Surveillance: Jackson Hole With Reinhart

years at the Federal Reserve System. He is the one who literally codified and invented modern research at the ECCOS building. He is with Melan their chief economists, Vince Reinhard, I want you to explain to radio and TV what Jackson Hole really is. A bunch of PhDs listening to dead serious papers, describe what really goes on at Jackson Hall. It's the biggest concentration of central bankers, and central bankers love to talk amongst themselves, and so that's the opportunity

for them to address what they're all concerned about. And what they're all concerned about now is just how the global economy is going to pull itself out of the pandemic, and moreover, how they are going to pull themselves out

of the unconventional policies they've got themselves into. I had the honor of sitting on the lawn years ago vince Reinhardt were the wonderful Alan Meltzer with Carl Brunner getting this summer's suare started with the Carnegie Rochester series of decades and decades ago, and it goes to the emotion of the serious events Villin Bouder blowing up years ago. It's some controversial paper, the controversy of the late Marvin good Friends paper of two thousand and sixteen. What will

be the controversy this year? I UH, I think the big issue who is to find out UH where J pal is relative to his committee? What do we learn this week? We learned that the ethel m C by and large wants to head to the taper asks asked Rob Kaplan that later today UH wants to start slowing asset purchases. We heard it pretty firmly in the minutes, but when J. Pale at his press conference was asked about it, he didn't seem anywhere nearly as convinced, nor

did he really convey that view of his committee. So which is it is? J? Pale really want to head to the exeter he doesn't. This is his opportunity if he wants to to confirm where his committee wants to go or to slow a mom How closely, evince, do you think that J Powell and the other FAN members are watching the Delta variant and the various shutdowns that we're seeing, whether it's port closures or whether it's delays the return to office of a number of different companies.

Delta is the ace card that J Pal can pull out of his sleeve if he wants to slow up this committee. I think, Lease, you know you, Lisa and Kaylee had it exactly right. What have we learned over the last eighteen months. Bad things can happen to good people, and they're very bad. Uh. In that environment, you want to buy insurance that insurance includes treasury securities rates are low.

That includes staying away from market activity. Uh. That's serious And from a monetary policy standpoint, it brings into the question of risk management. Do you want to head for the exits if in fact something bad could happen in between and you're wrong footed? And so if sorry? Well, thinking about how the Delta variant informs FED policy, we know this FED is prioritizing the labor market and the recovery there that seems to be taking precedents over inflation.

And we heard from the US Labor Secretary, Marty Walls. She asked, are they saying that some states who have already rolled back those enhanced unemployment benefits may need to actually put them back in place because of the delta variant? I mean, how do you think about that factor into the job's recovery. Yeah, that that that's a really important point and it tells you the problem of leaning forward in an uncertain time, You just may be leaning leaning

in as events turned against you. And the really interesting thing about the minutes, cably was, in fact they were less hierarchical about their dual objective for the last year. It's always been employment, employment, employment, in price stability and inflation. The second half of the dual man it was in the background in the minutes, they said they were worried about they had made substantial further problem or rather they made further progress toward employment and probably were at their

price stability goal, so they were bringing back that mandate. Now, the question is if they're really worried about the outlook Uh, do they push concerns about inflation further into the background, And just real quick, in terms of their concerns about inflation, how much do you expect them to highlight how this has been a K shaped recovery and how the inflationary pressures that we're seeing are actually hampering with people on

the lower brackets more than others. That's what everybody forgets about the nineteen seventies, and that is that that inflation is a regressive tax, and part of it is what's that's doing the real wages at the lower end of the end of the spectrum. Look, Jpal has been extremely good in framing policy more inclusively than any of his predecessors, and you've identified an opportunity for him to complain about inflation, not just because it worries the bond market. Stars Vince,

I got thirty seconds. I'm so sorry. You and Carmen Reinhardt wrote the paper of the summer last year Foreign Affairs on the Pandemic Depression. Have we exited the pandemic depression? Absolutely not. Uh. A message was rebound, wasn't recovery. We still have a lot of lost output in the US. And importantly, what we have done is forbearance, not forgiveness. That is, at some time, at some point, all those uh, all those payments, right is gonna come do what's gonna happen.

Then we are out of time. Let's do it again, Vincent Reynard, thank you. With mel in their chief it kind of let's get right to it and we are thrilled to start strong on Friday with Dennis Garbon. He's the retired editor of the Gartment Newsletters, still writing the Gartment news Letter, and it is a jewel today in his retirement, which harkens back to Saigon. That cartoon Dennis Garden Gartment in your morning letter is painful. It is

very painful. The the relationship of the similarities between what happened in nineteen seventy five and in Saigon and what is happening now in Afghanistan are frightening for those of us who were all around back in the nineteen seventies and remember how that looked. It is a is dismaying to see the United States a position in the world

having been diminished as badly as it has been. This is a very disturbing circumstances prevailed, and this is a long, long week, and we have a long time ahead of us to worry about the loss of perspective here in the United States. Jonics Lisa wants to jump in, but I've got your your newsletters of jewel on how prices are priced at the margin? Almost there's a marginal pricing of the margin at the margin. Explain that well, first of all, and in all markets, I've always maintained that

prices made at the margin. When the last two percent of buyers become sellers, prices go down and the last two percent of sellers become buyers, prices tend to go up, and prices made at the margin. And what bothered me this time was looking at the level of margin being used in the in the stock markets that these days had been going up for fifteen consecutive months, coextensive with

a bowl market in stock prices. But there's always been a very leading indicator that the use of margin has led the market to the downside, has led the market to the upside, and now for the first time in fifteen months in July, the use of margin, and I've maintained that that's where that's where wise and sophisticated smart money has been leaving the market since July. It's very disconcerting that tends to lead the stock market higher or lower by by several months, two or three or four months,

sometimes a bit longer. But when you start to see margin usage declining, you have to be careful about the stock market itself. It is one of the better leading, leading stock market indicators that I have learned to watch over the course of my nearly fifty years of being in the markets. Dennis, what does this mean in terms of some sort of draw down, considering that a draw down these days is perhaps maybe a half a percentage point decline, Well, I think there's more going on here

than half a point. To client, take a look at the broader market. We tend to pay too much attention to the Dow, too much attention to the SNP, way too much attention to the NASADAC, and nobody's paying attention to the broad Russell Index, which has not made a new high now and several months has broken its upward sloping trend lines several weeks ago. That goes back into March of last year. Something is happening in the broad market that doesn't seem to be in taking place publicly.

The public is still involved in the markets. It still sees the down making new highs. It still sees the SMP and the NASDAC making new highs. And you brought up the fact that you have to pay attention to what happened in Amazon. Amazon, for the technicians, gaped lower dramatically almost ten days ago and has not come close to bouncing since then at all. And and Amazon had

been one of the leaders to the upside. When the leaders, when the generals get taken out and get shot, you have to be worried about what the sergeants and corporals and privates are going to be doing. Yeah, And I look at things like the AII sentiment survey that we got this week, the Bears out exceeding the Bowls for the first time this year. Have we started to see a real shift in sentiment this week? I think you have. I think that that's starting to take place. I think

there's no question about it. People talking about the inevitable tapering of the FEDS expansionary policies. That's going to happen. Whether it happens in October and November, December, January, certainly

that's going to happen. And I've maintained all along that the great bull market that we've gone through has been almost solely predicated upon the expansionary policies, not just by the FED, but by the Bank of Canada, the Bank of England, the e c B, the Bank of Japan, and the FED is is clearly at sometime in the next month, two months, three months, four months, going to start the process of tapering. Whenever that happens, that's less money coming into the market, and money will leave the

stock market and go into the expanding economic circumstances. Clearly, the economy is doing well, and that's what happens at turning points. Stocks go up before the economy turns higher, stocks go down before the economy turns lower. Stocks are going to start moving lower, and the economy will continue to not boom, but be really quite quite expansive, quite strong.

Dennis Gartman, thank you so much. Too short to visit this morning, to get us started on this Friday, Chairman, the University of Akron's Endelman uh fun on a Friday in August. It's always important and on Blueboard Radio this place so well. I went into the closet this morning, my closet with my suits is about in the west Wingley says, it's a good thirty ft long. And you know, I said, I said, blue is the only way to go.

