Surveillance: Fed Dot Plot Is Not a Good Idea, Orphanides Says

of course on the Bloomberg. This is why we do Bloomberg Surveillance. It's a quality of the guests, and we do that in London, we do that in New York.

Michael Spencer the Yesterday. Richard Clarina with us from PIMCO today of course for years of work at Columbia University and now from the Massachusetts Institute of Technology in Boston at the nacios or finds he is a former ECB official, which barely describes his research, contribution to economics and of course his timely work with his Cyprus during their crisis. Wonderful to have you with us, Professor. I want to get the cypress in a minute, but I want to

talk about what I consider your word toolbox. What's the toolbox that Mario Draggi has if he has a constraint of a German philosophy, a German economics and the cacophony known as Italy. Well, the toolbooks he should start with is the Treaty of the European Union that gives the ECB supreme independence and one primary mandate, which the c

B has been missing. The c B has not been easy monetary policy sufficiently to reach inflation of just under two percent, which is their objective, and they can uh use the power of their balance it to to get there. Uh. You mentioned Germany and political constraint. This is what the c B should have been ignoring while they meet their mandate. But Mr orphanedez if, like the markets believe Mario Druggie will extend QUEI today. What are the implications of tapering?

Does it make it that much harder to then withdraw some of the support? Frankly, I think talk of tapering was premature in the in the Euro Area. Let's let's go back to the basics. Core inflation in the EU Area has been at or below one percent for almost four years running. Just to just to understand how severe. The undershoot of inflation is monetary policy should have been far more expansionary, and this is what should have been done by expanding the balance it the CB started expanding

balance its way too late. They only started QUEI in in mark of twenty fifteen, and they did not do it at a pace that is sufficient to make up for the for the previous misses. Right now, in my view, they should actually announce that they will continue the asset purchases throughout seventeen UH and frankly they may need to

do much more of that. The fact that they've delayed initiating the que program is what creates a difficulty they have right now where they have to do much more than they would otherwise would have to right so this is extremely significant. Mr Orphanidez, When do you think tapering should start? If you think it was premature to talk about it two months ago, and if you believe that

there's more quee coming, are we talking tapering in eighteen? Even? Frankly, eighteen would probably be be a reasonable guest right now, but only if they do the appropriate monetary policy in coming months. The longer they have two tight conditions, then the longer we have inflation that is too low, and as long as inflation is too low, it's really pretty

mature to talk about tapering. If they were to really extend the pace of US purchases, in my view, they should have increased the right there, the pace of purchases over the next year. Then they could be too Then they could be talking about tapering in twenty eight. If they keep under delivering, then that that may have to come even later. In the last weeks or so, Professor, any number of times I have cited Cypress is an example of clearing markets, of facing crisis, of making tough decisions.

You live that with your Cypress a few years back. What can Italy, as an example, learn from your experience and your leader's experience in Cypress in clearing markets. What does Italy need to learn and do well? To tell you the truth? I hope that that Cyprus is not comparable to Twitterly, what we seen in Cyprus in twenty thirteen was unnecessary in distraction. I remember I was watching

that from from Boston in dismay. This was just an example of the gratuitous distraction of the real economy that has been going on during the crisis. I hope we do not see something like that in in Italy. What we need in Italy is is well known. First of all, the talent government should implement more structural reforms so that the medium term growth can can rise. And then second we actually need a boost in aggregate demand, which is

where the c B comes in. By maintaining two tight monetary policy, nominal income growth in Italy is too low, this actually deteriorate and that dynamics. This makes a fairm profitability lower, This raises npls. So the fact that we're talking about say banking issue in Italy right now, well, this is policy made. This isn't bad banks. The banking system in in Italy was a really very good shape at the beginning of the crisis. But if you have a five year long recession, then you end up with

problem to the banks as well. Okay, let's do this. My question to Richard Clarida doesn't matter. Would you ask a question please, if your colleague Mr Richard Clarata with the Nazis athanasios, uh, you know, both of us are wants and there's been some discussion increased in recent years on the FED and potentially other central banks. Uh. Reprofiling inflation targeting to price level targeting. The e CP is not the only central bank that's fallen short. The Fed's

fallen short of its inflation target for four years. And so, without getting into whether or not central banks should do that, do you think in the next five years we'll see a major central bank redefined inflation targeting? Is price level targeting? Well, that's that's that's a very good question if we are to see one, my bed would be on starting with the Bank of Canada. Bank of Canada has a has a story of actually considered what is best practice over

the years and trying to do this. When I'm thinking about the Federal Reserve, I think the Federal Reserve, even though it came late, it has managed to achieve price ability and it has actually crossed over beyond full employment, which has over done it. So really, in the case of the c B, I would have been so happy if they could just do what their mandate has been over the last two years, over the last several years. Before we start talking about about price level targeting, I

want to have to agree with you. If we had price level targeting, things would have been easier. In the current point. I need to go to both you. This is crucial. Professor of Finiti is John B. Taylor's name has been vetted to after we move on from yelling if we have a Trump administration, John Taylor with the more rules based theme than discretion. Is that an appropriate stance of the US Federal Reserve system in my view? And John Taylor is an excellent candidate for the for

the Federal Reserve. I think we do it to hold central banks accountable to their mandate. Same thing I've been saying about the c B I could say about the FED. The Fed has done a better job than they have been the last several years. Still being more systematic and accountable would be an improvement for the next ten, ten, twenty years. Anatalia, so often it is how do you view or how would your view were you still an

ECB board member. The referendum in it today, does it push and press more, you drug it to do more? Or would you still say that he needs to put even if we didn't have the referendum giving Renzi sixty percent of no votes. Well, listen, the rise of populism is a concern in the euro Area. But what's the best way to fight populism, deliver growth. So, frankly, I go back to my basic recipe. If the c B had been doing its job, growth would have been faster

in the euro Area. That would have been the best defense against the rise of populism. I do worry about political factors. We have elections coming up in in in Europe, we have the Netherlands, we have France, we have we have Germany, and we see populism anywhere. Frankly, the establishment recipe is not working. We actually do need to deliver

more growth with easier policy. And this is we've been talking about the c B. I have to say, and and here I should give praise to the European Commission last month, for the first time in their history, they actually took a stance on phisical policy for the U as a whole and the knowledge that phisical policy is too tight as well. Right now, Athana is with us from Boston. He is with m I T and with Colombia and PIMCO. Richard Claria, Professor Claire, let me start.

You bring up the dots right now and basically the vigilantees and Cherry Yellen are finally on the same page. Is at the correct state. You know, that's why I love the show, because you nailed it. For the last three years, the dots have been detached on the markets, and the dots have been doing all the moving, the red lines coming up in all asked five weeks, we've actually had market pricing move up towards the dots. So

it actually can go both ways. Okay, within that, there's the dots, Professor fern Needs and I mean this with great respect for your research at the FED years ago. Does your toolbox include the dots? No, no, it did not. And as a matter of fact, I don't think that that having the dots out there is a good idea. It creates this this disconnect between markets and the f MC.

I would much rather that the FAT says we're going to do our job and deliver price stability and full employment without trying to guess what the FED funds there is going to be three years out all right, and mr finding this. I'm here in London and actually the NPC is very different to what the FED used to be like, and a lot of people saying, well, look, the FEED is now trying to be more like NPC have different views, They argue, not openly but you hear

very different things. Is it more confusing for a central bank to be transparent or not? Well, I think there are there are limits to how useful transparency can be, and in the case of the FED, I think that those limits have been crossed. The dots were a very useful device to have during the crisis when the FED was trying to communicate that it would keep interest rates low for much longer than the markets thought at the time.

It was a useful tool. But frankly, when you are in the business of providing guesses for things you don't know about, like FED funds three years out, this is where you cross the limits of transparency and you end up risking misinforming investors rather than providing useful information. Do you agree with that, Richard? And you know, on the basis of it, it was basically to give the market a glimpse of how people were thinking, even if they

were wrong. Well, there are a lot of problems with the doctors I've said, I think on your show, you know, the dots are very precisely answer to an uninteresting question. That being said, I think there are there's information and if I were doing it, I would I would not get rid of the dots. I would I would refine uh and and improve them. But I agree they've created as many headaches as they've solved in the last couple of years. Let me rip up the script here, and

I think this is important. Mr Bullet out of St. Louis is an original guy in part of his latest theory, and he will say, this is a small, non vetted paper. You know, I'm dealing here with heavyweights Claire and or Fans and Bullard. I don't want to get Mr Bullard upset at me, but he talks about don't move until there's a regime change. Is James Bullard getting his regime change or some well that's to be determinable. Only weigh

in on that. Jim is very thoughtful and and the basic point he's making is when I have some sympathy with which is you need to think of a rules based policy as a guide post um. And I've called

it a forward looking Taylor rule. And essentially what he's saying is that the problem right now is it's very hard to look into the future because we can either be stuck in a low interest rate equilibrium, in which case we're never going to hike more than once or twice, or we go back to a better accolademy will be hawking a lot. Since I don't know, I'm not going to give up FORKA. This is this is critical, Professor Orphan.

It is if it's an ex and A we're out front fed or it's an ex post, we gotta wait, wait, wait till after the fact fed, which is given Professor Dr Bullard's great interest in a regime change before you act, are we at that point? Well, I wouldn't put so much emphasis on the regime change perces as in what Riach said, which is, we really don't know where the fat funds er should be going to have. We have too much, too much uncertainty in too many UH, in

too many mothers. There has been the discussion on what is the equilibrium really interest rate for the past several years. It's one of the reasons why you really should not think that you can't tell a priority what the fat funds wer should be so so much way out. The way to do this, UH is really to to look at what is the distribution of risks for inflation and for economic activity and make sure you're guiding policies so

that so that risks are balanced going forward. This is why, in my view, for example, the FEDS should should have been acting much faster with an employment rate going so low and now crossing reasonable estimates of the full employment, they should have been already moving up. You don't need to know what the FATS front is going to be three years ound in order to say, hey, you know we actually need somewhat tighter monetary policy today, right, because you just need to look at the data and that

you look at the data. You look at the data and how the data you look at the data, and how the data is influencing uh ther your forecasts and the risks to the forecast a year or two out. That's that's all you need to do. Very good, Thank you so much. Jathani Finis, Massachusetts Institute of Technology. I want to bring an Abbey Joseph Cohen now she is, as I said, senior investment strategist at Goldman Sachs, President of the Global Markets Institute. Great to have you with us,

Thank you so much. Happy to participate. Tell us a bit about the the the interplay here between US equities and what's going on in Frankfurt today. How are investors here in the US watching what's happening with the ECB. Well, clearly there's always attention when there's a decision to be made by a major central bank, but let's step away from that for a moment. It was all of this discussion about monetary policy. I think when the history is written of the last several years, the real story will

be the absence of fiscal policy. We see enormous pressure on central banks, including the ECB and the SAID to provide as much stimulus as they can through the use of monetary policy, including some new tools that they've created and put in their toolbox. On the other hand, I think when we look at Europe in particular, what we see is that, uh, they are facing a number of other structural issues. There has been very little in the

way of fiscal policy because of the monstrous record. They've been trying to keep their fiscal deficits as low as as they can, but there are also the structural problems in terms of slow labor force growth and also educational attainment, which is not keeping up with the sort of jobs that are being created. Since the election here in the US, the conversation has centered squarely on the prospects for more fiscal stimulus here in the US, tax reform changes to

the tax policy as well. What degree do you think Europe is watching that? You mentioned the absence of fiscal policy in Europe? How closely or policy makers they're paying attention to what plays out here in the US over the next I let's say six to twelve months couple. Like everyone else, they're paying a great deal of attention

and wondering which way policy will actually settle. UM. You know, there are a lot of discussions during the campaign, but some of the specifics UM not only are not yet known, but they may be at odds with what Republicans in the House and Senate might like UH to move forward on. So what do we think, what do we believe will happen? Yes, I think everyone in the financial markets. Well, let me not make that broad statement. Almost everyone in the financial

markets is assuming some form of fiscal stimulus. When we look at corporate tax reform, what we do know is that during the Obama administration there has been support on the Democratic side of the aisle for corporate tax reform. Some of the proposals not all that different in context, UH than the Republican proposals, but nothing happened during Mr Obama's terms of office, in large part because the Democrats didn't want to separate corporate tax reform from individual tax

