Surveillance: The Pros and Cons of A "Rules-Based" Fed

of course on the Bloomberg. Alberto Gallo was at RBS now at Algebras and we want to dive into the market view right now with Alberto. Bring up the chart, Anthony, if you would. This is a chart we showed four or five years ago about three times a day. This is the Spanish German spread, the difference in yield between

Spain and Germany. And all you need to know is albert O Galla loaded the boat right there and did better than good in trying to game how race would come down for Spain, Italy, Greece and the rest of them. And the major question, Alberto is we're down here now and what does that symbolize for the old and the new levels of Spain. Is it a new regime for Spain? Is it all clear for Spain? It's a law and you're supposed to be cautious. Spain fortunately has a stable

political situation. But generally what we're gonna see in Europe is the emergence of the same populous wave that we are that we have seen in the UK and the US. I think the next week points the next vulnerable countries are Italy and France. So that's the areas where we're more worried about the rising eilds and in spreads. Italy goes to vote a referendum on the fourth of the

December about simplifying the constitution and simplifying the government. But this vote has been painted by the opposition as a way to kick out the current government, a little bit like Brexit was painted as a way to kick the former UK government. And then you have in France the risk of le pan um rising. While the current leading center right candidate is very harsh on economic policy is a general statement and Marty Feldstein was on yesterday talking

about asset bubbles. Professor Feldstein with real concern about elevated markets. Do you agree with that our markets frothy or is there value there in the galo bonds space or for that matter, the non galo equity space. We have been cautious on bonds. We've been calling for this bubble to deflate for many months, and particularly you know, we're worried about Italian bonds, were worried about French bonds and about UK bonds. You know, here in the UK inflation expect

stations are three and a half. You're getting one point four percent on Guild ten year yields. So there is no value in bonds. You've got to be in a type of investment which is positioned for a rising inflation or environment and a rising bond yield environment. And currently bond funds are not set for that environment because they were all long, they were all in a lot of btfs where all positive strategies, and as an investor in those funds, you're sitting doc right. But Alberto, we need

risk back on the markets right. What DTV has done it rightly so is to give time for fiscal spending so you don't price risk when when you look at bond yields anymore. This has to come back if we're going to keep in check so some kind of populous measures which are counterproductive. Yeah, but you know, risk buying bonds is not really a risk trade. It's it's when you think at the moment. Yeah, if you think growth is low and and central banks are going to keep

the world from falling apart, you buy bonds. If you actually think that there is some growth and fiscal spending, then you start buying. Either you buy high yield bonds, or you buy stocks or your position for a steeper yield curve. You buy banks and insurance companies. You buy all those things that people were not looking at because they were linked to growth. Remember, even inequities. People were buying utilities and telecoms, which was a dividend trade. It

wasn't a growth trade. So we're seeing a huge rotation now, right. But you remember, probably as much as I do, there there was a point when berluscing Sylvia Brosco and it was in charge. There was no growth. But actually the real opposition wasn't political. It was a bond market that kicked him out right, and we had a technocratic government. We don't have that anymore. We don't have that. But

you know, you know, drug is living in January. If we have a no vote in Italy, and if we have lepan rising in France, you know, do whatever it takes.

Pledge is not gonna work as well. So we could still see Italy spread going above two hundred against boons and France spread going around the hundred against boons if there is a no vote at the referendum in Italy, which is possible, or if there is a chance of lepan higher than thirty percent, which is and to become true and and and this this is the real issue, inequality leading to population. Monetary policy hasn't solved the problem. I want to send this up with economics here, Alberto,

I think this is just absolutely critical. Let's bring up the Francy and the quadrart. This is nominal GDP in Francis Italy and it's not a pretty story. There is the presidential four year moving average of the animal spirit of Italy and it ain't there. Do you see and with with davidy Sarah, do you see albert O Gallo any indication of economic growth or does Mr Trump and Chancellor Miracle and others have to work within a no

growth analysis. I think it's very different. I think the US we're gonna see a stronger growth because sound of fiscal policies will have an impact. In particular, if you do infrastructure spending, you spend a dollar, you increase GDP by around a dollar or maybe even more. If you cut taxes to the one percent, then you don't have

that same effect. But infrastructure spending is good. In the UK, you're probably gonna see the same although inflation is going to outpace GDP because the pound is weak and there's a lot of uncertainty. So but in Europe, show ball. The German finance minister yesterday said we're going to double the incer plan. The inucor plan is only zero point one percent of GDP, so you actually need to to make it ten times eager to have an impact in Europe,

