Surveillance: Gensler & Crypto With Rubenstein

the right guy at the right time. Interviewed by the Gentleman from Baltimore, David Rubinstein peer to peer interview and the gentleman from Baltimore joins us, sound did you guys know each other? Did you know the families years ago? We grew up in the same part of northwest Baltimore, but he's younger than me and so I really didn't know him. It's uh, it's interesting to see the path of Gary Gensler now to this point, David of an SEC facing absolutely stunning innovation. It is just mind boggling

to me, the challenges ahead. What did you learn about Gensler's approach to these innovative challenges? Gary Gensler for those who don't know him, is a really really smart person, an academic superstar at at Penn, but also professor at M I T and also a very young partner at Goldman. Sachs previously headed the CFTC, now the SEC. The real challenge he has is does he need to go to Congress to get additional authority to regulate things like cryptocurrencies

or can he do it with the existing authority? And I suspect he will use existing authorities because trying to get legislative approval for some of the things he wants is going to take forever, and the markets may move well past what Congress already decides to do. So I think he's going to do things administratively and see what the impact is. David tom was framing innovation as a positive. Does Gary Gensler view it as largely a positive that

you do have so much money going into crypto assets? Well, I think he thinks that innovation is good. But you have to make certain that the SEC's job is to make make it clear to everybody what the facts are. They're not saying this is a good investment or this is a bad investment. They're saying here's all the facts

you should have before you make a decision. But sometimes now people are not being quite accurate in his view about what the facts are, or technology is pushing people to make certain investment decisions they might not otherwise make if they really knew all the facts. So that's what

his concern is. How do you police this at a time when the technology is moving more quickly than often regulators can keep up, and frankly, when the brightest minds are attracted to the biggest paychecks, seeing more in Silicon Valley or Wall Street than in Washington, d C. That's a real good question. There's no great answer for it, because the truth is you can make staggering sums on the outside out winning the regulators, and the regulators are

playing catch up. So I think all you can really do is make a couple of examples of people who have made some mistakes and hope that will trickle down to other people. But it's impossible to catch all the innovations that are going on that probably the SEC isn't happy with. David an overarching question, and I say this with immense affection for say a Screenberg Bear Sterns with the buy tickets in one pocket in the cell tickets in the other pocket were now to robin hood and

all have we gone too far? Have we gone too far in a search for depth of market and very narrow spreads. It maybe benefits some, but our mothers too early to say. There's no doubt that younger people are coming into the market and trading day traders, our traders and minute traders, and I don't know that they're fully informed about what they're doing. But also there haven't been gigantic losses for many people yet because the markets have

been very robust. Now if if all of a sudden the markets go down, we'll see as as Warren Buffett likes to say, who's swimming without a bathing suit on? Well, tell me again about what Ginstler's approach is just in the next twelve months to dool Is the immediacy for his slow Motion agency. He's asking his staff to come up with ideas and the words. The way he operates at the CFTC and that the SEC is he has

a lot of smart staff people. He asked them to deal with the challenges he asked him to deal with and come back with the recommendations. So he's waiting for recommendations, but I suspect at some point he will deal with

some of the challenges like cryptocurrency. Most recently, after my interview with him, he made a speech about private equity, indicating that he thought there were some issues that have to be dealt with with the disclosure of private equity fees and so forth, and we'll see whether he regulates in that area. There's no doubt that he has a lot of authority. There's no doubt he's very smart and determined to do something as you did at the CFCC, So I suspect his tenure at the SEC will be

one of activism. And there's no doubt that he's highly respected in the White House and highly respected in Congress. I have to say, David tom was talking about younger traders going into crypto assets, and I got a text for my twelve year old son this morning saying, Mom, we should buy some ethereum. It's going up fast and we'll continue. I do wonder, David Rubinstein, in your tenure in the markets, in your decades, do you think that

investing has gotten more or less treacherous for investors. Well, the example you just gave as an example of reminds one of Joe Kennedy when he was getting his shoes shine and the the person shining his shoes was talking about stock tips. That's when he realized too many people in the market and he sold everything. When you're twelve

year old is dealing with stock market uh gyrations. You have to wonder whether that's the top of the market, but there's no doubt that, uh the market is much more complicated today than it ever was, and technology is giving people certain advantages over other people and when they trade, and what the SEC is trying to do is to make sure and everybody has an equal playing field. It's not easy to do because the technology is changing hour

by hour. So I think people have to really know what they're doing when they trade in the markets and recognize that it's great time to make money recently. But at some point the markets do go down and then they're gonna be some losses, and I suspect at that point you'll see investigations. David, Thank you so much, David Rubinstein with us, of course, and it is a pure

