when you think about leverage, leverage is like little bears porridge. It has to be just right. Too much leverage is bad, but too little leverage is bad too, because the banks recycle money, and if and if you have too little leverage, they're not performing their function of recycling money into the banking system. It betrays a complete misunderstanding of how banks work. I want to elaborate on

this for a second. You know, I don't have any institutional obligations to anybody. I work at New Burger Berman. If I have the opinion that that the banks are under capitalized, I could say it. Nobody owes me anything. They could agree with me, they could disagree with me. There's been a process in place for six years of regulating banks and delivering them and last year Kushkari shows up and and the first thing out of his mouth is the process is broken and we need more capital.

It's like, you know, wait a second, you're part of the new Minneapolis fed. You you just don't show up and try and blow up what people have been doing for the last six years. And you know, and I, like I said on the TV, you know, prior to the financial crisis, bank regulators did about his bad job as anybody's ever did done and history Planet Earth, um, you know, thankfully, you know, Governor Daniel Torula took over and he's done a fantastic job. And I take great umbrage.

And somebody's showing up and announcing to the whole world that the guy to Rula who's interest a fantastic job, doesn't know what he's talking about, because it's insane. We were talking about the transparency lack through of in these stress tests, and let me just ask you the last minute we've got with you about the call that we've heard of the last week from Senator Tom Cotton and others.

You know, a letter to the Treasury Secretary to look at the jurisdiction of the Financial Stability Oversight accounts that to reevaluate that and look more closely at too big, too big to failness and systemic importance. Do you see an erosion with the f stock as well? Is that is the Is the role of the f SO gonna change? No, I don't know that that letter is irrelevant. It's who cares. It's just I mean you mean anything. You know, that's

some politicians. Mollot Off doesn't mean the thing. Steve Iceman, thank you so much. Thank your room, always valuable, some real insight there, and particularly thank you for your comments earlier on the sport of asset management. Mr Heisman clearly optimistic on the good times for active management once we get rate normalization. That was such a good band, David Gurrow right, and they were awesome. The band reunited Emerson like and Palmer like Noboddy. You know, it's they were

just super bud. You've got a wonderful interview coming up. Our David Weston, Alex Steele, and John Farrell with Peter Navarro. Let's be clear here, he's got he's got bulletproof chops, tough university, as doctorate is from Harvard and economics. He's out of Irvine. His acclaim book Death by China, and he has been a lightening rod of support and criticism, uh for Trump economics. So this is a timely conversation, certainly with the leadership of China meeting with Mr Trump

tomorrow and now to David Weston. Trump will be signing two executive orders on trade and joining us now on both Bloomberg Television and on radio to take us through these two orders as the Director of the National Trade Council in the White House, Dr Peter Navarro. Peter, welcome back to the program. Good to have you here, David, How are you today? Good? Thanks. So we've had some preview of these two orders. I'd like to talk about themselves. First.

The one that's going to review country by country possible unfair trade practices. Is that based largely on the question of a trade deficit with those countries. That's correct, David. There's uh about sixteen countries with which we have significant trade deficits. And the bigger picture here is that the United States is the freest trader in the world. Let's be clear about that. On balance, we have the lowest tariffs, we have the lowest non tariff barriers, yet we have

the largest trade deficit. And these deficits are causing the job loss, They're causing our factories to move off shore their reflection of that, and so uh. Historically, what's going to happen with this omnibus investigation into trade abuses is that the Secretary of Commerce Wilber Ross, with the U. S. Trade Representative are going to take a comprehensive look at all of the different ways uh that that trade deficit

might be happening. UM in the trade space. We're gonna look at differential tariffs, non tariff barriers, things like forced technology transfer, all of these things, and in ninety days, UM wilber Ross is going to deliver a report to the desk of the President and the information in that report will basically be the foundation of which will guide

our our future trade policy. The purpose of this investigation is basically to fulfill a promise to the American people that that the Canada Trump made, uh to basically look into these trade abuses, correct them, smart new deals in a way which will basically put our people back to work and bring our factories back on shore. So so, Peter, certainly trade deficits or something to take a look at.