there's a problem. Yeah, that factor analysis is important. Let's finally look at the euro here and I look at the markets, folks with Alberto Gala, Alberto, do you just sum a dashed through parody? Once twice, three four times? We've made the dash to parity is a weaker yro the solution for all these different issues. I think it helps, but we it's not the solution. It helps, and we're

gonna see another dash to party. I agree with you as you suggested, but I think the Europe the weak ero helps Germany, helps some countries, some businesses that export, but you really need inclusive growth policies, so you need some spending in infrastructure, You need some spending in the periphery countries. I have done austerity like Greece or you know, or Spain or Italy. Because now the dividing growth between Germany, which benefits the most by the week euro versus the

other countries, you know, it is too large. And if the other countries all vote for populist governments, then there's no more Europe. Europe parody with the dollar will ever happen. Yeah, I think your party is in the cards, especially if you see a no vote at the Italian referenum, or if you see lepen rising in France. All these trends are going to weaken the Europe definitely and and increased

spreads in peripheral bonds. All right, there you go, Berta Gallus saying your parody tom possibly in the cards, depending of course, on the outcome of this referendomnity December four. It's a great pleasure to have with a small Street Coumar, president of Street Umar Global Strategies. Here in are Bloomberg eleven three or is it years? And New york'sre great to see. Let's start with the dollar against slightly weaker today, but this has been a strong dollar story at least

since the election. How long do you do you expect that to persist? And what's driving it? I have been a dollar bull for quite some time. I think this is the start. For instance, if you were to look in terms of where the dollar euro exchange rate is going, I have been saying two clients that we should expect the euro to go to parody. We are now talking about one or six, one or seven, so we have a little bit further to go. What propels it, David, is the fact that one you have a FED hike,

which was will they hike in December? Won't they hike in December? And as you just said a couple of minutes ago, you now have a hundred percent probability according to the marketer. And I think the Trump election and the fact that he has said that he will not renominate Janet Yellen to the chairmanship when her term expires in January tween means that the Fed essentially has no pull. She's not going to get if she's not going to be renominated, she might as well do what is necessary

and hike. And I'm looking for at least two hikes next year, which is again a switch from what I thought before the elections. So the elections have changed it quite a bit. You're going to have quite a few more rate hikes and that boost the dollar. In addition, if there is anything like a trade restriction taking place on the part of Trump, I hope not. I hope it's more on the fiscal stimulus side rather than trade restrictions. But if restrictions come into force, that is going to

strengthen the dollar as well. It increases global uncertainty, it increases increases global risk, and global investors bring money into the United States. When that happens, all of that is going to be good for the dollar. And the side point to what you asked, David, as that happens, I have started to say that the two thirty five ten year yield we saw in the last couple of days and today it's just below two thirty, it's just not sustainable because you have such a we have more than

a two percent spread with the German tenure Buld. It's the highest we have had since nine and this is just unsustainable. At what I think it means is that the bond vigilantes have gone a bit too far in terms of selling the treasury. So it's a treasury yields come down and the dollar continues to strengthen. What you're you're implying there, I guess, is that you have a father's politically aware, not necessarily political as a as an institution.

They would fiercely say that that they're not, but there was some awareness here that that they could doing something at the last meeting, could have done something with regard to to the election. How politically cognizant is this Federal Reserve? Do you think? Well, we have one again in controvertible fact, And that is according to the Federal Election Commission. Lyle Brainard, who is a permanent voter and a member of the

FED Board of Governors. She was a contributor to the Hillary Clinton campaign, rumored to be in the running for Treasury secretary in a Clinton administration, and the responses this is properly legal. But the question to you and me is does it. How does it look whether it is legal or not. So I think it puts the whole question of political independence into into issue. And we have had a long history in this country, David, of presidents

from time to time bullying the FED. One of the star instances I think of is my the former chairman of my economics department at Columbia, Author Burns, who became the chairman in the early seventies, essentially was bullied into increasing the money supply in n seventy two to finance Richard Nixon's Vietnam War, and so it has been done. So the FED does not have a history of continued independence. Paul Wolker, if anything, was probably an exception to the rule.

