Surveillance: China & Fed With Beschloss

It has maybe done at Jackson Hole. It has done at world meetings where she holds holds court with profound and original prospectives perspective, I should say on Central Asia, Sonny Beschlov is the rock Creek, the chief executive officer. Yes, very good on investment, expert on natural gas, but also expert on her Iran and all of Central Asia. And it is in crisis. It's best laws. Thank you so much for joining us today. You know, back to the

nineteen fifties, the Iran Pakistan India gas pipeline. You've lived it at the Kaibra pass uh in West Pakistan. The romance of the British, the Great Game and all that other malarkey. Is China going to come in and take over the vacuum of the Iran Pakistan India pipeline is the US exits um Uh. You always go straight to the to the point of the matter. And it is really interesting as you set up studied these natural gas pipelines going through all the way in Asia but also

in Europe. And no question that your politics is always more important than the physical aspect of these things. China is seeing avoid you know, we saw the Russians losing Afghanistan. We saw us pulling out as we speak. And no question that the Chinese are seeing big void um and uh. And they will take advantage because they will need a lot of energy to continue their growth and they know that natural is part of that solution to their coal problems.

Our core memory here is cobalt in Africa. How the Chinese came in and worked out long term contracts on obscure minerals. How will they work with the Taliban? Will it be the same method long term contracts with some things on the back end that maybe we'll give them an advantage you know. Um again, I'm not an expert on on working with the Taliban, but um, I think what we're seeing this time around is that the economic um thinking on the Taliban side is not something that

is clear at this the rest of the world. They are not a group that worked closely with the World Bank, or with multilateral institutions, or with eight organizations, so we have no idea how they will really behave when it comes to having international agreements, if any, and to sticking to it. So those I would not really um think about relying on. I think the question is where does the pipeline go. It doesn't have to go to Afghanistan.

In the meantime, as Fanny. As Fanny, we are looking at a Jackson Hole that has a very big effect potentially at least on the international community, at least the international community that does fall within the international banking world. There is a question of whether any kind of taper announcement would affect the international community, arguably more than even domestic markets in the United States. What do you think

You're so right, Lisa. I think the whole international point of Jackson Hall has been a little bit diminished in the last few weeks and people have not been talking about it. I think a lot of people are disappointed not to be there in person and for it to be virtual. But um, I mean my own thinking is that UM is that tapering is not going to start in um UM in this meeting, and I don't think that that j PAL is going to UM go there

at this meeting. Is more likely in November December. But no question, the conversations that usually take UH take part in Jackson Hall at the margins are going to be the ones that will decide in terms of how the central bankers are communicating with each other, not just to the rest of the world. And those are the ones that I would watch for. And again I don't think that they will be talking about it too much about

us papering at this particular meeting this Friday. Okay, so let's say you're correct, and if that does follow that timeline, what are the grammifications for emerging markets for asset prices following a slowdown in these bond purchases UM. So as we've seen a number of emerging markets have been already starting to increase their own interest rates. We've seen that happen over the la as few months, and we've seen actually some more tightening in emerging markets again as the

usual sort of course of things. UM. The emerging markets that have a lot of US denominated. They that and do not have a lot of exports that our U S data base will be the ones to get get into difficulty. I think, given the way tapering will happen, which is probably incredibly gradually and not sudden, probably the impact on emerging markets will be something that is slower. The third job of the FED, which is stability of

the global economy. The U S economy of course, but also the global economy, will not be something that j POW will be forgetting to consider. We've been having a lot of conversations about moral hazard. What is the level and the risk right now of moral hazard if we don't do something, if we don't taper as quickly as

we should. I think the big problem if we don't start papering, whether it you know it is in October or November or December, more likely November December time, is the pressure of inflation again, UH are thinking that Rock Creek, and my thinking is that the supply chain problems are so huge, so overwhelming number one and all the other things that are going on in UM in terms of COVID related problems in various economies, that they are the one.

They are the things that are governing price increases much more than typical inflationary pressures. So the issue really at hand is whether we get we are too late to move. But in general inflation is a slow process. If we see take off, I think Jay Powell and its colleagues at the Federal Reserves have lots of tools to catch up quickly if they need to. So not so worried about moral hazard. Thank you so much, greatly appreciate it.

With the Rock Creek this morning, what we're supposed to do is dutifully come out right now and talk about price up, yield down or price down, yield up, talk full faith and credit. I g HW yield bonds with Bob Michael. He's been a JP Morgan for four hundred years and joins us this morning, thrilled that he could join us, Bob. But we're gonna spend some serious time here on the great unspoken, and you nail it in your research note. Stephanie Kelton at Stony Brook has changed

the world. She came out with modern monetary theory. We are in an MMT experiment of some type as well, and the financial media is not talking about this enough because everybody sort of wishes the theory would go away, which is unfair to something that's had such an impact. Are you a believer in MMT more and Tom, It's

hard not to be a belief. It seems like the go to policy response now in a crisis where the role of governments is to borrow large amount of debts and deploy it through fiscal stimulus and try to shortcut two recovery, and the role of central banks is to print lots of money and buy that debt and ensure that the cost of the recovery is affordable. I think it's worked. It's hard to see where any pain has been created or where there will be problems down the road.

I think we all sense that there's got to be something. What I'd like to see how the Jackson hold is for the central bankers to say this is an emergency policy response. This isn't a normal part of our tool kit. They need to draw the line somewhere here. And I'm not surely said I think this is really important with no criticism of people like Claudia sam and Stephanie Kilt and I'm not even criticizing their cats and they have cats at home. It's very evident on Twitter that they do.

So nobody has an exit strategy from our pandemic MMT well, and no one has a sense of exactly what the consequences will be either, Bob, we talk about the potential of some digital deal interious to use the same word from the day before at ramifications of from the MMT types of policies that you talk about, Yet we're not seeing them. Yields are not going up. Inflation to the extent that it is going up is recognized as passing and somewhat decelerating. So when are we going to see

the negative ramifications from MMT like policies. Well, we're at an interesting point right now with Chair Pal and the FED in the crosshairs of what's going on in Washington, and he's got Jackson Hole in the September f O MC meeting to start backing out of this. But right now we're well past the crisis, and the recovery is underway, and we're recovering a lot of lost jobs, and we're going to close the output gap by the end of

this year. And if m m T continues with half a trillion in an infrastructure bill and three and a half trillion in various forms of stimulus, and the FED continues to print money and buy debt. I think there's a moral hazard there where you're looking at the FED underwriting a lot of government policies. So I think it's a very good time for the FED to assert its independence, draw line in the sand, and say that they're bringing

these things to an end. Now when, though, and what commentary do you need to hear to get them to do that, is that inflation goes from transitory to worrying. I think that's part of it. I think right now they can point to substantial further progress hasn't been made on a lot of the things that they look at. When when they look at where policy rates are, um, they don't need to be at zero for a lot longer, they don't need the hundred and twenty billion in in

large scale asset purchases every month. They can move to something that's more normal. I step back and I look at where things are, and if this had been a normal cycle, say going back I don't know, forty years ago, maybe even fifteen or so years ago, at this point in the cycle, I'd expect the FED funds rate to be two around a zero real held, and I'd expect the ten year treasury to be around three about a

one real heeld. So the fact that we're not there tells you the amount of distortion that the central banks are creating. Bob. But if the FED were to say at the Jackson Hole meeting they're planning to start tapering their bond purchases September, November, December at some point in the near future, I'd indicated it would be faster than expected. What would be the market response, Well, I think the

market response would be a gradual rise in rates. And I know there's some debate out there about whether FED taper leads to a rise in rates or not. I don't get that at all. Let me tell you if if bond prices are the very definition of asset price inflation, you've got a central bank printing unlimited amounts of its own money and going in and buying a specific asset class. If that's not how you inflate the price of an asset class, how do you you look at the negative

one percent real yield on ten year treasuries. I think the first stop is to get to something that looks around a zero percent and and we'll get there, we're gonna run out of time. But how do you affect a hundred basis point move in the real yield? Do you do it off phenomenal or do you do it

with the help of inflation expectations. I think you do it with the combination of both, but mostly with nominal yields, mostly with the realization that you don't have the eight hundred pound gorilla of the Fed sitting on the bond market. And maybe other central banks will start to dial down, uh, their large scale Pharaoh Pharaoll right now is writing on manuscript brought on meditation. Bob, It's going to be a

really important book. Uh, you know, I think Barnes and Noble is like waiting with boxes and boxes of it. You gotta do a book, Bob michael on MMT. That would be That would be just wonderful. It would really work with JP Morgan Asset Management, they've been on fire marksany sifting through all the cross winds. Here Moody's analytics chief economist, a well renowned and well respected economists who has been often cited for being accurate in a time

of such great uncertainty. Mark, thank you so much for being with us. We start to look out to September to October to November. Regardless of what the Fed does, how can you characterize the men behind this labor market right now? Good? Very good recording lots of jobs, created almost a million jobs in July. That's on top of a million jobs in June. I don't think we can

sustain that pace. But if you told me the economy creates a half million jobs per month on average over the next twelve eighteen months, that'll bring unemployment back in close to full employment, something kind of in the mid three percent range by likely twenty three. That sounds about right to me. So it's good, all right, So everyone agrees that it's good, and the degree which it is great, or the degree to which we've got a tightness in a late labor market that perhaps isn't recognize, is up

for debate. However, there is also a question of the enhanced unemployment benefits what the role off will do. Will it allow more people are sort of push them back into the labor market, or will it simply reduce the buying power of consumers that see uh, some of their income depleted. This is a great uncertainty. Where do you

weigh in on that. Well, I around the debate over whether the supplemental unemployment insurance that's the three dollar extra per week that folks are getting in about half the states UH, that was part of the American Rescue Plan. UH. I don't think that that had a major impact on the willingness of people to go to work. I think that's probably on the list of reasons. But it's towards

the bottom of the list of reasons. And we got some data points regarding that late last week we got state employment data for July and you could see in July, and you know, you had half the states UH eliminate that the supplemental insurance benefit. In July, there was no effect an employment in those states compared to states that kept the unemployment insurance. So so, you know, a lot of data points to calm the script still being written. We'll see and I expect we'll see some impact, but

it's really on the margin. And Mark, in the depths of oh eight oh nine, you were the reigning optimist. You were the one everybody tried it out to say, you know what, folks, we're going to recover from this. It took some time, but folks, Mark Zandi absolutely nailed the economic recovery of twelve and on. You have a heated note mark Sandy saying, would everybody calm down by the overheating effects of this trillions of dollars of stimulus?

Why should I be calm about overheating? Well, the first thing I'd say is there's a lot still a lot of slack in the economy, Tom, I mean, the unemployment rate is still five point four percent full employments, something in the mid threes, maybe even the low threes. We still have millions of people who stepped out of the workforce during the pandemic, who aren't even counted as unemployed. So you know, we got a long way to go.

I you know, we're head in the right direction. We're creating lots of jobs, and we got pretty deep holed dig out of and this support we're talking about now that you know something, some flavor of the build Back Better agenda the present by uh you know, unveiled earlier this year, that doesn't really kick in until four and and to do a degree that you know, I don't really think that is an inflationary issue nothing. I quickly point it out. There's a lot of aspects of the

plan that address inflation. So, for example, a big part of the plan is to increase housing supply, and we all know there's a very severe shortage of affordable housing and that's driving up rents and rank growth is the single most important aspect of in so you know that will go a long way to addressing that particular aspect. Mark there was a folk crew of years ago called Stubbs, Blinder and Zandy. They were outstanding. I loved what they

did that by coffee houses all through eastern Pennsylvania. David Stubbs over in London with JP Morgan is just brilliant on the technological overlay in our underestimation of productivity. You've studied this with the former vice chairman of the FED. How do you take in the technology overlay right now and what it will do to wage growth? Do we grossly worry about wage growth where we should not? Yeah,

I'm not. That's a great point. You know, wage growth has held up admirable well during the pandemic, and I do expect it to continue to accelerate as the labor market continues to improve unemployee comes in. But I'm not I'm not concerned that this is inflationary because productivity growth is also accelerated. Now, part of that is you know, cyclical related to the pandemic measurement issues, all that kind

of stuff. But abstracting from all that, looking through the noise, it feels like productivity growth underlying productivity growth that's accelerating. And there's many reasons for that. One is, I think technology. You know, there's a lot of technologies out there that's just taking time for businesses to incorporate, incorporate into their business practices. But I think they are and I think we are seeing productivity improvement. That if that is the case,

then that you know, that's a win win, right. That's a win for businesses because they can you know, pay higher wages and still maintain their earnings. Is obviously a win for workers as you know, it's a reason to be more feel more confident about our long term fiscal

situation because it means more tax revenue. You know, there's an endless reasons for optimis and if in fact, protectival growth is accelerated, I you know, you know, hard to know, but it feels like Tom that product productivity growth is improving. Mark though, on that note, you mentioned that We may not get some of this fiscal stimulus until twenty three, but by then, what is the argument that it's too late,

Maybe the economy won't need it. Well, the UH support we're talking about now, the fiscal package, the build back better gender, is not about short term growth. It's about long term growth. It's about lifting long term growth, lifting productivity growth because of better public infrastructure. Everything from roads to broadband is about lifting labor force participation in labor

force growth. That's you know, if I give lower income, lower middle income households support for childcare and elder care and paid family leave, that's going to make it more likely that they can go to work. Right now, they can't get a lot of low income households, particularly women in low income households, can't go to work because they can't pay for childcare. And this is helping free them

up so they and go to work. So this is about long term economic growth, and it's also about making sure that the benefits of the increasing long term economic growth a crew to lower and middle income households EF folks have been left behind in our economy over the past three four decades, UH Mark, this has been wonderful. Marks Andy, thank you so much, greatly appreciated. With Moody's

analytics there with a decidedly optimistic cast. When you are on the train between Boston and New York, you look across the water at the secrets of the General Dynamics Company. Arguably Phee Novakovic has resurrected General Dynamics into what it used to be and what it is moving forward. This is a really important interview with David Rubinstein, of course, peer to peer conversations, David, she just basically rescued General Dynamics. There's no no beating around the bush. What is the

Novakovic method. Well, she's very tough, she's very smart. Um, she knows the defense industry quite well. She had worked with the Pentagon for quite some time and she write omb was overseeing the defense BUDG difference sometime when she took over in two thousand thirteen. The previous year General Dynamics had lost about six or seven hundred million dollars and so she turned it around and now the stock is up about a d since she's been the CEO.

So a very good turnaround story. It's a good turnaround story. But as you well know, it Carlile. This is so much a contract by contract boomer bus business as well. Is she mackenzie did into a different kind of company or is it the same defense contract or that you and I used to stare at across the bay in Grutten. Well,

it's a little different. And that many defense companies today are making a lot of money on I T or electronic related things or things relating to cyber and that's an important part of what General Dynamics is doing as well. But the bread and butter of General Dynamics has long been tanks and submarines, and they are very very good at that. They also owned golf Stream, and golf Stream has been extremely profitable in recent years. Well it is. You know, I decided not to go for the gulf

Stream seven hundred, David. I just thought it was too extravagant for what we're doing at surveillance. Francine wanted to go there. Tell us about golf Stream. Is it a bolt on business or is it early part of her vision? Well, when they bought it from uh TED Enforcement many years ago, it was seen as uh unclear what this mission was because it really wasn't a defense part of of General Dynamics. It's not a defense uh industry uh kind of company.

Kind of company, but in recent years General Dynamics has really turned around golf stream to the point where it's clearly the in my view of the elite of of the business jet business in the United States. And they have done quite well in their G six fifties, there G seven hundreds and so forth, so it's a very very profitable business for them now. Mr Rubinstein. It's incredible the timing of this interview as well, just given the

events in Afghanistan. Any insight that you can glean from that interview just after the Taliban took over cobble and well, where we think about the future of defense spending, Well, there's always a thought in Washington and when presidents of the United States are Democrats and the Congress is Democratic,

probably defense spending will go down. But I think the events in Afghanistan will probably make it more likely defense spending will go up more than even President Biden are proposed, because it's clear there's still a lot of uncertainty out there in the world, and I think that what happened in Afghanistan, without assessing whether there was fault on somebody's part or not is clearly going to embolden people to think we need to have a much bigger defense budget

in my view, David, one final question, if we could, and it folds in from Taylor's good question. In our business and in our government relationship with China, do you look in Afghanistan is being a change agent for how we speak to China. I think Afghanistan is going to make it more difficult for the United States to persuade

some of our allies to follow our lead. And so with resuspect of China, China is probably going to have a closer relationship with Afghanistan in the future than then we are going to have, clearly, and I think as a result, it will change the dynamics somewhat. But our own relationship with China really is not dependent on Afghanistan, and that's a complicated relationship. And I don't think President Bush, I'm sorry, President Biden and President she are likely to

meet anytime soon. The sooner they meet, I think it would be good, But I just don't think it's gonna happen anytime soon, right, David Rubinstein, thank you so much in congratulations, are really inspired peer to peer conversation. Look for that. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m. Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best

in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom keane In. This is Bloomberg