Surveillance: Concerned About U.S. Trade Policy, Dudley Says

and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course on the Bloomberg we have with us Marianna Moscato and Kenneth Rogoff and really talk about this economic moment that we are in into this autumn and into two thousand nineteen, and so much of that economic moment is this linkage of economics into finance,

and is the banking and finance system. We had Mr Ackerman on earlier talking so much rationalizing out ten years and we've seen what Deutsche Bank has done in many other troubled banks. Is well, ken, what a gap between US banking and European banking did you expect to see

that five years ago, seven years ago, ten years ago. Well, the banking system so much bigger in Europe as part of the problem, so that's made it harder for them to deal with They depend on the banking system more, but also the Balkanized regulate regulation, so they would do the stress tests in Europe. The Italians would stress test the Italian banks, the French would stress test. The French banks didn't even talk to each other, even though the

loans were interconnected. They're changing that, they put the c B in charge of it, but it's still having trouble really forcefully taking the reins. So the European banks, that was a big part of why the recovery was so slow. Again, um, what what does it mean? So the recovery was so slow, But we're central banks right to do that? Or should they have done something else? If you look at inequality and maybe you know some of the stems of populism is do central banks and what they did? I mean,

I I find that hard to see. I mean, I mean, cutting interest rates is usually considered redistributing from people who have money to people who are borrowing. So I think the central banks, frankly, I would have been more radical. I think I wrote a paper in December two thousand eight h for which I took a lot of criticism, saying inflation is not the lesser is not the greater evil? Right now you should worry about something much worse. So

actually I think they were a little cautious. Uh and reluctant to be more creative in their use of instruments. But of course fiscal policy could have done more, but politically in Europe that wasn't easy. I advocated writing down the debts in the periphery countries and I think that would have been a good investment for Germany and for France.

Didn't happen, Marianna, do you agree with that absolutely? And I mean I think that the key problem right now is that the source of the key if you want fact, is that led to the crisis. Things like private debt, private debt, not public debt, private debt being out of hand. The ratio of private debt to disposable income in the UK is back at record levels. We also have record

level hoarding in the industrial sector. We have record level financialization um in industry, so increasing amount of profits just being used to boost share prices, stock options, surprise, surprise, executive pay so over three trillion dollars having been spent on share buybacks in the fortune companies. All these problems are actually getting worse. We have not reformed the fundamental system.

And you can create all the money you want through KWI, but if you aren't also creating opportunities in the real economy that money to send up back in the bank. I want to go back to the banks as well. And this goes back to when Hyak won the Nobel Prize and the other guy, Myrtle, wouldnt even get up on stage. It was so controversial. And can you nail this in your latest Project Syndicate piece on how we didn't clear the grease problem? Why are we afraid Mariana

to clear markets? Why are we afraid? Why are we so tentative about clearing the grease problem. We're clearing the banking problem. What's where did the fear come from? The timidity in your record? But the problem is how you define the grease problem. I mean, let me just talk about Italy for a minute, which is much worse than grease. If Italy goes bust, we're going to see Italy has had a lower deficit than Germany for the last twenty years.

Italy's problem was not the deficit. Italy's debt to GDP is completely out of the roof. But why not because it was spending too much? But it wasn't. Both the private sector and the public sector were quite inertial. They had all sorts of parasitic relationships between them. There was

lack of investment by key Italian industrial players like Fiat. Interestingly, when Fiat came here, Obama, in a moment of confidence, said, you know Chrysler, which was bailed out by the U. S. Government because we didn't just build out the banks, we also build that industry. He said, you have to invest in this country and hybrid technology if you want Chrysler. So Makiona, who passed away, who was a great uh entrepreneur, he said, fine, we will. But in Italy they didn't.

In Italy, the relationship between public and private has been extremely problematic, and the public sector hasn't invested. Is Italy gonna be can in the fourth edition of this Time is different? I mean, is that where we're heading This is going to be like the Spain of sixteenth century?

Could be? I mean, I think as long as real interest rates stay this low, will simply see a country that, as Marianna describes as a lot of corruption, is not highly functional, isn't growing at the rate that it could. I might add that Italy suffered a lot from China. They competed in a lot of spheres with China. It's part of why they didn't do well. But if real interest rates were to rise, I don't expect that, but

I'm not going to say it could never happen. Then suddenly funding their deaths, that would be very want to fancy jump in here on your Italy please, I think this is important. Yeah, But does it all depend on Marianna. It depends on whether you know the markets maybe are too short termism. Is they just want to know from the populous leaders whether they will stick to the rules

or not. Is that the wrong thing for the market to be focusing on the market should be fundamentally worried that you cannot have a monetary union with the level of skewed so different levels of competitiveness that we currently have in Europe. So instead of obsessing that everyone has to fit the three rule right the fiscal compact, what really we should be doing in Europe if we are going to have you know, cohesion, is to learn lessons

from each other. So the kind of investments, again in both the private and the public sector, that had been made in Northern Europe. And I'm thinking also of the type of financial system that we have, for example in Germany, where you have patient, long term finance enabling, for example, the steel sector in Germany to really transform itself along the whole entity event, the green transformation of the country.

We don't have that in Southern Europe. We have consumption led growth, we have you know there there just isn't that level of ambition, vision, national plan. We have a financial system which is actually quite short term. It's just like it is in the Anglo saccent world. But we mean, the opportunity for Europe right now is to think about itself as a hub of innovation. Think of itself of how does it actually differ from China, How does it differ also from the U S and terms for example

of the stakeholder governance model in northern Europe. That could because I would just say and sort of seconding what Marianna said, but maybe emphasizing the fact the euro was just the mother of all mistakes here. They certainly shut a broad grease and uh, it'llly if they didn't weren't on the Euro Okay, they wouldn't be Sweden suddenly. But they've been able to deal more easily. They need more time,

they have a lot of adjustments. Marianna described it very eloquently, but it's very hard to do with in the system. It's not just the fiscal deficits, it's the monitor to do it for four hours here and what I think for instant and I want to do is get it back to the theme and particularly folks, what we've see in America is of a guilded age and of what we've seen politically with President Trump as well. Is there

a persistency to this guilded age? Can there be a persistency to the politics and the culture that Donald Trump represents? I hope not. But I mean I think in terms of the economy, a lot of what we're seeing is possibly sustainable. Uh there, Larry Summers sort of said we're in secular stagnation. I argued, no, we after a financial crisis, you have this long period of slow growth. It can take a to ten years to recover. There are some

of these trends and demographics and productivity, etcetera. But some of what you were seeing was the financial crisis, probably at least half of it. And there's ketch up. So no, I think, uh, you know, knock on wood, it could go well for a while. In your index, there's no Donald Trump I was surprised by that. Why not, why didn't you write about President Trump in this movement that we see in America. I think I do mention that

he's well. First of all, he's very unique. I bet you didn't know that, in the sense that he's the first U S president to really attack those institutions in the US which have been key for US competitiveness. The first thing he did, literally the first month in office, he went after ARPA, which is a sister organization of DARPA, but in the Department of Energy. DARPA, as you know, was key to founding the Internet and has been a key source of innovation, including of the serie UM in

all our phones UM. In fact, everything in our phone is basically funded by the US government, Internet, GPS, SERI, touch screen. And he went after those organizations. And that's it's quite interesting because you know, China actually learned from the lessons of Silicon Valley, right, So China today is investing massively through different types of state actors alongside private actors UM and what I think will be the next

big thing, which is the green revolution UM. And they wouldn't have been able to do that without the patient finance, for example of the China Development Bank UM different. They're increasing are in D spending by overcent in the last ten years. And so the US kind of talks Jefferson but as Hamilton's but like that, but China acts and talks Hamilton's but um Trump is dismantling the Hamiltonsian legacy.

And I'm not talking about the musical. I'm talking about the real, you know, active strategic investments of the U S government which have been fundamental to the Internet revolution. Now Tottech, biot tech and clean love. That Tesla would not have existed without the US government. The last word of Mariana, which is appropriate Kendroga, thank you so much for joining us. I'm gonna put two books here, folks. I really can't say these are two really different books.

A cursive cash now in it's fifteen printing. This is a brave book, to say the least on the cash economy, and also a negative interest rates and also as well, this must read the value of everything you agree, you disagree, you want to scream at, or you love her to death,

Masaccado with the economic history you need to know. Always good to speak with James Rumor Jim Romor on commodities, on weather, But of course, with Hurricane Florence upon the nation and particularly in the southeast, it's good to catch up with Jim Rumor. Jim, what's your believability on the track of this hurricane. You've followed Elno, you've followed global temperature in oceans forever. Is this a run of the male hurricane ores or something different? Well? Thanks Tom, sorry

miss you on TV or this morning. It's really being affected by um just a combination of a weekending lawn and warm Atlantic temperatures. Right now, we still feel overall though the hurricane season is gonna be weaker than normal for the Gulf Coast and also for Florida. That's good the orange juice crop. And also it won't have an effect on the on the energy markets. Well, I understand it won't have an effect on the energy markets, but

it does on shipping as well. Let's start with square one in your history on this is great and I assume al Nino, but is a Pacific thing? Did did those things affect the Atlantic Ocean? Well, they certainly do. You know, we don't have an Almenia right now. The ocean temperature is off the coast at Peru are actually very cool and that's reducing sheer right now in the Atlantic. And the reason we're seeing flora's as strong as it is. When we have an alninia and warm Eastern Pacific temperatures,

things tend to really die out. This storm I think's gonna be moving further south from something we call it fugi wah wah affect. Helena out in the Atlantic's gonna o curve this thing down towards the South Carolina coast. Yeah, flooding will be really detrimental. A lot of equities could be affected by this more than commodities are. Our Rob Caroline was very good on that as well. John. As I type here, I've got to type in the search

engine of the crack Bloomberg surveillance search engine the Fujiwara effect. Okay, I'm up to speed here. And that's like to two hurricanes or tight foods together, right, Jim, that's right. Well, Actually, my new weekly report called Climate Telligence Report and on my on my website really talks about this in a blog this morning. Uh, this has happened quite a bit and and models tend to be wrong. So because of this Felena. We're gonna see this thing hug the coast,

go down to South Carolina coast. Stocks such as A Generic Holdings, which is a a generator company. Generator is probably be the biggest lift as well as home deep. I was gonna say, what's on deep effect here, and the answer is it's got to be huge and demonstrable. That's right. In two days you received uh four or five percent return, which takes you know, several years again a T bill obviously, you know. So there are a lot of stocks out there are being affected more than

the commodity markets right now. Let's go back right now to general commodities, GYM. We've seen an abundance of soybeans. We've got tariffs this that what is your perspective on the front loading of commodity purchases before these tariffs set in? Well, you know, demand that's certainly slacking me off. We're gonna have the largest soybing crop in history, so we're gonna see just all this farmers selling, I mean, beans are the lowest they've been in many years. We've been bearrassed

all summer. The one market I thought would do better, which did well during June and July was wheat. We've had global weather problems and much of Europe and Austrial Australian Canada. So I think you're seeing the wheat market outperformed soybeans because of potential for demand. Leader for weeks. What's your number one car right now? Except plywood in the southeast. Some of the equities actually, uh, some of

the I think, Um, I'm still pretty bears soybeans. I think that the sugar actually has a chance to break out. With droughts in India, we've had everybody bears the sugar market. Now we're seeing rule production actually come down, so that's a trade. I think we will go up eventually. And I'm still kind of barrassed. Jim Romer, thank you so much. We are now going to speak to the grizzled Steven A of Federated about what we have wrought through the day.

From Kenneth Rogoff and Marianna Masacado. Steve as one of the great themes here which affects every listener, certainly in America, if not worldwide. And I want to go back on eight books right now you can buy for fifteen hundred dollars hardback Benjamin Graham David Dodd on Railroad Security Analysis, a book that changed everything about investment. And you got a copy of that book. I've got to copy that book. I didn't pay fifteen hundred dollars for it. What what

I want to say? Steve is Ken Rogoff not once, not twice, but three times talked about monopoly among American companies, and particularly technology company. Are you buying blue chips in a time of monopoly? You know, these these tech there's nothing like a monopoly, Tommy, because they have pricing power. And these tech companies are, in fact, the new monopolies, aren't They really they have enormous pricing power, but they

haven't really used it. They've they've reinvested it, if you will, and they keep lowering prices on it, run it around the economy. Um. So they've been benign monopolies in some ways. Okay, this is brilliant, their benign monopolies. Let's say let's pick up good morning. Mr Bezos were thrilled that you listen to Bloomberg surveillance. But Jeff Bezos has been benign. He would certainly say that, and as entourage would say that.

But then there's a point, and the bargaining he has with his public is we never get to that pricing power point. Yeah, and I think most people think his model is such that he's not going to get there. I don't know. I mean, I I've been told, like, we had the PPI number this morning and a little

surprising to people, a little lower. But what I keep emphasizing is you've got some price pressure in the economy on the wage side, but you've got these benign monopolies, if you will, the salesforce, dot COM's or whatever, providing companies with the tools to improve productivity in ways that aren't always measured. And on the other side, you've got Jeff Bezos up there on a hill loock with a

gatling gun looking for volunteers to raise prices. And so we're not getting the kind of late so called late cycle inflationary impulse that we should be getting. Is dampening think and that's what's extending this cycle. It's so there's a benefit to all of us. Really. Okay, So this goes to yesterday's bombshell with Numura cutting out Tesla and using this word investible. And I said to someone, I said, in America. We don't say a Graham dot word, which

was speculation. It's like an American to use the word speculation. Has this market, Steve Off, become more of a speculation because of some of these larger macro trends. I don't think so, Tom. I mean, you can buy and buy and own with comfort today, right, I mean, look at the the evaluation on the overall market has actually gone down in the last twelve months. We're trading here around seventeen times this year's earnings, seventeen times this year's Make

America Great Again earnings. Yeah, that's not that's not in excessive at all. And and if you start looking at stocks, individual stocks, I mean there's a whole lot on my bio list they're trading at ten to twelve times earning. So this is some names or sectors. All the financial stocks are dirt cheap right now. JP Morgan's one that we like. As you know, the energy stocks are completely on their back talk John John Krinsky was talking up

Schlumbers the other day. The industrials are loaded. You know, load a mid tea means even Apple, as much as it's had a nice, very nice run, it's trading out sixteen times. Let me rip up the scripture then, because two days ago we began the theme around a wonderful

interview that said Apple is under owned by institutions. They did not mention federated, but people you know long only by side institutions, and those people that are behind Steve Off have to catch up, and by definition they have to acquire Apple, Microsoft and the Amazon and the others. Do you buy that idea that Apple has a wind behind it just because everybody's got a gunpoint by it.

Maybe I don't necessarily that they're Certainly it's not over owned in that sense, although it is over on Tom in a way that the big flows in the last seven years have been to the passive funds, and that's partly been the wind behind the apples price rose, right so and the money flown in passes this year upside in Apple Tshu are right, it's been up. It's heavily owned by the country because a lot of them are

in these passive funds. I don't think you could say it's under own within this with an equity is the surprise within the four accounting statements? What are you most focused on now? And to take away shareholder equity. What are you most focused on an income statement, balance sheet and cash flow statement? Well, we always are looking at balance sheets, Tom, because you know, you don't want to get yourself in a situation um with a dangerous level

of leverage. I actually balance sheets are generally in good shape. There's some areas that are weak, but generally corporate balance sheets are pretty good. We look at cash flows because we think cash flow is really dry value and that for us is a big driver of our whole process on investing. And the cash flows to us look very very good, and the quality of earnings there for to us looks really solid across many sectors in the economy

right now. The question I can ask you what I would ask and carry up at Pioneer and other value investors is cash. There's a huge pressure a mutual funds to be invested. There's usually do you have a do you have a maximum cash you can hold? By perspectus, most of our perspects don't don't do that. I mean we we we acknowledge that many of our investors, particularly we work with investor visors, they like to do their own allocating, so they prefer we're fully invested. We tell people.

We will endeavor to be fully invested usually, but we've never We're not big at federated at you know, locking down our portfolio managers and not allowing them to use cash. We're very opportunistic in our portfolio approach, so we sometimes will hold ten cash in portfolio because we don't see any particular values at the moment. What are you lightening up on now as you find opportunities in banking and energy well at the margin? Uh let me let me

rephrase us in a more delicate manner. Did you sell all your Amazon yesterday? No? How did you exactly? What are you like? It's one reason we like the market. Tom, we're lighting up on bonds more than we are one Christ up yield down and you just can't own him here. Yeah, yeah, we're we're max underweight right now on bonds, and you know, it's one reason we like the markets. You think the text stocks that have led to us still look fundamentally good.

I think they probably do for a little bit of a pause, but I wouldn't guess a big pull back and the rest of it could play catch up. How to buy and hold? Do? I mean? I mean within the long term more conservative movement of a five year old a seven year older even Dare I say buy and hold? Is that a dangerous strategy? Now? Do you have to be more nimble? I think you've got a little be a little more nimble, Tom. But you know, one reason our performance has been decent is that we've

we've tried to hold turnover to reasonable levels. But just buy and hold is a little bit naive. The world keeps changing. There's all these disruptors out there. You want to try to stay on top of them. And you've got to make sure the companies you aren't being disrupted. So it's not just as simple as buy and all. And let me go to my pet project, which is rebalancing. Everyone knows I'm not a big fan of. You know. The consultants come in and we've gotta deal with this

every day. We need a fee rebalance every X number of months quarters. Soon they're gonna be rebalance, rebalance on Thursday. It's rebalanced Thursday. Rebalance is a good way to lose winners, isn't it. Yeah, you've got to let your winners run. I mean, unless you think you're smarter than everybody's all the time. I mean the reason they're up is usually because something good has happened. So we try to let

our winners run at certain levels. Maybe the risk exposure gets to be too much, but you know we're not big on you know, daily rebalancing. Uh oh, this has been a clinic Steva, thank you so much. I love

doing this. Folks. You have you know, a given interview in this case with Ken Rogoff and Marianna Masicado and and if someone in the capabilities of Mr Author Federated Investors come into really further home that conversation is a great steve with Federated investors with us on the equity markets. Joining us today is Bill Dudley, the recently retired President of the New York Federal Reserve and truly a man who was in the middle of the crisis. Good morning, Bill.

You came to the Fed in two thousand seven, so you were there for the crash. You were on the market's desk, and then they made you president in two thousand nine and you had to clean it all up. So let's go back to that time period two thousand seven to two thousand eight. First, Uh, when did you first realize that we were not dealing with issues of

individual institutions, but as system wide crisis. You know, pretty early on Mike, because I could see that the housing bubble was basically very vulnerable to being broke burst, and if it did burst, it was going to put a lot of pressure, especially on the non banking part of the financial system, so securities firms, finance companies, UH, mortgage

banks UH. And so what we saw is just a very big increase in stress on the financial system, and starting in two thousand and seven, but mostly in two thousand and eight, things started to break. And unfortunately, the regulatory regime that we had in place them was pretty well suited to handling bank problems, but not very well stud to handling non bank problems, and non bank problems were where the problems turned up first. They'll take me

inside the market's room. During that period, I've spoken to people who were on the market's desk that worked for you who said they were just dumbfounded watching fedwire the bank transfer system as the money just flowed out. Well, I think that what happened was that there was a tremendous loss of confidence in financial markets, and when confidence

is lost, it's very hard to bring it back. And that's why the federies really had to take extraordinary steps, not just in terms of intervening to prevent catastrophic failures of firms that might take down the entire financial system, but also to support markets so people could continue to borrow and lend, because at the end of the day, it's the flow of credit that supports the economy, supports households,

supports businesses. So the FED had to take some extraordinary steps. Now, the good news is we're probably a lot better place today than we were then. The banking system is a lot stronger, a lot more capital and liquidity, but there's still some some risk. Some of the powers that the FED has to intervene in crisis have actually been trimmed

back by Congress. Uh Emerging risk may arise in new areas, uh it to extent that you regulate the banking system uh More, you're probably gonna push more activity out into the non bank sector. So that's something that we need to keep our eye on in the future. What was the scariest moment for you. I think the scariest moment was really the week after Lehman failed and financial markets completely melted down, both in terms of you know, the

willingness of people to buy commercial paper from highly rated companies. Uh, and uh, you know the unwillingness of people just to transact with one other's essentially a huge flight to liquidity. People were holding liquidity and you know, the market function basically just broke down. Did it shock you after working at Golden Sacks for years that they almost went to Not really? I mean the investment banks were pretty vulnerable in the sense that they had they were very leveraged.

They didn't have a lot of capital. Uh, they were dependent on short term wholesale funding to finance some long term, hard to value a liquid assets, and so when the funding started to run, that put all investment banks, including Goldman Sacks in in harm's way. Now, the good news was that making Goldman Sacks and Morgan Stanley bank holding companies uh, having them go out and raise private capital right after Lehman failed did reassure people in the markets

that these were viable companies with viable business models. But it was a close call for some of the investment banks. Well, there's still an argument ten years on whether Lehman could have or should have been saved, which maybe two different questions how would you answer those, Well, I think it's people exaggerate house important. It was one way or the other. You know, the financial crisis was going to get worse regardless because the housing sector was collapsing and housing prices

were going down. So even if Lehman somehow had been saved, other bad things would have happened until Congress passed the TARP legislation, which brought forth a lot of money that could be used to recapitalize the bagging system. If Lehman hadn't failed, it would have been harder to get Congress to move and so other bad things would happen. It would have been a different path, but I don't think it would have been a better path in terms of

how the financial crisis would have paid played out. You mentioned some of the regulatory changes that have taken place for good and for bad. Are we fighting the last war or do we have a regulatory system that can cope with maybe whatever comes up in the banking system now? Well, I think there's always a risk that you fight the last war, right because you learned the sources of vulnerability

of caused by the last period of stress. So like money market fund reform, Central clearing of over the counter rivers. Lessons learned from the last crisis. Uh, it's hard to learn the lessons before you actually experienced their bad outcome. So I do worry about the non bank financial sector. A lot of credit in the United States is intermediate

outside of the core banking system. UH. Now, the fact that some of the major are securitious firms are now regulated entities and subject to capital and liquidity requirements is good, But there's still a lot of activity that takes place not in the core banking system, and I worry about that. Out in Jackson Hole, I asked some of your former colleagues what the major legacy of the crisis was, and I thought Jim Bullard had one of the best answers.

He said, it changed central banking forever. Well, I think what it did is it basically nderscore the importance of financial stability in the pursuit of the feds monetary policy goals. Without financial stability, you cannot achieve your inflation and employment objectives. And so financial stability now is a really core part of how the Federal Reserve thinks about its job and monetary policy. But how do you do that? You have one blunt instrument. Well, that's one of the challenges for

the US. Frankly. Uh, the you know, in other countries have more ability to put in place what are called macropotential tools, like changing the loan to value ratio for mortgages or requiring people to put more money down when they when they buy a mortgage. Uh, we we have we we could in practice do the same thing in the US, but it's very, very difficult because the regulatory apparatus in the US is very uh, you know, uh atimistic.

You know, we have state regulators, we have federal regulators, we have several federal regulators, So it's very hard to do things, uh, in a coordinated way on the macro predential side to deal with financial stability issues. Now, the good news is we do have the Financial Stability Oversych Council, and so in principle they could do things. But whether they'll actually be able to act in a timely way

that remains an open question in my mind. Ray Dalio of Bridgewater was on just a few moments ago with us and he said, worried about the Seventh Inning, that maybe about two years from now we will see a recession and it will be a bad one because of the impact of the dollar on global markets and because of a lot of unfunded liabilities out there. From the comfortable perch of retirement, are you as worried as Ray

is about what maybe coming down the pike? Well, I'm worried about a couple of things we wanted to obviously, trade policy to extent that we get into a trade war with China, that's not going to be have a good outcome. Uh. Number two, I'm worried about the fiscal sustainability of the the track that the US is on in terms of its budget and debt. You know, ending this cycle with a budget devosit of five percent of

GDP is a pretty horrible performance. And of course, I think the fact that the global economy is still very dollarized a lot of people around the world to US dollars, and so it's the extent that something bad happens in the U s that will get communicated back to the rest of the world because we live in a dollarized global economy. Okay, you're retired. Where was your dot? I'm pretty close to the consensus. I was pretty close to

the consensus. I think the FED is you know, continue to do, you know, the right thing, gradually removing accommodation. I'm very much aligned with the voice Chair Powell terms of the Montrey policy. Outlook alright. Bill Dudley, recently retired President of the Funeral Reserve Bank of New York. Thank you very much for joining us this morning on Bloomberg Radio and television worldwide. 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 Keane before the podcast. You can always catch us worldwide. I'm bloom and Radio