And I come in and you know, Teal's got the blue thing going and Lisa's got the blue thing going, and I said, canceled the guest at seven thirty and find someone in blue. Gabriella Santos joins us now in JP Morgan Blue and that is always good to see. Gabriel. Thank you so much for joining us on a blue Friday here. And one of the things you talk about is something John Farrow and his Gloom on the Way

to Crete talks about, which is a draw down. And you say, and particularly with a draw downs are normal. We should not be afraid of the Pharaoh draw down. Well, this drawdown we're seeing in China's is absolutely business as usual for investing in Chinese equities. Every year you should expectent annual correction, and every three years or so you tend to have an over thirty percent correction. We had this in ten, we had it in and eleven. And

it's unrelated to the economic cycle. It's related to China's regulatory and reform campaigns, which tend to happen every once in a while. It takes time to rebuild confidence. But three months out Chinese equities tend to be up ten percent. Uh in six months out they tend to be up twenty percent. During these moments, we hold on a second, Gabriella, are you saying that it's a good time to go

buy Chinese equities? We fundamentally disagree with the thesis that China is now uninvestible, and that is not what we're speaking to our client. It's about, or hearing from our institutional clients. It's really still a story about building a

strategic allocation to Chinese onshore equities and onshore bonds. To me, that is one of the most important themes of the next decade is the rise of China and portfolios, and it's really just about navigating these moments of volatility and thinking carefully about how to invest in China rather than going through an existential crisis every time we get these draw downs, and in fact it's it's what one of your guests that the CEO of the Norwegian Sovereign Wealth

Fund on Wednesday not rethinking that long term allocation to Chinese on shore equities. Well, let's talk about how to invest in China. Let's go there, especially at a time when you've got so many cross currents. You've got the regulatory uncertainty around the shifting priorities of the executive leadership in China. You also have the slowdown the your experience experiencing, as well as the COVID policies which are much strict

er than in places like the United States. How do you pass through all of this noise and figure out how to allocate at a time of such incredible uncertainty. The noise is so high right now, the volume is extremely high. And I think the trick is not to see each thing China says or does as an independent development right, It's all a piece of a bigger puzzle. And what is that puzzled all about this new phase

of Chinese development. It's moving from a middle income into a high income country over the next five ten years, and it really wants to shift from the quantity to the quality of growth. And everything that's been doing over the past few months is aligned with that long term plan. And what's quality. It's growth focused on innovation. What's innovation it's not Internet and social media. It's deep technology and renewable energy, and it's quality also in the sense of

the quality of life for workers, for customers, and for mergence. Well, you talked about renewable energy there, Gabrielle. China, of course is trying to reach net carbon neutrality by and it wants to have peat carbon emissions by And I'm wondering how you just kind of think about that green transition when talking about an economy and a growth trajectory that

has been powered by the industrial economy. So an example of how China, you know, we tend to think about China is being really difficult from an E s G perspective, and it is starting from a uh, you know, further behind in other countries. But this is an example of China moving in the right direction here thinking about the EVE and China's extremely serious about this energy transition because it's focused on reducing pollution and improving the quality of

life for its people. And this is going to involve a lot of carrots insteads right, carrots in terms of developing its domestic renewable energy market solar wind, uh carrots in terms of busting the penetration of e V auto sales China's already the largest ev market in the world, and this is just the beginning, and it involves sticks. China launched an emissions trading scheme this year to to put a price on carbon and increase the cost for

heavy industry. So it's all about that transition to higher quality growth and really navigating the winners and losers in that phase. Well, we've seen this borne out in commodity. Is this specifically when you look at iron ore features in Singapore. I mean they're trying to pull back on steel production. A lot of that has to do with environmental concern and that has shown up, but it also the other side of that is the growth concerns that that Lisa was alluding to. And I'm wondering how you

think about PBOC policy here in a decelerating China. One quick comment on the commodities. Yeah, they're losers kind of some of those heavy metals like iron ore and steel, but they're also winners something like copper for example, which is a huge input into renewable energy and electric vehicle. So a perfect example there. And in terms of policy, I think the way to see this is China, every time it has a growth slow down. It's going to step on the accelerator less and less um so unlike

you know China five years ago. So it's very targeted easing here maybe a reserve requirement cutter two. Very targeted towards credit in high end manufacturing and private industry. It is not that old China that lifts all books. Gabriel A. Santos, thank you so much there on China, some of the optimism within a faraoh like draw down. It's been an

extraordinary week. I really want to say thank you to all of the Bloomberg Surveillance team for starting strong with Thomas Barfield of Boston University, and I end my Friday here with George Friedman, Geopolitical Futures founder and chairman, with me Kaylee Lines as well. Lisa Brammon is preparing for the nine o'clock our George, thank you, thank you so much for being with us. There is that sentence in your essay which in the last century we were at

war eleventeen percent of the time. What went wrong? Well, we started to go to war at a time we were hit remembered by al Qaeda. We went into Afghanistan on a raid uh to capture al Qaeda. We failed in that. They escaped at tor Bora, and then we were in Agana. We didn't know what to do, so we did what we do know how to do. We sent troops in and tried to create a different country. Afghanistan is Afghanistan. It has been that way for a

very long time. Many have tried to change it, and in the end we spent a generation there, twenty years. We've gotten nowhere in terms of pacifying the country, and it was time to leave. And when you leave a war, as in Vietnam, it looks ugly and more ugly the most. But it looked ugly. George Freeman, I thought of you about four or five days ago of my nineteen fifty six when I was barely remember and the Hungarian rebel, who should you've literally lived, get out of dodge, get

out of a country as well. How do you see the United States assisting Afghans? Who Admirals Tevita say, the Taliban one out of one out of Afghanistan. How do we get them out smoother and faster? I don't know. There are probably hundreds of thousands who'd like to leave. We don't have the aircraft to move them. Out, and remember Taliban is the most powerful force in the country. They won the war. They will impose the kind of

rules that want to have. We may negotiate with them, but at this point we've reached the situation where we are not in control of Afghanistan. We don't get the option to make decisions. You mentioned complexity. Are we having complexity policy complexity, tactical complexity because we don't have a theory, we don't have a view, we don't have a strategy. The fundamental interests in the United States just to make

sure that North America secure. Our number one interest is easy, keep Canada and Mexico happy, don't alie with anyone else. Number two is control the oceans. We control the Atlantic and control the Pacific. We're secure. We can get involved in Eurasia once in a while, very very carefully. But these all in wars like Vietnam, like Afghanistan, places us always edit is his advantage. The native population doesn't like us. They want us out, and they're going to beat us

because they're not going anywhere. We're coming in and we're never going to have enough force to take it out of country like Afghanistan. So we're frivolously involving ourselves and things that look good. We delude ourselves that are enormous. Power and it is enormous, is infinite, and then it's always easier to stay another year than to leave. Longer you stay, the uglier it gets. Well. Obviously, the United States has power. It's a matter of how it is used.

Are we no longer going to see the US as a global hegemon and as as the police police country of the world. A global hegemon is very careful and how it uses power, it doesn't fritter it away. On secondary issues, Afghanistan was never a strategic issue for the United States once a sound in London left. It was a country that the Russians were defeated in, the British were defeated in. It was a very difficult country. So we have to make sure that our cost benefit analysis

is correct. There is a price in going to war. We don't just wave a wand and we saw that in Vietnam, and we didn't learn. We did it again. And now after twenty years there are people are staying we should have stayed longer. We we're not gonna win. How long would we stay? George you are experts in our machinery as well. Have we finally figured out the technology does win? In Vietnam and Cambodia, the technology doesn't win, and Cobble are up north on the border with Uzbekistan.

It could win if you're prepared to afflict horrible casualties on the enemy. Extraordinary casualties. Technology is a wonderful weapon for killing, but it's indiscriminate. The United States was not prepared properly to engage in indiscriminated war against the Taliban, and the problem wasn't tech lack of technology. It was we fought a war that we didn't have to win, and therefore we pulled our punches. Unlike Germany or Japan, where we did everything we needed to win, we probably

didn't do that in Afghanistan. But then we shouldn't be there. George Freeman, thank you so much. Sorry, look forward to speaking to you again. George Freeman, Geopolitical Futures founder and chairman. 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 In. This is Bloomberg.