Surveillance: Monetary Policy with Goolsbee

question from Evercore I scias follows. Number one, can Bloomberg right above the tach the attacks? Number two? Can anyone deliver a blow to Sanders? Three can either Clobhan or Buddha Usa debate stage yet again to bounce into polls? And four can bide and use it to bounce back in the run up to Super Tuesday? Lisa? Out of those four, what's number one for you? I mean it? Look, Michael Bloomberg, the founding, a majority partner of the majority

owner of Bloomberg LP. This is gonna be his first debate, and I think a lot of people are really focused on him, given how quickly he's risen in the polls. That said, Bernie Sanders has really risen to the front, the fact that he has like become the front runner, after Pete Botaj had been it for a while, after

Elizabeth Warren had been it for a while. Can he maintain that momentum and does he deliver the same sort of your with me or against me, whether you're a Democrat or not, leading to his supporters staying home if he does not get nominated as and Tom mut go as far as sand is this six in comparison with candidate Donald Trump and the Republican Party that Bernie Sanders is not the candidate the party might want or might not want, but it could be the candidate they are

dealt with. I think they will go in the booth and choose. And that's what happens is that we saw that in New Hampshire with Avengerce Chuck Gabriel with a he's with capital Alpha from Minneapolis today but always focused on Washington. Is well, Chuck, what's going to be the prism of the Washington you know? So well? As they look at this debate in Nevada, how are Republicans and Democrats on the hill, the senators, the members of the House,

how will they observe this debate. Well, thanks Tom. I think everybody be looking very very closely at Michael Bloomberg and to see how he can actually perform in an uncontrolled environment taking punches from you know, four or five other candidates that really resent his skipping the first four events and sort of just paying his way past past February and into Super Tuesday. So I think there'd be

a big focus on that. But you know, while everyone is lamenting that Michael Bloomberg is so cuddly developed a conscience about billions and taking on Wall Street sort of in a peremptory way of looking forward to tomorrow to tonight, I think the bigger story, of course, is that Bernie

Sanders is the one is the beneficiary of all of this. Uh. And I think there's a sort of a you know, that's the second dynamic that will really be in evidence behind the bloomberghsteria tonight, And that is the stop Bonie you have in the back of your wonderful research. Note the paragraph on the new Wall Street policies not only of mayor Bloomberg, what are the others as well? Can you win coast to coast on an anti Wall Street theme.

I don't believe so for a minute. I really don't, you know, there there has been no hue and cry among the Democratic candidates outside of loose one, you know, who's really you know, uniquely burdened on this, having had led the Tarp Commission. There isn't in Congress. Uh. You know, we actually had a bipartisan bill to to you know, take back a little bit of the Dodd Frank just

a couple of years ago. So you know, when you talk to Americans, they're not talking negatively about Wall Street exact the extent there really you know, incited to do

so by these populoust sort of angry narratives. So I don't think so at all, and I think they're really you know, maybe that's good news that we won't have a lot of time to discuss whether Michael Bloomberg has made a financial transaction tax of ceiling rather the floor rather than a ceiling for long, because you know, after this Saturday's Nevada caucuses and then we go to a South Carolina the following Saturday, you only have basically chosen

four percent of delegates. But then on Super Tuesday marked third Boom three Super Tuesday six the vote in March. It's happening very quickly, Chuck. So let's talk about electability. Michael Bloomberg. Mr Bloomberg actenly has the opposite problem that Senator Sanders had, at least in terms of perception. There are people who believe Mr Bloomberg would struggle to get the nomination ultimately, but ultimately he would do better in the general, the opposite applying to Senator Sanders in the

minds of many. I'm just interested in the data, Chuck, that you're looking at the moment. I'm looking at a new pole from the Post and ABC that essentially still sees Senator Sanders is the most selectable cited by thirty at Democratic Leaners as best situated to beat Trump. What do you see the polls in the data that you look at, Chuck, Well, I do think that you know, Sanders has a very very loyal basis support and and you know there's not a single state where he doesn't have.

One of the reasons the Democrats are in this situation is they changed the rules, they're their primary rules, to basically front load more of the primaries and create the fifteen percent proportional vote that you know, a candidate can't get any delegates unless they get at least fift in the congressional district or a state. So ironically, you know you're gonna have a very congested field. And I and I think that you know, I know what you're talking about.

You're talking about what where will be in the end. But we'll get a very different look at Bloomberg at that time. And I think for I think, really what Bloomberg speaks to and those poles speak to is Democrats just want to defeat Donald Trump, and they sense that a centrist will do it, and they think another billionaire who will get in the ring with the president is the right way to go. But I don't think that's the majority of the party. Took just twenty twenty seconds here.

I'm wondering, from your perspective, how close do you think we are to sort of honing in on the candidate. I think there's maybe a thirty chance that Lisa, that we will actually have a better chance that people uh suspect that we'll know who the Democratic nominee could be in it very well could be Sanders by the end of March early April, say mid April, with the New

York Primary. I think that's I think that's absolutely true, and of course Wall Street will freak out a bit, but nothing spooks this market, So why not do it now? Chuck Cabriel, thank you so much. With Capital Alpha here as we moved to the debate. Right now we take over some time of Austin Gouldsby's he's at the April School, Chicago,

former chairman of the President's Council Economic Advisor. We've been talking retail right now, Austin, I need to talk FED policy with you, and I want you to defend William Dudley, the former FED President of New York, who, in a Bloomberg opinion piece was heated that this isn't about the blunt instrument of a balance sheet, of the blunt instrument about monetary policy. That monetary policy still has an effect on the American economy. If they cut race once or

daresay twice from here, what does that do to our listeners. Well, you've got a lot of listeners, so it probably does different things to different ones of them. Um, I have publicly said that I'm skeptical, not a look. I still think conventional monetary policy and cutting interest rates does matter for the economy. It's just that right now it matters less than it basically has ever mattered because several of

the normal channels are not working. So when you cut interest rates, normally, one of the big channels is there's a pent up stock of people who say, want to refinance their homes. They've been waiting for rates to come down, and then when you cut the rates, you get a whole bunch of these people who have been sitting on the sidelines. And the same for business investment, and the same for consumer durables, uh, you know, buying autos and

stuff like that. The problem is we've had the rates so low for so long that anybody who was waiting to buy a new car, to do a business investment, to refinance their home, they were waiting for rates to get low enough, they already did it. So there's not any of that pent up demand, um, and so that

channel is less effective. And then the second is if we were let's say, the coronavirus got over here and people freaked out and stopped going to work, and we and we had a downturn like what they're facing in China. The normal FED move, as you know, is to cut rates four to five hundred basis points over a relatively short period of time. That's the kind of signature FED move to fight off a recession. You can't got the interest rate five o our basis points when it's already

too low. So I am a huge fan of Bill Dudley's I was on the Economic Advisory Panel to the New York FED when he was the President of the New York FED, and I think there is a lot of wisdom in his piece. But the part of it in which he's kind of pleading to the world please still respect are the power of our monetary policy, I think it's that part is maybe overstated. So, professor, what tools do you think the FED should use should it need to act to stimulate our economy at some point

in the future. Well, look, they should use the conventional monetary channel. It's just they got the shorter runway, so you're not gonna be landing a seven forty seven on it. You know, we're gonna we're gonna have to focus on the on the smaller planes. And I continue to think that the unconventional monetary policies like forward guidance, like QUI, like a series of things are modestly effective, but they

should certainly be in the toolkit. Um. I think for the people who believe that those unconventional monetary policies and the balance sheet are super directive of the markets, are they're the thing that has led stocks to rise. You know, in I I would like to see what data they're looking at, because my read of the data is their their impact had There has been some impact, but it's been a modest impact if you if you actually start

going and looking at the various assets. So as as we take a look at today's economy, you know, it has been clear for some time that it has been driven in very very large part by the consumer. How confident are you in the U S consumer today? I think you're right, has been driven by the consumer and the job market. That's the that's the that's the shining part of the economy. I'm still pretty confident on them. Um. Though. The only thing is anything that destroys consumer confidence puts

our recovery at risk. That that part is clear. And I will say two things that historically can direct consumer confidence in fast order are a massive political dysfunction and meltdown in Washington. And did I say one or a I think I said a b uh, natural disasters or infectious disease for sure, if we got to ronavirus spreading in the US, I think it's hard to fathom that that would not freak out consumer confidence in a short basis, short of an epidemic becoming a pandemic. There's a trillion

dollar deficit. Are you oblivious? I mean, come on, you have to sit there and explain CBO to presidents and that I'm looking at a one point three trillion dollar run rate to begin with of a plugged in GDP number. That's maybe it works, maybe it doesn't. Is Austin gools to me telling me that Senator Dirkson's a billion here, a billion there, a trillion here, a trillion there, doesn't matter, you know, it does matter. The part that's disturbing is not the one trillion. What is the part that's the

disturbing is the one trillion in a boom? Uh, Because if then there weren't a boom, it's gonna be two trillion plus. Well, no way, this is important. I don't mean to interrupt you, but I'm gonna go out John Taylor on you and automatic stabilizers. If you modeled in an n b E R recent what would have one point three trillion dollar deficit become double it? Yeah, probably double it. You know, it depends on how deep the

recession is. So we saw the the deficit exploded to record levels in the first one to two years of the Obama administration because it was the deepest resonn As the economy comes back, the deficit gets cut in half. What we have basically never had in the United States economic history is a circumstance where we're growing and the unemployment rate is below four, but the deficit is exploding. Uh So I think it easily could be above two

trillion in the event of a recession. And my thing about deficits is it's not that it's going to be a fiscal grease style fiscal crisis that drives the US interst rate through the roof the problem of the debt and the deficits is not that a drive up the interest rate. It's that you have to pay back the money. And so ten twent thirty years from now, our kids

are gonna becoming of age and need training. We're gonna want to fund social security and scientific research and every other thing that the government does, and we're going to just have a bigger and bigger share of our budget is being spent on interest on the debt that we're that we're doing right now. That's the that's the problem. That's the problem. What is if I'm a you know, a bull on deficits and national debt, what's my argument for saying it doesn't really matter? Well, it depends what

the it is um. The the debt capacity let's call it, of the U. S Government is vastly an access of where the debt is now, So it doesn't matter for interest rates in the United States that we are doing this, and the there is as you know, I've been a public opponent and been blasted by the MMT people. There is one aspect that I have always said the m MT people are correct, which is, by by observed practice, you can spend trillions of dollars, You can increase the

deficit by trillions of dollars without tanking the economy. We did it with the George W. Bush two trillion dollars tax cuts unpaid for, then a two trillion dollar war in Iraq, unpaid for, and then Trump another two trillion dollar tax cuts, unpaid for. Those things did not blow up the interest rate, They didn't blow up the economy. But we do have to pay back that money with interest. That's my that's my point, Austin, thank you so much,

very generous of you. Professor Gouldsby is at the University of Chicago. Let us begin a three hour conversation with a gentleman from Yale University. Stephen Roach invented Morgan Stanley economics. He literally brought the digital age to print economics a million years ago. He is holding court giving up quality sees at Yale University. Steve has been too long, wonderful to have you one to talk to you, Tom and John.

In your book The Next Asia, you have a great essay China's macro imperatives right now they have domestic imperatives. From where you sit, what is the to do list for Beijing? Number one, two and three is simply to control the virus. The economy will come later. The economy is strong, resilient, uh and changing, but it's being subjected to a a powerful shock and um it's all hands

on deck to deal with that. And as I said, the economy will um uh later, I mean within this and Steve you've you know, I've seen you with the panda's out in western China and your cheng Do and all that. You know up the yangs River, you've got Wuhan where that big bend is. What's the thing? The media and for that matter, Global Wall Street get wrong about the resiliency of China to bounce back once they

get through this virus. Well, you know, in the midst of a crisis, Tom, whether it's you know, in the depths of oh eight or in you know, other uh, seemingly catastrophic developments like the financial to the Asian financial crisis of it seems like the world or your favorite economy is imploding. But these things have a way of passing. Right now, you know, the uh, the evidence on infection

rates and totality rates remains worrisome. There's some second derivatives that are looking a little bit better, but the situation that you just alluded to in Japan is now increasingly problematic. And I would just note here that Japan, the third largest economy in the world, is probably back in recession again. I mean, they had a horrible print on fourth quarter GDP. The trade data released this morning point to spillovers into

the first quarter of this year. So you're looking at two consecutive quarters of of decline for a long recession prone Japanese economy who shot itself on the foot with another increase in their consumption tax. So you know, China is u it a standstill. All the daily trackers of CULP, consumption and traffic are flat uh post Lunar New Year, when they normally have bounced back dramatically, So that economy is printing a very low number of barely positives at

all in the first quarter. The world economy is starting to feel like a transitory, hopefully temporary recession in the first half of this year. Professor, you did a fantastic interview with Barren's recently in the last couple of weeks, and I'd like to take the opportunity to point our audience to go and pick that up if they can. I'm just interested in exploring this further, Professor. Is not

just Japan, of course, it's Germany as well. The economy stagnating there, just in terms of the dynamics that are shaking the global economy just a little bit relatively speaking. What is it you see that's transitory? What is temporary. Why will we come out of this the other side as the year grows older, in better shape. The virus we now call a COVID nineteen UM. You know, if you look at US stars trajectory, John, you know there was a one quarter hit and then a very sharp

rebound over the next four quarters. This is not stars, but it's an infection rate is higher, but it's mortal. Your rate is lower. I think it will take longer to um get a grip on this, but I think that the trajectory is relevant and comfortable this time as well. Professor wrote unbalanced the codepends codependency of America and China, And I want to just put out a hypothetical that say it takes longer to get the coronavirus under control,

this goes on for a longer period of time. Are people overleas sanguine about the US economy economy being immune to the impacts that we're seeing in China right now? Of course they are at least I mean, you know, the the U s economy is viewed as teflon like bulletproof. Uh, and there's seemingly nothing that could touch it. But you know,

Greenspan had the best line of all. Actually, it was back in where he said the US is not an oasis and with the rest of the world China, Japan, John pointed out German, Many and um, France as well, Um on the skids here. Um, that's gonna come back to to bite us as well. And so our growth rate, which is not as weak as it is in other economies,

were as far from strong. Uh. And you know we're we're cruising it too, which is not the biggest cushion to deal with another global shock, Professor, Roach, where do you expect to first see the effects of the slowdown in China, in Japan, in Germany manifest themselves in the US? Well, yeah, I think it'll come from our trade numbers. There's also already as we've seen from Apple clogging of China centric supply chains, which is going to stifle our ability to

to buy our favorite electronic device. And there are other spellover effects as well. Steve, we've gotta go. But I got one key question which is just so critical to know. Our listeners want to hear your response to it. What is the cost of the accommodation of this central bank? I mean, the real FED funds target rate is back negative. You know, we're not down at stand Fisher Alter accommodation, but we're there are on our way there. I should say,

what's the price of the free lunch we've got right now? Well, look it's a long, um long answer, Tom. But you know, free money UM enables financial instability, UH. It enables UM zombie like behavior of corporations who might otherwise be disciplined with a more meaningful cost to capital. And of course it facilitates the most reckless UH fiscal policy the United States has ever had. In an economic condition, the FED enables the Congress to keep printing a trillion dollar deaths

as far as the eye can see. Steve Roachs, thank you so much with the university and update. There's been way too long. We got to get him in more of any regular because he's always busy, and he brings a holistic theme, almost a balance sheet them to economics. I've just enjoyed our exchanges on China and what happens with global trite. This is gonna be fun because SA and Society general, the great Derivatives House of paris Um always has a sophisticated note, and they've been pretty cautious

on global GDP and U s GDP. Sophie Win with US do a multi asset and Sophie has the word in a report, John, what is it transitory? No? Not not even existential, No, not even zeitgeist g o L. We have a major house here talking gold, Sophie Win. How do you put gold in the mix here in your assets strategy? UM? Good morning. So from an essata allocation standpoint, UM, we think that at this point having a balance but firm makes sense. But having disport for

protection through treasuries on gold UM makes sense. So gold is really one of the best prefer protection that you could have your as dellocation. Well, I don't want to go to the tent of a decimal point, but give me a percentage in gold right here at s We don't have a target on it, but I guess that when you look at how gold and US dollar have decorrelated UM in recent weeks, it really allows you to understand that barbo portfolio is at this point is really

the trend for investors. So fear the risk medicating characteristics of say gold becoming more attractive relative to say treasuries. We like both, but it's clear that having gold at these points where from a relate to the basis if you look at gold versus copper and dealing with the tenor treasuries, it's clear that gold is really a way

to protect. But following case of risk off, which is the case right now with this black Swan scenario of the coronavirus um when everyone is talking about how expensive bombs are, so it feels like gold at this point is really the best candidates, Sophie. Is it likely that gold will keep rallying intedum with US equities? It feels like this where you have some uncertainties regarding how long

this corona virus is gonna last. But also, as you mentioned our my recession scenario that we're having with the two negative quarters, these two quarters of negative gp um, it could be a way for investors to have at the same time equities and gold, you know, but folio what kind of equities I mean? I mean you do mulpay asset strategy, which is salvaging my four oh one k, which is a two oh one K because I didn't like Tesla when Pharaoh bought it, Sophie, what kind of

equities am I comfortable with? If I need to make a return to catch up with everybody else. Yeah, very difficult. So inc we do. It's Wednesday, difficult question day. What kind of equities do I buy? UM? So for now our strategy is more so into short terms, into short term it feels like the US dollar assets are going to benefit on this Black Song scenario, but more in the long term we continue to stay away from US growth,

so we don't really like US tech. What do you like to prefer to focus on value portions UM on the equachy market, so basically EM equities where the growth differentials is quite attractive, but also valuation perspective, it's good. And also Jack music, which is so if you thank you someone. Sophie Winn was Society General there today with a really john almost controversial in Japanese equities there. I mean, that's I'm going to call that an outlier. Should I

bring you in my five stages of diminishing bullishness? I love that charge. This number one, you'll hear people saying it's transitory. If things get worse, you'll hear them turn to number two, that the US is resilient and if things get a little but worse from there, you'll turn to number three, which is the US is decoupling. And then if things get a little bit worse from there, you'll turn to number four, which is the Federal save us.

And then the final stage of diminishing bulishness is would doomed. That's just full capitulation. We're in stage one transitory. In the Wikipedia for Charles Schwab, there's a paragraph it's five six eight pages down under history, and it doesn't capture what happened in Some of us lived this and it was absolutely extraordinary how an upstart out of San Francisco and their first branch in Sacramento, California, came out and

revolutionized the investment business and revolutionized it step by step. Paul, it's so important here as we bring in David Rubinstein, is it didn't happen all of a sudden. It was step by incremental by incremental steps through seventy five and seventies sticks until we were there. Let's listen in the Chars Schwab with David Rubinstein, they are children, are grandchildren. Say you know, can you give me a stock tip

or something? Because I got some money and we have a mutual fund actually index fund called the Schwablin thousand. I use that all the time for my kids, the ETF portion of the things I've taught them all about. But in some respects it's a little bit more ring. I'd rather have the kids buy individual stocks. So what I'm gonna do coming up this spring, We're going to introduce fractionalization of stock, so you can buy a small fraction of Facebook, small fraction of Netscape or Amazon. Amazon

is a high price in the words on Amazon. Let's say it's trading for a share. Some people can't afford thirteen hundrellars of shares they could buy about thirty dollars. How about thirteen mestors worth? Really important concept. It is the talk of the industry right now. I know motif H really leading on that, but many others looking at fractional share of purpose right now, well, we look at the complete David Rubinstein is peer to peer is just brilliant.

This time with Charles Schwabs. Mr Rubenstein joins us uh this morning. David, what a joy to hear you and a very vital Charles schwab walk through the past. What's he say about the future of individual investor? Really? Nations

Rights and privileges. Well, remember he came from very modest background and then revolutionize the industry, as you said, And for those who don't remember the revolution was this in the old days before seventy seventy five, if you bought a stock, you paid a fixed commission, and everybody paid the same commission around the country. He came up with the idea after the federal government allowed UH this to be deregulated to kind of have very low fees. Now

the fees are basically zero for buying stocks. But he's built a company UH that is now managed about four trillion dollars and it's the leader in UH in brokerage accounts for for people all over the United States and all over the world. And he's now eighty two years old. Um. He overcame a lot of handicaps. He was dyslexic, didn't know he was dyslexic, was not a good student. Never found out until he was much older that he was dyslexic, and that was the reason he wasn't a good student.

He almost flunked out of Stanford. He got into Stanford initially because he was a great golfer. And he's still a pretty good golfer, but he built a business that is now legendary, and his face is so well known because the original advertising people said to him, why don't we use your face? He was reluctant to do it, but then it was used and now became so well known that his face is known to everybody in effect. So, David,

it's interesting. Just recently charged Swab kind of shocked the market yet again by going to zero commissions on a lot of equity transactions. What's the economics behind that? It seems like that's a big hit to their revenue. Uh, not so much. I mean I think they were probably getting maybe four or so of the revenue from those commissions. Where how do they afford to do it? Well, they sell funds, and when you sell funds, you charge management

fees for those funds. But also they have enormous amounts of cash reserves by people that keep their funds on account with them, and so they're they're making interest on it, and sometimes they're not charging that much to the client, not paying that much of the client. So they have a four trillion dollars and they're earning fees on that and they're investing that. So that's how they can afford

to do it. Really, the brokerage commission business now is relatively modest, and there are others are also going zero commission. So it seems like us a gift and it is giving away some money and maybe their stock will go down a little bit because of it, But in truth that they have so many other ways of making money, it's not a big deal. Yeah, David. When I think of retail investing in this country, I think that, you know, the thundering herd of Merrill Lynch. I think, of course

Charles Schwabin some of their discount brokers. Yet a lot of Americans still are not invested in the market. Does Charles have a chuck of a sense of kind of maybe having the increased participation. Of course, they want people to buy more stocks, That's why I wanted he's talking about fractionalization where people would buy stocks and so forth.

But remember a lot of people are investing through their four oh one case and their I ras, and also a lot of people have pension funds at their place of employment, and the pension funds are investing in the stock market. And you could argue and effect that they're investing on mahaff of the future retirees clear to the stock market is a much bigger business than it was in seventy five. And the reason he was able to pull this off it wasn't that he was the only

person who said let's have discount fees. He invested heavily in technology and others were not willing to do that, and he put a lot of his money into technology. He ultimately sold his company after a few years to Bank of America. Bank of America kind of ran it into the ground, and he bought it back and then he closed on the deal right before the bubble burst in in October, and so his stock went way down and he was worried whether he could company could survive.

But actually he came back and again invested heavily in technology and became the market leader in this business. David, thank you. David Rubin's TIN Peer to peer conversation is really quite good. With Charles Schwab tonight nine pm. I'm Bloomberg Television. 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.