Surveillance: Slowdown in 2020 But Not Recession, Hooper Says

Good morning to Peter. Good morning Jonathan, great to catch up with you want today that global risk appetite appears to be returning. Are you confident that this has got some fundamental underpinnings. Well, John, I think there's several things at work here. One is, uh, you know, the the economy continues to tourtal along at three plus and recession people were concerned about near term reception risk. Those are receding.

We put out a PC yesterday saying that there's a good chance at pal FED can achieve history here by avoiding a recession altogether. As you look into one, uh that that view could be having a bit of effect, And I think developments on the trade front probably overall a bit more positive. Certainly we're avoiding. Uh, it looks like we're avoiding a major trade war over NAFTA with Europe, and the Trump administration is pushing hard in the one area where there is a lot of bipartisan support because

of each China. That's too much optimism for Friday morning, right, that's all gloom and doom Frinday. I mean, I'm waiting to go to cash. I mean, this is way do we allow this much optimism when we can allow it, We can allow it on a week where we've had that twenty five different economists talk about it downtown itxactly. You think it's different this time that you dare not right to in the pace that it's different this time.

Tell me why it might be different this time. Well, we did actually put those words in the piece, uh, somewhat sheepishly. But it is different this time because you look at every recession we've had since the late nineteen forties, it's been a tight labor market and the FED tightening, but almost all of them have also been accompanied by a major investment overhang, overbuilding and housing, overbuilding and business

equipment and structures. That's not there this time. I mean, this is that's what usually when when the FED starts to tighten, that's that's that kind of spending collapses and pushes you into recession. We don't have it. It's been a very slow gradual recovery. Housing vacancies are all all time highs, I mean all time lows. Excuse me, housing market quite tight. Uh. And no one says business capital has been booming this time around. Productivity growth still near

historic lows. Uh. We we have a long ways to go there. So I think the Fed have some some some things going for it. So let's set up the framework for the way you think about things. Right now. Most of the people that come on this program look at four percent GDP growth and they say, yeah, great, But in we're heading for a recession potentially, you're saying we could come short of that, we could be doing okay,

and that this time could be different. Typically, and I can't think of one historical example of whether the Federal Reserve is engineered a soft landing. Can you know? It hasn't happened before, But I think they have it. They have a chance this time. They do have to have a slowdown. We have to have a growth go below potential. It's got a drop below two percent, and we think it probably will be somewhere in the one one and

a half percent range in twenty twenty. It will be a noticeable slow but it doesn't have to be a recession because you don't have that normal cyclical spending over spending which drives you down in place. We interrupt now. Jeffrey Frankel out with a great essay which I put out on Project Syndicate on China the President in Trade. He wrote an essay years ago I believe for M B. E. R. Dr Hooper about defining a recession and the I can

we review. We haven't done this, John in Ages. But you know, the cannon is a recession is two negative GDP quarters And guys like you and Professor Frankel say, no, it isn't. It's more subtle than that. What's a recession? Well, a recession, you know, I'll go with a two negative quarters in GDP. That's that's not a bad proxy. Labor. Labor comes in here as well. You have to have a significant increase in unemployment, a probably a fairly sharp one.

Typically labor market overshoots unemployment going well below the rout and then zooms up in a relatively brief period. Going back, we think this this zoom up can be a more gradual process. We could think slow down, uh with with a with a return to nehru over a couple of years, can do it without going into a deep downturn and recess. Where neighbor neighbor neighbor the non accelerating rate of unemployment,

no one else does wise it is it is. It is exactly four point three five Now you know, it's somewhere in the four and a quarter four and a half percent range. The latest official number put out by Congratual Budget Office I think was four or six. I think you look at the f M CUM indications where long run unemployment is longer term, it's it's four five for four. I think probably we'll see it come down a little bit next week to four or four. What are the signs that we've gone through it? What are

the signs we've gone through it? Well? We are seeing we are seeing a gradual uptrend in wage inflation. Now, both the average hourly earnings and employment cost index, which several years ago we're around one and a half percent, have now gotten up close to three percent. It's been a fairly steady march up as the labor market is tightened. I think that's probably the best indicator. How do you respond to yields? You wrote an important piece at Jorga

Bank earlier this summer on the yield curve. You told everybody to calm down. But but in general, the yield lift of the past ten days, how do you respond to that? Uh, I'm saying, well, it's finally happening. We've been expecting this for some time. We wouldn't be surprised to see a ten year Ye'll get up somewhere closer to three and a half percent by late next late this year, early next year. Our our senses the economy has a lot of momentum, the labor markets continuing to tighten.

Wage inflation has been rising price inflations back to where the Fed wants it, and it's likely to overshoot a bit. This is a recipe for the Fed to continue on this gradual piece of right hikes. It doesn't make sense that the tenure would would remain unchanged in this in this environment until it looks like we're going into a slowdown, and we don't think that will happen to the latter part of next year. I think most people would agree

with that sentiment as well. Paid when I think what's interesting about this week as a global risk appetite has returned on a week where treasury yields half grinded higher. We're sitting in Japan this morning as well. With jgbs at the long end, you would started to drift high too. I think we've got twenty eighteen heights in the Japanese bond market in terms of yield. Do you think the economy can withstand high treasury yields because so far it's

done absolutely fine. Oh, absolutely yes, I think you know. Uh. I think the key issue here is when interest sensitive spending globally interesting spending, the sensitive to US interest rates globally begins to have complain I don't think it's until the FED gets up to into the above three percent and three and quarter three and a half percent range. We're we're feeling some pain from emerging markets. Now, okay, that's mostly idiosyncratic. It's it's not contagion on a big

on a big scale resulting from FED tightening. That will probably come. I think we're expecting something probably sometime in the second half next year. Uh, and that probably spill over into you know this this this risk on will become risk off and we'll see a drop in financial conditions. And that was that's what's along with some slowing of fiscal stimulus, that's what's going to generate this slowdown we're expecting.

In Peter is great to catch out with you some really really thoughtful stuff from the Deutsche Bank team this week Peter Hoop at deutche Bank Securities chief Economists. Reach out to Peter and the team if you want to get the research how the foul pal fed can make history and White Tom Kane, it might be different this time. It's a really thoughtful piece. And now we're gonna go essentially to China because Free of Bemish of Pantheon has real hands on living in Chinese China experience. I should

say for you, a good morning to you. What will be the response of the I mean this party and that's so much the people of China or President g and the elite of China, but just the party apparatus from see the shining Sea of China. What will there be a response their response be to President Trump's trade war? Well, I think at this stage we're seeing a very measured response from the Chinese trying to kind of take the

high road, UM in that sense. And then I guess your question really speaks to what what UM is going to be the response of the people of of China to the extent that one can one can generalize, and will they accept the narrative, UM, that is coming from the leaders on high that we're protecting you by not escalating this trade war, by by not just responding to

Mr Trump's tweets. And I guess we can we can hope at least that a lot of the kind of if one wants to say, vitriol of that is coming out of of the the U S side of this, of this UM. So the negotiations, if we can even call them negotiations, is UM. Maybe that starts to die down a bit after the mid term elections. UM. Certainly Mr Trump's most recent response, I'm not sure what the venue was for that. It might have been more kind

of an audience type of response. I'm prepared to eat my words on this, it will at any stage, and then to revegitate them almost immediately afterwards if if the story changes. But looking at the short terms, he leaves here. Um. The what we've had this week is that we've had a big escalation for Mr from Mr Trump at the beginning of a week China and had a very measured

response to that. They they said five to ten percent tariffs on on sixty billion of goods, which is kind of a drop in the water, really in the bucket um in the context of what's been imposed from from Mr Trump. Mr Trump has said he's gonna he's gonna slap the tariffs on on a further two hundred and sixty seven billion of goods um as soon as China retaliates. We haven't had that yet. We've had a kind of

with some some rhetoric um. But at this stage, if he's willing to put off the twenty five percent until January to laughter Christmas to laughter in the midtimes, because of the to give businesses time to adjust, it doesn't seem likely at this stage that we're going to see him turn around and say, well, okay, well I'm going to immediately slap on the carriers on the two hundred

and sixty seven. That's the short term answer to that, and there's a very different longer term answer to that, and certainly I see China and the US on a collision course. Then well, I think the longer term outcome warrants a much longer conversation at the time we have this morning. I think there's plenty of things that investors are interested in, But if I could pick two of them, one is the trade conversation you've just laid out for us. The second part is how China responds with policy tools

outside of trade. Are we shifting towards an easing bias? And have we done that already? Were the signs that you see Freyer that that's happening right now in China? I think we are seeing that easing bias. I think we would have seen that regardless of what was going on in the trade wars by this stage of years. One of the indicators that I look at most closely is M one and M one is a great leading indicator for China because it's such a banking um centric economy,

and there's shadow banking elements to that as well. But the M one tends to have a good kind of two or three quarter lead on on GDP growth, and I'm talking for nominal GDP growth here, and that's been showing a substantial slowdown UM since since the mid sixteen and together that indicates that GDP growth would be slowing into into the beginning of next year. UM, but we are starting to see it pick up again now that the Chinese easing response. We gotta rip up the scripture.

This is really important M one. You mean M one in China, not M one in the United States right now. Actually in the United States that we don't see so much of that the money indicators being being so important. But in China and the likes of Europe, even where banks are more important than they are in in the US as a kind of as financial intermediaries relatively speaking relative to other forms of financing. M one in China and particular, you're very good neading indicator. Freya Bemish. Thank

you so much greatly. I appreciate that. UH. This morning, John Farren toom Kean are Bloomberg Interactive Broker Studios. We are thrilled for the support from Interactor Brokers, and we're also thrilled to bring you what I think, on an almost theology basis, is the political interview of the weekend, UH. The Gentleman from the sixth Congressional District of Pennsylvania. Ryan Anthony Costello is in the absolute crosshairs of national gerrymandering and also a centrist. How rare is that he joins

us now? Is he retires from Congress in a bit? But Ryan, far more importantly is the idea that you've had the courage to take a middle ground. You see it in the statistics out by all the pundon's, the Cook Report and and all that. How lonely is it to be in the middle in Washington? There are other members such as that. But what it does bring about, Tom is uh, no matter what you do, you always have about of the electorate uh ticked off at? Yeah,

sometimes it changes though. Sometimes it's the left, sometimes it's the right, depending upon how is that changing? Right now? What's the what's the marginal change now between a polarized left and a polarized right? Or do we need to wait farther to get to see that? I think it probably uh farther to But of course the issue set uh, you know change as I mentioned who maybe take coffee of with. The goal obviously is always to try and work to get to that eight twenty solution where you

can get percent of the people behind you. And I do think where we're falling short is it on some of these issues we can at eight twenty issues we mightn't. We might not be getting a percent of an issue solved, but we should be finding the areas where we you know, get get the find where the consensus is. Do that, and then the stuff we can't agree to, let let that linger another day and fight for another day. A pleasure to speak to you in terms of my Tuesday

evening reality. Early in November of two thousand sixteen, I was standing in a living room, I believe I was watching CNN, and there was a dawning reality that Secretary Clinton would barely win Bucks County. I was thunderstruck and how the president did so well in Bucks County. And that was the first moment I realized we would have a President Trump if that election was held today, with the president get that close again in Bucks County, you know,

less than three thousand votes, he would not. There are some polling I think that suggests that, uh, he's lost five, maybe even ten points um in that county. Uh and in that specific case, lower Bucks County, which has a lot more I don't want to over generalize, but working class UM voters uh saw and President Trump someone who was going to disrupt the system, who was speaking their language. Uh, you know, would be a trade deals or some other um even cultural issues he felt spoke to them, they

felt spoke to them um at this point. And you're right though, that is I think where the tipping point for him in parts of Pennsylvania, Michigan, Wisconsin. I was very surprised. I did not expect President Trump to win. I thought Hillary Clinton in Bucks County or where I'm from, Chester County, in the Philadelphia Star would have performed better than she did. Within this Congressman, is the Tax Reform Act.

