Surveillance: No Reason To Stop Hiking, Zentner Says

economics of Pennsylvania, Lawrence Klein. He's the one that invented how we figure out what the U. S economy is doing. He was the first doctoral candidate of the giant, Paul Samuelson. It devolves down many years later to the blue Chip Award Allen Zennor. Morgan Stanley did something extraordinary, put together four years of data at Morgan Stanley and did it with the smallest standard error in twenty years. Now joining us, she walks on water from Morgan Stanley. How did you

do it? What? What do you do to walk on water? Thanks? Tom. I think part of it is when you're in a large organization like Morgan Stanley, you have the benefit of global strategists covering every asset class of global economists in every region and coming together in that mind sharing and being sure that all those beans at up is part of the process that helps what we call keeping it honest? Did I and to Jim Garman, and can I say

this and tell me if I'm wrong? And what Steve Roach wrought with Richard Burney years ago was you people argue like I mean, it goes back and forth. It's a very constructively argumentative process. And it is so it is, Yeah, and I would describe it as constructive. I mean, sometimes it can feel like arguing, but it's it's feedback. It's pushed back. And that's really important because a is uh. You take it, you listen to it, You make sure that you're looking at it in the way that this

person is presenting to you. And so at least when you go out with a forecast, you go out with extremely strong conviction. I never could have stuck to our one hype call in twenty fifteen or one hYP call in tween um if I didn't have that debate to be darn sure that I felt convicted about that view. Do people actually the first of all, congratulations on the award but do people um debate enough? So maybe in your organization they do. But are people kind of vocal

um our policymakers vocal enough and do they exchange views enough? Well? I think it's a it's a is an absolutely great question. I mean, if you talk to Don Cone, the former vice chair of the f O m C, uh, you know, he is one of those that will lament over the day that the Sunshine Act was put in place where they released transcripts with only a five year lag Now five years sounds like a lot um, but five years.

Most board governors have fourteen year terms. Uh. And so he said, after that was put in place, what had been very open, robust debate at the table in the boardroom at the f O m C was everyone would come in with prepared marks and you would go around the table and read your prepared marks on how you felt about the economy and monetary policy and then say next, and the next person would go on. And it really

tamped down open debate and discussion at those meetings. That said. Uh, something that certainly Cherry Yelling stuck to when she was ahead of the f O m C was that she would have those conversations offline ahead of time before the meeting by phone. Um so that those debates did not take place when where the transcripts would pick them up. Um So, I don't think it tamped it down completely. But um yeah, much of it plays out on the on the global stage as they're speaking publicly now whereas

it was never that way before. But but if you look at the bo E, it's the Bank of England, it's very different to what, of course, you know, how the FED does it. It's um is there a right or wrong way? And and does that go back to just market functioning. If you have too many transparent and you know, open debates in the public, do you have a higher chance of the market miscommunicating on misunderstanding. Yes, I think I think there is that that chance all right,

because you've got many voices. I remember the the common complaint from clients of ours. After Bernanke took over the FED, the first truly academic leader of the FED, and he instilled his a blue sky thinking where everyone had a say, and he encouraged everyone to speak publicly. You know that certainly men, especially if I traveled outside of the US, clients would say, who in the heck? Do I listen to I used only listen to one man. Now they let's listen to one man roller tape if you would.

Right now, here's the president, a central banker. My biggest threat is the FED because the FED is raising rates too fast and it's independent. So I don't speak to him. But I'm not happy with what he's doing because it's going to fist the president United States. Trish rig And dashing out with their new show over at Fox. But it's good to see that ell and there's the there's the president right now threatening FED independence. Everybody agrees on

this as well. Let's back up to the call that made you famous, which you have the courage to go out and say no, it'll be slower. Bring that call up to date, and what a FED call into two thousand nineteen looks at. Do you still have a house cautious call? Yeah, I think compared to consensus, we're still on the more cautious side. Um. Absolutely no reason for them to stop hiking right now, and they are completely