reform form. UM. If we can move forward now on the corporate tax reform, we are expecting to see a reduction in what's called the statutory tax rate, but that happens through the elimination of other deductions and credits and so on. UM, and so what we'll be looking for is the effective tax rate. The effect tax rate for the SMP five is now below It's not the thirty

eight or thirty nine percent that so many people speak about. Uh. The other thing that many people are focused on, of course, is repatriation of the money that is sitting outside the United States. Uh. These are the results of profits earned by US companies outside the United States where the tax rates, the statutory rates are lower, and they didn't want to get hit by the double whammy of bringing these back

repatriating these funds at a higher rate. I think there'll be a lot of discussion of that repatriation, how this gets done. Even within the Republican Party, there's seemed to be two or three separate proposals. One of the things that we see happening for investors is that there adjusting their portfolios to look at these companies that may be

bringing their money back, etcetera. We don't yet know whether that money can be used directly for share repurchases for m and A activity, or as many of the Democrats have suggested, there should be some link between repatriation and reinvestment of that money in the United States for things like cathics and job creation. And now it sounds like from from what you're describing that there is there is no shortage of uncertainty. And I wonder what you make

of the market reaction. Sort of in the immediate aftermath of the election, we saw a lot of investors betting on the prospects of of stimulus here, betting on the prospect of investment in infrastructure. Say, have have calmer minds prevail? Of clear minds prevailed if things calmed out a bit, Well, let me put it in two different phases. I find may um if we harken back to some of the conversations that I've had uh with you and Tom and

others over the last several months. The point I was making is that based upon the dynamic of the U S economy, the sort of profit generation, the job creation that we were seeing, and so on, SMP five hundred at DRED was the right number UH in my view for the end of two thousand and sixteen. So that's where we are UM number one, number two. The other point that I made very strongly is that I thought

that interest rates have been way too low UH. And so we have in fact seen a notable rise in rates, but they're still below what our fixed income teams might consider to be fair value UM. And so we do think that said will be raising rates here in December. We think that will be some ongoing moves. Yes, that's the so called policy he rates. But we have already

seen intermediate and long yields move higher. With a ten year at about a two point four percent, we think in the coming months we ought to be seeing it something like two point seven. So, to get back to your question, much of what has happened in the markets since the election have been consistent with an underlying economy that is growing UH, that seems to have very good legs as stable UM is generating good corporate profits and so on. If we turn our attention to the stock selection.

What we see, uh, is that we've already moved into a different phase. The first phase of the post election rally had to do with infrastructure companies, with those that would benefit from it, those that might benefit from a change in the regulatory environment, and so on. And now we've seen a real move towards what my colleagues are referring to as the reflation trade. Basically, the economy doing well, inflation beginning to move up, prices rising, wages moving up.

By the way, wages moving up is a good thing, not a bad thing, um. And so we are seeing a shift into some of the more cyclical aspects of the stock market. When you look at a degree which the next leg of this is going to be earnings driven, what do you see and what's the cabalist going to be for that? Um? If we just do the straight analysis of earnings driven and so on, it looks okay, um. And and so the S and P of forecasts for two thousand and seventeen our team is showing an increase

of about um. The consensus is a little bit higher, something like twelve or thirteen percent. So there seems to be good earning support for still higher stock prices, and that may in fact continue to drive the stock market until we see what the actual policies will be from the new administration. UH fiscal policy respecting stimulus, yes, but it's also important to look at things like trade policy. Um. One thing that I can't stress enough is the following.

Over the last decade, the US economy using GDP has grown per adom about two The single fastest growing sector of our economy has been trade, where the annual growth rate has been about six percent. If in fact we are moving into more of a protectionist era, that's not so good, if you will, for US companies that have been doing very well by exporting producing things here selling them abroad. It is one of the truly most elegant reading rarely, David, can you take a classic restaurant in

the classic hotel and not screw it up? They did that here at the Pier Hotel with Perne was beautiful. Is here for the power piece. I don't think I can afford an orange juice. That's it's another water for it is the power breakfast at the Pierre Hotel. This is the hotel where Elizabeth Taylor lived, among other were these sailor all lived here for years, and at the very top of the hotel was a sconce. One of the most important people in American investment in finance, the

late Martin's Wage. He helped court here on investment and as our steam guest, who's Abby Joseph Cohen, It is wonderful to speak to you from Marty's Wage's abode. As you know, Uh, Marty's Wage always said, don't fight the Fed. We can't fight Janet Yellen right now, so what do we do? Marty's Wage also loved sitting wearing baseball attire. Um. Something that I think many people don't know is that he was an avid fan um and always had his baseball cap with him. But but let's get back to business,

shall we. Um? What shall we talk about? Tom Well? I think the FED. I think the idea of Mrs It's a claim comment, don't fight the Fed. This is a Fed in motion, isn't it? This is a Fed in motion? But for good reason, our economy, in my view and the view of many others, no longer requires as much monetary stimulus. Obviously, they've been withdrawing the Kiwi. They've begun to raise interest rates, and we think more

increases will becoming. The fact that intermediate long yields have already moved up I think as a reflection not just that investors are expecting the FED to move, but the FED probably should. This is an economy that is growing in this quarter two and a half to three percent. Maybe that's goost a little bit by inventory accumulation, But an economy that's been growing, let's call it about to

two and a half percent, generating lots of jobs. Wages have begun to rise, many prices have begun to rise. It's time for interest rates to move up. And by the way, when they do, interest rates will still be low. We are at record low levels. If they move up somewhat, we don't think it's going to deter economic activity. It's partial differential Thursday. So let's do that right now. Abby.

If we get the rays, if we get the feed in action, if we get the president elect and action, is it an increase in inflation out running an increase in real growth or can we get the best of all worlds? I believe initially we will have growth that people focus on. The inflation will come later. The sort of increases we're seeing in wages and so on now, in my view, not particularly inflationary, because it's coming after a period in which wages in many categories were stagnant.

Good wage growth is good for middle class consumption, obviously, the number one largest sector of the U. S economy. The inflation, I believe, always comes later when we begin to see that there are capacity constraints UM in the labor markets, UM in the production and capacity of the US economy and so on. We haven't seen it. But there's something else that I think will be pushing inflation

up somewhat, and that is commodity prices UM. We have benefited for quite a while now from low energy prices that has really pushed down headline cp I. Of course, c p I UM never really got quite that low. Core CPI has begun to rise, and the headline inflation, of course, will reflect the increases not just an energy prices, but ultimately some of the other commodities that we're seeing move higher. Aby Joseph Co we have about a minute left and we'll have to get you to join us here.

Next time you can. You can bring a baseball cap if if you like, but let me ask you about and I'm not one of those orange juices. There you go, They're very They're delicious. Uh. We look at the dollar here, Bloomer dollar spotted slightly weaker this morning. But the tale of the strong dollar has been the overarching narrative here for a while. How long do you expect that that story to continue here? And do you expect this administration

to to a similar strong dollar policy. A dollar story, or any currency story, is always a relative story, and we tend to focus as Americans on what we're doing that is pushing the dollar up. Let's keep in mind that Europe is not looking all that robust. Other parts of the world are not looking all that robust, and that is contributing to the idea of dollar as reserve currency,

safe haven uh and and so on. Um. We think the dollar will continue to rise relative to the euro relative to some of these are the currencies, but on a percentage basis, we've probably seen a good deal of the move already. Keep in mind that all of the things being equal, this is not great for economic growth. If the as the dollar rises, our exports become less competitively priced. The most recent trade data show that there

was some problem there. Abby, Thank you so much. Ms Cohen appears this morning courtesy and Nicholas backs from of the Washington Capital as they took it to the Bruins last night. We will continue from the Pierre Hotel, the Power Breakfast at the Pierre. This is Bloomberg. Who you put your trust in? Matters. Investors have put their trust in independent registered investment advisors to the tune of four trillion dollars. Why they see their roles to serve, not sell.

That's why Charles Schwab is committed to the success over seven thousand independent financial advisors who passionately dedicate themselves to helping people achieve their financial goals. Learn more at find your Independent Advisor dot com. It is a wonderful day of celebration for Bloomberg Surveillance. My book of the year is Kenna Rogoffs The Cursor Cash, which is exceptionally brave book. And the first book has advanced uh in uh into

two thousand seventeen with the Undoing Project. And if I didn't tell you who the author was, you say, Okay, Tom, I trust you. I'm going to read the Undoing Project, but we're gonna do the big long year and mentioned that this is the new effort by one Michael Lewis. Michael, good morning, Good morning, Tom. Congratulations you've done it again. No one would ever think you would take within the trade Kaman in Diversky and put it into the poetry

that you've done with the Undoing Project. Um. David Gurr has got a million questions, as do I, But I want to go to the heart of the matter, which is how did you take the challenges and complexity of game theory, psychology and really obtuse mathematics and bring it as accessibly as you did to the Undoing Project? How

did you write the book? Um? The key to the whole thing was the love story between the two men and and the that was the That was the big key that it gave that the relationship was so emotionally charged and interesting, and the characters were so interesting that I that I figured that that once you hooked with the reader with the characters in that story, they'd follow

They follow you anywhere. And David jump in here. But I really want to say that this is the one Michael Lewis book where you can see the movie as you read the book. And I never thought about common in divers King. But I mean this is the sequel to The Big Short. You can literally see the damn movie. The book is so lively. Michael, talk a bit more about that relationship. These two professors working together more than

just a professional relationship. They were very close friends, more than just an academic relationship, because they were these Israelis who were on and off the battlefield every six years, you know. I mean they were dragged into the real world in a way that academics seldom are, and had huge influences on the real ward, like reshaping the Israeli military. Uh. And the the relationship struck everybody around them as bizarre because they were seen as opposite. I mean, it was

a Felix and Oscar relationship, and uh they were. It was it was and what it was. And I think what was so exciting to the two of them is that they found they were different with each other than they were with anybody else. They got into a room and they became different people, and uh, they brought out they brought out stuff in each other's minds that didn't didn't come out except when they were with each other.

I mean it was it's if you look at their work, what what Amos Tversky and Danny Knaman did together is so different from anything either one of them did alone. Uh it's it's like, I don't know, it's like two people who can kind of sing, but when they get together, it sounds beautiful. Uh So, the the the that was part that was part of what interested in me is that you had this collaboration that was just genuinely a collaboration.

You couldn't untangle the one from the other. And the tragedy of the thing was that the world kind of wouldn't let that love that be that they really wanted to know who did what and assigned credit and all that, and it horran the relationship. Michael Lewis they, of course we're path breakers in the field is behavioral economics. For those who don't know it, give us the definition what

is behavior like? Well, so it's funny you say that, because yes, in a way, they they gave birth to behavioral economics without even thinking they were that's what they were doing. I mean it was like with a flick of the risk because their work in sort of exploring how the human mind deals with uncertainty and makes judgments and decisions. Uh, was firmly withinside, you know, psychology, and then it bleeds out in all kinds of ways when they show that people are make systematic errors and and

behavioral economics is taking essentially taking on board. It's a funny name for because what behavioral economics is is psychology. It's it's it's it's taking, it's taking insights from psychology and trying to play out play with their implications in in in the economy. I think of behavioral economics and how easily applied it is to to sports. I think if your previous work, Tom brought up moneyball, were these two guys sports fans that they see those applications when

they were doing their work. Amos Tversky very much so Danny Danny Common didn't have much interested in sports, but but Amos Tversky actually he was doing moneyball like stuff. Uh way back in the eighties he was writing papers about the myth of a hot hand in basketball or that that he showed that streaked shooting was not actually streaked shooting, that it was perfectly explainable as uh as

a kind of part of a random pattern. But they they the more, the more direct connection with the whole Moneyball stuff, is that that they they sort of ex Their work explains, you know, why baseball scouts misjudge baseball players. They explain what's going on in the minds of people who were evaluating other people for any kind of job. And so oddly, when I got into this, what I really thought of it, this is kind of the prequel

or origin story for Moneyball. I love how you framed at the beginning, Michael Lewis, how you were getting massive acclaim for money Paul, even before Brad Pitt was cast in the movie. And and there were these two upstarts out of Chicago who said, Michael, maybe it's not an original that I could It was absolutely shocking to me that I had written this entire book about the way this baseball team had found players who were misvalued and

and talked about things like biases. I mean, they were the behavior economics had infiltrated the Oakland A's front office and so condom and into verse he had via behavior economics. And then I didn't know about it, and that there was said that that that there was this early story. I didn't know that it was going to be a book, but I just thought, how did I miss that. Yeah, Michael,

you you and the book with the tragedy. For all of us that love economics, I think of the death of Rudiger Dornbush of m I T is the only equivalent. The sadness of Amos Tversky dying described for us what Mr Traversky meant for Mr Khanman and all of a certain generation of economics. He he really was maybe the most vivid, uh pungent mind of his time, and that everybody who knew him couldn't get him out of his head,

get their heads there is uh he he um. People who worked with him for the rest of their lives, whenever they were faced some problem, would always ask themselves, what would Amos say? Uh? Richard Nisbitt, the psychology at Michigan, designed a online intelligence test and it was the longer it takes you after you've met Amos to figure out that Amos is smarter than you, the stupider you are

he was, and then nobody disputed it. His mind was just had this agility and this ability to move to levels of abstraction very quickly that you don't find in any field. Uh. I mean, my favorite aim of story is that he was in I did to uh party filled with some of the world's greatest physicists, and he just kind of by accident, and nobody knew who he was because he was a psychologist. And after the party one of the young physicists called the host and said,

who was that physicist I was talking to? And they said, and he said, they couldn't figure out who he was talking about, he says, and they said, and they finally realized, oh no, no, he wasn't a physicist. That was Amos diversity. He's a psychologist. And the young physicist said, he's the smartest physicist I've ever met. And and so this guy he was he was superman uh and uh and really a really peculiar personality and not a self consciously smarty pants guy. He was a warrior, he was. He was

a war hero. He was he was raised in Israel to be a spartan um. And in any case, he was the most alive person anybody knew, and his early death it struck everybody is just like totally improbable that Amos is dead. And one of the things I noticed and working on the book, is that people have kept him alive. They keep alive in his memory. But that's fair,

that's so true. They don't where they refused. His filing cabinets from twenty years ago that he had outside his office at Stanford University are still in the hallway at Stanford University. What Michael Lewis just said, there's that's the smartest thing I've ever heard. That that's so true. And it's true of Rudy dorn Bush and Amos Tversky. We people just keep them alive. They need them, they still need them, uh, and so they find ways to keep them alive. And I think, you know, it's funny. I

think my book is part of that effort. That I think, and then the people who enabled my book and made it possible for me to write it, a big motive was keeping Amos alive. We're going to continue this discussion of Bloomberg Television. Michael Lewis with us today on Bloomberg Radio, and I'll be blunt, folks. I'm still waiting through the end of the year books. I'm gonna be right out front. This is the read for two thousand seventeen. Michael Lewis.

The undoing project the accessibility, including the opening chapter on the n b A is shocking what he has done to what we all study, which is common antiversity. The undoing project of friendship changed our minds. Michael Lewis, It's rare that we speak to a CEO that I can say not only changed in the industry, changed his company and all that, but maybe changed America. He's out of the University of Texas, Austin. He is he bleeds Southwest.

Southwest Air Love. Gary Kelly joins us right now, Gary, good morning. I think Gary. The thing I would notice is the great Southwest Air tradition that all babies born on the airplane are named Gary Kelly. Right. What's it like when you get an email that a child has

been born on one of your airplanes? Well, um, you know, the first obviously, the first reaction is I hope all went well, and you know, we diverted that flight to make sure that mother and baby were safe and and the baby was a little premature, so I think your body was concerned. But the last report I had is that everybody's doing wells. But yeah, it's it's uh, yeah, it's interesting. We have over fifty thousand employees at Southwest.

We serve a hundred and twenty million customers a year where the largest airline in America and things happen every day, you know. So it's just a part of being a part of society. That's nicely put in within the fifty year tradition of forty five year tradition of Southwest air I know the no layoff angle on that You've had a two thousand sixteen of not labor war, but real back and forth with your employees. I know there's been recent settlements. Are you gonna have more of this into

next year? And is this a new reality for airlines? Is battles between fancy executives and their labor. Is this where we're heading? Well, good question. I think that you know, I don't know about the rest of the industry. I would just talk about Southwest with with my comments. Um, we view Southwest as a family, and Uh, families have disagreements, that's not new in labor negotiations are always vigorous. UM. I'm glad that we're able to take care of our people,

pay them extraordinarily. Well, Uh, you've made the point. We've never had a furlougher in our history. I love our people. We want to do the best job that we can to take care of them. So, uh, we're a family and we love each other, and uh we'll we'll continue, I think to serve our customers very well, and that's the most important thing here. High a t a out with the report we spoke to them in Europe earlier on Bloomberg surveillance clearly showing the profitability of America versus

the foreign airlines. Are we gonna see finally the foreign airlines come more into ownership and act ativity in North America in the US or is that something that waits for another day? How do you see the the framework of ownership over the next three or four years? Uh, you know, there doesn't seem to be any real energy behind making a change there. And uh, you know, we have tremendous air service in the United States. We have very very vigorous competition. Um. It just it begs the

question of what problem are we trying to solve with that? Um? Yeah, So I don't see a need to change there. And um on the other hand, there have been um a lot of challenges in terms of reregulating the airline industry, and my hope is that that will abate and that's where our focus is going. To be over the next several years with the new administration Gary Kelly with Southwesteria

joining us this morning. UM I I look at the state of the industry and certainly when we speak the cell side, they inform us of more persistent cash flows. The last decade, Southwest are twelve percent a year return, much of that coming in the recent um years. Do you work day to day with your strategy and with your planning for next year, assuming a more responsible industry, it will lead to persistent cash flows or are you guys gonna make the same mistakes you made for the

last thirty forty years in expansion? Well, you know, I'm not going to uh assume all the mistakes that our competitors made. You know, I started at Southwest thirty years ago. Every single major airline that was in existence in nine is either gone or gone bank And to be clear, you've never gone bankrupt. Absolutely, let's say that absolutely not so every single one and we haven't made those mistakes.

Is the point. Southwest has been great service, low cost, UH low fares, and we've taken great care of our people and that's served us very very well. So what the rest of the industry Three will do prospectively. I don't know. I will say that the environment, in my opinion, has never been more competitive than it is right now. We've never had stronger competitors financially than we have right now. So the industry is definitely different, and whether that will continue,

that will be up to our competitors. Obviously, our job is to beat them. How do you meet that competition? I'm named the airport DFW. I'll let you decide which airport within the southwest uh span. I'm at that airport. I'm an hour behind. Maybe if we pull back from the runway, I'm three hours behind. That upsets people. The luggage upsets people. The pretzels upset people. How what's the distinctive feature of that new competition? Well, I think that

you're hitting on it. The competition is better across the board. On time performance is better, baggage handling is better. There are fewer customer complaints with the d O TEA with our competitors. Uh. The costs are relatively lower than they were historically, and the fares are more competitive. So just fits the full gamut of the ways that we touch customers.

Every airline is just better. It makes us if we're going to compete, we have to continue to get better also, and I would quickly add that Southwest has never been better. We're stronger today than in any point in time in our forty five year history, and will continue to invest in our customer experience and work really hard to keep our costs low so our fairs can stay low. I don't know if you know this, but only this could

happen on Southwest Airlines. Brian Kelly, the points guy. His latest article is on Southwest passengers nailing the Mannequin challenge. They froze the whole plane so they can do the mannequin challenge photograph that everybody's doing now. Brian Kelly changed the business with these points, our charge cards and points and all of us getting a million miles. Is that Gary Kelly's nightmare or your best friend? Oh no, we're very intentional. Um. We have a great relationship with Chase,

our our Visa credit card. If you don't have it in your wallet, you're really missing out because it is shameless plug, most generous frequent flyer program out there, and it's it's just an element of our customer experience and the customer relationship and we have very strong profits, so obviously we're able to do all that in a way that it rewards the company and our customers. Gary Kelly, I've got a race next time on board of Southwest Air twins being born. Gary Kelly is the chief executive

officer of Southwest. Thanks for listening to the Boomberg Surveillance podcast. Subscribe and listen to interviews 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. Who you put your trust in matters? Investors have put their trust and independent registered investment advisors to the two and four

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