There's a couple of articles this week clearly suggesting in the zeitgeist that it's not playing well with frontline, mainline Republicans. It's only a product for the rich and the guilded age that we live in. How the Republicans sell the benefits of the new tax reform to the broad spectrum of America, I think you have to do a couple of things. Number One, we don't have invertens anymore. So. The challenge here, I think you've correctly identified it is

in talking about how corporate tax reform benefits everyone. Uh, that can get lost in the shuffle. It's an abstraction. I think you have to point to the stock market, you have to point to low unemployment, you have to point to um the fact that companies aren't leaving America anymore. That's one piece of the puzzle. The other one is looking at the wage increased growth. We've seen in the

past year, wage increased growth of about three percent. That significant final piece here is and this is a bigger challenge because it hasn't happened yet. Folks have not filed obviously, they tax research. Yet that's when you're going to see that family, that middle and middle income class family ums them aided. Again the generalization of a couple of thousand dollars. We cannot rely as Republicans just on saying we pass tax reform, the economy is going good, vote for us.

There has to be more than that. The other thing, I would say Democrats have really doubled and tripled down on their counter messaging on this, and that's what the other reason why I think it has not really been embedded as a positive in the minds of every single Republican voter or or every single independent or Democratic congresmand Cossello,

where this is the sixth District of Pennsylvania Congressman. As you look across the aisle, there's, you know, developing Democrat party strategy, one of progressive, one of what someone suggests as extreme, and like the Republicans, trying to find a path to the middle in a distant part of Pennsylvania. I know you've never been to Pittsburgh, but just southwest

of Pittsburgh, Mr Lamb did better than good. Is one of your great fears for the GOP is the Democrats find more Connor Lambs well, uh, not too far from me Burke's County, which I represent part of right now, and Levining County as you head towards Hershey, Pennsylvania used to be represented by Tim Holden, another blue dog Democrat.

And what you're finding is that Democrats who are who do culturally connect with their region remind those Democratic voters that voted for Trump that there are Democrats out there like them. They're just looking for those kinds of Democrats.

They're going to have the same challenge that Republicans have, and that is you have a progressive left, which if you pull it, um pe socialism as favorable, right, I mean that's really I mean we're talking really left type progressive and so they have the same ideological tensions that Republicans have at times. Um. And so you're sort of seeing this strange mixture in the Democratic Party where they're

gonna have their own uh sets of issues. But in certain parts of Pennsylvania and across the country in the Midwest, and Pittsburgh is the Midwest. Um, Philadelphia, I would say, isn't. But in the Midwest, no, no, it's not. I mean Pittsburgh. I mean it's interesting. Pennsylvania's kind of the dividing line between the Midwest and western Pennsylvania and the northeast. This

it's the Steelers verse Eagles baby, um and uh. In the Midwest, those Democrats have to be not only they have to be and they also have to be perceived as different Democrats than the progressive left in order to win, just like Republicans in my neck of the woods need to be viewed as you know, your suburban moderate centrist Republican, not your tea party anti establishment republican that's willing to shut the government down. A lot of voters are not

going to go for that brand of Republicanism either. So it's it creates I think, actually, Tom the kind of America that we have, which is gone, that's constantly you know, the wind shift a little bit, and you have to

reflect the passions of the time. But you also have to demonstrate thoughtfulness and a degree of independence as a member of Congress, because I think voters ultimately a lot of voters who aren't just going to vote straight are or straight d are looking for that uh, that that independent brand and that check and balance on executive branch, on regulatory agencies, and and are trying to focus on

local issues. Did you see did you see John Farrell how the congressman got in that slam against the Pittsburgh Steelers. I felt for a moment like I was doing drive time Katie K Radio, CBS Radio, Pittsburgh. I do like to see. I like the Steelers, but I love the Oh you just thank god you're retiring congressman, Thank you so much. Ryan at Castello from Philadelphia might point out, and with Kevin Surreley all Eagles an important conversation there.

Betsy Graci research piece reads dense, It is loaded with math, It is loaded with ratios, and it always ends up being a smart dissertation on what's going on, She joins us this morning, Betsy, the operating incomes of these beasts continues to grow? Is there no end in sight? Does the operating the profit of of our major banks? Does it just continue to advance? You know, Tom, there's uh.

This note that we wrote is all about tech and technology and investing in tech, and it is driving operating leverage. And that's one of the key levers for why we do have some improvement here in operating profit of the US banks. US banks catching a bit of a bit over the last week, Betsy, largely off the back of this mild sort of statening of the yield curve back up to a massive twenty six basis points two versus tens. Betsy, how much support can you expect from the shape of

a yield curve going forward from here? Yeah, you know, Jonathan's um state the curve definitely is a little bit of a help. But um, that's not the only thing that's driving our outlaws here for the institutions. You know, number one is the operating leverage from this investment spent in technology. And then you know, we also have I know,

a little bit of loan growth. It's not as much as some people want, but you have a little bit of you know, commercial industrial growth taking up here in the third quarter, you expect to get more volume in terms and long growth. Bet see what's driving that, Well, you know we're talking about small numbers, right, We're talking about three percent going to four percent, and that is in a large part function of commercial industrial loans which

are beginning to accelerate. That's the function of companies beginning some cap bax, as well as a little bit of m and a investment. Betsy. I want to talk about your wonderful research report, a collaborative effort by Morgan Stanley and you know, I look at this report is almost a two thousand nineteen, as you say, a call to arms and folks. All you need to know about technology is the following new entrants able to provide banking services for up to cheaper Why don't you have a picture

of Jeff Bezos on the cover. Well, he's not into banking directly yet, right yet, so, uh depiction on the cover, though, I think does give you know this report the you know, the background for the report, which is essentially a strategic imperative for bank management to invest in the technology to get four things right. You know, one is a customer centric view and I do want to highlight here this is a global effort. My colleague in London, Julia Miatto,

she really drove this note. UM. Importantly, the awards strategic agenda has to be customer centric. Few at the heart of the bank. Fix the legacy systems, make them work for you, not against you. UM, embrace change and get to scale. And you know, getting to scales can be through a variety of ways. Partnering with thin Tex, partnering with the providers, or m and A. You know, it's

it's one of those things. Yeah, but Amazon always wins at This is the idea of retail players like Amazon come in to take on Fortress Diamond and Fortress mooining Head and the rest or is it something more tech techy Google, you know, let's write code kind of stuff. Um. At this stage, we believe the banks are you know that embrace change and put their customers at the heart

of their I T platforms. It's more of the techie techy and you know, my my opinion, more of the tech techies five than the we're gonna be taken over by Big Tex. But hey, this is an evolving discussion, right, Who's gonna who's gonna leave the charge on? This? Is Mr Diamond doing it? There's another bank that has best practices on the new technology. You know we have in here global note um, a group of institutions that we think are best in classmates about twelve or fifteen of

them out of the US. We're talking about Bank of America and JPM and Bank of America in the consumer space is really leading the pack. Interesting. Interesting, Well, just one more piece of gossip before we let you go, Betsye, And that is the theme this week of a zeitgeist at Bank of America is not getting it done in investment banking, folks. For all of you that know the investment bankers never wear bow ties. They don't know who

a C. Milan is. They're smooth guys out in the Hampton's. Yes, that's what I'm saying exactly, Betsy, give us an update on investment banking for Mr moynihan, what's really going on there? You know? Look, um, my opinion here is that in Bay their focus is, as you will know, Tom quality growth right, and quality growth means uh dick tier knitting. And I view that they're investment banking business is more of a corporate centric, client centric and flow driven more

of the plain vanilla. Yeah, that's called you're too young for this, Betsy, but that's called doing a chemical bank. But the answers that's what they want to get back to, right, well, I think that's where they are. Yeah, yeah, excuse me, Betsy, very quickly, what's your single best buy right now? Topic State Streets? Okay, very good, Betsy Grace. Well please, yes,

we want to know why. Okay, So look, State Street is our topic in US large cat banks, and the main reason is that they have come under some pressure of a stock recently when they announced the CRD acquisition, which is a technology play in my opinion, and I believe the market is being too punitive on that and happy to get into that more. You know, another time if you want, no, We're gonna can't do it right now.

Betsy Gracy, thank you so much for Morgan Stanley. Congratulations on this important research piece on technology and with banking, of course. Betsy Grace of Morgan Stanley, thanks for listening to the Bloomberg Surveillance Podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio