Surveillance: Growth Composition Is Improving, Dutta Says

effort at the American Economic Association meetings over the weekend. Adam, I thought much more than normal these headline These meetings made headlines. What was the lead thought that you got out of the discussions of posing, yelling Bernanke and others. Uh. The main thought, of course, centered around Ben Bernanke's annual

presidential address. Uh. Not that he gives it every year, but this year he was president, and it was a major plea, an argument more than plea, that monetary policy can offset the next recession successfully, that there is room to go negative on interest rates, that quee done properly

on a large scale can make a big difference. And frankly, there was a pushback on that for me to a limited degree, from Janet Yelling his successor, from Larry Summers Um and I think this was a really important discussion to have. There's a huge amount of convergence on the idea of public investment UH in this low inflation, low interest rate environment, and there is a desire to have a constructive front, so I think I think there was

a lot going on there. Also for the profession, was a lot going on about changes in the profession where Ben Bernanky Janet Yelling have been really leading some efforts about diversity and sexism less racism, but that's not as big a deal for the rest of the world. And every econ one on one book, including Abel Bernancy. There's chapter twenty seven which is naval gazing, which is what

economists like to do. Alan Blinder of Princeton does that this morning with an essay in the Wall Street Journal. Really talking about this two percent target, which is a huge debate. I spoke to Charles Evans of Chicago, a Federaries serve President Chicago about to at length. I think

it was six seven weeks ago. Is is well defined for our audience the two percent debate very simply the idea is that if you go directly for zero percent inflation target, you're probably going to mess things up because there's creeping price changes and it tends to be deflationary in real terms if which sounds contradictory, but anyway, the effect is deflationary if you set for too lower target.

So all the central banks converged on a two percent target in the late nineties early two thousand's, and Ben bernanke Rick Michigan, a number of people myself included, all contributed to that. The argument right now is completely excuse me that the inflation expectations are, if anything, being dragged to the downside towards zero. You look at bond markets in Europe and Japan until lesser degree US, they're pricing and no inflation and no interest rate hikes out many

many years. And so the question is if you get to a recession, you don't have much room to cut rates, and and we're maybe driving down inflation in bad ways and expectations in bad ways by not achieving our inflation target. So the debate is is it better to raise the inflation target. If you raise the inflation target, can you get there? How do you get there? I don't want to interrupt. To me, that's the heart of the matter is the execution. Okay, anybody can set a target, or

a strategy or a theme, etcetera. But the heart of it to me at imposing is then you have to affect a pro Is there any proof that a central bank can reflate short of pretty money? I'll you know the deutsch Land of a long time ago. At the moment,

the evidence isn't great. Um So I my main pitch in these sessions at a A was Unfortunately, if you look at Japan, the Bank of Japan over the last five years roughly has done pretty much everything that Bernankey or Krugman or I or many people ask them to do for their own reasons and including setting inflation target, including doing aggressive que and the amount of difference it's made in terms of inflation outcomes has been minimal. On the other hand, I would hate to run the experiment.

If they hadn't done that, what would have happened in Japan? They would have been in deflation, possibly accelerating inflation with more harm. And I mean, I can't jump in. I just want to bring the conversation to the story of the moment and talk about the federal reserves, involvement in

asset prices and its role shapey financial conditions. What we've seen over the last week quite clearly is renewed sans renewed tensions in the Middle East, and yet a financial market is set of financial markets that don't show real signs of stress. There is a belief, because we've been conditioned over the last couple of years, that if we get into any difficulty, the FETE will be there to

ball a sound. I just wonder from your conversations over the last week how much discomfort there is with that at the moment, and how uncomfortable should central banks be with this situation? Well, I think I think John, the the issue is sorry that the central banks recognized that a they shouldn't be making judgments on geopolitical matters. They

have no way to do that. But be that, going back to nine eleven and before, the impact on macroeconomic outcomes of even oil disruptions, of even major security threats do not tend to be lasting. Again, that doesn't mean they're not important, but it means that in terms of the course of the things central banks are supposed to

talk about, which include inflation, unemployment, financial stability. These national security threats, even very big ones, do not tend to matter that much, and I and so they should not be reacting to this. And I think for once markets are pricing that correctly that they should not expect much to come out of this. Long term product of investment

is going to be disrupted. Waste of human lives, waste of money, waste of opportunities is going to occur, But in terms of trading relative values not not really an issue. One last quick point, as was stressing one of the session with a lot of central bank officials Sunday morning at a E A phil plane from the e c B, the deput Government Bank in Japan all pointed out that they've had low rates for a very long time and no asset bubbles in recent years, and so I think

people are overly concerned about that. And do you think that's the case though, when you look at the fixed income market and see at one point last year that we had seventeen trillion dollars of negative yielding assets, largely because of central bank involvements in financial markets, I find it difficult to get my hands around the idea that the ECB can sit there comfortably and say that they have not no role and asset prices and asset distication

to the point that we might even have a bumble. Yeah, I realized that that's a very common point of view. But I think the world divides john into the people who think we have low rates because central banks took action, versus versus we take action because we have low rates. And I think there are very fundamental causes of these low rates. And it's demographics, it's technology, it's low growth prospects.

It's been added to by the Trump administration creating huge amounts of uncertainty about the trade regime and now security. These all drive down real factors. There's no investment demand and the central banks are merely reacting to that. People would like to say it's the central banks causing it, and the central banks don't always admit that they're not causing it because they don't want to seem powerless. But in my view, it's the other way around. Okay, this

is really important. It will be a huge topic with Sherman Greenspan this morning. What is causing the dearth of business investment? Yeah, and that that's the question, and I tend to be I am reluctantly. But in recent years, and you and I have talked about this time come around to sort of a Robert Gordon point of view, which is that there's been some kind of fundamental technology.

That's where Greenspan is too. Alan Greenspan has come around the Northwestern Yeah, because when you look at the to me, the big arguments are first that almost all the rich countries, including Japan, Western Europe, US all slowed down in productivity growth that roughly the same time, and it was before the crisis, and that that to me suggested some kind of global fundamental It's been phenomenal, Adam Post, and thank you so much for joining us from American Economic Association meetings.

He is with the Peterson Institute. It is not a surprise to those that no international relations that, without question, the most trend essay that we have seen some Stephen A. Cook, he is with a Council on Foreign Relations. His book False Dawn is absolutely definitive and at times heart wrenching on his experience of the Middle East. And we are thrilled they could join us. He could join us this

morning in our Washington studios. Stephen Cook you stopped this debate distracted by John Bolton yesterday afternoon with your publication in Foreign Policy. You minced no words, we should leave and leave. Now. What has been in a response to your essay yesterday, Well, it's actually been rather surprising. There's been a lot of support for the essay. I've heard from members of Congress, former members of Congress, former ambassadors,

my dissertation supervisor, UH, and a variety of others. It's been a former marine to former Marines who served in the Rock. They've said, look, after now almost seventeen years, you're calling a spade a spade that there's not much for the United States to do in Iraq, and to take out Costam Suleimani over over Iraq, a place where Americans are vulnerable for no discernible reason, seems to be a policy that is unnecessarily reckless. You're the pro I'm

the amateur. The night that night to two am in the morning, I stood in the Bloomberg Television Studios in New York and open the National Geographic Atlas, looked at the map and said, you've got to be kidding me. That was in two thousand three. You just visited Iraq, which we agree is totally changed from oh three oh five, and on and on and on. What did you observe there that says to you leave and leave now? The bottom line for me and Iraq was that Iraq really

isn't a state. Uh that map no longer exists. There is a territory that we call Iraq, and there are discernible borders. But as the classic definition, the state of the state that controls the monopoly of violence that can enforce property rights doesn't exist. You have a number of different a number of myriad of armed groups fighting over national resources and impoverishing what would otherwise be a wealthy country. It is simply a river into the Persian Gulf. On

the right side is Iranian oil fields. On the left side Iraq's treasure. What keeps Iran from just not moving west over the river to pick up all those oil fields? It really doesn't have to Iran. As every any Iraqi you will tell you that Iran is the most influential farm presence in the country. The protests that broke out in Iraq in October were in part about Iranian dominance. Our killing of customs. Solimana has really changed the terms of the debate, those protesters as still want or Iran out,

but now the Iraqi parliament also wants the United States out. Stephen, is that the president's objective to get out of the Middle lag so many people full of walls and now the scratching their heads after last week because it still is objective. Well, your question speaks to the strategic and coherence of the administration at this point. The President says he wants to reduce America's footprint in the Middle East, yet he takes actions that threatened to draw the United

States further into the region. Stephen, if the United States retrenches, where does it leave the coalition of the fight against ISIS in the region? Well, it's a very good question, and I think that the United States can continue to fight terrorism without having as large and as vulnerable a footprint as it does in a place like a rock where we're really not welcome, and that where we're so hamstrung and so impotent that there's not much that we

can do at the moment. As you know, over the last several decades, General Sulemani was at the epicentral and effort to build out a sheer sphere of influence. So imagine there are some allies, some allies of the United States that did want them in the Middle East to

help them push back against that. Stephen, your thoughts on that situation, Well, I think that it's undoubtedly the case that the Saudias, the Maratis, the Israelis are particularly interested in ensuring that the United States remains in the Middle East to counter Iran. I don't think that anybody is arguing that the United States should just withdraw from the Middle East. Iraq is a zombie state. Iraq is not a place where the United States can do much good

at this point. But we have lots of presents, and there's a smart way to be in the Middle East, and being in a rock and killing customs Sulimani over Iraq doesn't seem to be a good thing. Steve, When we've heard very little from Israel in the last couple of days, why, well, the Israelis are obviously quite concerned about blowback on them. Uh. It's well known that his Balah and Iranian proxy Lebanese terrorist group has hundreds of

thousands of rockets that can be rained down on Israel. Now, Israel has made a lot of progress in developing defenses against this. But the sheer number of rockets in the possession of his law is deeply worrying to the Israelis UH, and they do not want to be implicated in this. They don't want to be the focal point of Iran's retaliation.

Isn't it quite original? State? And that we have all of these various different, contradicting interests in the region, and yet we struggle to identify one nation in the Middle East at the moment that was happy with that strike Thursday night and to Friday original list. That that is

I think a very very good point. Uh. We are at a point in the Middle East where it's very very hard for American policymakers to define exactly what's important to us, and this leads to a series of contradictory policies. President Trump has been unpredictable, but this is also a problem with the Obama administration identifying what's important, developing a strategy, matching up national resources to that strategy, and pursuing those interests. It's been a problem for some time all of your

nationwide we wellcommuter Bloomberg surveillance. John Farrow in New York Time Time keenan Washington and the Stephen A. Cook of the Council on Foreign Relations, And again you've seen my rave review for his False Dawn, which is decidedly not dated. Protest, democracy and violence, Stephen A. Cook, how do you respond to every pro I've ever talked to that said, Look, Iran is the one real economy, real nation, real culture,

real middle class of the Middle East. Have we just frittered it away with the agony since nineteen seventy nine? Have we handed away forever Persia? Well, it's I think it's a very very tough issue. There has been a lot of effort on the part of people in Washington to think of ways and how to improve relations with Iran, but Iran has to want to do that as well.

We had the Joint Comprehensive Plan of Action, but then once that was signed General cut some solar money went out to consolidate and extend Iran's influence around the region. That made it very difficult for actually people both on both sides of both sides of the debate to defend uh a warming of relations between the two countries. So let me ask you this question. And I asked to

have the atmstra VENs in general Kimmitt as well. We've got a lot of people listening with family in the military exposed in a new and different way in the last three or four days. How do you respond when you see troop movements and troop announcements Bloomberg with the Marines moving from the Mediterranean into the Persian Gulf. How do you, as a academic respond to these military movements. Well, one of the things that that concerns me is that

we are moving forces back into the Middle East. But it's entirely unclear to anybody why we are doing it. If there is an interest, if there is a strategy that is at play here, then we need to know about it. Otherwise, these guys are being sent to the Middle East for no discernible Folks want to rip up the scripture. This is so keen. Thank you for your notes on our coverage from Friday, Stephen Cook. It's just simple. The military prose and the academic prose say the same thing.

What's the strategy? How do we find an American strategy for the Middle East? Well, this is I think this is a problem that any I think any president at this point is going and I'm not going to pin this on the President Trump. That's right. We the Cold War ended thirty years ago and the world is changing. And I think that it's very very hard after now being in the region in this very significant way for almost two decades, it's very hard to discern what it

is important to the United States. Is it building democratic societies? Is it fighting terrorism? Is it oil? Is it Israel? No one has a real clear answer to this, and it's I think it's up to us people, academics, military strategists, and others to debate this. Do we decide what it is? With a great sacrifice, So all in America off of September eleven, of two thousand one, and to steal a line from Freed Zicaria, what does the post nine eleven world look like to you? It looks like a mess? Uh.

There is no real Uh. It seems it's a very long time ago in nine eleven where we had this purpose and we've lost it. We've gotten wrapped around the axle on politics in the Middle East, on things that aren't as important to us. It's now time to sit back and consider exactly what's important to the United States in this part of the world. Thank you so much for coming and Stephen and Cook folks, and the counts on foreign relations. I will put out on Twitter and

LinkedIn today his important essay and foreign policy places. Saide that Jena Mountain Adams is with us Blimbag Intelligence chief Equity strategists, your thoughts on obvious the East Cold Gina. Then we'll get to the call at Bloomberg more volatility, closer to trend levels, higher equity markets through the year. Though, what do you come down on that? Uh? You know, if I can, I can sympathize with the idea that equity markets continue their advance that they've been in for

more than a decade. Now, you know, I don't I don't know about the higher vall call. I think that you'd have to have a pretty significant change in market structure in order to get higher prices with higher volatility. That certainly was the case in the very very late market extension of into two thousand. You know, if that's your call that we're going to go into some kind of melt up phase, then you will see volatility rise

as prices rise. I think it's real. I really struggled to make the case that we're in a melt up, I think instead, you know, investors are somewhat hesitant. It's really a story of liquidity driving prices, and that to me means volatility stays low as prices advanced. That would be my only issue, um is I think you do needed to see a big change in the way that markets behave and see a massive shift and sentiment as well, really driving some kind of melt up phase in order

to have praises rates with volatility. So let's talk about something important, because you've touched on it. I remember in January, I think it was there was a feeling that maybe this was it, this was the melt up, that final stages of a ball market where things start to rip and everyone starts to participate. Two years later, here we are still talking about the same dynamic, potentially the characteristics of a late cycle, end of cycle melt up in

a ball market. What are they and why is it so different to what we see in the last compliments. So if there are really just several pillars that characterize a melt up, in our mind, you have to have rising prices on rising volatility on deteriorating fundamentals. That means a decelerating earning scrowth outlook on just a massive explosion and optimism reflected in the sentiment surveys. That we've been missing a lot of those characteristics at various points in

this cycle. But the one that really has we've struggled to sort of find is that massive optimistic sentiment. I think in fits and starts, you do develop periods in which investors are a little bit more enthusiastic. Late seventeen was one of those periods. We did see a major market peak occur in early eighteen, but it proved not to be the secular bull market peak because you didn't have enough long term build and optimism I would suggest to really support a massive melt up peak developing. I

think we're in a similar state now. We probably are a little excessively optimistic. You see it in the strategists

all caving on their on their forecast, right. You know, I used to be one of these strategists, and thank god I don't have to do this forecasting anymore, because it is really, really, you know, it's tricky when the market is inflating on sentiment and sentiment and alone, it's really difficult to predict how far it's going to go, but we haven't seen a massive improvement and fundamentals to really drive those market outcomes right now, so we are

probably slightly over optimistic in the short run. That said, most of the flows over the course of the last several years have gone to the bond market, not into the equity market. You did see some equity influence at the end of last year, but not nearly as much as you would normally see when stocks are peaking and sentiment is overly enthusiastic. Gena and the zeitgeis this morning, is any given company switching from share buy back to

dividends increased dividends? Walk us through that. In this case, it was an essay on Apple computer and they really need to get their act together and just switch from share buy back, massive two dividend growth more sprightly. What's the soil? What there? What's the distinction between share buy back and dividends? I think it's signal more than anything.

I think that traditionally, the signal of a switch from sort of a short term boost to share prices via share buy back to a longer term commitment to dividend is a signal of a slowing longer term growth outlook to most investors, and so the results is, if you are committing to a long term higher dividend, pay higher dividend growth over over an extended period, the investor thinks fantastic.

It is a certainty of income. However, it also maybe suggests you don't have a whole lot to do with your cash, you don't have a whole lot of investment prospects. Maybe your long term growth rate is going to slow going forward. I mean you traditionally see the you know, slow growing stables, more defensive places, the bigger dividend players in the equity market. Gina Martin Adams with us as we're in the doubt twenty nine thousand. Watch I'm kidding, Gina.

Manufacturing has been a tough spot on the I M. I should point out on that particular reading in that sector, not terrific services holding up. That's the story worldwide, particularly in Europe, and I wonder if that continues. One of the great themes of that has been Neil dudd Is excellence a renaissance. Mcrowis really been quite good of pushing against the certitude of the gloom crew. Uh. Neil Donna let us reframe right now, you're called twelve months forward

on g d P. What is that statistic? Well, I mean if you look at your Bloomberg News consensus, Uh, they have GDP running basically below two personal a year, and um, you know, I wouldn't be surprised if we print something, um, you know, close to two and a half. I think the composition of growth is improving. I mean, you know, you look at I mean, investment spending will probably be a little bit better, and inventory investment certainly

will be a little bit better. The trade deficits somewhat narrower. We've seen the dollar come off the boil of that's going to support exports and and help narrow the trade gaps. So um, you know, it's not an economy that's off

to the races. But you know, it's always about This job is all about what is the market pricing in and what do you think the like the outcome is going to be, and then pick your battles with the consensus wisely, and I think the consensus a little bit too cautious on growth, for which is one of the reasons why I think this upward march in equity prices in the US will probably continue. You have been a well you've been you know, you've been wonderfully resilient about

this versus the gloom crew. And you've just explained, well, but you explain how we get there. How do you look at the resiliency of the American consumer? Is that a foundation for your optimism or is it almost a one off to your optimism? Well, I mean, certainly, consumer balance sheets, household balance sheets are in a much better place then they've been in years. Um. You know, look at the household savings race. It's actually been rising even

as consumer spendings have been doing reasonably well. We've seen, um, in addition of financial obligations ratios at rock bottom levels. So the household balance sheets very strong. The upside risk, of course, is that you know, we've seen this recovery and equity prices. People feel better about their situation, they begin to draw down some of that precautionary savings, and the consumer actually does even better than what it's been doing. So um, yeah, I mean, I think the consumer is

basically running in place. The risks are to the upside um um, and we know that. I mean that's also reflective in the housing market's sort of been the one thing that no one's been talking about. But I mean, hey, look, I mean new home sales are up what ten to fift over the last twelve months. Those are signed contracts and new houses those that leads construction activity. So I think construction activity is also likely to be a tail

went for growth in. So you know, UM wasn't a great year for the economy and it was mostly about consumers. I do think we'll have a better better balance uh in the in in the year ahead. No, you know how this works. There's always a diates of in somewhere to confirm your prize for anyone looking at the economy right now. And if you barish on the economy, you might be focused on manufacturing. So two questions from me.

The best read to get on manufacturing right now. You've done some terrific work on pointing out the difference between say the I S M and the p M I and my follow up question to that, Neil, would be the importance even if you do get a read of weakness in manufacturing, the importance to the overall economy and how that's diminished over the last ten years. Just your point on those two things, Well, I mean, So, I mean there's an issue between the two major surveys of

one of sample size and construction. Right. So the market pm I actually overweights the forward looking indicators like new orders, while while the I s M equally lates them. All um, um and so um we've seen, we've seen UM. In addition, it's a sample size right, market p M I has eight hundreds, I s MUS three hundred. Some have made the point that, you know, the market p M I is less sensitive to what's going on in the global economy. The I s M it's more sensitive to what's happening globally.

Uh So that's something else to think about. Um. But you know, when I look at manufacturing UM, it comes back to the inventory cycle John. Um. If you look at even the I s M, you still have more of the server respot and is telling you that their inventory levels are too low then too high. That's very unusual with the I s M sitting this far below dist Okay, So my sense is that you get an inventory tail in and that's going to necessitate further games

and manufacturing production. So I would be surprised to see the I s M UM still sitting where it where it is, you know, this time and let's say three to four months. So again it's about it's not about where the data point is right now, because that's all the bears are talking about. It's about why is it gonna stay here in three months? And that's a much harder call to make. I think it's not likely to stay there. It's likely to go higher. No, you expect

that inventory bill to be front loaded this year. How do you think that's going to fly out through the course of Well, it means that. I mean it's not just the US also, I mean look at Europe. I mean, if you look at the pace of contraction and insventries and in Germany for example, and we haven't seen anything like that since the sovereign debt crisis. So in other words, it wouldn't take much in the way of global growth and you know, European growth stabilization to the prompt games

and production activity in those economies. I think you have a bit of a synchronized inventory cycle um in the Western world over the first six months. Neil, do we need to get used to subpar growth? I mean, there was a time it was morning in America three percent plus on we go the president has hit a real residence with the American people in search of this. Do you is a card carrying optimists give up on three

plus growth? So I think the only way you get to three plus growth, Tom, in any sort of sustained way, is if you see a inflection and productivity, I mean productivity growth. Historically as a process, it does and turn on a dime. What you can say is that on the plus side, you know, if you look at the last let's say five years, productivity has been growing a little over one percent at an annual rate. Now that's very low, but if you look at the five years

before that, it was basically half a percent. So we've sort of been slowly growing productivity. UM. I would say the one positive that I've seen lately is that, you know, even though we've had a weak investment year UM in the last year, UM, I do think capital deepening is growing at a more normal, normal rate than it had been, and so you know, maybe there's a chance for productivity to grow something looking at closer to normal this year, I mean maybe one and a half percent. But again

it's it's a it's a process. But you know what I mean, do we need the question is do we need three and at three percent growth, I mean I think you know, look we're talking about we're gonna have. We've had, you know, improving a median household income, declines in UH, in measures of poverty, low unemployment, and that's all happened, you know, with growth running slightly above two. So um, you know, I mean to me, I think two and a half it's pretty good. I mean, this

is so important. We have capital deepening with with your optimism, does labor get a better share of what's out there? Or is that just from a bygoing time? I mean, certainly, I mean that's what the FET is trying to engineer, right and totally totally meading and uh and we have when we and we have seen I mean, certainly we

have seen some increase in labor share of income. And one of the interesting things I think we're seeing right now though in the labor market is it's sort of this um, you know, not necessarily falling labor share, but

shifting of where the labor income is going. Because we're seeing, um, you know, folks at the low end see much faster wage growth, but interestingly enough, folks at the high end seeing slower wage growth, so that premium that the high end had been sort of commanding or compelling isn't isn't isn't a strong as it had been before, Maybe because the labor markets tighter and Neil always great to get your thoughts happen to get to you, and it's a

nil down to that. Very nice sence, Macro, head of Economic Research, joining us on the upside risk to the economy in the United States of America through twenty and ahead of payrolls Friday. 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.