Surveillance: The Fed's Options With Kroszner

Randall Krosner of the Boos School of Chicago were thrilled the former governor of the Federal Reserve continues with us at Queen Victoria Street and sitting with me in New York as Allan Ruskin, chief international strategist for Deutsche Bank as well, if you could bring up this chart and we ran this by Randy Crossing here moments ago, I want to run it by Alan Ruskin as well. We had QUEE and then we rolled over and we had q T and Allen we got a new set of

options based around this repo market reality. One was asserted to of QT the yellow line, one was the flat line. And the new news, as we may expand the balance sheet, is that the Deutsche Bank view. I think what you saw from Chairman Powell is a reasonable characterization of where we're at. I think it'll look and see how effective the repos are. We've got some special circumstances now in terms of braining factors, you know, particularly from settlements and

you know, just generally territory balances. But it looks like excess reserves that are in the system are not doing their job as such, and it does look like we're gonna need more reserves. So I think ultimately the organic path is probably to that green line to the top side. So there's the light blue line of the top side. Okay, I want you to speak to the academics and one of the charms of Ragarajin and Randy Crosser at BOOST School, like your charm at LSE, is you guys actually understand

there's a market out there. Explain to the academic economist purists why they need to pay attention to the repo. Explain to the monetary theoreticians why all this matters. Well, it certainly matters that the Federal Reserve has control of the very front end of the curve, that's the anchor to the whole yield curve. So at a minimum they want to be able to hit their effective funds read target. It pretty much sets the tone for the rest of the curve. Um, you don't really want extreme levels of

volatility either. That sort of sets in tune questions about effectiveness and monetary policy, whether the Federal Reserve can also quash short term volatility as well at the front of the curve. So, um, they're want control. Okay, they want control, And we were talking about this with you, Randy Crossner's or anything. What can the FED do now to fix this more permanently? So I think you know there at

least two things that they could do. One is exactly Zellen said, allow the balance sheet to to continue to grow. We talked about that before. And also they could set up a facility that allows for more reserves to come into the system just naturally as rates go up, rather than the FIT having to decide, well, we're gonna put in twenty billion at eleven AM or ten billion at eleven AM. We the Fed does estimates of how much is needed each day. It's difficult to get those estimates right.

Why not let the market decide that you So you effectively could just have a standing facility that if rates go above the target by a certain amount, then you just provide as as much as as you need at that and that would help to provide some stability there. M Randy. If there was a liquidity problem in the markets, like a real liquidity problem in the market, where would we see it first? So I think this is exactly

where you would see it. In these money markets. You see these these short term rates spike up because people need the cash and they need it now. They don't need it tomorrow, they need it now, and these are these these kind of now rates. Um. If you look at alan, you know the impact on the rest of the markets. Does it have an impact on some of the other central banks around the world on on how they should look at liquidity? Um, Not to a great degree.

But I think what you have seen is that just temporarily, there was some linkage between currencies and the tightness in the liquidity markets, or the dollar liquidity markets. So you did see, for example, as things tightened up, the dollar briefly went through a spell where it actually did quite well, and then when things eased up, the dollar gave back something. So you know, some of that relates obviously to the you know where the sources of funding. Some of the

funding comes through the cross currency basis market. So um, you know there is a linkage there as well. Um, I think the other central banks have got to know. Obviously other issues you don't see particular natural spillover is yet in terms of tension and I liquidity in other markets.

Let's keep on McCormick publishing on Australia in the cross currency dynamics between Australia and all this last now, Randy Krouser ill agrees and wrote a wonderful book, The Age of Turbulence in the math world of you and Alan Ruskin. Turbulence is at epsilon off the other side of the equation. What's the new epsilon? What do we learned this week about the new volatility that Mr Ruskin was talking about

moments ago? Well, I think that's right. I think these these challenges and volatility of the market and the liquidity the market, that's really it's the financial plumbing. It's the base for for everything, and when it's working normally, we don't even think about it. It's just like the plumbing in your house. You never think about it working, but man if it gets backed up, you know that you

want to run from that house. It causes all sorts of troubles and it's foundational for it can cause volatility and other markets that can cause difficulties for just making making payments. And so I think what we need to really do is think about do we have the right institutions to make sure we have the smooth function of

the markets. And that's why allowing the balance sheet to grow organically, that's why having a facility like many other central banks have to just naturally provide more more reserves into the system rather than the New York Fed and and the Fed Reserve and Washington try to estimate each day.

