Surveillance: Risk That Fed Could Go Faster, Kiesel Says

of course, on the Bloomberg. We start this morning with the markets. Jason Turner, chairman of Fertiguous Research Partners, who join us here in the studio in New York. Morning. Jason, good morning. Let's start with just the peculiarity of this particular market, the rhythms of course cycles to the market, especially the beginning of the year. When you look at the market today at positioning at the beginning of two thousand seventeen, how different is the beginning of this year

from years past, well, certainly compared to last year. I don't think it could be more different. As you might remember, the Fed tightened December of two thousand fifteen, and then it's signal that it was going to tighten four more times UH, and that uh, you know, to use a technical term, freaked out the emerging markets and the commodity markets. UH. And the FED had to be level too, I believe. But and you wind up having oil down to twenty six dollars before too long and the FED reserving um

reverting course. This is very different. Of course. I think there's a lot of attendant optimism about the new administration in terms of what it might do with regulatory policy, what will do with fiscal policy. Trade obviously remains a big question mark. But the FED is i think, content to once normalize rates, but is content to uh let inflation run a little hot. I'm looking at your most recent note and politics right up there at the top.

But you note here that two sixteen a year in which a well established political class learned that democracy was its achilles heels. You're talking about the FED wiser if you've got politics. So what's the bigger driver here in two thousand seventeen of those two things? Yeah, I I think central banks, and I think correctly we'll take a back seat to UH to fiscal and regulatory and trade policy. And I think it's it's high time Certainly, the Fed's

balance sheet UH quintuppling over the past past eight years. Certainly, I think it was for all the right intentions. I think there was a sense in which, and I think Japan indicated this last year with its experimentation and negative interest rates, that there were limits to what you could expect monetary policy to achieve. I'm very much of the view that monetary policy UH should be used to set the potential UH for economic growth. It's it's a very

imperfect way of creating a economic growth itself. It winds up creating misallocations of capital, which is what we've seen, and I think it's better to have a more balanced policy approach policy mix in two thousand seventeen, Jason, do you get the sense that central bankers are reckoning with that tectonic shift the minutes out yesterday? As I said, UH, some acknowledgement there of the uncertainty amount the potential for

for fiscal policy in the new year. UH. Do do you think that they're coming to terms with the changing dynamics between a fiscal policy and monetary policy? I think a little, while little, and I don't want to be overly critical of the FED it's it's very kind of do regord to to do that. But I think that there's I think people have realized that central bankers are not some pride of superman. Uh they're they're men and women. They may have PhDs, but um, there are limits to

what they can actually achieve. And I think it's it's far better, frankly, if we're not discussing from an investment point of view, if we're not discussing the central banks at every minute of every day, it's you're discussing people are actually putting capital at risk. The most important person that works for you right now, it's not Jason trentnerd. It's one D Clifton, that's right, who was down and he must be a little busy right Oh my goodness standards.

I mean it doesn't smoke anymore, but he still probably drinks about a case of diet cocod So, uh, yeah, it's good and good for you. What is what has he learned about the change in Washington just in the last four weeks. Well, I think he's learned that h Obviously things are going to be very different in terms of the way the administration to be is going to be communicating with both the press and market participants. UH

and UH. I think a lot of the standard um, you know, the standard modes of communication, avenues of communication are going to be very very different, and so that is going to take some getting used to. UH. Probably the most among Washington insiders. I think the rest of us might not notice much of a difference in you know, we live in a social media world. I think Washington, at least as far as the interactions between the insiders had been concerned, has largely been um, you left out

of that. We sort of go here, John Tucker, are bites this for me and David Gura. Folks, we see Trump treats and we decide if it's news. Yes. Here we are in real time with Jason Trunner. For those of you, we recommend you do not tweet in your car. We've had two tweets in the last four minutes, in eight minutes, including David gurn I've got to bring this up with respect to the senior senator from New York quote head clown, Chuck Schumer. I'm trying to think of

Richard Nixon tweeting that head clowns. Sam Irvins, right, Mr Gurrow pick up on this observation of our last two president elect tweets. You know, it's interesting because we've had so many conversations with the with the Great Valier, among others, about the role that Chuck Schumer will play here. He actually has a very close relationship with head clown had Cloud and from yes, thank you, So you know, I I uh keep it, I'm plumbing. I'm not okay, Chuck Schumer.

