Surveillance: No Recession In Sight, Kudlow Says

Pretty decent job report and m This is interesting because we're still seeing above trend hiring, which is odd. When the underplom rate is this low, you tend to think you're gonna see things slow down. The number of people who are sixteen to seventy, the working age population, has slowed down dramatically. It's running about seventy thousand a month. So that tells you anything above that is an economy

that's growing faster and it's training. And that's why the uneplumber rate has come down about a half a point this last year. When this print comes out, though, I just wonder if payrolls growth slows, are we gonna blame demand or lack of supply. What do you think the reaction function of the investor is right now, because I imagine they're going to blame demand. I think most people should be it will be thinking about supply because that's where the constraint is. And that's what all of our

business clients are telling us. They having a hard time finding people. We've got a survey of folks business leaders that is pointing out this that folks are just that's the big challenge for for businesses. So one day you figure you're gonna start to see slower growth and hiring, and it's got to be because of the supply constraint. You think so. But I think given the perception of investors right now, looking at the dates around sweat, there

is a real concern about demand him. You know, I think the issue in the market is really more about the possibility of recession in the next couple of years. Has been that idea has been percolating for most of the last year. So that's why people worry about the yell curve and what the FED is doing. And you might wonder why are people worried about the FED when the real FED funds rator is only zero and it's

because the market has been thinking. As you look at our history, what people observe is that every time we get to full employment or low levels of unemployment, within a year or two, we trip up in a new recession. And I think, I think this what's going on the equity market. It's more about the possibility of a recession than it is about the economy itself today. Well, listen, look at the ice it has come out in the lasts.

This is a market that ignored a really hot I d P print and was lately to focus on what happened with the I s M. I think there's a view amongst most investors and most market participants right now that the labor markets that lacking indicates on what is happening gaps whereas the reality it is. But you know, things like the I s M are more sentiment driven to and they've been out of line with some of

the other measures. So I think, yes, of course the labor market is lagging, and it responds to how business to see things. But but the truth is, I think, uh, we we are still riding a wave of fiscal stimulus from last year, and I think the I really think that the big idea that's brewing in the market is more a worry about a new recession and could the FED be the cause of that by overtightening. What is

your view on the American economy? I mean, I'm JP Morgan is a huge platform as a chasman, you know, economic operation. You're in commercial banking, which is a whole a different wing. But is it a view of two point whatever? Is CLARENI says a solid economy or is itself of that? You know in macro terms? I think it is a spectacular economy. We we've come out of an awful recession. We're back to levels of unemployment that I haven't seen since I was in college, and that

wasn't yesterday. Um And but the big issue in the in the U. S. Economy is all the disruption caused by innovation. So you look at the labor market, it looks great. Unemployment is low, people are getting jobs, helping it signs all over the place. Our business leaders can't know they were having to work hard to have fired pep hired people. And yet when you look at the income distribution of the U. S. Economy, that kind of tells you why it is that there's so much age.

I mean, do you agree with a guilded age? You mean Robert Gordon, your great mentor a Northwestern wrote about this a few years ago. Are we in a guilded age of Eisenhower unemployment rate? I think so. I think I think so, And come on, guys, is the same way not here to poopoo on the economy. I think the economy compared to the rest of the world is solid.

I agree with that relatively speaking. What I struggle to agree with is, how do you reconcile the idea that the real Fed funds rate is at zero and could well be a neutral and yet the economy is spectacular? How do you reconcile those two things? Just the idea that a real Fed funds rate of zero is also neutral? Could economist? Some economists think maybe we've gone through neutral, though I don't think it is neutral. I don't think the Fed thinks it's neutral. If you look at the FEDE,

someone at the Fed thinks it's neutral. Well, some do, but I have thought that for a while, and they've changed your mind a while ago. If you look at the bulk of the folks there, they tend to think that neutral is a real fit a fun straight about a percentage point over inflation. So I I don't I don't think if if Chairman Power we're here and not on air, I think he would. We tried to get him.