But as an economist, I'm sure you would agree that a trade deficit does not necessarily equate to unfair trade practices. There are lots of reasons you can have a trade deficits, so it's a possible at least some of these countries you'll take a look at and decide, you know what it's for other factors, it's not because of untare practices. Yeah,

that's a great question, and you're act exactly right. I mean, take Canada for example, We run a trade deficit in goods with them of over ten billion dollars, but a lot of that is driven by oil energy, so no big deal air. On the other hand, we have other countries which are cheating us blind uh. We have also a systemic problem um with our taxes, our income tax system relative to the rest of the world, which runs on a vat, which creates a disadvantage for us for

for our country. So these are all the things we need to look at. Trade deficits aren't bad per se, but when you run a large and persistent trade deficit for as long as we have, UH, it's basically a proxy for all of the job loss, the slow economic growth, the low wages that we've suffered over the last fifteen years. And President Trump is going to deliver on this promise

to turn that right around. And this is a big first step and his historic No American president has ever looked at this problem UH and committed to solving it. This and the Secretary of Commerce is going to deliver an historic report in a ninety days. We're going to start moving and Peter, it raises the question about what the proper remedy is insofar as you find unfair practices. Is it to enforce the existing laws, including under w

t O more effectively or is it new agreements? Is it possible, and this goes to the second order as I understand it, that goes to anti dumping and countervailing duty enforcement. Is it possible that we have the rules in place, we just haven't been enforcing them effectively. Well, that is the day. That's a great segue to the second order. And let me describe that for the for for your viewers. UM, there's there's two ways that we

can enforce against cheating. UH. One is he called anti dumping, and that's basically to defend our manufacturers and workers against countries that dump products into our markets below cost. And then the other part of that is what's called countervailing duties, and that's when foreign governments unfairly subsidize their industries and we get products essentially at costs lower than they should be. So the Department of Commerce historically has been able to

file these anti dumping und availing duty cases. We have almost four hundred of them active right now, covering forty countries. But the problem is that the duties we are supposed to collect, UM, we haven't always been collecting. Since two thousand one, we failed to collect two point eight billion

dollars in these duties. And it's not just the revenues we lose when we fail to collect them, it's also the fact that our industries don't get the kind of relief that they were promised when they filed their cases. So Customs and Border Protection we're giving them the tools basically to turn that situation around. And this order besides being a great order on trade in the economy, is a beautiful example of interagency cooperation and a new Trump administration.

Because Secretary Ross and Commerce Secretary Kelly at the Department of Homeland Security, and the Commissioner at Customs and Boarder Protection Kevin mcaleen, and they all work together on this, it's a great order. Well, Peter, nowhere is this more clear than what has already happened over the last few years in terms of China and the anti dumping tariffs on steel, which at some point a triple digit taxes

and that did wind up benefiting the steel industry. Here are you looking at those kind of tariffs like triple digit uncertain products from certain countries and what about retaliation? Well, you managed to go off in in in a direction that has nothing to do with what we're talking about today. We're talking today about two orders, one which will look at trade abuses in a copy handsome way, and another which is directed at collecting customs duties. The principle here

for the Trump administration is smart, tough trade negotiations. The information we're gonna get from the Omnibus investigation will inform that the second pillar of President Trump's trade policy is strict enforcement and compliance. And when you have cheaters basically sending products in here after we've already had duties assessed and they don't pay them, that's not the kind of behavior we're going to tolerate. So this is the let's not don't even go there. I mean, we're not talking

about trade wars or tariffs or anything like that. That's

that's your rhetoric. We're talking and tariff barriers. I mean you specifically mentioned you're looking at tariff and non tariff barriers and anti dumping, and that's exactly what we're talking about, exactly, and what we're gonna do with this report, if I may, what we're gonna do with this report is lay a strong foundation for measured, analytically based steps that we're going to take to fight what's happening with unfair trade practices in this world. Look, I go back to the beginning

of what I said. We are the freest trader in the world. We have the lowest tariffs, we have the lowest non tariff barriers, and that's not fair of the American people. And and we're gonna look at the causes of these trade deficits. There's gonna be some causes that are unrelated to trade per se. But when it's trade and when there's unfair or non reciprocal behavior by any of our trading partners, I can assure you President Trump is going to take action. How significant paid effects distortions

to the problems that you're talking about currently? Say again, how significant our FECs distortions to the problem that you're talking about currently? Okay, little code word there? The effects you're talking about the currency issue? Pay that you're familiar with foreign exchange and ECT go U. Yeah, Come on, um, Look, Secretary Ross is going to look carefully at many many factors. Currency misalignments are certainly one of them in an international environment.

Will he will look at that, uh and come up with an assessment and see where we are. Is that something that we'll be brought up with a president? She next, sweet pizza? Uh. These orders are totally unrelated to the Chinese visit, and I have nothing to say about the Chinese visit. I'm here to talk about the two orders today, So let's let's talk about what's happening within the White House.

Has been a lot of reporting about a division between the nationalists like your South Peter and the Bannons of this world, and a division between yourselth and sake Gary co in the film President of Goldman Sacks, what do you make of those reports at the moment? And it's that fracture within the White House or is that just a natural debate that's emerging. Well, two days ago we were sitting in a room altogether going over these executive orders and we agreed that these would move forward today.

So that's that's pretty good. But you know, look, I'm here, and I know you want to sell soap here with selictions stories or whatever, but I'm here to talk about two historical events. Be omnibus investigation. His historical because no sitting president has ever looked at the issue of trade deficits and trade abuses in this way and promised to

take action. The Customs and Border Protection Order is historic because here we have UH agencies working strongly together with the White House solving a problem with the stroke of a pen in in in in less than thirty days. When we're looking at this UH that's gone on for fifteen years. So I would say that's pretty good for the for President Trump and his team 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. Marylynch, Pierce Federan Smith Incorporated Member s I p C. Good morning everyone, David gurn Tom Keenan moments are Michael McKee in Florida, his Florida with William Dudley, David Gurrow. This is gonna be great. Bill Dudley is one of the most interesting practicing economists today.

Eleven years of Goldman Sachs out of the New College of Florida are really interesting school. And then his PhD at Berkeley. Bill Dudley has done original economics full disclosure. He was in my book Flag on one Engine and it's phrasing there. Uh. David Gurra was from Patrick O'Brien on the budget deficit. There is not a moment to

lose and it's ever more so today. Absolutely very eager to hear what he has to say to our our colleague Michael McKee, who has been traveling the world quite literally traveling the world talking to to central bankers and policy makers here over these last a few weeks. He's in Sarasota for the for the interview today. Just a host of interviews this week, Kathleen Hayes talking with Eric Rosen Green, Jim Bullard coming up on Blomberg Grady as

well at ten o'clock Wall Time. And what's great about him versus other presidents governors is he was knee deep in the practicing grind of market economics, where he had to publish weekly with his team including jan Hanseius. Now there Ed mcelvy of course, Uh there for years at Goldman Sex. But he's one of the few people in the academic central bank world that actually did the market economics grind, which gives you great respect for being wrong

because as you know, you're wrong often. David early and often will admit that for sure. Uh. Eager to hear what he has to say about the Fed's balance sheet, Michael McKee saying he's eager to talk more about that with Bill Dudley. It's something that Bill Deadley spoke about in broad strokes yesterday in his speech down in Florida.

Mike mculbee following up on that and of course said just his outlook for for growth, outlook for rate increases, something of paramount interest to all of us as well. And of course the background and this of course coming

off the Federals at phrase from RK. Kathleen Haser conversation with Jim Bullard later this morning of noisy g d P. And at the end of the day, with the mandate that we have of inflation, the mandate of jobs, there's also the quiet unspoken mandate of economic growth has no substitute. The backdrop against CBO report yesterday pretty grim on the future budget, and also the backdrop of challenging productivity numbers. UH. The other UH to day here is our Michael McKee. Well,

good morning. We are at New College, a small liberal arts institution here in Sarasota that is the honors college for the Florida University System. It is also the alma mater of New York FED President Bill Dudley, and we thank you for having us at your alma mater this morning. We're glad to have you for joining us. The mood on Global Wall Street, the question on Global Wall Street has shifted recently from when is the FED going to move?

To how far? How fast? So to put it in terms that have come up in the last week or so. Are you a two more this year kind of guy? Or maybe a three more this year kind of guy? Um? How many times do you see the Fed moving in two thousand seventeen? Oka, It really depends on the data. So trying to predict, you know, what, what's going to happen based on what I think today is not. I don't think that's very relevant. Look what happened in two

thousand and sixteen. In the fall of two thousand and fifteen, the medium consensus was four hikes. In two thousands sixteen, we did one. Uh. Two thousand seventeen, going into the year, the medium with three. So far we've done one. So I think I think where where the where the FONC is is? I think in a reasonable place? Uh, you know,

a couple more hikes this year seems reasonable. Uh. You know, if the comedy is a little bit stronger than we expect, we could go do a little bit more, and if it's weaker than we expect, we could do a little bit less. Well, what tells you it's time to raise rates? It took a long time and to build Dudley interview to convince Wall Street you were going to move in March, primarily because people were saying, well, nothing really changed in the economy between December and March. Well, the fact was

nothing really changed. The economy is on the same trajectory, growing above trend, generating sturdy job gains, and we basically we had been trying to communicate to people if the econmy state on that trajectory, we're going to get gradually remove monetary policy accommodation. So the March move was consistent, I think with what we said previously because the communy was performing in line with what we were anticipating. What

does that mean you would consider moving in May? Or do you want some time to see what happened with this rate increase, to see if there are changes in the economy, And of course there's no press conference, so mechanically it's a little more difficult. Well, I don't think that we're at the stage in the cycle where there's a great urgency to tightening monitor policy, because the economy is growing just a little bit above trend and inflation

is still a little bit below our target. If you look at the underlying pace of inflation, if just for example, if you look at the core personal consumption expenditures deflators from running about one in three courters per cent. So that tells you that there's not this huge rush that we have to tighten monterary policy quickly. The e commedy

is clearly not overheating. At the same time, policy is accommodative, and we're pretty close to full employment, so it makes sense to very gradually take back accommodation to get monterrey policy, you know, closer to neutral as we go through two thousand and seventeen. All right, well, where's neutrals? How high will you go? Well, I think the consensus about among many people is that the neutral federal funds rate, so adjusted for inflation, is somewhere between zero and one percent.

So add our two percent inflation tiret, you're probably talking a neutral federal funds rate maybe somewhere in the two to three percent range. Uh So we're we're right now, we're you know, ninety one basis points or so on the federal funds rate. So we have maybe you know, a hundred and hundred fifty basis points of tightening ahead perhaps, but it all depends on the economy. If the comedy is stronger, that would suggest that we have a little more to do if the commedy is weaker than the

probably not so much. Well what about the pace? How soon do you need to get that hundred basis? I don't think that soon. I mean, if you look at the last year, we've been growing above trend, generating very sturdy job gains, yet the unemployment rate hasn't really moved very much. So that tells you that there's actually something maybe a little bit more excess back in the labor market.

Then then you would think just looking at the unempotant rate, the fact is as people who have been discouraged, workers are coming back into the labor force, So that allows you to generate pretty sturdy job games without putting a lot more pressure on the labor mark. Are you doing that? Is it the level of FED funds that is stimulating

job growth? In other words, if you raise raids, so you're going to cut that off, well, I think you're gonna You're gonna you're perhaps gonna slow that down a little bit, and that's what that would be the goal. I don't think it's a question of you know, the

spicket wide open or the spicket shut. I think the spicket, just turning the spicket down a little bit, so that comedy isn't is it less risk of overheating as we go forward in two thousand, seventeen, eighteen and beyond fiscal policy, did you adjust any of your forecast to account for something happening in two thousand seventeen or eighteen? Not explicitly, because I don't know what it is, how big it is,

or when it's going to happen. I do think that it's true that the likelihood over the next couple of years is fiscal policy becomes more expansive. But until I can see a little bit more visibility in terms of what it is, when it isn't how big it is, I'm not going to corporate explicitly into my growth forecus now what I think the fact that I think fiscal policy is likely to turn somewhat stimulative over the next couple of years, that just means that affects my view

of the risk to the outlook. So this creates a little bit more upside risks to the outlook than before. Well, consumer and corporate confidence very high since the election, But do you see evidence our corporate leaders tell you that they're acting on that confidence are they investing. I would say at this point there's been a huge increase in both consumer and business sentiment, but it's not translating at

least yet into the hard data. So this is one reason why when we get the first quarter GDP numbers at the end of next month, uh, they're probably gonna be a little weaker than one might one might expect given the very large improvements that we've seen in consumer and business sentiment. So the jury is out is the rising off is going to translate to forward into a greater economic activity or not. We'll see business leaders say

they have to see something concrete before they spend. Well, I think that, you know, they probably would like to see more clarity on what's for example, it's going to happen to the corporate tax regime. I imagine that's important to them. But I think that that generally the mood is pretty pretty pretty upbeat. Do you think that fiscal policy as being talked about can generate three percent or better growth on a sustained basis or we eight two percent to come? It all depends on what happens to

productivity growth. If we can do things that push up productivity growth. We can also push up the sustainable growth rate of the economy. If you think about that sustainable growth rate of the economy, it's basically how fast is the labor force growing plus productivity. Labor force in the US is only growing about a half percent a year, so to get to three percent, we need to an half percent growth in productivity. Not impossible, we did it

in the late nineteen nineties. But you'd have to say, these policies are going to have you know, have are gonna have to lift productivity in some some some some sort sort of way. What what kind of policy would do that? Well, I think there's no question that infrastructure spending over time would raise productivity growth. Better education for people, are more job training and others lift the capabilities of workers, would lift productivity over time. Uh, some types of regular

deregulation might also help on the proactivity front. So there are things you can do to live proactivity. The question is how much will you get from those things. FEDS balance sheet just under four and a half trillion dollars back into prominence. Members of the Open Market Committee talking about it, big implications for investors when you start doing something. So the first question is when do you address it? How do you know that it is time to start

doing something. Well, we've said publicly a number of times that we're not going to normalize begin to normalize the balance until the federal funds rate normalization process is well advanced. And the question is what is well advanced me? I think generally if you talk to people in the market, they think that that's going to start sometime with the federal fund rate between one and two percent. So not

quite yet. When surprise A is me, is you know sometime later this year or sometime in two thousand and eighteen should be comedy perform in line with our expectations that we'll start to gradually let securities mature rather than reinvesting them. We've been very clear that the balance sheet is really not our primary tool of monetary policy. Short term interest rates are primary to monetary policy. So if we do something on the balance sheet, it's gonna be

something that's gonna be very passive. It's just gonna be running in the in the background. So we we want to do this in a way that was just very very not a big deal for the You suggested yesterday tapering your reinvestments rather than just ending them. But given the taper tantrum we saw a couple of years ago, wouldn't the markets just take it as a sign that

it's ending in adjust accordingly. Well, I'm not that worried that the markets are going to react to changes in our balance sheet in a in a violent way, because because it's already factored in. I mean, most people think that sometime late this year or sometime in two thousand eighteen, we're gonna gradually start to allow securities to match your and D gradually and the reinvestment process. So I think

that's already an expectation. The taper tantrum in two thousand thirteen I think was violent as it was because people conflated, UH, the idea that we're going to reduce the pace of asset purchases with pulling forward the timing of monetary policy tightening. UH. In this case, I, from my personal opinion, if we start to normalize the balance sheet, that's a substitute for short term rate hikes because it would also work in

the direction of actually tightening financial conditions. So if and when we decided to begin to normalize the balance sheet, we might actually decide at the same time to take a little pause in terms of raising short term interest rates? Do you stop reinvestments in mortgages only? Are also treasuries because if you look at currency in circulation and other fat obligations, your treasury holdings are just about equal to what you would need as an asset to hold against