What was Arthur Burns like to review for our young number ones here today? There was Cherry chairman, Bernanke, Chairman Greenspan, huge uproar when we went from Greenspan Bernankey, and before that there were selected others. But Arthur Burns defined a kind of economics. Could he do economics today? In the need for transparency today? I mean, would we accept him pipe smoking in the House of the Senate, Humphrey Hawkins, just as one idea, I think the world has changed.

I think your your question is spot on, Tom, because I don't see the author Burns kind of pipe smoking uh omp chat economist, contemplative thinking hard right. I mean, David, this is a serious deal because if you go back and look, Arthur Burns wasn't measured. He wasn't measured. I mean they made serious jumps in yields when they chose to and of course not to forget one more, David,

since you asked a question about political independence. We had a very little remembered FED chairman called g William Miller who lasted in his job for exactly one year, in challenging to say the last when when when you look at that we bought the show to a complete Arthur once again with three commands, I fell asleep, No, no,

no three. When you when you look at the future of this FED over the next twelve months eighteen months, Donald Trump the president, let us have a huge opportunity here to reshape it, whether we're not not even necessarily by bullying. He's going to have a lot of personnel changes that that that he can make. What does a Donald Trump FED look like? And we've been talking about past chairman what what is the the ideal Donald Trump,

Chairman of the Fan. That's a great question, David. I would characterize the FED policy that we have had in the last few years as essentially seat of the pants policy making. You look at the latest data point that you get and then decide whether to hike or not to hike. If there is the slightest bit of a problem elsewhere, you decide to postpone. And that was the

That's what happened. For instance, in September of twenty fifteen, when there was in the Jackson Hole a month prior, the FED had essentially Janet Ellen seemed to indicate a September eight hike which never happened groundworkers there, and so that is what we had. So the markets have been pushed up, held back by what the FED is going to do. So the change I would like to see, and I think many of the conservative people advising the President elect come from that camp, is more rules based.

For instance, another one of my professors in my PhD dissertation was John Taylor, famous for his tailor rule, who is now at Stanford University. And in terms of what it is my cap by my calculation, the tailor rule would call for a federal funds rate of about plus one and a half percent today, which shown also about the let's talk to you now, Rules versus discretion. Sherman Greenspan says more discretion. John Taylor Stanford says more rules,

which works. Three. Absolutely. I'm in favor of rules because I think discretion gives rise to all kinds of subjectivity which you do not want. The market gets certainty as a result of rules. In other words, the problem there, Tom is not rules versus discretion as much as the fact that a rule space policy makes it unnecessary to have these twelve members voting on the Federal Reserve decisions. You and I can guess exactly what the fit should

be doing, and the market has certainty. Street Commar with Us from Street Commar Global Strategy is one of the great joys of having doctor uh Commar in with us is the idea of eighteen things to talk about. Let me go to the emotion of our listeners, which is, where's the next pay raise, whether it's them, their kids, whatever. So if I get a Trumpian inflation, do you just assume I get be in growth with that? Or is

the worst outcome here? I get a higher inflation without the growth that drives wage growth, which is I think you are going to have some inflation pickup, Tom, if you have a significant increase in physical spending and before that has an impact on productivity. The spending alone is likely to push up prices. Now, whether you get a salary increase or not compared with that inflation is going to depend very much in terms of what kind of

work that person is doing. For instance, the low wage or manufacturing jobs where the competitors happened to be in Mexico or China or other countries, those jobs are gone forever. I don't think trade restrictions are threats by the new president Electrump do for those people you just describe who were his core constituency. We have a lesson there from

what happened in Germany in two thousand three, Tom. What they had was known as the Hearts Reforms, which cost the Den Chancellor Gerhard Schreuder to be thrown out of office. In two thousand five, Angela Merkel came in, but it essentially said workers need to be retrained, they need to be educated in jobs which have a greater demand. And as you go for an education, as you accept the training, you will get some form of salary to keep you going, and in the future you will be self sustaining as

a result of better skills. But if you're going to stay with your skill level and you want to be supported and you want to get a job, you cannot prevent the Chinese, Indians and Mexicans from competing with you. Do you think that it's a certitude here that we're going to get a big fiscal stimulus package, that we're going to get the kind of infrastructure spending the Donald

Trump was talking about on the campaign trail. Uh? And and and if that's the case, what are the lessons learned from back in two thousand and eight two thousand nine, how do you make this package more effected than the one back then? Uh? I'll answer you into a three parts because you have a number of questions that I think, yes, there is going to be fiscal stimulus. The easy part

of the fiscal stimulus is to give tax cuts. Rather than decide how to build a bridge and where you're going to spend the money, that's going to take quite a bit longer to get done. So the tax cuts themselves are immediately going to give some form of a flip in terms increase on the growth rate in the short term. Give a temporary stimulus. Now, how much of benefit that has depends on where the tax cut is structured.

If it is structed, if it is structured to give it only at the highest income levels, it's not going to percolate down to the core Trump supporters who brought him to office. And that's not going to work. And in terms of what needs to be done subsequently is you need to have these fiscal stimulus programs on infrastructure to be well set. You need the participation of the private sector. For instance, you can have a toll road where the private sector in est has the benefit in

the tones being used. Then you have less expenditure on the part of the public. All of those are important and they're going to take time. That's why I don't think you're going to have a big bust and growth immediately. Three and I'm depressed. Yea. I came out of the building yesterday. Folks were next to Bloomingdale's here on Lexington Avenue. On there the windows are open, rest of lights and the holiday windows, and they said, should I walk home?

And it's four blocks, I mean three four city blocks. There's a photo on on Twitter folks of young David Gura. David, you live just this side of the Hampton's. How long is it you walk on ourt? That's about six that's about six miles, but six miles, Yeah, I've never done. That's like a marathon. There you go. Let me get a headline in the headline here crossing the turbo from MSNBC which says President elect Donald Trump will not pursue

an investigation into Hillary Clinton. Again, this is report from MSNBC that's not been confirmed by Bloomberg, saining Donald Trump will not pursue an investigation into Hillary Clinton. Remember during the campaign he often pledged to do that if he were to be elected. He launched an investigation over her usage of personal email, so he appears to be reversing course on that. Again, an unconfirmed report here from MSNBC.

And will bring you more details on that as we get the most of The New York Times responding Michael Barr mentioning the fact that Donald Trump canceled his meeting with The New York Times today, The New York Times saying it first became aware of that when it when the editor where they saw the tweet from Doc Donald Trump this morning while we're looking at the news flow NBC saying that Mr Giuliani Mayor Giuliani considered for Trump

National Intelligence director, sort of the stream of consciousness. It's it's a whole new world day. Yeah, more meetings today a Trump tower before he heads to to Florida. I think for the president in two or three or four terms, do they use Snapchat? What platform is next? What's the next president chatting American public? I don't know. It's a brave new world. We're thrilled you're with us worldwide Bloomberg surveillance. This is Bloomberg. Who you put your trust in matters.

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dot com. Write what I said at the top of the show, the w I r P function on the bloomber looking at fed at funds future showing a probability of a race went probably like, come on, I must have like astonished. I have not seen that before, but indeed it's been that way since yesterday afternoon. I want to bring Kim show Holts, Professor of Management Practice in the Economics Department n y U Sturring School of Business, form a global chief economist at City Group. It's great

to have you with us. And we were talking to to Sri Kumar a few minutes ago about the the the pluses and minuses of a rules based system for for the FED Reserve. This is something that Congress is actively chewing over. It seems like there is a possibility we could see this happen here in the new term walkerster as you see at the the the pluses and minuses of a system like that the Fords and the against. Well,

let's start with where we are. We currently have a system in which Congress monitors the Fed and judges their performance against a mandate. The mandate is price stability and keeping unemployment close to some low sustainable level. And on that basis, the Fed has done a reasonably good job, and especially considering the enormous scale of the recent crisis, inflation has been relatively low and stable, in fact, if anything,

a little bit too low. Um so uh. I think that that has turned out to be a successful system. What's being proposed is that Congress switched to monitoring the operational tools that the FED users, namely conventional interest rates, and they want to set their The proposal has been to set up a policy rule, the Tailor rule, as a benchmark against which the FED could create its own rule, but would still be measured not only against its own

rule but against the tailor rule. And while that has some benefits, it does tend to constrain FED discretion more than what we observe today. They could also have some real downsides. And in particular, any simple rule that we can think of is often going to need to be violated in practice, and basically because it just can't take account of the complexity of the world we're in that it sounds like the proposed legislation would would allow for

some flexibility there. I think there will be those who wonder about the counter factual here, if you look back over the last ten fifteen years, how things would be different or might be different if a rule like this we're in place. Well, it's it's hard to say. I mean, one of the questions is, uh, would the Federal Reserve be more um obliged to try and stick to a rule or stay close to a rule even if they

thought that wasn't the optimal policy. So, for example, they're often very sharp changes in financial conditions, equity market crashes, um, big crises that we've observed, and they don't show up instantaneously in a rule, typically not a simple one like the tailor rule. So have the Fed waited to respond to those kinds of shocks until it shows up in GDP and inflation? That could have been a real big problem. Now, on the other hand, to be fair, um, having a

rule probably reduces the chances of really large errors. So UM, the question is how do you judge the last thirty years from the Fed? I think a lot of people would say, aside for the financial crisis, they got the basics of keeping inflation low and stable. Right, let's go ned phelps on everyone nehru and a I R you is one of the plug ins of the tailor rule. I would suggest if you get six economists in a room,

you're gonna get fourteen opinions. On Nehru. How can we have a tailor rule where we don't know what one of the major plugins is, Tom, I couldn't agree more. Actually, I think you'll find out that there would be even more disagreement about measuring potential GDP, which is another way another element of a different formulation of the tailor rule, and the one about which there is the most disagreement is the natural rate of interest. That first number that

appears in the tailor rule. UM. Taylor used the number two. It seemed reasonable at the time because it was the average for the short term real interest rate he'd observed. Today they are estimates that that number should be as low as zero UM, and that that source of uncertainty about what the right love all the races is just enormous. So I don't think any simple rule can account for that. Kim schoen holts with us as we are. You gonna tweet out today so everybody can know what you're doing. UM.

You know the new n y U distribution system. This is great. UM. I actually don't tweet under my own name, but Steve Chacketty and I write a blog exactly Money and Banking dot Com, and we every time we do postum, which is usually on Monday mornings, we tweet out the message that we've done a post It's under real Stephen Chacketty, an esteemed economist. I'm accept no invitation work at b I S in Switzerland. Chrima sen Holtz with it's professor

shoen Holtz, Dr. Schoen Holts of New York University. What was the shift like to go from market big bank economics to academics. When you go into classroom for the first time to teach, I mean, did you take the pharmaceutical? Did you were you sit? What do you do? You know? I tell it the other way Tom. You know, in the twenty years I was a market economist, I was doing economics one oh one for clients all the time, trying to teach them applied macroeconomics and evaluating asset prices.

So I just brought that to the classroom, uh and felt pretty much right at home. What do NBA students want and folks? Full disclosure here. N y u Stern was literally my first supporter when we did Bloomberg on the Economy. They're the first people, along with sector spiders, who stood up and said, yeah, we're going to sponsor this program. What do the NBA students want from academics

like you? Look, I think they want several things. First, they want a broad understanding of the world so they can do their jobs, not just now, but in the long run. They want to have careers, not just first jobs. But second, they want to set of skills that are going to prepare them for the for the workplace today, and those skills are changing. UM. Big example of that is financial technology, UM, which is changing the way people operating finance. How do you teach the ambiguity that you

and I know from microeconomics. The the what I find so challenging is for people it's not on the one hand, on the other hand, it's the mathemamatically ambiguous dynamics within every economic discussion. How do you teach ambiguity? You know? My I think, in practical sense, Tom, the best way to do it is actually put people in the position of thinking about a decision they have to make. It's it's a bit bit like game playing or a war game in some sense, and you have to challenge them

to think about, how do you make this decision? What are the factors that are going to influence your decision what do you need to know? And then when you drive, when you drill down, you find out what are the things you can you can know and what are the things you can't. I think that's actually the most practical. It was sort of David like Harvard football last weekend. They had to figure out the ambiguous outcome. Yes it was not ambiguous outcome. Do you get students who are

interested in going into government at this point? Is that an attractive career path? Talking about going to to to government? Economics? For you have to take tweet one O one. It's a minority and I but you know, for you know, I think in many ways they think. To keep in mind is if you ask how do you change the world today? You may be able to do that better through creating a new business and changing the technologies that are available to us than entering government. So um entrepreneurial

activity big plus. We we encourage people to do that. It's reading your most recent notes and you write a lot about the problems with how we measure inflation. You bring up the new frontier their financial technology, how about the new new terrain of of forecasting? Are we getting any better at getting a sense of how the economy is doing. Um, we're we're okay, but we're not good and uh. And it's partly because you know, there are

certain things about the economy that are inherently unfecastable. People form expectations about the future, sometimes in ways we do not understand, and those expectations have a huge influence on the way they behave on whether they invest, whether they save, whether they spend more, um, whether they're willing to pay a higher price. Um. So there are a lot of things about which we need to learn more. The good news is there's a lot more microeconomic work that's being

done to inform what we think about the macroeconomy. And I have good I have hopes that ten or twenty years from now that will actually improve our way of thinking about the world. Taking this back to what we were talking about a few minutes ago, a more rules based system. Tom was asking about ambiguity of mathematics and the micro economics space. How big a hurdle is that to overcome there? The ambiguity that central bankers face on a daily basis. Look, they have to make decisions, they're

they're in the game. They can't Uh, it's a little bit like you know, when when you you face uncertainty. They're a bit like an airline pilot. They're already up in the air and if there's a challenge, they have to figure out how to land the plane, not to stop and say, let's think about this as an academic exercise. So from their point of view, getting the plane down safely is the big challenge. A brilliant model. The brilliant model,

the dynamics the institutions and policymakers have to work. And I go, we mentioned Rick Michigan before on this, but the basic idea of the dynamics. Do you observe that the people around the presidential president elect can move him from Trump incertitude, which we all know and I think of Mr Trump, thank you. I know, but but but if you have Trump incertitude, can he amend that to a dynamic analysis? You know, I can't say with any degree of certainty. You know probably better than I do,

but I do. I did think that President Obama added some insight into this the other day when he said, when you get into the Oval office, it changes the way you see the world exactly. And I think that, you know, we'll see how that works out after January. David, I'll be honest here, I'm sort of optimistic about it, because every president is overcome by events, every single one. Yeah, yes, invariably.

I was struck. They're reading that piece in New York Times over the weekend by Maggie Haberman about uh, Donald Trump after that meeting in the Oval Office, how he was sort of back to his old old routine and didn't do We've seen the tweets this morning, so yes, maybe we're waiting for that, that event or those events. He's not there yet. I was going to go over to the Gucci store yesterday and I gave up. Couldn't get through it. He couldn't fight through the crowds. He

just was going over to look weekly window shopping. Now, why you and our producer folks, why you and he wants the he wants the little loafers with a fur around the edges, snake tops of this Christmas list? Let me ask you. You know, we're talking about our introspection president elect, coming to terms with the gravity of his office. We've seen that in the central banking space as well. You've written about this, this to the Bank of Japan,

becoming introspective reevaluating its policies. UH, is this going to become more widespread? Do you think we've seen central banks learning along the way here? But the BJ did take a real pause to take speak they've had to. I mean, this is necessity is the mother of invention. They've tried a lot of different things and they're not working that well. Um. Their goal is to try and get an inflation target of two and they're far below it, and the odds of them hitting it are not that good in the

next couple of years. So UM, I admire their willingness to to review their UH performance, to think about new ways of approaching the problem, and to try things that other central banks just haven't done. Having said that, they're on a pretty risky path and there's no no certainty that what they're trying now will work, and it puts

them at some risk. One final question, if we could within the last press conference, which seems light years ago, I was thunderstruck about chair yelling, struggled with an ex post x anti before the fact After the fact analysis, it seems like it's an institution that wants to get out front with a crystal ball, but understands every bit of History says they're reactive by definition. They are an

ex post after the fact institution, aren't they. You know, if they could see the future, they would anticipate it in bejo behave accordingly. But like most of us mortals there, they have limits in their ability to foresee what will happen. So the best they can really do toime is tell you how they will behave when the events create shocks. And if you know that, you can anticipate their behavior in advance, and you actually make policy more effective because

what you do in markets responds before they do. Kim john Olds, thank you so much. With Stern School, New York University of course, assisting on economics this day of a likelihood of a December rate rise, I don't know if you've ever seen that before, but there it is. I thought so yesterday, But I mean I made a joke. Do we go to a hundred ten percent right play? You're to bring Jim Paulson, strategist, Wells Capital Management, Jim,

good morning, Good morning. Let's let's pick up here with where we were we just we're talking to Jane Foley about how sorry Tom Keane inter Jackson, please the only reason Paulson's on as the Vikings are playing the Lions PM Thanksgiving Day dinner before or after Jim, I went to Rachel Worsban and I said, we got to talk to Paulson about Vikings Lions. I mean, that's why Thanksgiving the Pilgrims looked at the Lions play. Yeah, that's the NFC North title is on the line. I'm gonna be uh,

I'm gonna be eating late tom after the game. I think very good to come. We got that out of the way. Continued to dispensed with, dispensed with these important as Jim Jane Foley talking about how how correlated everything is right now. You look at the equity space, you're looking also at FX, you're looking at commodities as well. You agree with that we're a time of high correlation. Well, um, I'm not sure I totally do. I mean, I certainly get risk on is correl and risk off is correlated. Um,

you know, you certainly got u. Um. You know a completely different relationship of lady between bond yields and the stock market, for example, different than has been in much of this recovery, with stocks and yields going you know, directly higher, certainly got the dividend aristocrats and bon surrogate stocks and low ball consumer stocks you know, significantly underperforming, while the cyclical areas in the market you know, are

doing doing much better. So, if anything, I think there's been uh less correlation than then there has been over much of this recovery, although I agree that a lot of the risk on parts are uh, you know, small caps. You know, there's there's a broader participation in this rally than we've had in earlier ones. What was the u the catalyst for what we saw yesterday, the records that we saw yesterday, Well, I think that, you know, I think a lot of this the catalyst to this market

has been building most of the year, you know. I I think we came off the loads of eighteen hundred back in February because of the expectation global growth picking up a little bit. And I think a lot of the trends that we saw since the election, for example, that people have attributed to Trump, I think we're in place, starting at least in the summer. I mean, if you look at the underperformance of you know, bond surrogate defensive stocks that started in the summer, the outperformance of more

cyclical started then as well. The yield curve started steeping then a little bit and accelerated the early fall uh inflation expectations started to climb UH then. And I think the big canaist to me is if you think about it prior, prior to the third quarter, we had sub real GDP growth in the United States for quite a while, and we also had negative year on year earnings growth.

Going on now in the third quarter would happen as we shot up to almost three GDP growth and we're looking now the GDP Atlanta fed now number is three points six percent for the fourth quarter, and also in the third quarter, year on your earnings growth went positive for the first time in more than a year, and it looks to be even stronger in the fourth quarter. In addition to that, in the third quarter, you had a notable pickup and overseas growth. So China reports got

decided little better. Look at Japan posting a two plus gd real GDP number in the latest quarter. The United Kingdom, which was feared to fall apart, is actually improved. So I think we went from you know, very sluggish growth throughout the world, negative year on your earnings to suddenly going to an accelerated growth in the United States and abroad and the return of positive earnings, and I think that's set off a move towards risk on assets, which

even got exacerbated by the election. How many chapters are left here in the story of the strengthening dollar. Well, that's where I differ a little bit with consensus um. You know, I know that the dollar indexes at a fourteen year high or whatever, um, But I think the reality is it's it's pretty close to the top end of a trading range it's been in since the start of January two fifteen. If you go back to January fifteen, the dollars about the same then as it is right now.

I think it's peaking. I think the dollar is gonna come down over the next couple of years, and that will be the biggest surprise I think in the markets. If there's one one way consensus trade at the moment, it's the dollars on a freight train north, and I

think it's gonna go the other way. This is an important outlier call, folks, and we're hearing this from a number of our guests, really trying to push against this massive uh consensus to you, Jim, I want to come back and talk about how our listeners should adapt and adjust too. And I say this with respect for those cautious the doom and gloom view frame for us, the

level of doomish and gloomish Now, how bad is it? Well, you know it's and there's a question, tom Um, it's some sense with the market breaking the new highs UM and with yields starting to move higher. I think it's sort of improved some of those outlooks you know, we've had, and maybe maybe the Trump election too, but we've had some big voices that have turned more bullish on the outlook for things. UM. I think to some extent there's

still a barrish undertow there. There's no doubt in that, UM, But I think if anything, it's turned a little more positive of late. We're taking a broader correlated view today. We're talking to people about their special abilities, but also to our good guests about how everything blends in together. Jim Paulson, with his capital management, he has been a resilient optimist. He has been on board his markets have

moved higher. Jim, Um, you know I had Saint his relatives that we you know, some of them are up for sainthood. Uh and put up with me who read Joe Grahamville religiously. And there's always every generation there's somebody who's a little bit cautious, a little bit gloomy. I've never seen the doom and gloom now, particularly on Friday's across the internet, across the bandwidth that all of our listeners read. It's like every Friday, go to cash? Is

this primal screen? How do you deal with that? How do you rationalize staying in your four oh n K, staying investments when you're buffeted by all this gloom? Yeah, that's been a constant theme, I think ever since two thousand and eight. In my view, this this recovery, to me, will always be remembered as you know, climbing a perpetual

wall worry like no other recovery I remember. And indeed, despite the fact that we're up, you know, more than threefold in the stock market, despite the fact that we've created uh uh, you know, record setting numbers of jobs and the unemployer rates come down below five a lot of good profitability under the bridge, and I could go on. Despite all that, this is this recovery has never generated

confidence in the future. It really has been absent that we have never really seen the full out of animal spirit behaviors that you normally associate with this long of a renewed expansion. And um, I think confidence has been our biggest challenge in this country. You know, certainly demographics have held as our growth rate back. That's a problem proactivities and issue, but I would put confidence up there with with with those issues is probably the most important

economic issue. And I think leadership, including the Federal Reserve, needs to think more about treating confidence as opposed to just treating balance sheets and income flows. Um. And and that's why I'm a bit excited that for the first time, with yields going up and with the Fed showing every indication that's going to raise yields, that might start to do more good for animal spirit behaviors that we're getting towards normalization again in a way from zero interest rates.

Then the higher rates will do bad for balance sheeting income flus. I think treating confidence might be one of the biggest things that could benefit the broadness of this economic recovery going forward. You're proposing training confidence directly, how's the FED going to do that? Well? I think that I think the Fed by maintaining a crisis like policy

far beyond any kind of sense of crisis. The crisis probably ended with an eighteen to twenty four months of the recovery start, the work continuing to practice unconventional massive monetary stimulus along with you know, zero interest rate structures, and far past the crisis point. I think, without saying a word, every day, it's actions scream we're very scared

and you should be scared too. And I would say a lot of our leaders have done the same kind of thing, uh in this sentry, rather than rather than maybe show some confidence, if they showed some confidence the private sector, what are they scared of? Well, there's just been an overwhelming sense that, you know, ever since oh eight, that we're this close to the second coming of the

Great Depression and the deflationary global of this. Don't you suggest that they are scared of the bi part America, which is the haves and they have not the inner quality of opportunity. Yeah, there's certainly some of that, and there has been a warping on the income distribution since we've hit disinflation, since the night. I think, um, the best thing for that time, in my view, would be if we could improve productivity in this country and that

that could that could go a long ways. If we could resurrect some private capital spending, and that takes confidence. If we could, if we could get confidence among corporations they take that massive excess cash hoards they have and put it into capital expansions and more capital for labor. And I think we did that, productivity arise and the share of labor's take of national come would also do better.

How is this next administration going to do that? We we here floated here, tax cuts, tax reform, infrastructure spending. What strides is that going to make here? Getting us to to a more confident consumer, more confident economy. Well, if it actually happens. I think one of the things I think the market is over estimating the pace and the degree of change it's going to happen under the

Trump presidency. This idea the way the markets moving that within the first hundred days, we're gonna have a massive rose of elding like capital spending program, We're going to build a wall around the country. We're gonna repeal violent care in place it. I think Minnesota, that's a writer in there. I I think that I think it's gonna be far slower. I think there's gonna be a lot of gridlock even among Trump and the Republicans, let alone

on the Democratic side of the aisle as well. And I don't expect we're going to get a lot of fiscal change until the next recession. I think in the next recession we may get a bigger fiscal spending program, but I don't look for a lot of change until then. Where do you see opportunity here? Quickly? I know you've liked materials in the past. In light of what we've seen here over the last two weeks, is that is

that oversold? I think on the first thing I'd say is I think that i'd look international right now that has lagged here in this most recent rally, both emerging

in international markets and away from the United States. I'd secondly, with the sectors right now, I like the materials and energy UH sectors overall in technology UM that are I think on the industrial producer capital goods sort of the equation that's gonna do well and the rest of this recovery, But those have trailed for example, the small cap stocks that have done real well of late, or the industrials that have done real well of late. UH and the financials.

I like those as well, but I think those stocks are a little ahead of themselves right now, and I'd look more at the materials, energy, UH areas of the marketplace. Jim Paulson, Thank you so much, Jim paul Thanks Capital manageming some wisdom there within the parson of his optimism. 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 and find your independent adviser dot com