But the right number is that those might be ways to go to smoothen out, but still their fundamental fragilities that are there that may be unintended consequences of regulation, and we need a kind of a bigger rethink about what those are. Thank you so much for Randy Crossner. They're very generous with this time this morning of University of Chicago, both school and Alan Ruskin from Deutsche Bank.

Why don't you bring in Mischelle? Michelle, do you want to us now principal Global Investors chiefs strategist joining us out of London. Same you live it every single day, So walkers through what on earth is the lightest twist and turn in the never ending Brexit story. Yeah, it's certainly never ending. Um. To be honest, this this latest twist is I think a little bit more of nothing. I don't think we've learned anything new if we listen really toward Junker said, I don't think he's given any

clear information about a potential deal. Um. And certainly if you've just heard from the Ireland Finance minister, they're certainly suggesting that the UK still far away from from getting any kind of deal. The Irish thrown cold water on the whole thing, and we've still got to wait to see what the Supreme Court says about the ruling on

Boris Johnson suspending Parliament. Any insight on now whatsoever seem well, I mean, it's an interesting one and and then again it doesn't really likely have any impact on breaksit whatsoever unless you were to have a completely drastic ruling which meant that everyone was brought back in and a lot of the powers taken away from Boris, which seems extremely

unlikely at this stage. I think for us, what it's been really interesting is that people are still have some optimism about brigs and and having Stirling and around one twenty five against the dollar is to ask quite surprising. Does that capture some optimism? See, it must do. It must be that people are taking away the risk of a no deal Brexit. For us, we would say there's still about chance of a no deal Brexit. Uh, there

doesn't seem to be any advancement in negotiations whatsoever. We still have no idea what any deal that Boris has in mind is um and of course, and then we're hearing that the you know, the chance of a general election are increasing, which adds to more uncertainty. So if anything actually going into October, we would have expected starting to be closer to the one twenty mark rather than mark. So tell us what you're telling clients about what they

should be doing right now. I think that if whatever we know, we know that Brexit at some point is likely to happen, we know there's going to be a prolonged period of uncertainty. To us, that means that the UK economy is going to be weakening. So if you are willing to wait out and wait for a no deal breaks or whatever form of Brexit it is, then at some point then there maybe value ahead for any

kind of assets UK assets. The thing is is that if you want to get back into the UK at that point, you still have to have a very very strong stomach for the macro weakness that's likely to ensue, and also there a lot of volatility that's likely to come because like breaks, it doesn't mean that there's certainty. Businesses still have no idea what breaks it means and

how they will have to operate under what conditions. So if anything that breaks it means I want to take it seem into a broader view your work with Principal Global Investors and in almost like a strategy into October, John and I and all of our listeners worldwide are getting bombarded by this story. This story is cacophony the right word, John, I think it can be. There's a cacophony of stuff going on. How do you synthesize that

into a cogent message for principal Global investors. I have to say it is a very very difficult period for investors, and one of the reasons is is it's not just a geopolitical atmosphere which is quite volatile, but also the macro picture is quite uncertain for us. What we've tried to do is we're trying to take a step back and look at what are the fundamentals. Now, that doesn't mean you take away your eyes from the headlines, because their headlines at this stage have a potential to hit.

And what I mean by that is we can see ecting markets doing relatively well over the rest of the year, so I mean a very modest rally. And that is assuming that the global economy recovers, starts to recover of stabilizers even towards the end of the year. But it also has to imply that that none of the shocks that are threatening the global economy come to fruition. So, in other words, the market price for perfection. Okay, I'll go with that. The the equity market is clearly priced

for perfection. Have we become immune to the dreaded exaggerate shark. I don't think we're immune, because if you see how markets fluctuate um with every single headline, I don't think they're becoming immune. But it has been somewhat interesting to us that when you consider where actually markets are compared to the underlying economy, it's so much stronger that dislocation has not disappeared. It's telling us that investors just want to put their money to work, which in some ways

is surprising. But I think we just have to get on the back of that. And you have seen some capitulation number investors who have had a very bearish um outlook for a while now, and now I happen to get back on top of this and get behind the acting market money. I mean, you have two shingles from the London School of Economics. I know you went through their international relations course. Is it always been like this?

I mean, if you go back to classic LSE and like the beginning the advent of World War two, or even back beyond that, has the cacophony we've been instance August normal? Or is this like a new thing because of new technology, new information transfer. I think it's something of a new thing, and I really think it's down to actually the politicians that we have um in the

global economy, the amount of geopolitical risks. It's an upproval of what has become a global norm for a number of decades is now being disrupted and I think that is really worth driving a lot of the volatility and uncertainty which is circling invested every day. Now, this has been wonderful. Don't be a stranger. See Michelle with us from a London thrill that she could be with us today with principal global investors. Right now, I want to

get a snapshot John, of the American economy. But before that, we must digress because it's far too important. Brighton and Hove Albion. Is that how you pronounced that? That's right? Are they like are they like a relegated coming up a better team or have they been there for years? I mean they're doing okay. They're doing okay and they're going to play Newcastle. Yeah. Should we bring in someone

with some perspective might have a bit of something about Newcastle? Yeah, in Shepherdson with us with Panthea, we're going to get to the American economy. It it's funny ivan for me to watch Newcastle because it's like totally different than the fancy pants Tottenham, you know, in fancy new stadium. I mean, Newcastle is a breath of fresh air to watch. Well, I wouldn't know something because I've given up my season ticket after twenty three years. Why did you do that?

It's my protest against the ownership. Not another penny goes to Mike Ashley. Not another penny. Can you just explain to Tom who Mike Ashley is, because is the retalent character who bought the club about ten years ago and it was kind of running into the ground. So this is this is my I'm not the only one protesting. There's about ten thou other season tickets you haven't read. He like the equivalent of foot locker in the United Kingdom sports Direct, one of these big chains of sports

stores in the UK. You also owns Newcastle United. I'm gonna secure you this right over to the expertise of Pantheon Economics. The consumer in the United Kingdom at their foot locker, how's our foot locker doing? How is the consumer? Ian Shepherdson. In America, the consumers fine? I mean, the

consumer is dragging along the whole economy. It looks to me like we're going to get another three plus quarter in the third quarter, which is really very good going given that we've seen business confidence really take a pounding from the trade war. Actually, the trade war might be helping consumer spending right now, because looks to me looking at the chain store sales numbers that people have been pulling forward purchases of consumer goods because they know that

the tariffs are coming. There were tarwers from post September one, so they'll start hitting the stores next month. So people looked to have been spending more like bringing forward some maybe some of the holiday purchases just to avoid the tariffits. So that's going to flatter the third quarter. It's the fourth quarter and beyond that. I'm a bit nervous about. But I mean, certainly compared to the corporate sect of the consumers, pretty a bit nervous about Bullet or bit

nervous about Rose and Grin George. That's that's an interesting question. I gotta Sam. I'm more on the Rose and Grin George to the spectrum Blore today talking about needing to action downside inflation risks. But the fact is that core CPI inflation now is two point four percent. A few months ago it is two percent. It hasn't been a both point four percent, yes, So I'm not quite sure where he's coming from it. You know, we we know there's some stuff in the pipeline from caiffs and some