to pure conversation. They've been wonderfully eclectic this year. Jordan Rochester joins us here on G ten, G five, maybe even G three Foreign exchange, of course, and number Jordan, let me get the dollar out of the way, because Pharrell's focused on the sterling, because he's got to get on the golf stream and come home. Jordan, I want to on the dollar. There's a persistency here. Are we at key levels of dollars strength or do we need

to go ever stronger to find a critical point? Well, the question is do you think more can be priced into the FED? Do you think US inflation keeps rising? Do you think US growth out performance keeps going? Does the consumer, does the services p M I is the I M S in U s keep going up and

stay at these high levels. And so far all of those things keep happening, whilst the rest of the world, especially China, having a slowdown to and that feeds through to Europe, and that leads to a European manufacturing slowdown, which we're seeing as well. Until those things change, I don't see a reason why the dollars should weaken, and so that's why we're still along the dollars here, expecting more of this appreciation to go. So Jordan's help out

a lot of people with this one. The Bank of England seems to be on track to hike before the Federal Reserve, yet sterling isn't doing much. In fact, you're short sterling. Can you make sense of that for our audience? Jordan's It depends who you're selling sterling against. So I'm doing against the dollar because I think it's a nice trade off between the US and the UK both kind of about performing with inflation rising, with both both have

central banks looking to raise rates. But I think the FED could have a bit more priced in than the Bank of England in the medium to long run because the UK has got a few problems with Brexit ahead.

When it comes to the Euro, because the European central Bank, they've had so pretty much ten years of low interest rates, quantitative easing, low yields, they're unlikely to move as fast with the ination that's going on right now, and so that's why the pound can strengthen against the Euro because that currency doesn't have a center bank willing to take action against this inflation, where against the dollar it's tip

for tap. The US pricing for the two year on the FED is pretty much the same for the Bank of England and until that changes, until there's more priced in for medium to long term growth and higher interest rates in the UK, I don't see a reason why cable should material go higher, Jordan. This is what I struggle with. I talked about this at the top of the AD, the growth inflation mix in the UK. If you ask people about it. TV Securities wrote about it

in their outlook. There's a feeling that it's worse than the UK than the U S. But I look at the year ahead calls for inflation, for growth for unemployment, John and they're very very similar. What do you make of the growth inflation mix in either country. Well, in the US you've got all of the excess savings. The UK also has those excess savings, so it is quite finely balanced. But if you look at the data for the UK, there are there are problems with the supply

chain that are on top of the global situation. So getting around ten to fifteen percent less ships arriving at UK ports because of the checks involved with Brexit, you're having all of the damage done from that sort of side. And then when it comes to the UK, consumer retail cells in the UK haven't gone up anywhere, nothing like the U S. So US retail sales have been much

much stronger than the pre pandemic trend. UK not so much so until that dynamic changes, until we see reasons for the UK consumer to go out and shop a bargain. I don't think you've got to see that change that narrative between the UK and the US. Jordan's this is a fascinating moment at a time when Steve Rattan and we were talking about his New York Times out ed. Basically he was saying, nobody should be surprised that modern

monetary theory essentially ended up with inflation. However, is what you're saying, that perhaps some of the stimulus in the United States actually gave consumers the spending power to keep the dollars strong, to basically keep the currency underpinned by economic momentum at a time when other nations, particularly the United Kingdom, is not seeing that well. To begin with, the plan was for FX markets all that all that stimulus was debt induced, so lots of issuance from the U. S. Treasury.

The world had way more dollars, and we saw massive dollar weakness last year. Remember going to queue four your a dollar really went higher, but that was on the idea from all the U S economists that the FED

wouldn't consider raising rates aggressively. That's changing, and I think once you introduce rate hikes into the equation in the future pricing of the curve, that sort of balance of payments argument for dollar weakness just fell through because investors seek yield, and the yields rising US much faster than Europe, So that's been part of that driver. And with monetary theory, if you get taxes, sorry, if you get inflation, the

way to do it is taxes. And because of Congress, because of the sort of type line with mention of cinema, the idea of big tax rising in the US have really softened as well. So that's why we're seeing more being priced in for inflation, more being priced in for rate hikes. Jordan's what do you make of Terry Wiseman's an argument that a perceived politicization of the Federal Reserve chair nominee will actually weaken the dollar potentially lose credibility

in the US Central Bank. The Fed's not gonna lose credibility, but it's kind of been political all along. So the US president has always had a choice of the FED chair, so that is that element. And remember President Trump used to tweet about Janet Ellen, so that there's always been that element of politics involved all central banks that we're talking about here. The FED included our independence, so it doesn't erode their credibility. They are trying to do the

job right. But yeah, there is an element of politics when it comes to the choice of FED chair, and we can't ignore that it's chosen by a politician. Jordan found a question. What's more likely Askton Fella avoids relegation or the Bank of englond heights interest rates next month? They're both, They're both likely. Come on, that's really unfair the villa. The villa is going to survive and you think we get it hi next month. To Jordan's we definitely get a hike. I think they mean it's pretty

much priced, so that's not really a big call. The question is do we see more rate hikes than what's priced him for the rest of the year, And that's getting tough. That's why we're short sterling because there's a hundred and fifteen basis points of rate hikes pretty much every quarter. You get a twenty five basis point rate hike in that FX curve. That's kind of that's kind of okay, but any anything more I doubt it. So that's why the risk reward is the bank thing might

do less. Later on, Jordan, thank you sir as always. Jordan Rochester joining us now to kick off the equity conversation is Ben Laidler, global market strategist. That eat out of London, Ben, Santa came early this year? Is that your take? Absolutely? November December generally the strongest months of the year, but so called sort of Santa rally, we've been here. We are the middle of November. We're up from or nearly from the sell off in in September.

So I think this has been very frontloaded U And you know, we the year and we never thought we were going to get here, was sitting on our card already, So you know, I I think markets are very well supported. I see, you know, got upside for next year. I would just you know, caution that, you know, maybe we're

not just going to keep rallying h inexorably here. I mean we've we've I think we've already had the Saints rally and we're sitting on great gains and we I would take a little bit of consolidation the modest Ben Laidler, let me make clear, folks, No one and Global Wall Street called for three years of double digit return like Ben Laylor, He's not surprised we're up twenty five. Ben, what is the double digit call for two thousand twenty two or do we finally get to a single digit reality.

I think we're gonna come pretty close to double digits. And just to put that in perspective, I mean, that would be your fourth straight year, and I think you've only ever seen that once in the last sort of fifty or sixty years, So it really we're heading into uncharted territory. But I think it's very very doable, and I think you know, the to drive us here, I think earning his expectations is just just still far too low. You know, in the US A globally there's seven eight

cent for next year. I think you probably get double that when all is said and done. I think, m you know, GDP growth is nearly double long term averages. I think we're seeing the resilience of corporate margins. We have a lot of sectors, a lot of these reopening sectors that still have a long way to bounce back here, and and I think valuations are going to come down a bit, but I still think they're going to stay

white higher than sort of long term averages. I think bond deals are going to go up a bit, but there's still a fraction of you know, previous some previous recoveries. And you've still got this huge text tech sector which just you know, deserves to have very high valuations. Then you said, take consolidation and a little bit around the edges. Given the fact that we've already front loaded this rally,

where are you taking consolidation right now? You know, I think our you know, tech, I guess would be the obvious place. I mean when neutral tech X time sort of very well here. I mean, we had this sort of everything rally, which you know, I take a lot of comfort from, right because I think, you know, it's not the sort of one legged stool we had sort of last year. But you know, I've been sort of putting back a little bit on tech. I think that I think the near term story is this very strong

growth reacceleration that that we're having. I mean, you've you've seen it in the payrolls numbers. You sat in the retail sales numbers yesterday, You've seen it in the I S M. I mean, you look at the FED now cast GENP now cast for the fourth quarter is nearly

nine percent growth. We had two percent last quarter. Uh So, I think, you know, you need to be sort of pulling back on on sort of defensive things that aren't exposed to that and really focusing on the you know, the sort of cyclicals, the commodities, the industrials, the segments of the market, the reopeners that are really sensitive to this this very strong growth recovery that we're seeing. And I would also just say the markets past this huge

stress test. I mean, we're all worried about inflation, we're all worried about the FED tapering, We're all worried about interest rates, and we've just had tapering an ouse when we've had a big repricing of the FED, and markets are you know, markets are yawning and many Your position for a repeat of Q one this year is that it is that the playbook. I think so, yes, I mean, I think you know, it's small cap, it's it's the reopening stocks, it's the sort of more cyclical side of

the economy. You know, who's got the most sensitivity to this growth rebound that we're seeing. And I, you know, I still don't think it's priced. I mean, just more broadly, I mean the earning ex numbers are just far, far too low. You know, even after what is it the fourth quarter of you know, very strong earning speaks. We've just had the optimism of Ben Laidler of et O. Ben, thank you, sir. Right now, Sarah House joins us for senior economist at Wells ferg and we're going to rip

up the script and get her in trouble. Sarah is family formation a dominant changer within the American economy. So I think the demographics are absolutely important to the overall housing outlook. So we see millennials are just entering their prime home buying years. You couple it with the pandemic and it sets us up for a strong demand to remain in train for years, especially just given the state

of overall household balance sheets. You know, the excess saving that we've seen over the past year, that that helps a lot of millennials pay down debt, getting a better position for home buying. So it's absolutely important to the housing now look going forward, nicely done, but if they can't afford the damn house because of down payment, is more money than that? God, what do they do? How do you perceive house prices reacting that most of America

can't find an entry point? So I think what we're seeing is is that this that the onslaught of activity that we're seeing. Okay, so maybe we didn't see a jump and starts this particular month, but you do have more homes under construction than at any time we've seen

since nineteen four. You still have more permits coming down the pike, and so yes, we're seeing construction activity can change right right now by supply, but there is supply coming down the pipeline in in subsequent years, and so I think that's going to help the affordability pictures for

for home buyers in the coming year. So, yes, the prices recently have gotten I think, away from many households, but I do think that we'll see some some greater balance over over the next year or two that should help that household formation and help that home buy an activity. On the flip side, Sarah, it's been really cheap to get a mortgage. It's been really cheap to borrow money for consumers, especially with longer term rate expectations as low

as they are. You pointed to this, and you think that this is an aberration, that this is wrong, the market is getting this incorrectly. Are you seeing a material increase in the policy rate? The end policy rate akin to what we heard from Bill Dudley of three to four percent. So that's not our base case right now. So we do think that the Fed will begin raising the Fed funds rate by the third quarter of next year.

I think the fact that they get going a little earlier than they have sketched out, I think that will help prevent that terminal rate perhaps reaching as as high. So, of course, the sooner the Fed gets started, that has the potential where they won't have to ultimately raise policy to such a restrictive stance. So right now, in our forecast that goes out through three we have about a

hundred basis points of tightening. Now, given what happens with inflation, how tight the labor market gets, that that could obviously change, But for right now, um, given the mix of demand and what we see happening with that mix of spending going forward and the path of inflation. We think that the FED still doesn't have to be too aggressive in this environment, or at least they won't be too aggressive

Sarah if they don't raise rates. Though until the beginning of is Morgan Stanley and TV Securities has been saying, is that a policy error? It's hard to say, because you know, while we I think everyone's pretty familiar with the risks in terms of if inflation does stay at the current levels and we don't get the moderation that I think many people many people still expect. But again, we have this, uh, we have a great likelihood that you're going to see demand slow over next year, that

the mix is going to shift more towards services. That's going to relieve a lot of the pressure that we're seeing in goods inflation, which has really been the aberration in this environment where goods inflation is out of forty year high, services inflation is still well within its its range of the past thirty years. And so I think that mix is going to help. So the FED to to the extent that they get going too soon, they might overcool demand which which is already set set to

slow and help alleviate some of these inflation pressures. Sir, Maybe an unfair question, but I want to take a chance. With the dynamics of this economy. How do you model when we flip to actual inflation adjusted wage growth? Where is that? Where is that soon quarters years out? So it's probably going to be somewhere in the back half of two. So we have inflation saying pretty elevated through the first half of next year. So we actually have

CPI hitting seven percent in the first quarter. So's eye popping as that six percent handle was. It's it's going to get worse before it gets better. But I think by the time you get to the second half of the year again, inflatian comes down. I think wage growth remains fairly strong. Given that on net we're going to see a tighter labor market than I think the FED and many others expected. That's going to keep wage growth

fairly strong and help those real earnings turn positive again. Sarah, I want to end the conversation where we began it talking about the housing market and the incredible growth in the supply of homes that will be coming online, and it raises a question about I don't want to say bubbles, but this question of froth and whether perhaps this period has ignited not only supply in the pipeline, but also just elevation, elevated valuations that cannot be sustainable. Can we

avoid a crash? Can we avoid a policy error? That is what a lot of people are worried about with the FED. So I think in terms of the housing markets, so the price the rate of price increases we've seen over the past year, or they're up nearly it certainly is concerning when we just look at it in a sure sheer price growth, you know, so it's it's surpassing the rate of growth that we saw in the bubble years.

But I think the quality of buyers is very different when you look at the credit scores, and so I think that helps this picture. You mentioned the low rates.

That helps in terms of raising the actual prices of these homes because it helps mitigate that the effect of that on on payments and so um, you know, I think there's there's definitely some some concerns out there in the housing market, but I think is um, you know, we're we're not at this point thinking that it's it's going to add and in the ugly way that we saw maybe in in the in the mid two thousand's Sarah tremendous as a white Senter house there of Wells Fargo.

It could get worse before it gets bets out. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten AMI 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 In. This is Bloomberg