Surveillance: G-7 Summit With Bremmer

today to Ian Bremer of Eurasia Group. It is G zero media, but far more is the effect of his many books upon our thinking of international relations, and that includes the phrase a G zero world. Dr Bremer. President Biden will travel to that the G eight x Russia, the G seven meetings. How G zero is this G seven meeting? Well, it's less G zero than last year, since the G seven didn't even meet UH in the year of the pandemic UH. It clearly is a little

more aligned. We've got a few pieces of news that matter, the Europeans and the Americans coordinating pretty effectively in the response to the downing of the Ryan airplane to mince the diversion a couple of weeks ago. So everyone pretty irritated at Blarus, right Now secondly, you've got the Biden administration announcing coordination of this global minimum tax. It will take years if it ever gets done, to get the

US Senate and individual European parliaments to ratify it. But still it's a meaningful move towards coordination among the G seven that sets up the O E C D in that direction. So it's not like nothing is getting done. But on really big issues out there, like on coronavirus response, like on climate change, we are very very far from meaningful global coordination. And even on China, where the US of course sees Beijing as its principal adversary through a

national security lens, the Europeans largely do not. And and this is perhaps the most principal issue that really divides the G seven in a in a Cold War era, seven is all rowing in the same direction because everyone sees the Soviets as their principal adversary. Today that is no longer the case at all, and it makes life a lot more difficult. You see, and you see the polarity of Europe. Mr Orban of Hungary coming on saying the Global minimum corporate tax plan his quote absurd. Okay,

that's one view from Eastern Europe. What captured my attention was the miracle victory and domestic ellections in Germany over the weekend. And to borrow from Mr Trump and the Queen, does the President Chancellor Malcha walk in front of him? I mean the body language that we're gonna see at this summit has to tilt to the Chancellor of Germany in her stem career, in her recent political victory. Well, since it's her last G seven, sure I'd let her

do that. And and since the relationship between Biden and Merkel has always been friendly. I've seen Biden now attend in person Munich security conferences for fifteen years. There's always been a good relationship with Merkel and the top of the German government, the Biden administration is staffed, its cabinet are largely Atlanticists who like these people. The European Allies or bond Is the singular major exception, are much happier with Biden than they were with Trump. But that doesn't

mean they trust the Americans. That doesn't mean there as a line with the Americans. And they also are very aware of just how unstable and politically divided Biden's own leadership for the future is and so the willingness of the Europeans to suddenly count funny United States that they are somewhat less aligned with, and they also don't necessarily trust the long term nature of its commitment. That the US EU relationship is nowhere close to where Biden would

like it to be. And this idea ever back, Tom, I mean when when Biden said America is back in terms of power, America never went anywhere. Not our dollar, not our tech companies, not our energy production. In terms of the influence we have with allies around the world, America has been deteriorating for a long time and it's not changing very much right now. Can it ever get

back in? You know, I split my adult life between Germany and the US, And when I first came here in the nineties, in the in the early Auts, I was welcomed with open arms. They were so excited to have an American in their midst who actually spoke the language. There was a real brotherhood between the two countries. After the healing from World War Two, and and then with the first UM or the second move into Iraq under Bush too um the relationship disintegrated a little and was

absolutely destroyed by President Trump? Can we ever get back together? It wasn't destroyed by Trump. It was deteriorating under Bush, under Obama, and under Trump, and that deterioration accelerated over time. But I think it has less to do with the individual presidents. It has more to do with the fact that the United States no longer leads by example. In the eyes of Europeans, our democracy is by far the

most divided and dysfunctional. January six was an absolute shock to the Europeans, more so than it was in the United States. We kind of got through. It was soft, you know, I mean, we don't we don't have these structural problems. Anyone that said it was a coup, No, it's not a coup. You know. We we came back and we get to business as usual, such as it is.

The Europeans are pretty startled by all of this. And let's also keep in mind, you remember when when the Snowden revelation showed that the I'm gonna Merkel's cell phone was being hacked by the Americans. It's just a very different environment where the US is seen as much more unilateralist. Biden says, we're pulling out of Afghanistan. Europeans have as many troops there as in the US. He didn't coordinate that. The Europeans we announced we're going to not pay attention

to patents anymore, um for for coronavirus. The Germans and the EU strongly opposed. That wasn't coordinated advanced by the United States. So even though they liked this guy, and even though they trust us more than the Chinese, were actually farther apart than we have been. And and that's exactly where I wanted to go. And I don't mean

to cut you off. If there's this question about how, yes, the US perhaps is it as far apart from Germany as they are with not However, what kind of consensus, what kind of alliance can they forge if there isn't that trust. And frankly, if Germany looks at the US and says you're not leading by example, we can forge a lot of coordinated policies when it's intentional and when

it's specific. So if we sit down and say that we want to work together on dealing with digital services, tax dealing with an alternamentum attacks, we don't have to hit each other with, you know, an escalating tariff environment, we can create predictability for the markets on Blarus, an issue that is, you know, not front of line for the average American in Washington. But nonetheless, Biden made it clear that he wanted to coordinate with the Europeans, and

we did that. We did that effectively. But that's very different from saying that on the issues that are the top priority of the United States that the Europeans will see them in the same way. And one thing we haven't mentioned so far, which matters a lot more than what we've seen in the US is Brexit. The UK is by far the most aligned and closest former European country with the United States. They're no longer in the EU.

The UK relationship with the EU is very strange. This makes it a lot harder for the Americans to actually get the Europeans on the same page because the UK used to help us with that inside the EU don't anymore. So, Ian, can you give us a sense of what kind of guide posts you're looking forward to determine whether this global tour that President Biden is embarking on today is successful. I want to see how much Emmanuel mccron talks about

strategic autonomy in front of the Americans. The French have a very different view of the future of Europe in terms of national security, in terms of migrants, um, in terms of the Middle East, North Africa, you name it. I want to see to what in the Mediterranean. I want to see to what extent he is trying to make a name for himself. Let's keep in mind Merkel did very well in these elections in East Germany. Mccron is gonna be there after Merkel was gone, and he

sees himself as the future leader of Europe. So I want to watch that. I want to see the mood music between the Germans and the Americans at the high levels, see how much it looks coordinated in advance. And I want to see if there's any substance to the reference to the cogs that come out. Nobody cares. When's your next book out? Early next year? Early next year? Give

us the thief, give us a tease here. It's called the crisis we need and and given that coronavirus, I mean, the lessons we've learned from coronavirus globally do not exist. So to what extent can we take from that? Uh? Any solace that with climate, with the technology revolution, with cyber are are we going to be able to use those to change our governance? Winston Churchill, looking at the world after coronavirus, would be very disappointed we did not

take advantage of this. Cristis about the drought very quickly here, Dr Bremer. The drought in the United States, I think is underplayed right now, do you agree? I think that Americans are paying a lot more attention to climate young people, whether they're from the left or the right or five years ago, the factors it's hitting a lot of Americans at home really matters. Dr Bremer, Thank you so much.

Really look forward to getting out six months now where we can planning his top risks of two thousand right now. Luigi san Gallas with us from Italy and from the Boost School of Chicago, and I really can't say enough about his podcast Capitalism and also of course A Capitalism for the People is wonderful book, a really different view on the American economic and political experiment. Professor's in Gallis, thank you so much for joining us this morning. How

will President Biden be greeted in Europe? I think that uh Matt was right, He's greeted very nicely just because it's not Trump. I think that Trump did create a long term friction, and some of that can be fixed by just not being Trump. But I think that there is a longer term concern of whether the US policy

and the European policy are aligned in the future. And I think that the the giant in the room is of courch China, and the policy that Germany as in mind and indirect to you as in mind for China is very different you from the policy that the Buying administration as in mind. So I think that there's a whisk for conflict there. Luigi, what do you expect to actually come from these meetings with European allies with respect to China policy? What are you hoping could get accomplished

or will actually tell you something concrete? Um, Honestly, I don't hope, I don't I don't expect anything to to take place. I think that Germany wants to maintain very stronger eight relationships with China and there is not going to do anything to jeopardize those and so uh And I think the United States like a stronger voice on human rights and also on trade policy in general. So I don't see much of a space for agreement there

has Germany becomes somewhat of a problem here, Luigi. I mean um Berlin wants stronger ties with Beijing, and Berlin also wants to send money to Moscow via the Nord dream To pipeline. It seems like the Germans are not willing to let go of a lot of US adversaries in parties that the Trump presidency represented a structure that is difficult to undo. Germany realized that cannot rely longer term on on the relation the same way that used to, and so I think it started to craft a European policy.

The problem is that there's not really European state, let alone the European Army. So I think it's gonna be a bit of a of a challenge there, because if you hope, were to spoke with a common uh language and a common message, I think would be one thing. Unfortunately, in foreign policy we steal a pretty fracture, Luigi, on your take on American capitalism, where is our capitalism now?

With the dominance of these technology companies. President Biden's dealing with it, our radio or TV listeners and viewers, each of us is dealing with this technological revolution, whether it's Amazon, Google, or things we don't even understand, how will our capitalism survive that? So I think it's a mixed view. On the one end, that technologist boat us an enormous amount

of benefits. I think would be hard to imagine the life under the pandemic without the technology that was provided from the zoom we're using to the Amazon, the river, our food to our door steps and sounds of food. So there is no doubt that there being enormous improvement,

enormous benefits. UH. The concern I have is that the market is becoming more concentrated and less uh contestable UM and more importantly, that these companies can pretty quickly have also some power and determine what we see, what we read, what we do and UH. And when we start to such a large market power, the concern is that you might use it not only for economic reason but also

for political reasons. So I think that the easier concern that is not just about uh the economic effects of concentration, but also the political effects. There's a quick question, Luigi about the dynamite of the economy with concentration at the top and then highly intended companies that have more legacy businesses making up the remaining economy. Do you think the economy that you're describing here with the concentration of big

tech is less dynamic and poised for slower growth. I think the wis the wish that is less dynamic, and I think that that's where, in my view, one of the direction of the anti trust should be um. In my view, I know this is a disputed view, but in my view, the trial against Microsoft in the late nineties was very useful to provide a space for the common technology revolution. I think that if Google exists today in part is because the d o J sue Microsoft. So it's only fair that the J was sue Google

to let the next Google come about. Luis, you gotta leave it there, Luigi's and Gale, thank you so much. Really look forward to you coaching Tottenham here in the coming weeks. He is from the University of Chicago Booths School. Of course, I can't say enough his book of the Summer a number of years ago on capitalism, Stewart Chiser Joy doesn't get it right to it. Would you be as head of equity derivative strategy stored in your world of equities. Is your world linked to the ten year

yield and the shock we see with low yields? Thod Martin Tom, It definitely is. And I think really what you've seen recently is probably pretty positive for equities in the sense that inflation break evens and inflation expectations that started to get to the level at which we thought it was going to become disruptive for equity markets. But now with like you know, with the tender break even back bold to forty, with ten year yields pulling back a little bit, I think that sort of has relieved

the pressure a bit. You know, we had a very fast and high volatility rise in rates and inflation expectations. The fact that those have come off a bit, I think is kind of reduced a little pressure on markets. But but there's definitely a link between the two, no doubt. So what where is the source of potential volatility here for markets? I mean, I think I think FED policy is gonna be probably the number one source of potential volatility over the next couple of weeks. Obviously we get

a big inflation print on Thursday. You know, ubs is is well above consensus for both core and headline, So I think that will test the recent moves and markets. You know, you you got tenure break evens up to sixty ish um the last time we had a strong inflation print, So I think it'll be interesting to see how that plays out. And then secondly, you know, the following week, how does that impact FED thinking? You know,

do the dots move um? Does the FED start to speak a little more positively about the growth outlook, which the market might read as hawker? So I think over the course of the next month, those are gonna be the two big ones and then two key learnings upon us at that point. But story, why am I not to believe that what the markets pricing in right now

is effectively what the market forces here. If we do get a higher than projected read on that inflation, what would change the dynamics here that would take us anywhere away from one five where we are right now on the tenure yield. Well, it's a great question. I think what most people are saying on the market side is number one, a lot of the inflation is coming from things like use car prices, which they expect to kind

of be quote unquote transitory. If it hurts me to say that term, but but that's the one that's out there. So I think, look, I think you know what would get it to move would be do you see things like wage inflation, like rents um like goods prices inflation that might be a little more sustainable. So I think it's going to be below the surface and the inflation print. What are the drivers and does that start to dislodge things?

If you were to say, you know what could be most disruptive from markets, I think it's gonna be longer term inflation expectations, you know, the fit excuse me. The FED looks at survey based inflation. So if things like University of Michigan long term inflation start to move, if the inflation term structure, you know, you know, stops being inverted from you know, five year to thirty year, that

could be an issue as well. So look, it's it's a high inflation print, and then it's the components of that print um that look less transitory than that maybe the FED and the markets are currently expecting. So are we overplaying the inflation story which we're not gonna have an answer to until the end of the year, and perhaps are playing some of these other factors like, for example, earnings disappointments, especially given how high expectations are. It's a

great question. I mean it's it's it's hard for portfolio manager or risk manager to ignore the cadence of the inflation data, right, So it could be that six months from now we look back and we think that that was a tempest in a teapot. But you know, an investor can't ignore that stuff as it's happening. So I think people are responding rationally to the data that that

they're seeing. Um In terms of earnings, expectations I think are high at the single stock level, but if you look collectively, you know, SMPPS for next quarter I think still shows a sequential decline versus last quarter. So we do think there's you know, the potential as we get into actually post f O m C. I think as people start to look at it, look at earnings and sharpen their pencils. I think earnings could you know, turn out to be a positive catalyst over over the course

of the rest of the month. We've heard that now this is the second time. That's an important insight. Sharpen the pencils as we go to earnings and of course, we'll do that here on Surveillan Stewart cards, and we look forward to you sharpening at your pencil in a couple of weeks with us as well. UBS had an equity derivative research. Joining us now is someone who has

a courage to take a longer perspective. Claudia Sam is one of the most interesting practicing economists in the nation with Jane Family Institute formally with the Federal Reserve and always controversial. We're thrilled and Missam could join us. This warning, Claudia, I love your Morning Report where you say, look, would everybody grow up and stop looking at weekly claims, stop looking monthly, monthly thinking monthly. You want us to have the courage to look out a decade. What do you

mean by that? Well, I follow every shred of data, just like anyone else who's doing macroeconomics right now. But I am so frustrated with the fact that we can't even set the latest numbers in the context of the pandemic, let alone the decades of trend that we have seen. Inflation is just one example, has trended down decade after decade. Trends do not reverse in a month. Or two like this is absurd. And we also, and this is very disconcerting,

have seen for decades fewer people working. I mean the employment to population ratio. If you smooth across the recessions, it's been going down. Claudia Samas again as Air Force one begins a flight three p m. This afternoon, President, the first Lady will be at Royal Air Force Milden Hall in the United Kingdom and then onto Cornwall in the G seven meetings. Very impressive. They're going to go to Tregana Castle. I think that was in poll dark as as well. Claudia. G seven meetings speaks to the

international economy. Where does the US fit in right now? After the Trump years? The President clearly wants to reassert abiden tone internationally. How would you suggest his best practice would be, it's time to lead and and it's time to work with these other countries. It's just like this moment in the pandemic. We are not going to be on track until the least privileged among us in the

world community are on track. And the United States has a responsibility, a moral responsibility to help people get out of the pandemic and the vaccines. But there's a leadership in the global economy that frankly starts at home and investing in the United States and its people. Like that's an example we need to set for the rest of the world. Let's tie the idea of the global stage with the domestic one. The idea here of inflation being

an international story. And one reason why people say for decades inflation has been coming down is because of the disinflation that was imported from China, the idea that there could be some cheap labor uh and and and cheap

goods that the US was importing. We are seeing a shift in How much does that change the underlying premise that inflation will not pick up if China is a wealthier nation that's seeing inflation itself pick up, right, well, I think it's important, especially as we watch the month to month numbers, to know that we have different cross currents, right, deflationary pressures, particularly now that we are still in a pandemic around the world there with US Now, obviously there

are supply chain issues that have come from the pandemic that are pushing against it. So it's kind of a race between the two. But I'm betting on the longer run trends, and it may change like China, it may shift around the world, but it's going to do so slowly. We're not turning on a dime here. Yeah, well, there is a question, especially as we emerge from the pandemic and President Biden among his comments saying that the world vaccination strategy that he has he's going to detail in

his trip to Europe. He is making comments as he heads overseas for the G seven meeting, Claudia, going forward, what is giving you convict shition that you are right in? All of these former FETE officials and others who are coming out and warning against being too sanguine about inflation are wrong. So I'm a good forecaster and I've trained with the best in the world. I mean the Federal Reserve.

They take inflation very seriously. They think about the data. Frankly, the staff did better forecasting than the Federal Open Market Committee for years telling them you're not getting to unless you do something. So I think there's a thoughtfulness, a grounding in data, and an understanding that supply chain issues do tend to be temporary. We live in a very different world, a very different economy than in the nineteen seventies.

And while I think inflation is going to run, you're over year around three percent the rest of this year. That's a good sign. That is a economy getting back on track, getting people back to work, And I just I want people to write down their numbers so we can have a conversation. Do you think that there would be if we got to say three or any around there, Claudia, do you think that there would be any conflict with

an inflation rate at that level? Uh? And I guess the other side of the mandate here, which is of course getting that full employment level, whatever that may be at this point. Right, Well, they're both pointing in the same direction. Again, if we look back last year, inflation was running around one percent. The FED says it once on average too. I mean the last time I checked one in three average to two. Right, So the Fed is on track, and we have millions of people who

are not on the job. So there are mandates pushing in the same direction. And I really struggled to see the conflict here. As part of that mandate, though, do you think that there's going to be more focused on the quality of jobs rather than just that aggregate number. Well, there should be that's what full employment is. Maybe you go back decades and decades, it wasn't just about having a job, it was having a job at a livable wage.

And frankly, I'm surprised at some of the movement we've seen, not just in wages but getting people, you know, more regular hours. I mean, there are so many things we can do in the labor market to make jobs better that are frankly no brainers. And we should have been there before the pandemic and we weren't. Clodius, I thank you so much. You've got to keep it shorter today because of the President's trip, but greatly greatly appreciate it.

Clodius and I can't say enough folks about following her on Twitter just to get her thoughts on the present economic data and the longer view as well with the Jane Family Institute. This is the equity conversation of the moment for me. Jonathan Gollub with credit Sweez, you were way out front months ago with respect for the big tech. They've been some no lent here over the last X number of months. What do you do with big tech right now? I think that the real story here is

not a tech versus the rest of the market. But really about the power of the reopening and operating leverage, and you want to be in companies that benefit the most from the stimulus and the reopening, and those tend to be higher fixed cost businesses and old economy businesses. I think the tech ends up being a market performer. These these tech names are superior long term best five years,

ten years, they wouldn't want to hold. But over the next three to six months between now and the end of the year, I think that they're they're they're kind of in the game, but they're not leading the pack. Okay, they're in the game, they're not leading them pack. But to me, what's so important here is they've got revenue growth. When you get operating leverage, increase fixed cost advantage. Does revenue growth matter? It does, but but it really depends

on the kind of business. What you really want is if you think about a factory where a huge amount of the overhead is in that building and the machine, when you increase revenues, it drops right to the bottom line. You just don't have the same dynamic for a software company you do for hardware, you do for technology equipment companies. You do for semis, but you don't for internet companies

or social media companies. So the pure play on this is to buy banks and commodities and industrial names and transportation companies, stuff that doesn't seem all that innovative, but tends to get a bigger unit of EPs growth from a single unit of revenue growth. Jonathan, how concerned should I be about margins here? You know, in supporting earnings

going forward? I mean, and I really think about it from the wage inflation perspective here, I think, you know, as this economy reopens, is that a big risk that we have wage inflation to the point that it impacts profitability? You know, we we we've a bunch of research on this, and we're finding is two things. First of all, right now, companies have an extraordinary amount of pricing power. Um. The ability to pass on higher costs is just shocking up.

I guess give you one specific example, UM, people who make you know, um sugary beverages. Yeah, you know, soft drinks. They're the cost of corn sweeteners up, the cost of the cans up, The cost of the oil is up. To transport those cance full of sugary water to the store is up, and yet their profit margins are rising because they're able to pass on that cost and some

and you're seeing that very very broadly. There's a problem, though, is if you look further out into the future, once you increase those wages, you can't bring it back down. You know, the price of every one of the things I mentioned, maybe oil prices going back down, maybe all, but wages stick. And so your point, I think is the good one. Commodity inflation, not concerning age inflation more concerned. Do you think that John Gollub does this research with

a Canna mountain do in his hand. Absolutely, He's got a red bull on the other one. Detail he's got a seltzer and his killed potato vodka seltzer, and he's just he's all set up for beverage research. Jonathan, Let's talk valuation here. I mean three times forward earnings. I know earnings have come through really strong over the past several quarters, but should investors be asking some valuation questions? Um? For first of all, you know we are at you know,

we're we're absolutely stretched valuations. I think, Um, if you if you assume and I do, that the earnings are underestimated. I mean take a look at last quarter UM where you had something like a twenty plus percent beat. If we see something even directionally like that, what it means is the actual PE multiple is much much lower than the stated number because the earnings are underestimated UM. So

that's the most important thing. The second issue is if you compare now to history, there are two big differences. Interest rates or discount rate is much lower, and number two, the cash full generation of the SMP is much higher. Some of that is text, some of that is just changing business practices. So I think that we're gonna be carrying a higher multiple for the next decade. I think that multiple is just gonna be higher. But in the near term, I think that the multiples are probably overstated

because we're understating the E and the P formula. What's your study on use of cash right now? What is your study on dividend growth? Share buy back? Which is obvious but critically, is there truly an appetite for capex um if? That's a brilliant question and I'm not just saying that the bi back. Here's what's happened, tom is the buy backs have gotten totally slashed, but the corporate

free cash flow generation has gotten better. So here's what normally happens during a session companies free cash flows just collapse and they need to pull in. They need to cut their nobody wants to cut a dividend, so they kill their buy backs and then they reinstate them later. Now you've had this weird thing, is that they've killed the buybacks in anticipation of of this thing being really ugly, and in fact the cash flows have held up so quickly.

What happens then, So what happens? Five backs are going to increase way, way, way more than we think over the next two or three years, and it's going to support the market. They'll give a real pine. I think Mr Golub's onto something there, and that's maybe the great surprise September as well. Jonathan Golubs always aren't always in the market. Credit Suites Chief US Equity Strategists. This is

the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations and subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene, and this is Bloomberg