I got in an airplane once, folks, and here's a guy who's got every lobbyist in his pocket, and he gets on with a plastic bag from a grocery store and to you know, from Brooklyn or where Queens are, and they were an artisanal apples. This guy's down to earth. Whatever whatever anybody's politics, Chuck Schumer is a basic guy. How's he going to adapt to the majority republicanist? I have a feeling though that I think, Chuck Young, we're

also as a pragmatist. I'm certainly not a political expert, but but I think, um, you know, politicians are entrepreneurs in their own right, and they can you know, they're they're political entrepreneurs and and they'll understand the way the winds are blowing and right now like it or whether the winds are blowing in Donald Trump's direction, and so I think that there's going to be more There may be. Uh. The positive surprise this year is that there may be

more common ground between the Democrats and Donald Trump. Donald Trump may have more problems with his own caucus uh than he he might have with Democrats. And that might seem like an outlandish thing to say, but again, I think most politicians job number one is getting re elected. Uh. And and certainly U, this election took a lot of people by surprise. That's been easy over the last eight, twelve, sixteen years to sort of roll your eyes at Washington.

Not a lot has been happening in Washington. It's been a glacial pace. There's been a lot of discord and in fighting. Do you expect Washington to play a more important role to Wall Street after we get through the first three agenda items here, the tax reform, the infrastructure spending, UH, perhaps that a change to Obamacare. Do you think that Washington is going to remain important throughout this throughout these

next four years. It's a very good question. I certainly, Um, I hope so for I certainly think for the first year it will be extraordinarily important. I think after that one hopes that that Washington becomes less important, and especially you know, if you're a fan of free markets and think that free markets are better ways to allocate capitals, okay capital than than relatively small groups of people. UM,

I think that would be a welcome, welcome change. I have a feeling that will be the case, just to the extent to which uh, the president les political capital will never be greatest as it as it is on on day one of his presidency. Uh, he'll have both houses of Congress in which to effect change. I think after that it's I think it's President Obama found it gets hot. Once you kind of go long ball in the first couple of years of your administration, it's hard.

It's harder to get big things done after that. Can we bring it back? And when did the next sexual adjacent try will bring him back? To the equity markets? Are you fully invested now? I'm I'm pretty only invested. I have some cash available, But I also think that this is not a market in which I would start fooling around on the short side, because, as we discussed, UH, this has been a bull market. No one's loved that you're at all time highs, and yet it's not part

of the zeitgeist of the of the culture. No one's talking, you know, cocktail parties. People are not talking about stocks, although choice of Trump Trump Trump Trump Trump Trump Trump trump Trump for their smartphone or you know, yeah, real estate, right, you know, but people are not talking about the last stock they bought. Jason Trenitt with this final thoughts with Frutiguous Research Partners, let's go back to the equity markets.

Does Graham, Dot and Coddle matter anymore? It's something you and I mean, you and I are the only two people who actually read the puppy starts on railroad stocks in or whatever. Does all this stuff you and I learned matter anymore? Well, it hasn't. Unfortunately, it hasn't mattered a lot over several several years, and one hopes right that it becomes more important once again. Ultimately, stock prices are a function of future cash flows and an interest rates.

That's that's what they you know, That's that's what we should we should be focused on. Um I think part of the problem with financial repression, part of the problem with with quantitative easing is that you've essentially enforced a certain purgatory on companies in which everyone had a low cost of capital, and it makes it very very difficult to outperform and pick stocks. And and David, what I would point out here is it's getting long in the tooth.

For us to make jokes about it is fine, but our listeners who are savers and retirees, there's nothing funny about this. Walk me through your your asset allocation matrix as it stands right now. I'm looking here at what

your bullish on your mid cap stocks. If what have you adjusted here going into the New y Yeah, I think it's good quite I and I generally have I would say throughout my career part of its worth, I've had a general bias towards being overweight large cap over small and mid I think this this time maybe a little bit different because small and MidCap stocks obviously have more domestic content, probably have a little bit less of the risk that may be associated with a change in

the world order. Put it kindly, as far as trade UH is concerned, UM, I also think that they're probably gonna benefit the most at the margin from changes in regulatory policy as well as corporate taxes. A lot of large companies already have relatively low effective tax rates. They're able to use um the three and half million words in the U. S tax Code to get their their their taxes lower. Small MidCap companies don't have that flexibility and should benefit more in my opinion, UH this year

as we make some of those structural changes. And here I'm looking at your your list here the best and worst performers at the last quarter, the fourth quarter two thousand and sixteen. What stands out to me in the best category financials and industrials and in the worst it's healthcare. Do you expect that to persist here as we move into two thousand and seventeen. I think that seems fair.

I mean, certainly, UM, I'm very bullish and financials, especially because of rates or it's because of I think net interest margins are going to expand. And I think also again you're gonna have a very significant change as far as the regulatory UH regulatory regime is concerned. The stocks have gone up a lot, but they're still trading probably at a round book value. So in my view, there

there's quite quite a bit of room. Industrials are interesting because they're outperforming while the dollar, you're generally speaking, who's been strengthening. UH. That is a change. I think that's probably a bet on the fact that you're going to have UH. The US may lead the global economy out of its dold rooms, and the global economy may do

a little bit better healthcare. I think the headline risk is is very significant, certainly in the in the next you know, three to six months, and we're going to see what we're going to get. UH. Certainly repealing Obamacare seems to be number one on the on the list. It will be replaced at some future date, will be announced, and that will start a whole new round of lobbying, in a whole new round of of I guess questions about the sector in the way it's going to be structured,

good for lawyers. Yeah, and you you like Japan right now, I'm looking at tell again at let's see one sixteen fifty seven. Is it? Is it principally because of the weak currency that Japan is attractive to you right now? It's yeah. I think there are other things to that recommend Japanese equities, like valuation, like a low dividend pay

out ratio. But the fact that they have reverse course on negative interest rates, at least for the time being, by focusing on targeting the yield curve as supposed to inflation, I think is a very meaningful, meaningful change. I do think their experimentation with negative interest rates last year was a policy error, and I think the fact that they're moving away from that as a positive. Jason, trying to thank you so much. Thank you. It was fatiguaus Razors

with their Cherman. And of course is it ten years? It's ten and a half, ten and a half. I'm still like a little kid. I count the half of years. It's over ten, ten and a half years. Jason, thank you so much, sir. Please to have in studio with his new Stupet Warrior. He's a drivtive strategist at BNP Para BA out with his outlook for two thousand seventeen. Always created speak these two. Thanks for coming in. Thank you very much. Let's start with volatility. I'm looking at

VIX right now at twelve, settling around twelve. We've seen this degree of complacency for a few weeks now. When you're looking at volatility in the year, head is that the indicator that you look to, how how useful is the VIX to you? And what do you foresee with

regard to volatility here in two thousand and seventeen. Yeah, So I think a couple of things are really interesting, especially when you look at the price action at the end of last year, particularly the fact that we've had consecutively, i think two years in a row now of higher real life volatility and the markets also drifting higher. So that is in stark contrast to the QII period where

we had the market drifting higher on lower volatility. So I think that trends likely to continue in the future. And as far as the VIX is concerned, Um, you know, the key driver of that that measure is short data realized volatility. And what we've seen both in the SMP and the indices globally if you look at you know, the v two X in Europe, UM in the eurostocks, or the VIX in the SPIRE is the fact that

correlation is solo sectors are diverse. Um, there's this dispersed performance and that's really kind of dampening volatility in really either direction. You look at financials in particular, in your outlook how are they how are you us financials looking to you right now? Yeah, so on on the ball side, it's interesting that quite rich, and especially when we look at et fs that are linked to financials, uh, those

are rich as well. And I think part of that has to do with the fact that whenever you have an asset that really breaks out of a historical range range trading which financials had been in some time, the valve resets higher and you you have to kind of wait to settle into a new price range before the mark really settles into into a more comfortable environment. In your research note, and folks, we need a math warning here, we're not going to do the legitimate math that Mr

Worther does. From there a lot of great characters. Everything's vague, gamma, you know, blah blah blah. But down at the bottom of your note you bury the headline, which is what pros like you do is try to game sector rotation. I find in the media pundits are either clueless or glib about sector rotation. This is a great way to enjoy losing money. How do I not lose money gaming

sector rotation? Well, I think you know, and I've mentioned this before, is One of the key things is that you need to look at when looking at sector rotation is trying to find the right variable that describes the rotation itself. So one of the things that we look at, um, you know, a couple of things. We look at our terms of trade, UM, economic surprise, dollar strength, etcetera. And we try to figure out from those variables, UM, you know what that actually means and what's the real driver?

You know, is it sector rotation itself is a value versus growth UM. And I think what we've really seen over the past a couple of weeks or months, first say, is value versus growth rather than actual sector sector rotation. So it's a matter of how you break up the SMP complex. But but I think in this in this context, it's really the kind of cyclicals versus defensives, value versus growth. You highlight the big macro event of the year ahead,

that being the elections in France. Of course, been more elections and votes across Europe. I wonder what we've learned, what you've learned from the string of votes we've had here in two thousand and sixteen, the breaks a vote, the referentument Italy, the US presidential election. What has that taught you and how has that affected the way that

you strategize you're going into the election France. So I think it's really interesting in the context, especially in the volatility contexts, in the sense that implied tends to be elevated ahead of the event, and regardless of what happens in the event itself, Implied collapses thereafter. Rather whether the event was well hedged, whether the event was underhedged, as it was in Brexit. Um. You know, we seen that investors have paid up ahead of the event, and you really,

regardless of the outcome, UM, you know, Implied has been crushed. Um. And I think that has to do partly with the fact that all these events are so well televised that UM, you know. And yeah, I don't know, continue please, I don't mean to interrupt him. I would say, with risk managers, UM, you know, both on the buy side and the cell side being um, more stringent than they were maybe a few years ago, it's you know, how do you go in the day after the event, having said I didn't

hedge or I didn't buy protection, how the event. This goes to from electrical engineering, the idea of slew rights, which is the rated change of an electrical circuit. This was in the movie The Big Short David. The idea here that your world was always gained by having an information advantage. Just in the last six or seven years his your information advantage shrunk because of digital media, digital information and of course the fact that everyone listening owns

a Bloomberg terminal not. That's actually a very good question and something we think about pretty much on a daily basis, because um, I would say the you know, financial media has become um much more aware, UM and you know, cognizant of some of these other indicators, looking at the VIX, looking at certain applied volatility metrics, UM. And really that kind of initial high level analysis that a lot of people would do is taken down one or two steps.

So on that basis that there really is less informational advantage per se, and you really have to kind of do your work. So I think it really differentiates to investor classes between those who do it and those who don't. We're talking yesterday, you and I about the prospects here for a move of overseas profits back to these US companies to have a sort of holiday. They would allow them to bring some those profits back into the the US.

Walk us through how you see the that that playing out with the effects would be on the bottom lines for for these companies. Were they to do that, we're

we to get that kind of holiday. So this is actually one of the interesting things, especially from a volatility perspective, when you when you think about buy backs and the way that they're generally um orchestrated their VALL dampening because companies tend to buy back more stock on than the stocks lower the you know, on an intra day basis, and and um buy back less when the stocks higher.

So on that basis you have this this effect of the implied VALL of those names are actually tend to be lower than the implied VAUL of other names that

aren't aren't actually conducting a buyback. So from that basis, if we have a number of large caps that bring back um, you know, say, of the trillion dollars of overseas cash they bring back between um you know, two hundred and five hundred billion of that um in of of that sixty cents in the dollar is actually spent on buy backs and special dividends, then I think that would be vall dampening and that would be positive for

the market. That's likely to happen. I mean you when when you think about how much of this could be for buyback versus capital expenditure, you satisfied with that ratio there So, and this is the key question I think. You know, with the proposed tax reform under the Better Way plan, if capex is expensed immediately, then you have you have a situation where companies will actually be incentivized

to do more capex. And on that basis, so you know, in the two thousand four tax repay creation holiday you had sixty cents in the dollar actually returned to shareholders. This time around, you might see Stewart, thank you so much, Stewart, Orther BMP Perry Boad. We're looking at at retail here in the wake of the holiday season, obviously looking at Macy's as we just heard uh prospects there were some

big layoffs at Macy's. I want to bring him now, John curn and he is with Collen forres a retail and let's se John, great to speak with you, great to be on. Let's let's start with Macy's. If if we could hear obviously some big headline number jobs going away here. What has changed for Macy's here in the last couple of quarters, if anything? Or is this the continuation of the trouble that department store chain has been seeing here for a while. Well, there's a big shift

to digital and the Amazon's leading that. We at Collen we actually forecast Amazon to be the largest apparel retailer in North America by the end of two thousand seventeen. You have maltrafect declining it essentially a mid single digit rate year on year after year since two thousand and fourteen, and seeing a big shift away from breaking mortar to digital, and Macy's casually in that shift. What are they doing to to curb that? We know about the rivalry here

between Amazon and Walmart. Walmart investing heavily to the tune of billions in building up and changing its website. Is Macy's trying to do anything to to change its online presence? I actually don't cover Macy's myself, my colleague Oliver chen does. But everyone's trying to move more towards digital, is trying to shut brick and mortar doors. There's way too much square footage in general in North America. So you're going to continue this is um this is just the beginning

of a door closure across retail. Two quick questions here in the time we got John that's so important. We're thrilled that you're on with us with Urine Oliver Chen's work. First of all, within the analysis, are we underweighing the impact of Amazon? Is this just really, at the end of the day, just about Amazon. That's not all about Amazon, but certainly a lot of it is. And it's a lot about the growth of the director consumer platforms of a lot of the brands are out there like a

Nike and on their armor. Um, as more brands expand their own online efforts, it's it's obviously negative. If I go to the back of a cow and sheet and I'm gonna look at a given retail operation, revenues ain't happen in negative two point same s sales, etcetera, etcetera, etcetera. Where down the income statement do they get this fixed or is it over in the balance sheet with real estate? What's the solution for retail America to intition this to

have product that people want to buy? You sound like you take it doesn't work in the consumer space if we just haven't seen it, at least in the retail space. We've seen seer struggle to monetize their real estate. The market caps down to eight hundred million from a peak of north ny billion, you know, a decade ago. Um, But financial engineering in retail we've yet to ever really

see work. Um. So that you have to have product, you go on, you go back, forget about you know, closing a thousand stores, laying off x thousands of people. As an industry, they're supposed to find the mother of all products. How do you do that? Well, you have to own Brandon intellectual property. That's how you do it. Um. That's those are That's who's winning now, whether it's the Nikes, the under Armors, or the other you know, the brands that are out there. But the brick and mortar retail

community continues to struggle. Help us understand here how retailers are looking ahead to Donald Trump's policies. We talk a lot about the effective of those potential policies on the economy large, but when it comes to retailers, what are they most concerned about? What could make the biggest difference for them? Here? Going forward. Yeah, it's funny this year.

I think usually it's fashion trends, consumer trends, they drive stock price performance in retail consumer discretionary, but changes in Washington policy, those potential changes have a norm of simplications for retail in the consumer discretionary space. If border tax adjustments are put through indiscriminately and you're just taxing imported goods from China and the Far East, it will have major negative implications for everybody in this group, and you

can start slashing your earnings estimates pretty much indiscriminately. He's immigration, A big issue? Is that something that is it all on the horizon here for retailers. People are thinking about it, but there's there's other issues like the border adjustments that I think people should be worried about. I think the other issue people should be very worried about, at least the retail management teams. You're an absolutely booming consumer macro environment.

Two thousand sixteen saw on acceleration and wages. It's all on acceleration and consumer spending. You're seeing a lot of really bad numbers from a lot of retailers. So what actually happens when the cycle does inevitably roll over. Things are going to get really ugly in retail. John Gore, thank you very much for joining us here. Again, a lot of big news. It's a gloomy that's gloomier than Howard divided. Holidays are over. Yeah, it's gloomier than Howard divisied.

It's difficult commentary er anyway. John cronin there with the accounting company joining us. Song all the retail news we've done here in the last twenty four hours. Who you put your trust in matters. Investors have put their trust in independent registered investment advisors to the tune of four trillion dollars. Why. They see their roles to serve, not sell.

That's why Charles Schwab is committed to the success over seven thousand independent financial advisors who passionately dedicate themselves to helping people achieve their financial goals. Learn more at find your Independent Advisor dot com. I'm gonna bring in Drew Madis now he's deputy chief US economist at U B S Troop. Thanks very much for being with us. I know you're processing the the unemployment numb as we got this morning, so we'll give you time to do that.

Let me start by asking you about what we learned from the Federatory of yesterday. We've been talking about the role of these minutes from that meeting at which that that did decide to raise rates. What was unclear to you going into getting those minutes yesterday and what did you learn when they came out at two o'clock. Well, I mean, I think what people were mainly concerned about was why there were three rate hikes all of a sudden, um,

and there had been two. Uh. And I think the minutes, you know, what the minute suggested was that that wasn't some sort of error, that that was in fact what they meant to do, or that it was consistent with what what how they were thinking of the world. Uh. You know, our view is that they'll still be two rate hikes next year. Uh. They they've talked a pretty aggressive rate hike schedule pretty much every year. Uh, and

they haven't been able to get it done. Um. And you know, we can debate why that why they haven't been able to get done, but I think it's because they tend to focus more on financial conditions than they have in the past. Um, and that that creates a circularity and kind of the whole structure, which which really prevents them from moving that much more restie circularity, uncertainty that the fit acknowledging that that exists. And it's a

complicating factory. How complicating is it for you here? Has you come up with your growth forecast as you try to forecast at what you think is gonna happen here in two thousand seventeen, I've tried to make it simple on myself. Uh, and so I've only done the work on things that have been kind of fully fleshed out. Uh, you're you're in a vacuum. Well, you know, the problem is there's there's a lot of numbers out there, but there's not a lot of detail behind some of the numbers.

And you know, I think until we get more clarity on some on some of the proposals that you know, the more cautious approach is probably the one that's best warranted. I mean, we have penciled in some acceleration growth from Trump, uh, from some of his policies for next year. And we have, um, we've penciled in a little more in two thousand eighteen, um from his policies. But you know, at the end of the day. We have an economy operating towards full capacity.

The employment rate is pretty much as low as you anyone probably wants to see it get um and you know, the inflation numbers are moving back up towards the fence target zone. So it's pretty you know, for us, it's hard to argue that we're far away from some sort of you know, natural state and the economy, and that means any sort of further stimulus just of and has the same bank Ford Spock drew. What's the twelve months

forward GDP view of UBS. We are just below too and a half percent, so about a hundred basis points of acceleration versus this year. You are optimistic compared to many we speak to our sub two and a half percent. What is the requirement to attain your optimism or to exceed it? Is it just about investment? You know, to be honest with you, Tom, it doesn't take a lot.

Our hundred basis point acceleration is pretty much. We don't have ay repeat in UH energy price movements that could generate the same kind of CAPEX decline, which doesn't seem like it's likely that we could make that happen, even if we wanted to um and uh that we uh, you know, we don't you know, effectively, It's just that we don't repeat the bad news twice. Uh. You know, So that acceleration and growth has nothing to do with

anything getting better. It has things to do. It has everything to do with two things inventory, uh, inventory movements and capex not repeating what we're completely unusual years. Uh. And so you know, when I look at the fact that you know, we are above consensus, I kind of wonder what implicitly people are assuming on the consensus about the future that you know that they are confident enough

about that they can put it into their forecasts. I think a lot of the consensus is, let's put it this way, a lot of the consensus is penciling and something bad happening, but they wouldn't be able to define what that something bad is. And I think that that's a dangerous way to forecasts. When you look at me, let me play off of that a little bit. It's unclear what the something bad maybe, but I mean we have some we have some possibilities here. Trade is certainly

a big one. I mean, that must be a huge weight on you as your forecasting well except for the fact that you know, we don't really know what's going to happen there. We don't know how much of this um you know, how much is talking, how much is going to be We're seeing contours this week, though, aren't we with GM and Ford and and the rest. Well, we'll see. I mean, you know, I'm hesitant to basically say that voluntary actions by by firms are should be

thought of in one direction or the other. I mean, that's that's not policy, that's that's firms responding in ways that they think our best. UM. So you know, I hesitated to comment on anything that they're doing individually, but I would say that, you know, until we see a tariff or until we see something concrete um that you know, I think it's you know, first of all, I mean, this could take six months, it could take a year. You know, you don't know the time frame for getting

for for making some of these things happening. Let's talk about employment. Here's we look ahead to Jobs Day at tomorrow. What are you gonna be looking for here? We're talking with Annie Blanche Flowers. Tom said a few moments ago about part time is um about wage growth, that what's going to attract your your attention tomorrow when those numbers come out, well, I'll be blown. I'm not gonna worry too much about part time employment because part time employment

isn't particularly elevated right now. UM. So I'm gonna be just looking at the at the overall jobs numbers. I'm gonna be focusing probably more on the household survey of the unemployment rate. I want to see what's going on there with participation, um, and with the employment of population ratio. I think we are in a stage in the labor market where we should be seeing lower levels of payroll

growth because we're running out of the easy people to hire. Uh. And so now in order to hire someone, you have to look a little harder. Uh. And we see that that's consistent with the job openings number, the quits ratio, and kind of the amount of time it takes to fill position. All of you know, in particular that last one has been less quite substantially. We saw that sort of precipitous drop last month for the month before, and I wonder what you think that portends for for this

month going forward? Here where at four point six now surveys four point seven percent, do you think we'll see an uptake here. Well, it's funny because uh, you know, when you um, you know, you know, my guess is that it will stay where it's at. Uh. One of the interesting risks though, is that usually are not usually, but you know, it's not inconceivable when you see a drop like that, that that's the start of a faster

pace of decline. Uh. And if you look back historically speaking, when you see big drops in the unemployment rate, oftentimes what economists will do will be the pencil in a rebound kind of normalize it back to some sort of trend they had in the back of their mind. Historically speaking, though, you're just as likely to see a further decline or or an acceleration on on the process. And that that is just the first step if you want to call it to dam breaking um for a more rapid decline

and unemployment rate. So, uh, we are anticipating an unchanged unemployment rate, which which means that we're saying it's it's neither the dam breaking nor is it some sort of false reading. Um. But if it were to drop further, that would be something that would that would make us really have to question, like how much further, the fact can watch that thing drop before they have to get serious potentially moving more quickly. Can I read into your

prescription then that you think we're full unemployment? Then if you think we're going to stay where we are, to be honest with you, I think we're probably a low full employment. I think you know we have the people in the labor force, um we have, we we don't have enough. What's been going on in the labor forces. We have this nice steady pace of job growth, but that's been happening because we've had fewer layoffs and fewer

higher less hiring. So the dynamics of the labor force are actually pretty low right now, even though the labor market itself looks pretty healthy. The net numbers look good, but the gross numbers look bad. Uh. And what I would like to see is a little more job switching. I'd like to see a few more people getting fired and a few more people getting hired, because that's a

more dynamic market. That's one that's better for everyone. How do you respond to the wonderful aggregate analysis you has just given us versus the partitioning of the American labor force into those employable those on the margin that want to be employable all the analysis should do every day and a huge body of Americans that aren't part of the discussion. Do you fold that in? Uh, you know, it's it's hard to separate it out when you're trying.

I mean, we're trying to predict policy, right and so um, certainly, you know, I mean from a philosophical perspective, what you want is a labor market where everyone can find work if they're willing to work. Um. And that's that's the idea of full employment, right that you that you've reached a frictional level of unemployment, and then there's some people who are temporarily unemployed because they need to be for whatever reason. Um, and the rest of everyone who wants

to work can work. Uh. And and that's the that's you know, probably you know, ideal is probably the wrong way of putting. But I'll go I'll go with what you just said, Drew. But are we getting the jobs if we want to work that we want? Or is David Blancheflower said yesterday, is it about getting marginally more hours of work? And we can't get that. I mean, have we become almost two labor efficient? Well, The problem

is that that's been encouraged. Right, So we have policies in place that have defined full work weeks as being below thirty hours or being thirty hours, which is a sharp change from kind of historical norms. Uh. And that has probably led to a bifurcation of labor force between skilled and unskilled labor because why would any firm pay for the thirtieth hour of work in an unskilled environment when that thirtieth hour of work has a marginal cost.

It's significant. So giving some of that thirtieth hour of work is no longer paying them the extra ten to fifteen an hour. It's paying them the fifteen dollars an hour and a whole range of mandated benefits um. And So because we put a break point in, we've created an artificial um stress in the system that encourages firms to think in terms of not giving anyone thirty hours

unless you can justify it from a skills perspective. Let me ask you just to to to pivot here a little bit here at the beginning of two thousand and seventeen, after the holiday season, how's the consumer looking to you in the US right now? I mean, I think the consumer looks good. Uh. You know when I said, when I was talking about the the the gross flows into another labor force, you know, and we saw it in claims today. No one's being fired. They're very low levels

of layoffs in the economy relative to the population size. UM. There are decent wage gains. They're not they're not incredibly great, but they're decent given that environment. UM. And uh, you have expanding access to credit for consumers. UM. You add all that up and you have a very steady consumption profile going forward. And that's one of the reasons why our growth forecast accelerates is because we do have that steady consumer built into our outlook. That just seems to

be the most basic case. And of course, with the consumer being the economy, UM, that provides you with a nice four momentum into the into two thousand seventeen. Thank you so much, dramatics UBS greatly appreciate it. Here pleased to be joined out by Mark Kiesel. He's the CEO for Global Credit at PIMCO, joining us from Newport Beach, California, with a new note navigating change Opportunities and quality credit, Specialty finance and Mortgages. Great to speak with you. Mark. Hi, David,

good morning. Let's start with your appetite for credit, how it's changed your in the new year, and I'm wondering if your appetite for quality credit has changed in particular. Well, David, a year ago, we were quite optimistic on credit. UM high yield in two thousands sixteen was the strongest performing market up fifteen sixt So a year ago, when energy prices were hitting the lows, we were buying aggressively high yield. Now we're de risking. We basically think under Trump the

market faces a lot more two way risks. There's positive scenarios under Trump, with tax reform and confidence picking up, but also there's negative. So we have been de risking. We think a lot of good news is christ then, folks. De risking is sort of like in the airline business when you deplane. What the hell is de risking? Mark? So, Tom, what we've been doing is we have been selling into strength. UM energy markets have basically gone from twenty six on

oil to fifty two. We've been selling into that strength, and we've been upgrading the overall quality of our portfolio. Mark, Mark, I'm marketing as I'm busting his chopped folks, because there's a general council it ogre, ogre and miserable out in Newport Beach, California, saying, don't say we sell bonds, but marks a good sport about it. Let me de risk over to David, when when you look at that, at the reasons for de risking as you put it in,

what what are the major ones? Is it? Is it the prospect from more political risk here in the new year? Is it? Is it central bank policy? What's the driving force there behind you doing that? So David just just on bonds alone, if you go pre election, we were really globally hitting limits of global que There were trends in place already for higher rates even before Trump. The global economy was gradually healing from very depressed levels. We have rising global p m I data, PPI data OPEC

deal to me was a big game changer. That that is the return of the cartel. You're seeing earnings bottom and then you have Trump surprise with the win. Now you've got animal spirits kicking in, you've got business confidence improving, consumer confidence improving, and you've got the prospect for the first time in eight years of a very pro business pro growth initiatives going through. So to me, I think

you want to be more defensive. The trend towards higher rates, I think is had had been in place even before Trump. Trump just accelerates that trend, but critically, and I mean it's seriously, Mark, do you have in your head a tip point on tenure yield which signals the Trump reflation? I know it's not two point four one per cent, but is there a number where you say, hey, this

is for real. Well, we have been basically starting to add a little bit of bonds here because we have seen the tenure back up a hundred by basis points. But I think a lot of this has to do with the Fed and will the Fed shift more hawkish or more dubbish over time? In my mind, they're gonna likely shift more hawkish, and that was clear yesterday in the minutes. They clearly highlighted that the risks of growth surpassing their forecasts have grown because there is this possibility

of expansionary fiscal policy. This is happening, by the way, Tom at the top at a time when the labor markets already tight, So there's this right tail risk out there of inflation. I think potentially surprising the FED. And also they even mentioned in the minutes yesterday that that that has implications for the reinvestment of treasuries and mortgages. So I think the market right now, it's priced in is two hikes this year and only two hikes next year.

So you've only got a hundred basis points of hikes over the next two years. In my mind, I think the risks are that they could go faster. Are you going to cash? What role is cash playing in your portfolio right now? Well, what we want to do is what two thousand sixty improved is the bond managers who outperformed most were flexible, nimble, and they capitalized on the key moments throughout the year, whether it was the energy crisis, Brexit,

or Trump. What we want to do now is we want to take profits, build up a significant cash position, and hang out in what we call the best risk reward investments in global fixed income. That would be tips because basically we want this this inflation protection. We're upgrading quality and corporate bonds, favoring the consumer banks, financials and pipelines, and importantly, non agency mortgages and agency mortgages have cheapened considerably and offer a very good risk reward right now.

So these higher quality bonds within global fixed income actually are the best place to be right now on a risk adjusted basis. David Gern time King were with Mark kisel Mark. You know, did it's a migration of yield and inflation? Which comes for and what's it mean for the return? The inflation adjusted return that our listeners will get to yield move higher and then inflation catches up. Or do we risk yields moving up but inflation moving

up faster. That's not good, is it? No, Tom, that's not And I think you just highlighted, you know, the reason why we have been selling into strength and de risking. A main risk for the US economy is that we could get a pick up of inflation as a result of higher wages. This labor market is very tight, You've got rising confidence, animal spirits, and this new fiscal policy. We don't know really what's gonna unfold here, but it

could be quite inflationary. Uh So, the important point is that US fiscal stimulus normally works best coming out of recessions. This economic expansion is eight years in the making and it's coming at a time when the labor markets already tight,

and that's why the inflation risk is higher today. Are you writing the obituary for globalization now in light of what we've seen, what we are seeing here when it comes to trade, when it comes to this income administration's policy towards China, towards Mexico, Are you worried that we are going to see a less globalized world. We are worried. And in fact, you know, part of pimco secular thinking has been that the rise of populism is creates this

inflationary risk tail. Uh. There has been a shift even before the US election away from monitory policy. There are limits of global QUEI were shifting gradually towards fiscal Trump, you know, could be more reasonable than the market sphere. At the same time, his legislative agenda could get deluded. As you know, Washington is very unpredictable. There are implementation risks with a lot of his policies. So I think the big point here is that this is a market

that can go either way. It can go positive or it can go negative. Okay, we got Alicia Manilla on tomorrow, folks. I can't begin to describe the excellence of her shop at Boston College and their effort on America's retirement planning. And I say this with great respect mark for PIMCO with your terrific retirement coverage. Uh there help me here with Marco Witz the efficient market frontier of where your bonds fit in. I mean, if I got equities, I

got bonds, I got cash. And there's that parabola that sideways parabola of most efficient optimal places. How can that work given the great distortions we're in right now? So, Tom, I think the importance of bonds is that if you look all over the developed markets all over the world, the populations are aging. Uh no more in the world. Is this more apparent than in in Japan, in Europe, and and will become a big issue in the United States.

People are going to need income to retire. Bonds provide stability of income, and there's not enough income producing assets in the world relative to the demand for those assets. So equities are going to do well in a growth spurt. But with Trump, you've got this negative scenario of trade restrictions, of uh, deterioration in geopolitical bonds will protect investors from downside risk and equities. That's the key to bonds is because yes, there is upside with Trump and that could

mean equities do well. But at the same time, Trump has a lot of bad risks UH that that the market i think is not focused on. And in that environment where where the negatives of Trump resurface, bonds will then protect UH investors by providing high quality income and protect protect from downside if the economy slows. Give us the mark case alant look thet PIMCO outlook on European

corporate credit. We've been following the back and forth the the chapter after chapter of the Monte de Pasky situation in Italy. What's your attitude toward European corporate credit right now? So again similar to what we were talking about earlier, we have been selling into strength. So basically, credit spreads are at two year tights right now. There's a lot of good news priced into the market. That's true not

only of Europe, but but in the United States as well. UH. Within Europe right now, Europe is growing at a slower pace. There's more economic upside risk in the United States. With Europe, we want to stay in very high quality sectors. We have been focused on cable. We have been focused on the consumer there because we are seeing a modest improvement in the economic data. And banks, really, banks are really a pure play on economic growth. As growth gradually heals

through Europe, banks should do well. They're going to benefit from steeper yield curves, higher rates, and in the US less regulations. So so banks are a favorite of ours in Europe and also in the United States. How about that U S China relationship. We haven't talked about China. We mentioned at the top of the program the stress test the Chinese government has been doing on the what's

your outlook for China in this year ahead? Are we going to see a repeat of what we saw last year in two thousand and sixteen with the issues with its currency? Do you think so? Fascinating? Uh, David, because that was the first two weeks of two thousand and sixteen and the markets focused on it again. China over the last two days has been intervening. We've seen the currency strengthen. The key has been the capital outflow data.

As the US outlook improves and China is slowing from a higher growth level, but albeit slowing, capital is moving into the United States. And out of China. Also, their property market, you know, is pretty overheated in some of these Tier one cities, and so there's a lot of capital that is looking to get out of China into the United States seeking higher, higher potential returns, and that's

creating a huge dilemma for China. They've had to now put in limits on this fifty thousand dollar limit for for capital outflows. Mark, thank you so much for the brafing with him. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm out on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio. Who you

put your trust in matters? Investors have put their trust and independent registered investment advisors to the two and four trillion dollars. Why Learn more at find your Independent Advisor dot com.