your liabilities. Well, that's for the Federal Upper Market Committee to decide, and we haven't made those decisions yet. UM, does it make sense to focus on mortgages or is there a problem with doing that because of you paid it? Look, I think my own personal view, I don't. I don't think it's there's a strong need to differentiate between mortgages and treasures, just speaking for myself. But it's up to the committee to decide. How do you envision conducting monetary

policy in the future. Do you go back to a Fed funds rate? Uh? Do you continue with the current system of interest on access reserves and repose in the Fed funds rate? Trade somewhere in the middle of it? Um, and when do you make a decision on that? Well, we don't have to make that decision for quite quite some time. But I would just emphasize that the current

system is working very well. Uh you know, there are some questions, what what what would the Fed be able to raise the Federal funds rate in a reliable and predictable manner with such a large balance sheet? Uh so we we we created the overnight reverse Repurchase Agreement to set a floor, and we have the ability to pay interest on access reserves as sort of the ceiling, and the Federal funds rate has traded right in the middle

of that range. And when when we raise our target by twenty five basis points, the Federal funds rate rises by exactly twenty five basis points. So not from my own perspective, having run the open market desk in two thousand and seven, two thousand and eight when things were a lot more turbulent than they are now, this system

works really well from my From my perspective. At the end of this year, you'll have a bit of a political problem in that the two leaders of the Federal Reserve their terms are going to be up, and we have to find out if they're going to be reappointed. If Donald Trump were to come to you and say, is Janet yelling? Is her policies? Are they my friend? In what I'm trying to do for the U. S economy?

What would you say absolutely? I mean, the FED has a very clear mandate from Congress maximum sustainable employment in the context of price stability. How's the FED doing on that mandate. We're at a four point seven percent unemploying rate. Inflation is a little bit if you look at underlying inflation is a little bit below our two percent objective, but we're not really very far off. Those objectives were adjusting Monterrey policy, I think in a very careful, measured way.

So I don't see any reason why, uh, people wouldn't look at chair yelling and say, she's doing a really great job. We're gonna go outside the box now. Uh. He is prolific within the industry. His writing has been prodigious, to say the least. And I find that with Dr Arian there are always the same questions, what's the FED gonna do? How many rates are they going to increase this year? We would like to wax philosophical and what Dr Larry in his world had claimed for, and that

is game theory. Mohammed, good morning, and we do so in the backdrop of Anne Marie Slaughter's wonderful new book, which opens with Thomas Shelling with her sitting in a classroom with fooda jammy years ago with k In and I the Powered Interpretent Defendants. I want to go back to Cambridge in John Maynard smith Evolution in the theory of games. This administration knows nothing about game theory. What do they need to know about the theory of games?

What is the Trump administration need to know about the game theory of chicken that you know so well? Yeah, I don't know if they know nothing about game theory, because they are exhibiting certain element of game theory in the approach they're taking with the rest of the world. You see this in particularly on trade, and they've come out and they've warned that they're willing to do things that may not be in the interest of the global economy and not in the interest of the US with

a view to getting concessions. And I think you will see quite a few concessions coming their way. I think if you want to see typical game theory, look at what's happening in the UK and the European Union over break set. That is classic game theory right now. Within that game of chicken is shells, conflict and strategy, the artist strategy, Avonage. Just Avonage Dick said, what is your art of strategy for Prime Minister Meg? So? I think she is doing what I would do, which is she

is saying this is what we can achieve. She is trying to define the benchmark for the negotiations and focusing in particular on securing free trade with Britain outside the EU. What's interesting is how quickly the EU came back and said, oh no, that's not how it's going to work. Um. So I think the EU also read the script. And the question is going to be do they end up in the prisoners dilemma where they cannot collaborate and they both works off, or do they find a way to

iterate to something that makes them both better off? On that note, what what's the what's the outcome of that prisoner's dilemma? If we get it? We know of course that if there's no trade deal by the end of this two year period we go back to w t O rules. How do you see this playing out? So it's about David. It's about ultimately three things trade, money and people, and the UK wants to get agreement on

trade first. Then minimize the money it will have to pay and then hope that it can get an agreement on people, which remember that's what really drove the Brexit vote, the migration issue. Um the EU says, no, we're not going to do this sequentially, We're going to do simultaneously, right, and that's a big difference. So a prisoner's dilemma where there is no collaboration between the two sides ends up by hurting both Britain and the EU through lower trade.

That would be the major outcome, lower trade between the biggest trading area in the world, the EU and G seven economy, and that's not a good outcome for either side. Of course. He's the chief Economic Advice with Alians, a columnist for Bloomberg View. Mohammed, let me ask you about what you heard from Donald to us when he spoke on the heels of Theresa May's speech. He talked about unanimity, He talked about the twenty seven remaining memories speaking with

one voice. As you travel through Europe, as you look at the political and economic landscape in Europe, how rooted in fact is what Mr tusks san It is rooted and hope more than than fact right now. And that is because the fundamental issue is the following, David. When you run sophisticated market economies at low growth for a long time, and when the benefits of that growth are perceived to go to a small segment of the population,

things start to break. They break politically, institutionally, financially, and economically. And that is a situation for Europe right now. It has to be very careful because society is responding to the lack of inclusive growth. So it's very hard to get the sort of harmony as solidarity that EU politician would like to get at this point. And that's got to realize this To get back to John Maynard Smith. Not John Maynard Kayesville, this is something different. Dr Larian.

Is Donald Trump or true hawk? I mean the classic discussion in academics is hawk dove within the game of chicken, the brinksmanship, of of of how we act. He loves to the president loves to pursue to posture. Is a hawk? Is he a true hawk? I think? First, um, we

I don't. I certainly don't have enough data point to respond, But I would say the major issue is the balance between tactical and strategic to what extent is the administration pursuing hactical objectives, and how is is reconciling this with the strategical protected objective for the most powerful economy in the world. And that's going to be critical not just for the well being of the US and the global economy, but also for whether there asset prices can be validated

given where they are well. Then I go to brinksmanship. Are you suggesting back the dullars fifty years ago? This goes back to all the tensions folks that Dr Shelling was acclaimed for. Is this a new Is it almost the neo brinksmanship? All these tensions that we've seen in the first eight days of this administration. It is maybe

the rest of the world. I think the rest of the world now realizes that the US wants a better deal and that the US will not be the global police um at at at no cost to the rest of the world. And and the rest of the world is is seeing the U s flex its muscles in a way that it hasn't before. The problem, and this is really important, common David. The problem is that you cannot replace something with nothing. So you have to be clear as to what does the new world economic order

look like? And that's a question market. When I travel outside the US, people are asking the same the sctions over and over again. What is it gonna what is it gonna be look like? Is it going to fragment economically, in trade, in payments or not? And David, it brings us up after what we saw on Anchor yesterday with Secretary Tillerson. I don't know, you know is Dr Larian says, what are we going to with Turkey? And to that question,

what does the new economic outlook look like? You had President Shesh and Pink speaking in Davos trying to really craft a new economic outlook, and certainly that's going to come into crystalline focus next week when he meets with President Trump at Mara Lago in Florida. Let's come back with Dr a bit about that. I hope you joys. I just made a decision, folks. It with Dr Larry and we we wouldn't know what's the Fed, what's the

Fed going to do? Etcetera, that we'd really talk about a lot of these theories behind the strategy and tactics of this changing world. I know, Mohammed, you were lending an ear to the interview that our colleague Michael McKee just did with Bill Dudley, the president of the New York Fan and I wonder what stood out to you. We were listening here for some commentary on unwinding that

balance sheet. Yeah, that was a great interview by Mike McKee. UM, two things stood out to me, one very specific and one more general. The very specific, as you say, where the balance sheet remarks, particularly that this could be a late seventeen issue, and that they don't have strong feelings as to the sequencing of balance sheet normalization. I think that is the issue that the market would look most into,

But there's more general aspect. Until Dudley's comments today, most of the Fed speak we heard this week was hinting that the FED was getting more confident about the economy, somewhat more assertive with markets, and was keeping an eye on asset prices. UM, Dudley didn't go back to that. Dudley was much more dovish than that. So it's interesting to see that that you didn't get as much consistency in signals as you've got ahead of the last fo

MC meeting when the FED really change market expectations. We've had a conversation throughout the week about the relationship between the soft data and the hard data to Bias left Its earlier in the week saying he's looking at soft data as a firm indicator of of what's happening with the hard data. It's leading the hard data. How do you see. It's something that Bill Dudley talked about this

morning with Michael McCain. Yeah, he and he said what everybody has noticed so far, which is that the much improved sentiment both for household and business indicators not yet reflected in heart data. UM, I don't know whether it's a firm leading indicator or whether it's a soft leading indicator. It certainly will have an impact on behaviors, but I

wouldn't say it's a firm leading indicator. Mom, and let me change gears here, and we thank you always for your coverage, uh the soft data and the hard data. The asset management business is coming to a thunderous end of this quarter with restructurings at Fidelity, black Rock, etcetera, and on and on. You are truly one of the great experts on this year, work for years at PIMCO and of course your work for Harvard Management, they've just

gone through their own active management restructuring. Can you tell a kid at your Cambridge to go into active management in two thousand seventeen, I would tell them, if you're going to active management, make sure it's in the less perfect asset classes. So don't go to active management on US stocks, going to active management on high yield on emerging markets, where a clear marketing perfections and where you

can be more confident about adding value. UM. I think the whole passive versus active debate is going to get much more sophisticated and people are going to realize it depends on what asset class. But that is just one of the big themes that's going to define asset management for the next few years, and asset management is going to change. Steve Weisman was with this earlier today, of course the Great Investor, and he was acclaimed in the

movie The Big Short as well. Dr Larry and Steve Weisman said, all of this debate is going to go away, and what active management needs is an end to the great distortion. They need to normalize fixed income in short term paper market that's not there now. When we finally normalize interest rates somewhere in our lifetime. Will that assist active managers? Yes? I mean think of you being on the field where the referee is also playing on the

other side. It makes life very complicated. And when the referee is a central bank pursuing non commercial objectives using market instruments, then it makes active management even more complicated. And and and that's been the reality since the global financial crisis. And for me, it's not a big surprise that quite a few sophisticated hedge funds have decided to exit because it's a world. It's a world where you've got to predict non commercial decisions and that's really hard. Yeah, I

strongly support that. Do you see, girl, how l Arion does that. He always brings in a New York Jets model into a discussion of asset management where the Jets lose because the referees on the other side. You see, there you go, he let go, But Tom, Tom, with all respect only you read this as a complaint about the pace. Let me let me finish here with with where we began. We have this meeting coming up next week. Presidentiation Ping is going to be in West Palm Beach

with the President of the United States. We had a conversation with a Marie Slaughter about, among other things, grand strategy in the year two thousand and seventeen. What's it gonna look like when we see Chinese grand strategy mixed with whatever The diplomatic outlook is that President Trump is pioneering in Washington, d C. What do you expect to come out of that meeting? What's going to be central to the conversations about the global economy there at mar Lago?

So I think it's it's first, it's important that they're looking to put the executive Orders on trade out before that meeting, because that's gonna define a little bit the US getting tougher on this notion of bilateral deficits and also on this notion of anti dumping UM penalties. I

haven't been collected. I think what you're gonna see is going to be while they're more reconciliatory than anything else, I think what you're going to see is two of the two biggest trading partners coming together and signaling that is in the joint interest of getting things together. I don't think you're going to see fireworks with tell you the truth, this has been fabulous folks. It will be

on our iTunes podcast. I can't say enough about really listening to Muhammad l Arian on the brinksmanship in the game of Chicken going on, and so much of our economics, whether it's Brexit, UH, United Kingdom, the EU, or is what we're observing out of Washington and for example China. Dr Larrian is always thank you so much. Thanks for listening to the Bloomberg Surveillance Podcast. Subscribe and listen to interview 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, Feeder and Smith Incorporated Member s I p C.