of the things is going to push inflation higher. So I think that that low inflation ship. You know, I think maybe it's sailed, and I'm not quite sure why Bullot is hanging onto it so tightly. Ian Shepherdson moments ago. I'm sure you haven't seen this, because it just came out seconds ago, literally from the Federris Bank of Boston, Mr Rosen Grin commenting on dissenting vote at the meeting

of the Federal Open Market Committee. Folks, this is a formal document stating his descent was that they should not cut rates. The first sentence, Ian Shepherdson, The stance of monetary policy is accommodative. Do you agree with that that

right now, even before this beet cut, that we were accommodative. Yes, I'm in real interest rates are zero, depending how you measure them, roughly zero long term rates, and some of them are below zero implied real mortgage rates on negative household service costs of corporate That service costs are rock rock. So I'm looking for kigns of any lack of accommodation,

and as you pose, I'm not seeing them. You know, I can I can kind of understand this sort of insurance type of proachest risk management approach that Powell has talked about, because after all, today core PC inflation is one point six percent, and that's not terrifying at all. Um. I just think that maybe a bit of forward thinking might might might make it clearer than actually that rate is going to rise, and that although the economy is going to weaken, I think that it's probably not going

to roll over. So I think some of these tensions are going to emerge, but probably not in the way that Jim Ballard thinks, more in the way that Eric Rosingren thinks, in that actually inflation and risk is not gone. But I gotta tell you, Tom, this is a hard thing to get over to people, because you know, we we haven't seen core CPI inflay at both three percent

for more than twenty years. I think we might see it again next next spring because of the tariffs, and so that the sort of disinflation low inflation mindset is extremely deeply entrenched, just like the high inflation mindset was deeply entrenched in the seventies and eighties, and it took a generation to work it out. But maybe we've we've We've got so many people know who can't remember any any rising inflation environment that they cannot think, well, it

can't happen, but actually I think it probably can. In quick final word on the repo operations that the New York Fed has been conducting, the former New York Fed President Bill Dudley saying that you should get a crib. The Fed can handle the repo market. Do you agree with that? Ian? Are we're going to smooth out some of the bumps of this week? They can handle it if they keep doing repos on a very frequent basis.

But if they don't, then it won't work because the reserves have shrunk so much that the IOE R FED funds spread, which has caused a problem. I can't come down permanently without a permanent reserve AD. So it's either a permanent reserve AD or they have to do a lot more frequent repos. I can't really say an Ian Sheperdson,

thank you so much with Pantheon. Nice update there. We're gonna do this now, we're gonna we're spend this black in a little bit of the next block with a guy who's been all over the media on initial public offerings because he's the only one we know east of the Hudson River that actually reads a damn prospectus. Red Wallace is with a Triton research and instead of going like what's we're all gonna do? Or what's Peloton gonna do? I want to talk for Global wall Street Wallace. How

did we get here? We used to get the prospectuses. There was a dance, there was a ballet, and it just seems to be blown up in the last eight months or so. Um, well, it's longer than the last eight months in the sense that you know, when Uber came out, we did the look back of Uber us, Microsoft and Microsoft in Public and nine with a you know, fifty page perspectives, right, and a much smaller business that

was also much more profitable. So it was a simple, smaller profitable business that could be described in fifty pages and people could understand what they were or the dog perspectives. Now three and eighty three pages, what's in there allowed us to enjoy these losses. Well, so that's what you want to do, is you want to be able to build a model out of the materials that they give you in the perspectus, and unfortunately you have to do three eighty three pages of what looks like it should

contain the right information and it doesn't. This is well, this is said. I mean, between the three of us in this room, we've read four thousand twelve perspectives. Also read for me, I mean, you know, it's interesting. We've had is gonna be the hear of these great tech I p o s. We had all lined up Airbnb, we work, Uber, Lift, all that kind of stuff. It

hasn't been very good. And I'm going to go back to Uber because for me that was kind of marked a sea change from the public markets from the van markets, which is the company did not do an adequate job apparently of kind of giving investors a sense of the path the profitability. How are you going to get there? I understand you're not profitable profitable today, that's okay, But what's the path of profitability? They didn't do that today.

Uh no, they didn't. But if you were going to, you know, indict the entire I p O market, I think you couldn't really do it. Just with you know, Uber, you need lift we work now is three points make a line, But I think they're clearly bifurcated from the rest of the companies that have gone public in a very successful showing. This year. I mean just data Dog and cloud Flair recently, like going above their ranges with great trading performance shows you what really is a tailor

to cities. Not to use it to blasioism, but um, you know the guys who have a model that people understand, and when they show investors from respect and give them the numbers that expect to see so that you can actually do the analysis correctly, it's different. I think you know, lift Uber and now we Work are all hyper capitalized, hyper opaque situations. And I think you know when we look at it, like you know, as you guys know, we score these companies on you know, a bunch of

over a dozen criteria. But the three things that when we see them in combination it's really a killer are big losses, which lift Uber and we Work all had opacity, right when you can't actually look into the numbers and pencil at a model that makes sense like okay, you're losing two billion dollars today, but you can see how I'm going to get my money back at some point. And then the third thing that I think we work

is really shown is just arrogance. And so when you have opacity and losses, the investors have to trust you, and the arrogance makes trust impossible to obtain, which is I think why we work as having the trouble they're having, right. And one of the other things that's just really strikes me, and I've been in this business thirty years, is the mismatch right now invaluation between private markets I e. Forty seven billion dollars before we work and public markets maybe

price talk of ten billion dollars. I've never seen that before and I and we're now seeing these marked a market in the public markets that are materially different and lower than in some cases higher but oftentimes sometimes lower this year. What's going on there? I mean, if I was going to be positive about it, what I would say is this that Uber and we work in particular, are different kinds of companies in the sense that they've

changed the world. I mean, I don't know about you, guys, like I can't go back to a world that doesn't have Uber, and I don't think we're going to go back to a world that doesn't have we work either, Right. And so these were very big, bold bets by investors that said, you know, we're onto something here that's growing very quickly and changing people's behavior in a really fundamental way. And so the products are great, right, and the companies

are great. The disclosure to investors who are asked to take over for the private market investors is the thing that you can quibble with because it's like, Okay, well, the people who had access to perfect data on the private side paid one price, and now, based on the information we can see in the public side, that price doesn't seem to make a lot of sense. I totally agree that you just said, except they take grave issue. In the old days, you went public and in the transaction,

the public corpus was the majority of the company. These are essentially private transaction people selling a stub item, which is how how how stubby is stubby? If you spin off we works, the company is. But they're they're doing split the difference. They're selling off percent of the company. And you're telling me that's a public company. I mean, well,

that's what Microsoft did. And also, by the way, like you know, Bill Gates and Steve Bond were sold into the I p O. Right, so they took money off the table in that I p O. So I think structurally it's similar. It's just the size is different, right because you didn't mean you know, it's only an accounting technicality that makes Uber a ten million dollar company. Really, their GP is fifty billion dollars, so it's a gigantic company.

Can you stay around? Sure? Okay, I'm just you know, he's the only one if I need eight thousand shares of we dog and surveillance clarity here. We always are going for clarity. I say we dog like, I say bit dog like. You know, it's like, really are you and I know, folks, I'm editorializing. Save me dated dog is not a dog, No, it's the name of the company. Company, the name of the company. Remember dog Pile before Google, before Google bought the algorithms of Dogpile. Dog Pile when

it came out, it was like stunning. It was like what is this search engine? And that was this is this is before your time. I think of the globe. Dot com is the sort of poster child of dumb you know dot com bubble companies. Yeah, speaking of I mean one of the things that I was thinking about, just as far as how things have changed. If you look at we Work, we work as kind of its own little dot com crash all by itself right. Well, let's try time with this wisdom on your next I

p O allocation. 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