convicted around this next year. The butt is that going in the next year, they're completely divided between do they deliver two, three, or four hikes? And that's because the risks have risen as we go into next year. Now, they're upside risk of financial conditions stay easy, they're downside risk of trade e M other international spillovers. We're talking about bregsit today. UH. You know those are are very

real downside risk to the outlook as well. UH. And so I think we should recognize that while the median dot UH is at three hikes for next year, for the f MC, it's it's not as hard dot as I would call it. Right, They're completely divided. Uh. And so I don't expect them to have any more clear clarity by the December meeting on how many times they should really hike next year. We think they will hike

twice through June. We think by the time they come into that September meeting to debate whether they should hike again or not, the shape of growth UH, if our forecasts hold true, will show that the economy is slowing back towards two percent. This is the other side of fiscal stimulus when that stimulus fades, uh, and that that's gonna be evidence that they must be around neutral. And then enough of them will say let's pause here and take a look around before deciding whether we need to

be restrictive. That's how we think it will play out. That is less than what consensus is is thinking though for hikes next year. Alright, thanks so much. Ellen sent there. They're off. Morgan Stan joining us now the former Ambassador of the United States to Israel, Martin Indick, who has had an exceptionally productive career in foreign policy and service to our National Security Council, working at Brookings and now with a Council on Foreign Relations. Ambassador, we are thrilled

to have you with us today. What would you expect Mr Urwan will do after Riad and after the Secretary's visit to Anchor? Oh, what is next for Turkey? Welcome morning, Tom, Thanks very much for having me on the program. U Urdwan is in the bazaar and he has some important good to sell. He's trickling out to the press. The Wall Street Journal has details of morning gruesome details of the audio recordings that are in the Turkish government's possession.

What is he looking for is anybody's guests. But but you would know as well as I that the Turkish lira has been struggling, that the Turkish economy is in trouble. The Trump double the tariffs on Turkeys steel, and so I think he's looking for relief in all of these respects from some Saudi perhaps Saudi financial support, some relief from Trump. After all, he released the evangelical pasta the Trump was hoping for right before the midterm elections here,

so he's positioned himself very well to uh get some payoffs. Ambassador. One of the great things we've seen here is the use of sanctions. Jack Lewis with yesterday the former Secretary of Treasury talking about the non efficacy of sanctions. What does Martin Index think of the use of sanctions by this administration or frankly by other nations as well, well? Uh In, In general, sanctions have become more effective, uh more recently because the Treasury, particularly under Jack lu was

quite quite effective in tightening the financial sanctions. Because the United States dominates the financial factor, particularly issues entertainments, it can hurt businesses that that ignore American sanctions. And so

I think they've become effect more effective over time. Now we're going to have an early test case of that proposition on November four when the United States imposes reimposes oil sanctions on Iran, and we will see how many countries decide to find alternative sources, and then the question of courses where they can find alternative sources of reasonable prices. The big ones to watch China and India because they're

the biggest importers of oil from Iran. But this crisis with Saudi Arabia comes at a moment when the efficacy are those actions will depend on Saudi Arabia making up the shortage in supply that comes from taking Iranian oil

off the markets. If the Assaudis don't do that, then the price of war is going to spike, not only giving the Saudis a revenue win for but also helping the Iranians because they'll be able to discount their royal significantly and still be able to sell it in those circumstances. So Martin, essentially the approach towards Iran does it complicate the United States ability to confront Saudi Arabia, even if

they wanted to completely. It's it's the thing that we will always need to take into account here is that Saudi Arabia, together with Israel, are the two pillars of Trump's anti Iranian policy. They are critical partners in this effort um not normally partners, but Saudi Arabia and Israel have a common concern about Iranian hegemonic efforts in the region.

So right at the moment when Trump is trying to impose maximum pressure on the Iranians, Saudi Arabia has gone wobbly, and there's likely to be a continuing kind of crisis between the United States and Saudi Arabia, not because of Trump, but because the Senator of the United States is really upset with what the Crown Tranter Saudi Arabia is alleged

to have done with this American resident journalist. And and so this is a train which is heading for a train crash, and it's very hard for Trump and Secretary of State Pompeo to put the brakes on it. So one beast, I would love it if for our audience you could lift the lid on how international diplomacy works at a time like this. All we have to go on right now is the official line from the Secretary of State Mr. Pompeo, and anything that he says releases

about conversations with Saudi Arabia. What's happening in the background right now with the officials from Turkey, Saudi Arabia, the United States tell us what we don't know. How does this work the industry of diplomacy right, So, so what you saw was the quick dispatch of Pompeio first of all to read and then to anchor. That tells us that he is trying to put this crisis back in the box by working out understandings with the Crown Prince of Saudi Arabia and the President of Turkey. That's the

heart of his mission. It is not made easier as usual by by President Trump, who has no discipline in this matter. He should be off the tweet waves, that he should be off the airways so that Pompeo can try to do his job and try to put together what he calls for, which is publicly which is a thorough investigation on the one hand, and the Saudis have committed to that, and on the other hand, to try and get the Turks to stop leaking to the press,

which undermines the whole effort. Mr Ambassador, you have stated that this is the first real crisis that Mr Trump faces. What does his team need to do to explain to him this is the real, first crisis that he faces. Well, I think they need to walk him through the way in which this can unravel his whole strategy towards Iran and as well as cause cause turmoil in the oil markets, especially if if there's a challenge to the Crown Prince of Saudi Arabia's leadership from other royals in the family

in Saudi Arabia. They need to make him understand the gravity of the situation and therefore the importance of discipline, thing that he seems incapable of holding. Two because in a crisis, every message has to be carefully controlled. This is not about a mid Ton Elections are about getting a judge confront. It's it's about uh international consequences in which things can spin out of control quite easily. Ambassador, thank you so much. Martin Indek with the Council and

Foreign Relations, the former United States Ambassador to Israel. I'm so excited our guest. I'm gonna let you bring him in because he's incredible with finance. He has one of the ten greatest tweets ever on uber rides It's ever in New York City. Was clearly drinking whiskey and refused to share. He's the only one who gets to drown out his depression on a Wednesday morning. That's one of

the ten best tweets ever. Somebody keeps track of this stuff. Interestingly, I don't rank him, No, the article ranked him for him. There's some hilarious ones. Joe Nevington joins the snap blombog intelligence credit and strategy analysts. Do you have a word? Super nightmare? Now everything is always pleasant and happy in an ubercar. Let's talk about it. Come to market. Tell me what they would come into market with, what they upsize it to, and just how big the order book is? Sure, Yeah,

I know it's a big it's a big deal. They came. They're issuing two bonds, a five year and an eight year. Looks like the five years and being priced at seven and a half percent and the eight year at eight percent, and that to me looks uh. Particularly the eight year looks tight relative topic year. That's like high yield junk junk junk, right, it is junk junk junk. It's it's it's expected to get junk junk junk ratings B minus

and be three at Moody's. What does that mean to the two mere mortals like me that don't memorize are below triple A. Sure, it means that junk. It means that it's one notch slightly higher than the triple C category, which is viewed as having a one in three chance of bank bankruptcy within a year. Let me stop your folks. What you just heard from Mr Levinson is so important, John, Uber is rated one notch above triple C, and yet it's the greatest company since time began. We have very

believe I've never heard this. But what I think is interesting about this if we say this from Netflix, and we saw this from Testa last year as well, you can have the attractiveness of the equity somehow reflected in the debt, which makes no sense because the upside is going to be in the equity and not in the debt. But for some reason, the attractiveness of taking a slice of equity turns up in the bond market. Why does that happen? John? Why is that happening? It happens all

the time, John. I you know, like as a young credit analyst years and years ago. You know, if we go back like twenty years, one of the first job that I looked at was long term capital management, and it was the same exact worked out that worked out really well. Luckily for us, we weren't involved in it, but it's the same thing. People see the growth and the opportunity and they failed to look at the risks, and that's what credit is supposed to be about. So

quality is really interesting to me right now. High yield and I don't know if you saw this this morning, Tom JP Morgan pointing out junk bond issuance is on course to be the lowest this year since two thousand and nine. It's basically going to come in a hundred and fifty five billion dollars yet to date so far, and that's really important. Supply shortage in this space and the seven percent paper, Where do they pay that interest coupon?

When you clip your Uber coupon in the back of your lift vehicle and mail off the coupon or take it down to the broker, it just comes out of cash on the balance sheet, right it does, because if you look at the data that the Wall Street Journal has, they're saying that in the company generates significantly negative even of margins, so it's not generating new profit, so it's

just draining the cash that is buying this beautiful. I mean, are long only institutional retirement you know widow portfolios buying Uber at seven percent coupon? Well that it is a private placement, so I hope it's not because there's no

liquidity in the bonds. Once you have a private placement, it becomes a much tougher issue to to trade, which actually makes things like Tesla, which the bond is fifteen points below its initial pricing, UH, much more interesting, which also yields the same yield as the as the Uber bond. What does Suber look like a night? Yes? And would you be willing to hold a night yet? Now through

to maturity? But with ye Seriously, the point here, Joel, this is a great conversation is it's a private transaction. That's the really. I mean, how many people will buy this piece? Is it like for people for sovereign wealth funds? Well, it's oversubscribed, so somebody's buying it. I just you know, again, if I go back to my history, UH, portfolio manager that I worked with said, if you're not getting paid

to take the risk, why are you doing it? And it feels like there's a lot of risks here in terms of lack of disclosure, lack of liquidity, UM, lack of cash flow, and they've the company has said that it's not gonna be profitable for three years. Critically, in the bond perspectives, do they see the financials that I don't know? Because it's not it's not, we don't know.

That's that's one of the reasons I think you take the you take the bond offering private because it's a a limited pool of investors, and I guess the finances are in a limited set of hands Joe as well. In theory that will be disclosed next year, right because Uber has to go public next year or otherwise. I believe a bunch of investors on the equity side have the option of cashing out on from the soft bank

venture fund. Interesting. So here's the other interesting thing for me, walk us through covenant light and how much of an issue this is in fixed income right now. I'm talking about the quality of the debt that come to the market, the covenants that used to be attached to it and are no longer attached to it. Sure well, covenant are are never an issue until there's an issue, And unfortunately that's the way the market works. And what happens, is

John Tucker, which marriage was he describing? There, take your pick, you got six? Did you join covenance to like the pre nup? Like the pre nups if the marriage. If the marriage doesn't go well, you can basically say you can have one of the covenants can be say the house. Or if the marriage doesn't go so well, you can basically say to them stop spending in the shops. When you start to get rid of those covenants, the agreement

you have with the issue a little bit light. The only thing I would say, John, is with my covenants and I've been married for fifteen years, they never get amended, even even pretty tough covenant um. But you know the problem is with the with deals that are getting done today is that it's being done at a topy kind of part of the cycle, and so they're being done with light covenants, meaning a lot of room and capacity. And when the market turns down, those are the bond

holders are gonna get that the hardest. First, is there a bet with a a private placement that they go to a premium if they come at par one hundred, that they trade positive or in a private placement, is there even price discovery one week, one quarter, one year on. It's pretty limited. Um. You know, when you have these darker markets, like a structured finance or a private placement,

you wind up using third party data. Now, luckily here at Bloomberg we can use a b val curve or something to price and saying this is what you see how he gets the product place. Michael Bard doesn't do that. Did you do a b vail curve today? No? I did not. What is a b vail curve? Please be sure. We have curves here at Bloomberg which can show you add different readings what a bun should be praised at um and so you could use something like that to

help you discover it. But you really never know because there's not a public market where you could just go and trade. Can you come back and be the official surveillance marriage counselor? I mean the idea that you've been married fifteen years is wonderfu We say, good morning, Mrs Levinson. It's really cool. I think that's what my career has been meant for. Okay, very good Our marriage counselor Joel

Levinson with us this morning. Busy day for Primister May and Brussels today she'll be meeting with the EU Council President Donald Tusk. Then later this evening she'll addressed the blocks twenty seven leaders, who will then convene over dinner without her. Honestly, the way politics work in Brussels. Don't you love that? And our guests will explain that. Yeah, our guest is going to explain that. Now, the thoughtful

and always outspoken Wolfgang mun Show. You wrote intelligence President Wolfgang, what is going on in Europe today? And how do you explain this process to people? Yeah, it's hard to explain European processes through people in in general. The reason the reason they're having dinner among themselves, it is because they need to they need to agree their own negotiating position. Now, we're not going to get any big breakthroughs on Brexit.

The whole thing is stalled, but there is a is a ray of hope and at least they want to avoid this kind of disaster they had at the most recent summit in in in the Austrian city of Walsburg, where everyone left went home angry and and and resentful of each other. So so the purpose of this meeting is simply to get it over with and have another one in November and December. I think there's a possibility

that they might agree a deal in December. But the main purpose today is for everyone really to shut up who shapes the policy of the because it seems to me we have a good cop in Chancellor Merkell and a bad cop in Mr Macron. How do they reconcile their differences with the seven um In the end, my my hunches that meant the Marcro position will prevail because

it isn't It isn't fundamentally a German position. It is also German position in Germany is a massive exporter, It has a trade circlus with the UK of fifty billion a year. Hundreds of thousands of jobs would be at stake if the UK were to drop out of the EU without a deal. Um people are not making enough of this. This is a really important factor that drives the German position, but also the Dutch position and the

position of the Nordic Member states. France has different interests, but but but a no deal Brexit would be an absolute disaster for Ireland and the EU. Ultimately, you know speaks here with the majority voice. Mccona has no no veto on this and while France and Germany want to do you know, act together, there's no no, no, no need at this stage for a device for a division um. There is a clear, a clear indication that they will compromise.

And this whole readiness to compromise it's new. That wasn't there a month ago when they basically indicated they would now have saying about you know, we're going to extend the transitional period. Now they won't compromise on the Irish PACTO.

There will be an Irish pact stop. They can't just say or forget about this, but you know there will be, there will be, there will they will at least make an effort to make it possible for the British to say with a straight face, this is a reasonably good deal. You invented a huge part of business journalism with your work with the Financial Time stots Land. For years I still lament the idea of them ceasing publication. I believe

it was two thousand twelve. You are one of our great experts on your Germany, your thoughts on the Verian election where I observed a piece of Germany going to the far right. You know a lot of other people and an uproar going to the far left or to the green left. Is it a barbelled Germany. It's getting there, It's it's definitely getting there. But if you look at the extra number of voters, the CSU, which is the party that has been governing Bavaria pretty much forever um

the CDs, you didn't lose that many votes. It was not a great result that the percentage was down by about ten but there were there were at about forty seven and they're now at at about thirty seven percent. Not great in terms of you know, what they had five years ago, but they hang on to most of their voters. The whole participation in the in the election went up quite a lot. They hang on to most of their voters. The party that really lost there were

the Social Democrats. Now they used to be the main opposition party. Now they're down to nine percent of the votes. They kind of collapse, and the Social Democrats also collapsed in the Netherlands and other European Italy, in other European countries. That's pretty much the main story of that. And you know, if you look at the combined vote of the left, the three parties of the left, they haven't changed. It's just that the Democrats are collapsing and the Koreans are gaining.

That's been the main, the main effect, and interesting, the awesome Bavaria. You have the a f D, which is the far right party, a very far right party with some some real fascist leanings. They got about just a little over ten percent, and they're not as strong there as they are Space Wolf. You know, we're out of time. John Farrell's living. We're out of time because this is a spirit discussion. One word answer, please, who lasts longer?

Prime Minister, County or Chancellor Mercle. I would think Quanti would last longer. That's amazing, Wolf cambo Chow, you're intelligent politics. We need to get him back on that writing for the Financial Times and of course a lot of other important duties from Germany to London, Wolfgang Man Show. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple, podcast, SoundCloud, or whichever podcast platform

you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio