Surveillance: Fed is Worried About Overheating, O'Sullivan Says

Do you want to us here in New York City in the studio and please to say Chris Grassanti Grassanti Capital Management, CEO our value man, who says, don't worry about Democrats taking the House, don't worry about higher rates, and don't worry about inflation. Can we start with politics, Chris? Why should we worry about the politics at the moment? You know, I think almost the consensus view is that the Democrats will take the House. It's very difficult to

see them taking the Senate. So I think the market has priced in divided government. It's not like a a lot has gotten done before this, So I you know, I don't think if com on the day after election day we see a divided Congress that it's it's going to upset the market. Maybe a little volatility, maybe some opportunity, but it's been so market positive with Republicans in the House, and Republicans running the Senate as well. Why is the

opposite not apply. Well, we've gotten the tax break, we will continue to get lower regulation because that's an executive function. Um So I think that the trends that have repelled the market can continue. Of course, the big wild card is if the Houses goes democratic, whether we'll see lots of investigations. But I think the final release of the Muller Report will set that to rest one way or another.

In terms of a trade policy, the President kind of rampant things up again, threatening to tax all imports coming from China, and the data over the weekend from the Chinese, the trade dates surplus might be narrowing, but with the United States, and it's a record, it doesn't look good for the Chinese if they're trying to have It's hard to have sympathy for the Chinese in some ways, but but here you kind of do because the trade deficit typically widens, and Tom will be able to tell this

bitter night because we're having strong economic times and we just buy more stuff because people have jobs, so the deficit would widen. The problem is that's Trump's major litmus test for whether things are fair or not. I don't care about the politics. Here's a reality. We're ten years on from Leman. We're only talking to optimists this week that had the courage to stay in the market. How did you stay in the market in April of two thousand nine, Well, we ran to quality times. So you

buy JP Morgan, you buy Goldman Sacks. It was the first time, really in a generation where they were turning. What did he buy bear Sterns for like a dollar? Was? It was like two dollars he bought Remember he bought it for two dollars and then he had to up the price to ten dollars because he got so many complaints about And you loaded the boat on JP Morgan? We did, because you know, if JP Morgan went under, we had what was the sweat like in London with

Northern Rock. Nobody was loading the boat on Northern Rock, good joke, they didn't, and that that was the story. If you loaded, and if you loaded the boat on RBS, I mean you are still struggling right now. That's the difference I think between them. We say the United States, the US did such a much better job of recapitalizing the banks than the rest of you, and they took their medicine earlier. I think that's right, because I think you're Eurebe is still doing that. But we took and

sit here with the benefit of hindsight. When you sort of talk about loading the boat of JP Morgan ten years ago, it didn't seem that hopefullus did it. No. I mean, that's why you could do it, although there is some as the boat goes under water, you head to the highest point, You head to the quality you could have done JP Moore than you could have done Wells Fargo. And by the way, in retrospect, neither Wells Fargo nor JP Morgan had a single quarter of reported

losses during that period. But did you sell them now? Are? Do you only own junk down? Do you only own things with five symbols? No, we've sold j JP Morgan simply because it's you know, it's quadruple since then, but we've we own and would buy today the Wells Fargo because of the company's specific problem, which I think they will grow out. What's the differential value between JPEOPLE Morgan.

What what ratio do you use to compare and contrast JPM with WS We use both price to book and price to earnings In both cases, Wells because of their mix. Right now, they're trading almost at parody, but the proviser is time. They usually Wells usually trades at almost a fifty premium because it has a more stable book of businesses, mortgages. It's it's kind of bread and butter lending where JP Morgan is more trading. So you can buy Wells if

they get the same historic premium, you'll make on your money. Chris, can we get a quick word from you on Apple big launch light this week? I know you hold the stock, do what are you looking for? You know, it's it's funny. We're contrarians and it's so it's hard to sit here and defend Apple. But it's just done everything right. It's

not terribly expensive. And what we love are two things that people don't usually talk about, which is all the cash that's coming back, and second the services business, which has gone It's almost like Amazon Web Services, the hidden

jam of Amazon. Here you have Apple services Busines is where they're selling apps and everything else, and that's gone from zero to almost ten percent of the revenue, and we think it's heading to the company revealing late last week that some of the twi's coming through will hit some of that products. The President is saying, that's an easy solution to that on shore um Sammy for duck Ship.

I'm sure it's not that obvious for Apple and not that simplistic kind that, but anything to you because the problem with all this trade stuff is you have to make multi year capital spending decisions based on stuff that can change. So no company is going to do that until we get some certainty there. And so that Jonathan coming full circle, that's the big wild card in this

this March. There's sure buy backs and dividing growth support the market into two thousand nineteen or you know it has it, has it has or will there be a change behavior? I don't think, you know. I think it's continues to be a tail wind Tom, but I don't think we need it. I think for the first time since the crisis, we have increasing employment, increasing wages for the first time. So you've got a bunch of tail winds,

of which is shared by backs. Are are simply one of Chris, thank you, great to catch up with you. Why don't you bring in James? He is one of the accurate payrolls forecasters on the planet. You my son have enjoined us from High Frequency Economics, The chief US economist, Jim, what did you look for Friday and did you get it? Hi? John? Morning, Morning Tom? And Well, it was actually a bit a bit stronger on the peril side than expected, plus on the on the weight side obviously as well. So I

mean they were they were pretty strong numbers. I mean, obviously monthly numbers jump around a lot, but I mean it's pretty unambiguous that we keep getting something in the in the range of two thousand a month on jobs, which even though an employment held in Friday's numbers, more than enough overtime to keep unemployment coming down. Meanwhile, wages are accelerating. Yeah, but Jim, there is this feeling and I've called you one of the most thanks for forecasters

because you are. But there are many people out there that say this has got a whole lot more predictable over the last couple of years. And wage growth has been pretty stable. Payrolls growth has been stable around two thousand every single month. Can we break out to a higher trend on wage growth? Jim, Well, I think the trend has been moving up and we'll continue to move up I mean, the two point nine percent year over year we saw on Friday is a new high and

that's going to keep on going up. And I think we've seen the same already in fact in the employment cost in which if anything, is more comprehensive, and the private wage number, and that report was already up to two. So what's the sweat at the Fed? I mean, coming off for Friday, what you thought made a nice splash and you know, end of the weekend, make America great again and all that, what's the level of sweat or the change in the level of sweat at the Fed?

And well, I mean, like everyone else, I'm sure they're they're watching the trade, trade war threats and trade tensions as as a stuff. And the monitor in terms of the labor market itself numbers on Friday, and I think, I mean, what they're worrying about is ultimately unemployment keeps on falling and the economy overheats. The unemployment rate at three point nine is already below the media and fedeficial estimate of what sustainable over the long run for and

a half percent. And while the inflation numbers right now, and I would say even the wage numbers right now are pretty much where they want to see them. I Mean, the question is do they stop at these at these at these readings or do they keep on accelerating because unemployment is too low? So I think ultimately, yeah, they're in terms of the labor market they're worrying about. Ultimately,

this is unsustainably strong. Jim, that Fed staff paper that came out over the weekend at Jackson Hole, um, several weekends back. Do you think that is the guide? Just follow the unemployment right and does that make sense to you? Well? Historically, I mean they've always put a lot of emphasis on the unemployment rate is a key slock indicator. And of course I mean broadly, I mean, what what are the

FED goals? FEDS goals, I mean they're full employment and price stability, and I mean they're defining price full employment right now at least is four and a half percent unemployment rate over the long haul. So yeah, I mean it's it's never been so simple that the only thing that matters for reslation is the uneployment rate. But I

mean it it's clearly an important indicator from their perspective. Jim, review for us the quality of the jobs being created, I mean, if we make the assumption everybody got two hundred thou months wrong because proper job growth was a huddy whatever, that marginal job growth that's surprised even the optimusts. Are they good jobs, and I think they're probably pretty average jobs on average, in the sense that the some of them are above average and some of them were

below average. And I think that's inevitable when you've got a hundred and fifty million jobs in terms of the level, I mean, half them are average and half the average. And not just trying to be facetious here, but the point is that when you look at average early earnings going up two point nine, and that's a pure average, so I mean, that's similar to what we're seeing, for instance, in the employment cost index, which is a weighted index.

I mean, this is a little technical, but if you were consistently seeing below average weights jobs created, you'd see the average early earnings number, which is the pure average, go up much much less than the employment cost index, which is a fixed weighted index. But they're pretty much

consistent right now. So implication is, yeah, they're above average jobs, and there are below average jobs, but on average, I mean, the new jobs being created are probably not all that different from the stock of jobs that's already out there d and fifty million jobs that are already out there at this stage of the cycle. Given what unemployment is, where is this payroll's growth coming from? And well, I mean it's across the board in terms of sectors, for sure.

And it's not as if when you hit the roughly what full employment is, and of course there's no clear right answer, and what full employment is, I mean, four point five is in the FATS estimate for what stainable over the long haul. I mean three point nine is obviously a bit below of that. But it's not as if you suddenly hit a wall where you run out of workers. And I mean at this point of the cycle, then certainly workers are harder to find, and gradually we

start seeing the wage numbers drift up. So I think that's the point we're at. And I mean, I certainly over time you would expect, I mean, the payroll numbers to slow a bit just because companies can't find workers. But I guess we asked this question, Jim, is because

I was told this two years ago. Yeah, although I don't think anyone would have really said you suddenly hit a wall that you suddenly can't employment grow goes from two hundred thousand, expected to slow, expected to go down towards a hundred thousand, expected to go to maintenance rights. It didn't. I yeah, I don't know. I would have questioned that. I mean, just because you've hit more or

less full employment. And again it's also plausible that maybe instead of two d and months would be getting two fifty a month right now. I mean, if if the unemployment rate we're higher, and there's been a lot of stimulats in the economy recently, growth is actually accelerated and means well, I mean you are seeing the wage numbers starting starting to pick up, so that's where the pressure is coming through. Fifteen weeks ago, it was like, Okay, this is as good as it gets. It will taper off.

Where have you adjusted your taper? Now? Have you? Have you extended this good growth into Q four and even into two thousand nineteen, and I haven't changed any numbers recently. I mean, I've got three percent for the second half of this year, so still pretty good. I mean, I don't think the trend is over four percent, which is what the Q two number was. I mean four two

for the second quarter. But when I've got three percent for the second half, I mean that said, I think the temptation would be if anything go up a bit from from three percent in the second half. The momentum it looks so good, I mean last week obviously, the IM numbers that came out, I mean, the job dis claims numbers are at their lowestans nineteen nine. But I do think ultimately, I mean, Taper of course is the

sort of a monitor policy ward these days. But in terms of growth, I mean, I think the fiscal stimulus will start fading into two and I think it's a fac keeps tightening every quarter that gradually montro policy becomes less accommodative as well. So I think it's it's pretty plausible that growth does start to slow by two thousand and nineteen. Jimmal Sullivan, thank you so much with high frequency economics, and now folks are definitive discussion today on

trade in the ramifications for you. Very lovely is always powerful in intellect with the Peterson Institute for International Economics, but the real joy is very Lovely combined with their colleague Chad Bone, and the two of them almost it seems writing every other day, maybe every three days, have put out a body of work that I know has made me smarter about the trade debate. Mary, what's the

next thing you write for? Peterson? Thanks so much for that. Well, we're particularly looking at just the some total of what's going on and how it will uh make American businesses either less competitive and international marketplaces or um forced companies to move some of their operations offshore. I think that's the real challenge that we're seeing right now. We're looking a little longer term, uh, you know, beyond day to day movies in the market and thinking longer term about competitiveness.

If it's make America great again in amercantile thinking of the president or neo mercantilist, I guess I should say, is it make China week again? Can the President with these actions diminish China g d P or throw them into some form of recession? Well, it definitely can have an effect on China. I think that that the you that the US is powerful enough to get them to their knees where they will just wholeheartedly accept Trump's demands

is wrong. However, our purchases of their manufactured grids. They're only about three percent of their total revenue. It's important in other ways however, to them, and they're always uh have their own internal struggles that this can make worse. Um. I think it is an attempt to hurt them to get what we want. Unfortunately, even if we do hurt them, we won't get what we want, which is some sanity in terms of intellectual property regimes and treatment of our

intellectual property and technology. This is something that of course we share with other countries such as Japan, the European Union. But the distraction of trade is you in the combine I think of Nick Lartey and the rest of Peterson. Does the distraction of trade dramatically damage investment it by US companies and particularly US multinationals. I've given US multinationals now their heads must be spinning over where the next

marginal investment dollar goes. Yes, and there's certainly an attempt by the administration to notn have US companies invest in China and quote to bring the jobs home. Um, that is a powerful I think at okay, But but Mary, Mary, I just set up a new router at my home, Thank you, Nextgear, and it was made in Vietnam. I mean the debate and this is no fault of mery

lovely folks who teaches at Syracuse. It's not China, China, China, But the debate in the media is always US China, Mary, and you know, it's a much richer set of adjacenc ease it is. And that's why we're worried about US competitiveness because there's a it's a big world. There's lots of other UH countries out there. If we look at even US operations in China, about se of the goods that they're selling are being sold into Asia. So how would tariffs on imports back to the state stop those

companies are moving to Asia? It won't. Asia's where the market growth is. It's where these companies need to be to make sure that they're profitable UH and return value for investors. So this bilateral focus of the president keeps him from seeing the bigger game. Part of that is seeing what our multinationals are doing abroad the other courses. As you point out that there's a lot of other UH GO income countries who are ready to either take more investment or finish off the goods so that they

come from say Vietnam, even with Chinese components. I mean within the micro economics are wedges and incentives. What are the incentives now that the president's creating with Trunch one of taxes and now Trunch two of trade taxes. What is the key incentive there that people have to adapt and adjust to. Well, it's going to raise the price of bringing an intermediate goods to the United States, and

so will will reorient some uh certainly supply chains. As you know, it's possible for them to simply import goods from other countries, other low wage countries, or we can produce it here at a higher cost. It's essentially producing a production island for the United States, and that will force companies to move production for sport outside the United States. That's the dynamic that it's setting up, and that's really not good for workers or for investors. I'm not going

to put out this chart because it's Monday. In my brains, Fried, I'll put out the link to it. And Mary, this is Paul Krugman, who you know, people go mental because Professor Krugman is talking about this, this or this. This

is the Krugman wheelhouse. This is the lovely wheelhouse. Is well, if you've got a dynamic on the y axis mary of the price of imports coming in, and on the other side you've got the units the volume of imports coming in, you have a demand for imports based on the price of them and the units of them, and you end up in a trade for war with what

Professor Krugman you would call a welfare loss. What's the welfare loss to our listeners, Well, it's basically that we're going to be forced to pay more for inputs and will drive up the cost of our goods. And people will say, well that will create jobs. Yes, it will create jobs in the protected in industry, but it has

to take jobs from some place else. When I have to pay more for my children's clothing, or for toys, or for mobile phones, all of which are threatened with the last trance of Chinese art, that means that I can't buy myself a nice dress at the store, or upgrade, you know, upgrade my router, or buy or you know, buy a new car. That means jobs are not created in those other industries. So basically you see the first thing, Oh,

well there's a job created in technic industry. X. Well, you failed to seize the job that wasn't created in another industry. And those other industries tend to be the export industries that pay more, they're firm to do more, R and D, and frankly their firms that are going to drive innovation in the future. So we're really just hampering ourselves in the future generations beautifully explained. I feel like it's like, this is not like ECON one O one. It's like ECON two or three or two oh four.

But within it, Mary is the idea of the marginal or the next dollar I spend, or the next tradeable item. When the President looks at the blunt instrument of car sales, Germany bad, We're good. I mean, the simplistic tone. And that's sort of criticism of President Trump, folks, it's just a fact. It's a simplistic analysis. Drag President Trump over to the dynamic space that Mary Lovely is in. Where's the complexity of that simplistic debate? Well, where is the complexity?

I think there are a lot of people who are trying to explain this to the president to make their views heard. We saw many many companies UH testifying and the hearings that were held for this latest tront of taxes against Chinese imports. We saw tens of thousands of companies asked for exemptions from the stealing a movement of terror. So the business and you know world is trying to get the message out this is not good for us.

You're hurting us in terms of the price of the goods that we need to produce the US and eventually it will show up in jobs. This has been wonderful, very lovely. Thank you so much, greatly appreciate your attendance on Bloomberg surveillance over the last number of weeks. Can't say enough about what they're doing at Peterson h It's a book's collusion. How central bankers ring the world know me?

Prints with us have been You can about an international focus there not me James Diamond wanders in on page eighteen, and a compare and contrast of the JP Morgan bear Stearns effort with the United States of America government versus stimulus effects and bail out effects of the international economy. From where you sit, what is the state of America banking? Are they truly too big to fail? Um? They remain

too big to fail? Its ironic actually worked for both of those from um, they're they're too big to fail because they actually existed on the subsidy. I mean in the four and a half trillion at the tight now four point two trillion of the said that the cheap money and so forth, they were able to sort of like bring themselves back from the frank. But in the process, UM,

the larger banks have collectively become larger. Uh. And there was an ask frank past that was the postestensibly reduced some of their risk and at least I mentioned before, there has been something leveraging throughout. However, they still remain reliant on that supply of money, on the quantity of using that has propped up. So the treasury assets that have gone through them, the mortgage assets have gone through them.

How they're reevaluating and half over the years those assets up, so they're not as healthy as they they've just had more money. But within your book Collusion, there's no chapter on Canada. What's wrong with the Canadian system of like five or six or seven banks? Um, you know, the reason I don't have a chapter on on Canada is because they didn't they didn't really rate in the whole

sort of quantitative easing of the rest of UM. The major G seven countries that I and plus China that I do look at as the major central banks in terms of creating the electronic money through this process. UM so, I mean they had a more stable and and less leverage banking system to begin with. They weren't actually at the UM you know, sort of crux of the crisis

when it happened, Emerging markets were much in paying. Canada was to an extent and pain um you know, Europe was in major pain and became still because of Greece, because of other debt problems, because of major bank problems and things like Deutschaum which continue and so forth. So there were just more problems throughout some of the other banking systems, and Canadians banks have been just relatively less

help than more stable going into this period. You know, as we reflect on what happened ten years ago, I have to wonder about the risk that has moved out of the banking system and into the asset management world. And there's been a lot of discussion about this, whether it's private equity firms taking a lot of a lot of the direct lending too smaller and mid sized businesses that big banks once did. How concerned are you that that is the next front lines of whatever crisis emerges.

That is such an excellent question. UM, it's it's at the front lines, because if we have any kind of unraveling UM through different points of possibility, whether it's geo politics, whether that's you know, emerging market debt of false, corporate

debt of false. We've seen it in the US non UH financial corporates have almost doubled from from three point to trillion debt to six point two one trillion said over this period, and so forth, UM and and these asset management companies have grown on the back of what has been a bull market that has been largely artificially injected by quantity using and the results of that money coming in and and and and investors and speculators and these funds looking for returns on the back of that money.

So if that unravels, then the returns UM that these growing asset management companies have been producing will start to

unravel as well. When debt starts to If it starts to default, it takes money therefore out of the stock market to pay for UM the liabilities of that debt and so forth, and it becomes this sort of circular cascade, and that ultimately means that all of these purchases, these asset management companies and the larger ones that have grown that purchased these assets over the years, have to start seeing losses and have to start taking money out, um

you know, for redemptions from some of their customers as well. Well. I guess that. Then the follow up question is are any of these asset managers systemically important or is this just sort of uh, this sort of cycle of liquidity withdrawal that happens anytime there's a market sell off. The reason they are more systemically important than they were, and of course they're not insured, so these assets are not you have guys see insure, and there's no unit of

government tied to them. Um. So as a result, that's whether a bit more dangerous. It is soundly important because they have bought a lot of the assets they've been part of, you know, so the party of inflating on the back of achieved money that has been created. Um. But but we don't necessarily don't have to bail them out. Okay,

even nomi can't there be a good outcoming. And you've been the great critic of the process of methodology of developed countries solving the problem whatever the prices down the road and wherever that price travels. But can't there be an if you and Chairman Bernanke were to sit down together, can't there be a constructive outcome to the financial system

or do you just throw in the towel. We'll have to look at the financial system and the general economies in combination, and I think some there there can be solutions and even unlined possibilities to what we have. What

are those online possibilities right now? Well, well, one of my possibilis right now, are you know some rads go too higher, or there's there's there's there's currency protections throughout the world, and that basically and stills just you know, sort of freeze um that that that's that's a that's

a far case scenario because of other factors. But I think you can solve some of that by going back to the core of why supposedly this money was created to begin with, is created to to basically inflate the economy. Even though that we can differ through that. We can basically say, look, there's all these debt in different countries where it's BCB creating at the advantages and and and deflected. Move it to more infrastructure, more long term, more sort

of sustainable, and actually follow that money. Right now, if you follow the money, you know the lines are all the correlation and causation as to the markets. But if you follow it into sort of real long termustainable private

investment developments or you get a more structured future. Do you just assume no, do you just assume stronger dollar In this great unlined um, the dollar is tends to be the recipient and the great unlined just because of the flight to tow qualities like to safety that's perceived in the fact that it remains the reserve currents. Throughout this decade. There has been more movement to other currencies at the trade alliances and so forth, and some of

the trade woards will continue to make that happen. However, the dollar still remains at the top of that pile. So if there's an acute problem, the dollar does go up at Then in the wake of the crisis, the dollar got basically creamed right away because of the fact that it started financials the US. It really depends on how it how It also plays out me, thank you so many friends, all the President's bankers, and she follows with a really terse two fifty pages, two hundred fifty

six pages collusion, How central bankers rigged the world. Very controversial. 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 Bloomberg Radio