Surveillance: Recovery Risks With Rogoff

So if you believe, let's just say you believe that we'll get a rate hike from the e CP at some point in this cycle, after that, the e c B will still be reinvesting the debts on its balance sheet that they've been buying over the last year. I want to bring in alberta gallo of Algebras on this albert So the CP is going to be in this market for a long long time. How does that shape

your view on fixed income in Europe? Good morning. Sometimes the most interesting things that come out of central banks are the things they don't talk about. And there's two big questions here. One is how long are they going to keep going with the emergency purchase program even after the pandemic is over, and it looks like, as you said, that that's going to be with us for a long period of time, even beyond two two UM. And the second one is what happens if there's another crisis. Now,

interest rates are already negative. Net supply of European government bonds is negative. This year, d c B is buying more than the governments are issuing, so you know, they've got to think about something new. And that's where you know, some warring scenarios come up for investors, a very very strong financial repression, very low yield to be inflation, even though inflation is pretty low in Europe. Bet So we've got to jump in because what you're talking about is

so important. Are you saying that we might not have seen the end of this and that's something new might be coming And I'm not saying anytime soon. I just want to understand the kind of something you're thinking about. You're thinking about equities. Surely we've already done everything we can do on the fixed income side. You know, the biggest question here for investors for the next years is whether governments are going to be able to beat secular stagnation.

Now it's it's a moment of celebration in the US with the new presidency and probably the Biding administration has a shot at this with a lot of fiscal stimulus and infrastructure spending. But if you look at Europe, the recovery plan is still very very small, and we've got

German elections later this year. It's not exactly the year where you know, the European Union is going to splurge on on fiscal so you know, the things that doesn't talk about is how are they going to get inflation back up, how much more fiscal is needed, and also you know what's the end game for the p P P And it looks like, you know, unless you're seeing Germany spending a lot more, which is unlikely this year.

It looks like the emergency purchase program is going to be with us for a much longer period of time, which means savers are getting returns well below inflation. So you know, one of the casualties of the pandemic has been the risk free rate. It's now very very deeply negative and it's going to continue to be like that, especially in Europe. It sounds like a process in search of a theory, albert Ogella, what's the underlying theory here? They literally making it up in the United States of

Europe as they go. Our theory is interest rates at the extreme become counter productive. So you know, you've got Argentina with very high interest rates. In theory, they are supposed to cur be inflation, but at some point you have a compounding impact and they become inflationary. Conversely, when you have deeply negative interest rates and they are persistent, they create asset bubbles which burst and then create deflation.

They keep zombie companies alive, which reduced productivity. So you really need to shake up the system, do reforms, invest in infrastructure and improve productivity, which the US has as a big shot at with this administration in Europe. In Europe, it's it's much it's a much tougher game to play this year. Meanwhile, Alberto, you have a rather difficult decision as a portfolio manager of whether to just go by

the central banks and ignore risk. At a certain point, it makes no fundamental sense for Italian bond yields to be getting lower with respect to German yields as their government basically threatens to fall apart. This is because the e c B has been buying more of their debt. Do you lean into that as a portfolio manager or

do you say risk matters? We say risk matters. Last year we were over half in cash in our own Globe of Credit fund before the pandemic hit, and we had a lot of protection on And you know, we're getting to a point where there is where the odds are very much skewed against the investors. So you can make two cents if you're right, but if you're wrong, you can lose five or ten. And the BTP example is spot on. So we're trying to preserve the odds to be at least equal or in favor of our investors.

So we're not buying BTPs here, we're not buying long data investment grade debt. But there are some areas where they're still upside in some of the perty free countries, in convertible debt, in some of the companies which are going to be the companies of the future. So you know, we're we're pretty cautious, but we still have some upside bets on the reopening of the economy. Alberta Smart, Thank you so much. Alberta god with Algebras Spence here on

an easy be looking for a solution. Speaking of hate, Mally loves to send me hate, Helen Apple. Michael Holland joins US now Holland and Company. He's paid a lot of taxes on capital gains over the year. Michael, what do you do with the stock that's a melt up and you've got a tax obligation? Do? How do you handle that? One of the things you can do is to choose your favorite university. You had the Lafayette Endowment

head on a few minutes ago. Give your appreciated stock to you the university of your choice for financial aid for some of the students. How is that you get the tax right off and help education and the equalization of opportunity that Jonathan Farrell was just talking about. Well, Michael'll let you worry about how to deal with the tax bill. There is a question of how to deal with risk right now and how to even assess it.

And I gotta say I was really struck by Seth Klarman this about post Group when he wrote in the Financial to note that was obtained by the financial time, so so much stimulus being deployed. Trying to figure out if the economy is in recession is like trying to assess if you had a fever after you just took a large dose of aspirin. He likened the current situation to investors being frogs boiled in water slowly becoming desensitized

to risk. How do you navigate as an investor? Seth Klarman has been brilliantly investing for decades and would never ignore what he's saying. I think right now, he said, I'm mindful of where the market psyche is, and with Janet Yellen pairing up with Jerome Power right now, I think they are panacea for people concerned about an overvalued market,

that the market could become even more overvalued. Uh, the trick will be a year from now when we I hope we're talking that that the the economy has fulfilled some of the heightened expectations about when the vaccine gets out there. I was interested to see a Bloomberg blurb yesterday about Amazon now moving in to help out with the distribution of the vaccine. I think we could get some positive surprises rather than negative surprise over the next

couple of quarters. On the vaccine front. If that happens, I think some of the uh, the animal spirits in the economy may start to waken up if the gift me for base so cynical, Michael, But do you think that big text says the rioting on the wall? And why is Amazon wait so long to come in and talk about this what it swits? And White so long to band Donald Trump? It all seems a little bit convenient that all of this has happened basically in the

month of the incoming administration is coming through. I think your cynicism, John is well placed. UH. And I think that the UH people who run these companies have seen where we're going UH. And I think there was more than just Netflix yesterday when the ox like Amazon cloud to the upside dramatically. I think there's a new sheriff, and I think it's I think it's going to be I think that the tech companies are going to have some some come up and over the next year, but

I think overall things probably are gonna be okay. Meanwhile, given your role at State Street UH and at some of the biggest asset managers over the years, seeing the transformation in that industry, what are you expecting in the years ahead under the Biden administration when it comes to consolidation and asset management into the hands of just a few behemoths, I think so long as the behemous behave themselves, it's difficult to make a serious political headway um in

terms of attacking them. I think the which happened Lisa over the last decade is, in particularly the last few years, UH is a dramatic favorable, dramatically favorable position for the people listening to the call here watching the call with respect to they just don't pay very much to have have their money taken care of, and so the fees continue to cascade down. It's a very favorable development. So the behemous if they if they don't manage it right.

And we just had Jonathan talk about how the texts are trying to manage right in a new environment. I think that the big people like State Street and Van Garden Fidelity will continue to do the same thing. They're smart people running these places, and as long as they keep making it better for all of us is who are investors. I think they reduced the possibility of draconian things happening to them. Michael Grant's a catch up as always,

a real gentleman of Wall Street. Malcol Hollands Macaoel thank you, sir, thank you very much. As I said, we've got some European yields moving as well, uh this morning, a lesser negative yield if you will, in Germany. To distill the sharp distinct, and Jane Foley joins us with Robbo Bank. Jane, I know it is about effects, and we want to get to that Paulsweenian myself. But what I would really want to focus on here is the yield differential, or

the guestimate of future inflation. I went back pre financial crisis, and the five year five year forward guestimate of inflation slash interest rates has never been wider. Higher inflation in the US, a lesser inflation in Europe. What does that signal to you at Rabble Bank on foreign exchange, Well, quite simply, it means that the euro is likely to

remain well supported against the US dollar. And to be honest to him, I think that this is really the crux of the story from last spring when we saw that will drop in US real interest rates and and there isn't any sign yet that that's going to really reverse. So at the start of the year we had this bit of a correction, and you're a dollar. We had a lot of new news and make adjusting their positions.

But fundamentally that story in real interest, it remains unchanged, and therefore it's likely that the dollar is going to remain soft until it does change. This is such a critical question, folks. You know, if you say to me, somebody wrote a forty two page year end study and they got to redo it into two thousand twenty one, Jane, I'm going to suggest the rewrite's going to come in July, and with that is the humility of the ex exis. Okay, you can say dollars stronger, you can say rates higher

in the US, but there's the when of it. How hard is it to get those two together, the movement of a given idea and also the when of it. Well, you know, I think the markets already starting to talk about, you know, changing fundamentals. But if we listen to policymakers, if we listen to power, for instance, a week or so ago, that doesn't seem to be any real chance that we're going to see fundamentals actually changed. When I talk about fundamentals. I'm talking about, you know what the

state could potentially do on rates. It's going to be a long time before they do something on rates, that's the way they're telling us, and of course on inflation that perhaps this is a big market story. I think for this year. The market has already got a bit more excited on the prospect of US inflation, but inflation prospects in the Eurozone remain very soft. And again we get back to the story that we've had running for a few years, well before the pandemic story of the

possibility of Japanese depignification in Europe. This this this risk that we have years of low growth and low inflation with the EU c be not necessarily having the tools to promote inflation. And if that's the case, then real interest rates in Europe may remain promoted by this sort of disinflationary or deflationary effect. So, Jane, that's kind of

where I wanted to go. I mean, I was, I was listening to Christine Leaguard this morning has sounded awfully like Fed chairman Pale in terms of lower for longer here. So where are currency traders placing their bets for the next six or twelve months. Again, I still think it's going to be on the week dollar story in a Again it's it's not necessarily related to the nominal yield story. And and most of these central bankers are still saying

more or less the same thing. We saw the Bank of Japan this morning again suggesting they could do more if if conditions need be lower for longer. That's the

that's the story for most central banks. But if we look at inflation expectations, it appears that the US has got the head start on I'm really being able to promote that if we were to talk about, you know, the change in um, the inflation outlook from the UCB or from the Bank of Japan, and the markets going to think, well, you know what, that's a moot point. They're never going to get to two percent, at least

not you know, for the foreseeable. But in the US, the market seems to believe that, and that is perhaps why we have real interest rates, you know, so low in in the U s. And that could stay the way, stay that way for quite a while. Jane, We you know, we just obviously had the inauguration yesterday at President Biden here trying to be aggressive on the fiscal stimulus side. How's the FX markets kind of pricing that in. I think they have been for a while, at least since

those are Georgian runoffs on the fifth of January. And clearly, you know the market is going to be watching the Senate to see how much push back there is. Clearly that there needs to be the support of some Republicans in the other I have to make sure that you'll go through. We don't know whether or not they're going to get there for one point nine, but you know that the market is optimistic that there will be more fiscal spending. We listened to Janet Yellen earlier only the week.

The market is hopeful of that, and I think a lot of that is probably now in the price. Jane Folly've got to leave it there. Thank you so much. Jane Foley with Roba think much to talk about here, and we are now thrilled to bring you on any number of topics. Kenneth Rogoff of Harvard his service to us in Davos. You know this is the Davos visit I guess this year. Ken Rogoff as well, can you

have written over the years on our fiscal responsibility. How out of whack is our fiscal economics as we enter a new presidency. Well, we're in a wartime situation, and in a situation like this, you do whatever it takes and you figure out how to pay for it later. Um. I think you know the thing that's probably most out of whack is we probably need a more robust system of taxes and transfers to deal with inequality. But in the short term, there's really very little alternative to continuing

these deficits as long as the markets will permit it. Well, as long as the markets will will permit it. Joe Stiglets to join us later today. I remember conversation ken with you with Professor Stiglets and Dabos, where you were in agreement on an optimism to grow our way out of our fiscal difficulties. Are we going to be able to do that with the new potential GDP of America? Now? I mean, I think that's not the point at the moment, with the pandemic is not over. This is the worst

crisis I've seen in my lifetime. I think since the Great Depression. This is worse than the financial crisis. Uh, And we have to try to have a robust plan for dealing with it. And this is this is catastrophe relief, this isn't you know, stimulus. Yet I think we have to get there with infrastructure spending and such, and the President Biden has a lot of ideas about that. What it What is true is as we emerge from the wartime economy whenever that is, you can't stay permanently on

wartime footing. You can't solve every social problem, the environment, everything simply by running deficits. At some point you have to make choices among policies about what you want to do and what you don't want to do. Uh. You probably, as I said, to deal with inequality, need a more robust system of taxes, transfers, providing more government services. And I think that's going to be a tough road, but that's really the direction we need to go. Do you

think that Joe Biden will look at it? And you know, again, what does it mean for him being able to actually push it through? Who knows? I mean, you know, I'm just relieved that we have a president who comports himself with dignity. Yes, Trump was not wrong about everything, but I think really the real issue was the threat to

the constitution, Uh, the institutions, international institutions. It's yes, it's sometimes good to have somebody who comes and breaks things up and shakes things up, but it had gone much too far. And Biden is so levelheaded. I thought it was actually a very inspirational speech that he gave yesterday, highlighting at the as issues that that's the most important thing the president can do. And I think if you don't have a good system of governance, you will not grow.

You were talking about Italy earlier. I mean it Italy certainly struggled with trying to balance all these competing interests and it's one of the reasons it's growth performance hasn't been so great. Uh in certainly in recent decades. But Professor, when you look at the spending, where does that spending need to go in the US infrastructure spending is it's actually internet infrastructure spending to make sure that people have access to the worldwide but web, especially for education, Like

you know, how should the US spend that money? Well, I mean again, the pandemic is the first thing. Uh. The Gates Foundation has done an estimate. It seems much too loud to me that it would cost billion dollars to do international distribution of the vaccines. Suppose it's two billion dollars that from the Europe in the United States would be money very well spent to try to tame this thing. But yes, I mean infrastructure. I think if

it's genuinely productive, is spectacularly useful. And I think you're right a broader notion of education. I think the future is not just bricks and mortar education, but online education for children and adults. Can you know I said your Curse of Cash is the bravest book written on economics in a generation. Clearly Christine Lagarde has read The Curse of Cash. Do you link bitcoin holy into criminal activity? And do you consider the new price appreciation of bitcoin

to be speculative? Well, I certainly think I agree that it's speculative. I've been a bitcoin skeptic, and certainly the price has gone up. But there's sort of an ultimate question, what's the use? Is it just valuable because people think it's valuable, That is a bubble that would blow up? Um, I can see bitcoin being used in failed states. It's conceivable, you know, it could have some use in a dystopian future. But I think the governments are not going to allow

pseudonymous transactions on a big scale. They're just not going to allow it. Uh. The regulation will come in, the government will win, It doesn't matter what the technology is. And so I think, you know, over the long run, if there's not a use, yes, the bubble will will burst. I hope there's not such a valuable use, but I

suppose it's a hedge against dystopia. Would you advise Secretary yelling at Treasury that the U s should be proactive in instituting that regulation which could collapse the price of cryptocurrency, but they are. Yeah, yes, I mean that's that's just true across the poort. It needs to be regulated. Uh, some some of the perhaps stable coins will you know, make it through this. But I think, of course that every central banks working on this. But I was, I'm

in the G thirty. We did a report on this, UM, so you know, I wouldn't say it's so crudely it's just to say make the price go down. That's not the purpose. But you know, you need to have the transactions obey the same kinds of information regulations as everything else. So, Uh, I think governments are on it. Uh, it's not being used that widely, and I suspect although the bitcoin lobbyists have been successful in getting it in some places, that won't last. Can we go talk to me about how

we can strengthen the financial system from now? I know the G thirty has also done quite a lot of work on you know, worrying about solving see maybe worrying about zombie companies. Are we in a better place now that we thought we would pre pandemic? Well? As this lingers, I think some of our defenses will weaken. I mean, part of what we did in Round one very effectively was the Federal Reserve basically said I'm going to guarantee junk bonds. I'm being just a little bit exaggerating, but

they did virtually go to that municipals. They ended up not having to buy very much. The market responded. But I think as things go on, there will be bankruptcies, there will be things, and that the Treasury is going to step in some places. The Federal Reserve is not in a position to lose lots of money, and we could see quite a lot of financial strains as this goes on. That said, a lot of the problems are really at you know, among low income small businesses, and

they're terrible for the country. They don't necessarily bring down the system quite the way that you know, full on banking crisis does. But of course that people can't pay their rent and they're not paying their rent, eventually you're going to have real estate bankruptcies, etcetera, etcetera. Is there anything that could be systemic? I mean, of course in this situation, when you have a shock of this magnitude, there's no telling what direction that's going to move things.

I think as long as interest rates stay this low, the government has sort of a lot of power to deal with things. If at some point, for example, Asia grew much faster for a sustained period and Europe and the United States didn't, then I think eventually that's going to put a lot of stresses on things, and interest rates will pick up there. You know, interest rates are below long term trend. Even if long term trend it's declining. We had declines like this before. Uh, they're at least

substantially reversed. Eventually over a long time. That's going to happen. Ken Rogoff, thank you so much for joining us to stay after inauguration He is at Harvard, and I can't say enough about his effort. The Curse of Cash still very timely. 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.

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