He was unavailable today from Atlanta. He's busy with the chairman Banankee and you were shot out to Michael McKee's killing with Robert Kaplan in this power thing? Am I right? John, it's a panel to form a chairman chatwoman. We're gonna hear all of them to government, all of them together understands. Yeah, but security scenario. It's very very cool. But I just wonder whether this is the appropriate forum for the chairman to communicate a change all single a little bit of

a change in communication. Jim, do you think it is? I don't think so, And I think I mean, Congress is the best place to do it, and in their official documents. But I think he's sort of he's I think he has changed the message. I think the messages we're we're closer to neutral than we were, and we're gonna be more cautious and we're gonna be given to guided by the data. It's not no longer automatic pilot.

We have n f I B Survey, the Small Business Survey, and small business folks are a lot more employees, and you think, like, it's not like a hundred employees or twenty, it's like a thousand employees. But where's investment? When you're traveling all over the country. I get the idea that

there's help. Why don't we can't get jobs? But is there really an appetite to invest in the two thousand to be more cautious, particularly in this environment, because what they what they think is going on, is that the markets are telling them you've got to be prepared for some possible recession in the future, so that automatically makes

you more cautious. But at the end of the day, your investment decisions are going to be based on what you think the market opportunities are, and they're going to be guided by what they see on the ground, not what they hear in the airwaves. Do you have a train to catch? Right? Do go get a train? Thank you so much that we were thrilled they could join

us here on job. Culling the reserve requirement ratio so effectively culling the amount of cash lenders must hold as reserves by one percentage point now will happen in two stages over the next month. Miranda Car joining us from High Tank International China macro Strategists. There, Miranda, great to have you with us on the program. Let's talk about this. Do I view this as easing or something seasonal? What is this? Well, there's two You always get a squeeze

in China's markets ahead of the spring festivals. People take money out of the out of the banking system. But the fact that you've had UM such one percent across the board for all the banks, it's it's more than offsetting the both the liquidity squeeze and the thing about in our cart it's permanent. If they just wanted to provide short term liquidity, they could do to that through open market operations. So this is UM an economic boost,

not just a liquidity injection. As a good point, and I do wonder whether what we've seen so far, because we have had a series of triple our cuts over the last couple of months, whether that's enough to support this economy, to support a turn in this economy, is it? Miranda, Well, they need to push more money into the students, to the banking system and support some of the infrastructure investment, which is one of the key things to offset the projected slow down going to this trade and sort of

lower lower exports. I mean, because you're already seeing the slowdown coming through in the commodity prices which have been incredibly weak um as we come into as we come into January, UM, so there needs to be more shovel money shoveled out. This is also just to offset the shadow banking slow down. This is a really important nuanswer to mail. This is not about commodities, it's not about food, it's not about the people of China small business data,

da dada. This is about the debt in the banking system, isn't it. Yeah. And the thing is they've tried to they're trying to drag the monetary system away from the you know, things like the trust lending and the shadow banking and the online financing and drag it back into the banking system, but also put into the cabin Don't they have to legislate that and not do it through a monetary intrusion, So they they I mean, they don't

need to legislate that. I mean, a lot of the so a lot of the slowdown last year was all about regulation. Um, it wasn't you know in terms of it wasn't a monetary policy tightening. They they they regulated and so they're sort of the regulation really squeezed the sort of off the shadow banking system. Now, the fact that they've eased that, that's not going to give a huge amount of boost into that sector, but it is going to give more more system wide liquidity. You are

experts on how they clear their systems. Is this really what it's about, is they won't let banks fail and that they just haven't cleared out the debris over side to in twenty years. And this is a price they pay right now, is they've got too much garbage businesses out there. Well, you the thing is they've cleaned out a lot Like a lot of the garbage was which everyone was focused on from the two thousand nine stimulus

package was from the local government financing platforms. Now that's been that's been hived off into fiscal bed so therefore it's been dealt with. It's basically been um, you know, put on the government balance sheet. So that's that's that's been in effect cleared up. What we're getting now is the first wave of private sector defaults and it's a small and medium sized private companies which are really struggling

at the moment. And now they've had when they had the shadow banking UM taps turned off last year, they were the ones that you saw the rising bankruptcies, really struggling and where the slowdown was. Now the question for China is how they get money into back into that sector so you don't see a huge wave of bankruptcy is coming through and much more pressure. And that's to

be honest, the big big issue for UM. You know, did the domestic economy this year because they're trying to get money into that sector, but some of the it's a really difficulty, don't have the mechanisms to do it. Some miranda just to be clear, to summarize and conclude the deleveraging effort, and the Chinese authorities slightly capitulated on that. Yeah, I mean basically deleveraging is not seen as a it's it's the saying that we're not going to go into

a big monetary boost. But obviously the deleveraging and the really squeeze that we had last year, it's it's basically that's come to an end and we're now into much more accommodative phase. Now, this has been brilliant round the car, Thank you so much. At the high time. Why don't you bring in professor Krueger years he looks at a

make America Great Again employment report and what are your thoughts? Well, my thoughts are a little bit cloudy because at the BLS web page, I guess went to a said we're sorry, unavailable. But from the top line numbers, this is an excellent report, and I think it shows that the Fed has been pursuing a very prudent course. No, it shows that the BED have felt that the labor market continues to be strong, the real economy is moving along. Uh, we had stimulus

at the wrong time. Um. But UM looks to me like this is a big win for the course has been on three seventy thousand, three twelve plus fifty eight. Even I can do the math three seventy thousand left. I mean this this really limits Chairman Powell's conversation this morning about stability or a rate cut. You just don't do that into a three seventy statistic, do you. Well, I think the Fed is going to be more data dependent. I think they're not on a pre set course, and

we'll probably see a fewer rate increases. And the headwinds that we have been developing late in December earlier this year aren't reflected in this report. But it shows that the actions that the BED was taking through the end of last year, it seemed to me to be pretty well justified. Alan Krueger, Princeton, Thank you now joining us Michael Darta. As we spoke to David Rosenberg earlier. Mr Darta at m CAM Partners is decisive in writing economics

and linking it in to market performance. Michael Darty, if you see a bang up jobs report, I saw one headline that called it a blowout, that's great. Can you link it over into equity market performance? I can sure try, Tom, Thanks for having me on. So we have a bit of a strange situation here. I mean, these numbers are white hot, very very very strong. Yet financial markets for some time have been basically telling us that growth is

going to slow. You simply don't see it in these numbers, and that really puts the FED in a bit of a pickle. Um. They say they're data dependent, and that means if they are going to shift course, they need

the data to tell them to do so. Unfortunately, data lags financial market indicators, and so you know, we basically have the situation where the FED is going to be incredibly reluctant to really shift policy in a dovish direction, despite the fact that you know, we've got parts of the yield curve that are inverted, significant stress and credit markets, slow down, in liquidity growth, all those things tell us

the economy is going to soppen this year. You and I are looking at the same quick data we'll see much more earlier. I'm looking at leisure and hospitality up in very few negative numbers on the screen. But if you look at now and over the last number of months, what portion of the big job numbers that we're seeing our quality jobs or are they all people saying, you know, what would you like for dessert? Well, you know, we we you know, we do have some low end jobs.

We also have higher quality jobs. The labor markets tight enough now to raise wages um so we are seeing workers wages move up just over three percent year over year. So you know, this is outside of the recovery range. For most of the expansion has been close to two So we are moving up now, and that's what matters. We also had a situation where nominal GDP growth last year was above five, very strong, basically the strongest of

the recovery. The question is this year in a slowing nominal growth environment, um, how does the FED handle that? And how do you look forward? Because if it's just a matter of celebrating stale data or end up with a policy are if you're just joining us, Michael Darta, mcamp partners with us on this job to a future. As were oh, up thirty is up twenty seven right now, you don't see any equity markets with the bond market. Off the headline, we had a huge move tenure yield

up seven even eight basis points. That get back a little bit right now. But two point on the tenure yield, real gyrations yen one six yen is a little bit weaker. Off the jobs report, I'll call that a fractional move as well, Michael Dart. And when I look at the numbers, and I'm just doing a quick eyeball here, folks, I see the Barbell economy. I see media and duration not doing much. I see you know, the marginally attached unemployment U five. I see the all in U six data

really not improving all that much? Is it a tale of two America's Well, Tom, I I think it's just a matter of some of the standard employment metrics not really capturing the depth of depth of the of the downturn and the slowness of most of the economic expansion. My favorite metric is the employment the population ratio for

prime age individual to fifty four. And you know, we're just now starting to get back to you know, to to more normal levels on that one, but it's taken quite a long time exactly by no means that you know, are we at levels consistent with record employment? You read my mind? Yeah, Michael, you read my mind on that. I did not that that's sharp, but something just like it of five to fifty four prime employment in America.

This morning, I took it back to President Truman. And the answer is is all our listeners know, the vector has always gone up. That's the American way. We always create more jobs. And there's been a leveling from two thousand and employed twenty five to fifty four in this nation, even a decline at one point, but let's call it a leveling. For radio. Fine, there's been a leveling. Let's go back. Why did we level out in employed prime

Americans beginning about two thousand. Well, I mean, so the starting point there literally was the tightest labor market since the since the nineteen sixties, and well it was just to some degree, you know, and then we had a you know, a very deep, very very long downturn in a quite slow recovery in that prime major ratio. Because you're looking at how many people are employed relative to their population, it's not distorted by dropouts into and less

distorted by demographics. And so you know, to the extent that we have people that are on the sidelines due to opioid addiction or lots of skills. You know, your previous guest, Alan Krueger has done a lot of work on that. You know, it's really captured in that ratio. So we are recovering. You know, we've recently hit a

cycle high on that ratio. I don't have the updated data on my Bloomberg screen at the moment, but recently we finally got back to the pre crisis media we're not at We're not at levels um that you would expect to see with the unemployment rates of FO We got so much to talk about very quickly, your Michael Darta Howard Chairman Powell fold this wonderful employment report, this blowout number into his comments this morning with Bernanke and yelling you know, I think you know, he's sort of

walking a tight rope here. I think he's you know, certainly not going to want a jostle markets anymore. That reacted very poorly to his press conference after the last bad decision, So I think he's going to try to tippo to a bit. He's probably not going to weigh in directly on this number, and he'll try not to weigh in directly on, you know, on on recent market dynamics. But you know, he may be lad there, so we'll

see how it unfolds. Michael Darter, thank you so much for your analysis away from your clients here on the job, say Michael Darted with m CAM Partners is well, here is administration. Now. I'm really pleased to say we joined now on Bloomberg Television and for our listeners across the world of Bloomberg Radio by Larry Cudlow, the National Economic Council Director, and he joins us now. Good day to Larry, Good day, Thank you, for having me. Always great to

have your Larry. Let's just start with that blow out payrolls report. The consumer in the United States looks really strong right now. Do you see that still a sustainable Larry? Oh sure? I mean look at first of all, if you if you break out some of the key pieces in this report, as you know, now, do we get the three and twelve thousand jobs the prior two months were revised higher, so that put another fifty eight thousand

jobs in. People are streaming into the workforce. So with where ages, you know, year on year average hourly earnings, what three point two percent hours worked are very significant two percent you put that together the income or a proxy for wage income as I've called it down through the years, that's five point two percent nominal and the inflation rate is only about I don't know, a bucket a quarter, maybe one point four percent. That's a lot

of consumer firepower. I think you saw that during the holidays selling season. I think it's going to continue. I just want to say, you know, I appreciate your characterization a blowout. It was a blowout, but but look, I just want to editorialize. I know this has been a gloomy period. I know people are concerned about the stock market. Okay, corrections come and go, nobody particularly likes them. But there

you have it. There's no recession in sight. If I may, this is so loose talk about recession with a lot of very I don't know, not hard day as surely there's just no recession. The American economy is growing three solid, job games are huge, and businesses are investing big time. So it's a much better, more optimistic picture than what we've been getting in the last month or two. So let's talk about that. Because you said back in July of last year that the boom would be sustainable for

as far as the eye can see. Now we're often overtaken by events. And I just wonder whether we're being overtaken by events now, do you still see the boom is sustainable as far as the eye can see, or do we need to temper expectations a little bit? Well? I hold to that. Um. You know, if I if I get a cutload forecast right for a few months, I'm going to write it as long as I possibly can. They're not always right, as I think, you know, but I think look, we have a set of economic policies

that are pro growth. I mean, this is President Trump's revolution. If you will lower business tax rates, roll back all manner of regulations. Uh, small business taxes coming down, individual taxes coming down. As I say, the regulatory rollback is huge, unlocking the energy sector. Now, I'm not gonna spend twenty minutes on this, but let me just say these are pro growth policies. And for those skeptics who say, well, it's a sugar high, it's not a sugar high. These

policies are going to remain in place for years, for years. Okay. The business tax cuts I guess have to be extended in this is We've got a long ways to go. I mean, hopefully they'll be made permanent. But you see my point. The policies are intact. The president is you know, in no way would he tolerate efforts by the new Congress to raise taxes or raise regulations and so forth. So why can't I ask you, why can't the incentive effects they have given us the supply side boom without installation?

Why can't that continue for as far as the eye can see? Well, this is the pushback, Larry, This will be the pushback. The downside surprises we've had elsewhere in the economy, housing and real estate, the industrial sector, retail

and wholesale sector, services, and business cycle indicators. What is happening with the yield curve, the inversion we see at the front end, the slow down in China, the rollover and crewed which, as we know, is no longer the net net positive for the U. S. Economy that it used to be. All of those things A big head

wins into the U. S economy at the moment. And I think the real debate happening with economists, quite honestly and genuinely and stripping out all of the politics, is about whether the U. S. Economy can decouple from the rest of the world. The rest of the world is not looking great, and the answer for many people is know why is the answer? Yes, Larry, Well, look, I agree with you. The rest of the world is not looking great. Maybe we'll talk about China and trade in

a few moments. I agree with that, But look, my basic model has always been that the US leads. It's not that I want everybody else to do poorly. I don't. I want booming growth and prosperity worldwide. But unfortunately there's a lot of policies out there that aren't working all right. Second point, the United States, we are the locomotive. We are the ancient that leads when we get it right.

I learned this from Reagan many years ago. When we get the story right, when we go free market, when we go incentives, when it pays more to invest or work the extra hour. You saw phenomenal wage increases today and along with the labor number. When these things go right, we will go right and then and then hopefully the rest of the world will follow if they don't take anti growth policies. So I agree with you globally, but I gotta say that the United States can go it alone.

We can shoulder the burden of the world economy if we must. Yep, I'd rather these countries, you know, followers. So you see the point I'm making. If we are on the incentive track, if we're on the growth track, if we're on the prosperity track, will be just fine, okay, and hopefully our success will even help their success. There's too much gloom. There's too much gloom and doom. I prefer boom. I think everyone watched the watching this program.

Larry with the exception of people with big shorts would love the boom and not the gloom at the moment, though, when you look at what's happening with Apple, Apple coming down and saying there's a big slow down in China,

bigger than they anticipated. Also pointing towards the trade situation, and your own colleague, Kevin Hassett saying the following yesterday to CNN, there are a heck of a lot of US companies that have sales in China that are gonna be watching their earnings being downgrading next year until we get a deal with the Chinese. To me, that's tacit. Admit that the trade debate, the skirmish with China is impacting big US companies and it's feeding back into the

U s economy. Larry, Well, look, let me just back out. You've got two issues here, both good questions. First of all, Kevin has it, my dear friend in colleague, We went back yesterday and took a look at the profit numbers on a worldwide basis. So if American companies operating in China had zero profits zero, that would only affect one point seven percent of total US profits, a very small fraction you follow me. Now, It's not gonna be zero,

It's gonna be better than zero. So I think it's a little easy and inaccurate to just say all these American companies are gonna crash because China's economy is very weak. I grant you that, but I don't think that profits. I think Mr Tim Cook, who was a friend of mine, he's a brilliant businessman. I think Apple may have been overextended. I'm not here to get a second guess his business plan and so forth. I'm just saying Apple is not apocryphal.

And the slowdown in China, which is quite significant, Uh, you know, they've lost their They're not doing market based reforms anymore. If they would listen to US and negotiate with us on trade, we would help them enormously with technology. I p tech transfers as well as free market approaches.

They've gone off the track. That's the Chinese problem. And by the way, I just want to add, not only am I not worried about American profits and China's I note that President Trump has been rather optimistic with respect to the China trade talks. We are set sending a delegation, as you may know of deputy level people to China this weekend and next, and then the Chinese will reciprocate

when they come here. President just talked to Sheet. So I don't want to get ahead of the curved, right, all these good ideas on no tariffs, no non tariff barriers, let's stop the technology stealing. I don't want to get ahead of that curve. Their enforcement issues, timing issues, et cetera. But but, but, but I think that President Trump is more optimistic, and I think China needs the kind of pro growth trade reforms that President Trump is suggesting. Their

economy has been slumping for years. Take a look at the charts on investment in sales. What car sales fell absolutely twenty They have gotten off track. So we could help them if they let us. And I don't think there's a catastrophe in the making if they do let us. But I'm not going to get ahead of the curve. Let's see how it works. Well, you know what encourage you to get ahead of the cub Oh, he wants some insigns. And what we're looking to achieve next week.

What is the minimum condition of success for the lower level talks to generate some high level talks in the coming months. Well, that's a good question, and it's a hard question. Um, you've got different buckets of issues. You've got your commodity buckets, agriculture, industrial supplies, capital goods. We are asking China to significantly reduce their tariff barriers and their non tariff barriers very very important. We'd like them to reduce their subsidies so they don't flood the market

with excess goods and services. That's one very important area. Another important area that will be discussed and vetted in this Deputy's meeting, the whole issue of I P theft um. By the way, that may be part of the Apple issue. Uh. I don't want to surmise too much here, but Apple technology may have been picked up by China and now China is becoming very competitive with Apple. You've got to

have a rule law. There's some indications from China that they're looking at that, but we don't know that yet. There's no enforcement, there's nothing concrete. Finally, among other things, the cyber hacking has got to stop, and and let's force face it, ownership has got to change. We are asking them to let American companies own their companies, so there's no forced transfer of sensitive technology that is hugely important. Now preliminary talks have been I would say a little

more optimistic than usual, but there is nothing definitive. I think Ambassador Lighthouser would tell you that there's nothing definitive, and again, trust but verify. I learned that under Reagan, and we're gonna have to have it here with Chinese trade talks, so we can help their economy if they let us. But we don't know this yet. There are some big claims and some big goals for next week alone.

Let's get to another potential meeting and not between the President of the United States and President She between the President of the United States and the Federal Reserve chairman. Are you working on making that meeting happen? Larry? Could that be happening anytime soon? I don't want to get too specific and too details on that um the details haven't been quite fixed yet, but I think both sides would like to have a meeting, and I personally think

a meeting would be useful. It's just my personal opinion. I prefer to talk rather than than not to talk, so I'd like to see a meeting. I can't be more specific than that. I'm sorry, it's just that, Um, the details have not been worked through yet. Well, final question, Larry, what would that be beneficial to the Federal Reserve? I beg your part? Why would that meeting be beneficial for

the Federal Reserve? Well? Look, um, in in diplomatic terms, what's the phrase of frank and candid exchange of views? I think it would be nice to have a frank and candid exchange of views? Shall we say up close and personal? Um? I think President Trump would benefit. I think j Pal would benefit. Can I just say one thing? I'm all right, you know, I don't want to predict anything here in a sense, I can't really predict a meeting, although I think what will happen. I just want to

note that, you know we're in a boom. You had this blockbuster jobs number today. There is no inflation. There is no inflation. More growth, more people working does not cause inflation. These old Federal Reserve models are outdated and have proven to be incorrect. Right now, the inflation rate is probably less than one and a half percent, even while unemployment is low and jobs are staring and we're growing at three pc. Why do I say that because that is a point of view which the President holds,

and I think the President is exactly right. Uh, this is supply side revolution. We're creating more goods and services. We're increasing the capital stock and business investment, and that's what creates incomes and jobs. Uh. I'm sure you remember Jean Baptiste say he wrote it in the early part of the nineteenth century. He was a French economic philosopher. I met him a while back. You perhaps did, also, says Law. Supply creates its own demand. This is not

government spending from the demand side. This is lower tax rates from the supply side, and it is businesses that ultimately drive the economy. I would like j. Powell to hear that argument from President Trump, who knows the argument very well. Now, Jay, I think does too. He's a very smart guy. Okay, So I'm just saying they can

benefit from an exchange of views. Let's understand that more people working and solid three percent growth is not is not causing higher inflation, and therefore FED policy should take that into account, says Law. We may have to go and commune with him to fully understand it. Hey, Larry, you and I could go on forever, but we both get in trouble, me with my producer and you with

your pr Thank you very much for joining us. A happy New Year to you said, and thank you very much for giving us your time, as you always do. After every payrolls Friday m 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 Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio