Surveillance: The USMCA Is Encouraging, Lagarde Says

about what you're up to now. Yeah. So I recently joined our Bannockburn Global Foreign Exchange, which is based in Cincinnati. They specialize financial services private equity midsize corporates. I'll get to do a lot of the same kind of thing that I do analyzing the global capital markets, but for a different client base, more private equity corporations, as opposed to where I was before, where I'd be focusing more on the asset managers. Talked to me about what you

tell them about the mess that's emerging in Europe. Once again, it's kind of a classic European confrontation between populace and this time in Italy, and between unelected officials in the European Union. We have the finance minister Germanic tria Um go up against some of the other finance ministers in Europe. In the last twenty four hours his country's fiscal push meeting a European Commission head that compared what was happening to taken us towards a Greek style crisis. Yeah, I

think it's a bit over the topic. That's younger for you. I think he often has these kind of over the top type of comments. I do think that there is a confrontation brewing, but I'm not sure it's really going to be on the on the level of Greece. I think that both the Italians have learned something, but also the EU has learned something from Greece, and that is

that the fiscal austerity could be counter productive. And I was saying before, is that what I think that Italy needs the most is growth and can and that means that Austeria might not help growth because here's what really happened. When you look at the different charts and you compare what happened in Italy, growth is really the deficit. That is to say that they really under forming in growth.

And if this new fiscal plan can help stimulate growth by having a flatter tax for something like a million households fifteen percent tax, and if they can have some more social spending the ideas that can lift growth and thereby reducing the debt to GDP through stronger growth. The market right now is not pricing a positive outcome. We haven't had a day of games for the euro since last Tuesday, so it's been about a week. Has just been weaker Euro story bleeding through. Italian bonds are taking

a bit of pain as well. The class half full approach to all of this is that maybe the moves outside of Italian bonds are mild. Maybe the moves outside of Italy are mild. But the glass half empty approach to all of this is that correlations are picking up, and you can see the correlations picking up with Italy and what's happening in Italy? Does that concern you? Concerned me? But I would really tell the story a little bit differently.

The key thing I think that made the dollar turn last week was not what was going on in Italy that didn't happen until the very end of the week. Would happen was a Federal Reserve met and confirmed that they will not only tighten another time in December this year, but they're sticking with three hikes new next year, and the e c B says, sorry, we're not gonna be able to raise rates until the end of next summer at the earliest, and the Bank of Japan seems nowhere

near close to raising interest rates. So I think that what the Federal Reserve did was singnal the continued divergence.

And then the other factor that I would about to put as part of this story is the huge ralliant oil prices another leg up today, and this is because I primarily supply concerns, and here's you know, people are talking about how Trump is succeeding with his tactics with South Korea NAFTA two point oh, but one area that has been very successful is getting countries to participate in this embargo when it's not just countries around Iran, but

we're talking about France and the Netherlands cutting back on their oil from from the Iranians a month ahead of time. And so I think that the supply concerns, So what's the problem here? Strong dollar because of fed higher oil prices, wagon emerging markets, and the Italian story. I mean, is Chairman Paul's central banker to the world, central banker to emerging markets, but it's also sent banker to the oil cartel. I mean again the professor, he alluded to that in

the press conference. Maybe we'll talk more about it in speech today at the National Association for Business. But he is central banker to all these interplaying features, isn't he. Well, I I don't know if he'd say he's central banker to that, but I would say, is that what happens in the US still matters for a lot of these contest I mean, it does not have to take into account what happens to Saudi politics as a Saudi real when it makes policy. I mean, John, let me do this.

I mean, you know how how on what I'm doing brand? I'm trying to bring it up here just a log chart of of of brand and I'm sorry, since the middle of August, it's a straight line up. Yeah, I mean, there's a little bit of persistence to the trend. Is this drip drip going on? It's like the Chinese water torture on emerging markets. And what it is is a stronger royal price, stronger dollar and just the heel to the United States just keep climbing, and the Federal was

of is not backing away from great hikes. Do you have a more constructive view on AM with that as your backdrop? Unfortunately it's difficult to write I think so, I think that, But here's what it gives me the idea though, that why I think I'm still pretty negative on EM. It's not just because of these macro forces, but every so often I hear from my emerging market

analysts and context that time to pick a bottom. And so we just had one of those phases, maybe it was about three or four weeks ago where the emerging where a lot of these emerging market alliss said, oh, we're cheap value now, so let's uh, emerging markets are goodbye, and so the same thing with Italian bonds. I think it was one of the largest asset managers had had up there up there portfolio investment in Italian bonds just for just in time for this to happen. But there

is a price of the story. In the price of the story in the m has got pretty cheap. And within sort of emerging markets, you've had some pretty aggressive rallies and pockets of emerging markets in various securities, various foreign exchange markets, various currencies, and Mark there must be some opportunities there that you've identified. There are opportunities, but from from from my point of view, I think medium term investors, it's too early to go back into emerging markets.

You say, well, there's value there. I say, yes, there's value, but it's going to give be more value shortly. Well, I guess it depends what how you wear and give you a short term sort of FX trade to date trade, and then maybe there's some opportunities out there. You're thinking more about digging a hole and starting a business in some of these countries at the moment, Mark, I would put I I take your point that for short term traders there there's I mean, there's enough volatility and emerging

market currencies to have a short short term punt. But for long term people are thinking about their pension funds, people are thinking about endowments. I think too early for emerging markets. I'd be more comfortable maybe the middle of next year, but I think the Federal Reserve will be darned nearly done with the great hikes. Mark Chandler grant To can't shove the Banic Burnt Global for X, Chief market strategist and managing partner. Some of our guests are deceptive.

They like to drive things down to simple concepts, usually simple concepts that provide couraging crisis, that provide UH, the ability to be in the market when you should be in the market, and even if there's pain, you're there and you're organized. But what is very deceptive is underneath the simplicity, there's a lot of first order principles in

a lot of academics. He's out of Lehigh University, out of Wharton, UH, and he's not only a c f A, but also very cool a certified public accountant as well, and that would be Robert Dahl of Duvin Bob. I mean c f A, c p A. What how did your brain get through that? I mean, I've never gotten debits and credits, right, I guess I have nothing else better to do but read a book and study and take it. That's my friend. Well, it's a very cool set of academics around it. Take the academics now to

this market at it. I mean in terms of like like cap em and all the rest of the mumbo jumbo. How do you stay in this market. You stay in because you recognize that we've got an amazing earnings profile. Yes, for the Bears, it's a decelerating but it's still gonna be plus twenty instead of plus twenty five. That's all pretty good news. Um. Look, they're gonna be bumps along the way. Valuation is no longer cheap. We've got a little competition. We're getting little expensive versus the rest of

the world. So you know these things that will bite at the edges, I think without question, But you still want to be there. This bullmark is okay, Okay, fancy guy. Let's John, let's dazzle people here with the y intercept on the y axis. Okay, I'm talking to Courtney down to Georgetown and we're talking lord linear cap M theory. The fact is it's hinged on a straight line, sitting on the Y axis, and that is the anchor called the risk free rate. I think a lot of our

our listeners understand the risk free rate. Bob dal do you have a clue where the risk free raiders? Does Jerome Powell know where the risk free rate is? I think no one knows, and it does seem to be moving around. Um, and we're getting closer to it. That's

why the Fed conversations are getting harder. We've been in a period for the last couple of years, as you know, where um, the Feds in the process of normalizing, so you know, next meeting, they're gonna meet and they're gonna raise rates next meeting, and then went on or on. We're getting to the point now we're approaching neutral, whatever that number is, and therefore these conversations get a little tougher.

What told to me about the competition for capital that just comes from vanilla generic tea bills two more than on a one month tea bill a five year note now with a yield of almost three percent? Bob, is there some real competition for capital in a white that it wasn't twelve months ago. Yeah, it's emerging competition. Look, I think I'll get better than that in the stock market. But the number you gave me is no longer zero.

You know, it was a while where where cash returned close to zero and I could get a two percent yield in the stock market, plus capital appreciation as earnings came through. And we're beginning to creep in with some

other conversations it's not the only asset in town anymore. Well, let's talk about the portfolio construction then, Bob, and coming forward, Tom talks about the risk free Right, there's some real talk that the risk might be in the risk free asset, which is the treasury market, another bond market as well. And then the next down to maybe they won't offer you that hedge, bobbab we are we having that discussion now?

Is it's still too early to have that discussion. I think it's early because I can't see a recession out my window. Um, you know, we'll get another recession, but I'm enjoying and trying to figure out where to be where the earnings are going to come from. But yeah, we're unlikely to get in the next downturn, returns on cash like we typically do. Rates will peek at a

lower level than we're used to. All they say, Bob Doll, if you look outside Bob Doll's window, he's got checked up the ibbots and chart back to up X. But to that point, Bob and the one of the most famous good morning Mr Ibbots and Professor Ibbotson. If you're listening up Yale, Bob Doll, what's really serious here is we've forgotten what a correction is. We've got we've forgotten what a bear market is explained to our audience. Where part of the game is you have to withstand the

emotion of bear markets. You and I haven't had that conversation in about fourteen and a half years now. We haven't, thankfully, we haven't had to the bottom line and the most simple way to put his thocks do go down um, and it's usually accompanied by, uh, some sort of problem with the economy, which I repeat is not visible yet, but we will get there. And uh, you have to know what you own. You have to know what your

time frame is. You know, somebody said to me recently, you know, can you tell me what to buy um if my time horizon is to the end of the year, And I said, yeah, cash, because because in lots of short term period stocks go down. Um. You'll look at those same ibits and charts and you look at the annual numbers and you'll find out stocks go down um more than of the years um. So we are so

so spoiled because it's been such a beautiful ride. And it brings to mind financial advisors some who say, you know, I'm just buying the index fun or I'm just buying the ETF because they're safe. This word is really important. John Farrells spoiled. It's unfortunately accurate. I'm as guilty of it as anyone all of us. I mean, we've had six straight years of valuation appreciation. He's going up six straight years. We're breaking that trend this year. Six in

a row has never happened before. The fixes back to oh no, what a world. Yeah, I'm just a round thing down, even though I've come back and forth on this before. There's a difference between peat margins and peak markets. Is that something that you're kind of pushing the clients at the moment as well? Yes, yes, yes, I hear a lot of bearish people say, well, peak earnings, we've grown twenty five percent, that's going to decelerate. Therefore I

should sell stock careful. If plus twenty five earnings goes to minus five, yes, sell some stocks. But if we're going from place to plus twenty, not so fast. Can you own the banks here, and Mr Doll, I can. Here's my problem. They're still so over owned and overbelieved. Yes, they're pretty cheap. Yes, the fundamentals are reasonably good. They're not perfect, but there as they've been since the first

of the year, overbelieved and overall. I can't get out of a meeting with a bunch of financial advisors where they don't ask what about the banks? I need that question to stop being asked before I can really get interested. Bob Doll, thank you so much, greatly appreciate it. With vine Ford, you know, it's for them to say that about the hurricanes is a big deal. It's got to

be a huge to tell people. This is about the decline in sales last month eleven percent down versus the estimate for nine Once again, Ford Motor September, US vehicle sales decline eleven point two seventy F series trucks made. And you wonder how much of that has made in Canada, how much is made in Mexico or the United States? Trade yesterday Here is Christine Leguard. The impact is there already.

And if you think of, you know, the the the impact that all the measures that have been floating around would have on global growth, then you're really talking about a major risk that would impact particularly China, because it's obviously one of the targets and the main target, but also all the other countries that are part of the supply chain or that provide raw materials. So you're talking about emerging market economies and many low income countries as well.

Were a lot of the hardship and the difficult decisions, and the financing is so badly needed. You know, how can we advocate domestic revenue mobilization in countries of sub Saria and Africa if they can no longer participate in trade or supply chain organizations because of the threat applying

to trade at large, the larger threat. And to bring it to this weekend in Canada and the United States, the U S m c A. I read to write it down here, it's such a new phrase for me, and I understand becomes Y m c A. It's US okay within this and within U S m c A. Now I got the song in my head. Now I'm not going to dance. That won't work out. And I would take um if I look at US m c A and I look at the dictate of what President

Trump is very clearly advocated. It is an effort that brings in Canada, brings in Mexico, and I don't want to get you in trouble. You're gonna ask, did Canada and Mexico came into the rhetoric of President Trump? And is that something we're going to see in the coming years as a president looks at multilateral and brings it

over to a unilateral approach. You know, It's it's hard for me to say and to make any comment about the agreement because we haven't had a chance to review It's I've read the same articles as you, but it's been in the making for thirteen months, so it's it's it's obvious that there must have been back and forth bargaining trade off and that's it's the whole point about negotiations.

Two things that I'm quite pleased about. One is um it ex ists, and to have this tree lateral agreement trilateral agreement between Mexico, US and Canada, is I think a very positive I'm encouraged with that because not so long ago, many but many of us were in fear that there would be nothing. So there is an agreement. Number one. Number two, what I hear is that the services are also partly or entirely I don't know. I

haven't read it yet. Covered and I think that is really showing the way that TPP, for instance, was was doing, in other words, expanding beyond the products that cross borders to services that also do, but not physically because many of them are are digital. There is a lot of upside to be had from services being included in the reduction of barriers. Christian Leaguard at the International Monetary Phone PIM, this was a really interesting meeting. This was the kickoff

to their annual meeting in Indonesia in three years. It's in Marrakech, with Indonesian authorities in the front row in their embassy as well, of course, shattered by the earth by natural disaster. We're literally in the in the green room in the back, and the Ambassador of Indonesia sentence regrets because he had an emergency meeting with their foreign minister as well. So there was a whole overlay of emotion.

And you had one part the i m F brass one part i m F staffers, and also a lot of Bloomberg surveillance guests and hosts in Economics and Politics of Washington, Douglas Holds Econ among others of the CBO there listening for the nuances you know the speech, Um, they're listening there for one or two sentences of what's the tone towards the world economic outlook next week? And of course her thoughts on all this trade issue, film Flis and Tom Keane on Amazon, and on the state

of our labor economy. Without question, our interview of the day, if not of the week, is Alan Krueger of Princeton University. I put him in a category with a Nobel laureate Michael Spence, in that there's an exceptionally broad spectrum of economics and social studies that Professor Krueger does, but he is definitive Card and Krueger on the minimum wage, Alan Krueger, were you surprised at Jeff Bezos set a fifteen dollar minimum wage level for Amazon nationwide. I think he did

the right thing. Um. I think what Amazon has done is what one expects of a responsible large company, especially at a time and the economy is doing so well. I think this is also an indication that wages are determined by more than just the blying demand, that companies have a lot of discretion over how much they pay their workers. Within this, Alan, is that maxim and the fear that if you raise the minimum wage, all other wages grow up, go up rather and labor and employer's

lose control of their income. Statement, is that a legitimate fear, Whether it's a success of Amazon or it's a mom and pop shop in New Jersey barely getting by well, I think it's a sign of a healthy economy that we're going to see wages rise. Wages are gradually picking up flower than you would expect given the unemployment rate below four percent, And of course you need to balance. You don't want wages to be so high that it puts businesses out of business. But I don't think we're

at much risk of that right now. Alan Cruger, could you share with people a little anecdote or story about your work comparing restaurant jobs in New Jersey and Pennsylvania and what you learned. Sure, what David cart and I discovered twenty five years ago was that the traditional UH supply and demand model at I was taught, that I taught my students is much more complicated in real life, and study after study has found that minimum wage increases

don't reliably have an adverse effect unemployment. The job markets much more complicated when employers pay higher wages, they have lower turnover, they have higher productivity, they find it easier to recruit workers and fill vacancies, and these effects can offset the traditional demand side law of demand effect of

a higher wage, possibly putting downward pressure on employment. If that's the case, why don't you see a revision in the way experts and economists who advised the government, Why don't they revise their description of what a minimum wage increase would do. I think this is one error where we have seen major change in the economics profession and in public policy since our work. The governments in the UK and Germany have imposed nationwide minimum wages substantially above

the US level. I think the way the minimum wages presented in textbooks is much more balanced now, much more even handed. Explains that the job market is not perfectly competitive, that employers have market power, that bargaining power, monopsony power, the ability of companies to have disgression over wages influences the job market. Professor, as you do so well. You

mentioned the word which is a confusing word, folks. This is how you move from a B minus to a C minus under Krueger and economics is try to tackle monopsony okay Alan. It's a rubber plantation in Singapore where the British plantation owner controls the price, the labor wage and everything of all the people pulling the rubber out

of the trees. That's the classic British model. Bring that over to America now, where we read the stories and the fabulous stories uh in the Atlantic magazine about the gig economy, about moving cardboard boxes around Manhattan, about Uber and all that. Is the gig economy so much an atomization of labor that it's going to drive us to

a new minimum wage ethos. Well, I think the gig economy is more competitive than uh, say, an Amazon fulfillment center, more competitive in the sense that there's much easier entry and exit. But the gig economy is still maybe one percent of employment in the US. I think it's uh not even the tail wagging the dog. It's it's um barely having an impact on the aggregate economy. What's much

more important. Our companies like Walmart and Amazon the largest employers, and they have kind of a moat around them, you know, they are a bit of an island to themselves, and they have the ability to uh influence how much the workers are paid. They're not just passively taking so at least is critical in the new technology. In my michaelmbusians capture by one or two large players. They have monopximistic tendencies where Amazon or Apple or others control the wage

because there's no alternative job. Is that true. I think that there's limited alternative jobs. It's costly for workers to make make a move. You know, the fact that Amazon did this by setting a minimum wage is fascinating because they could have said, we're just going to raise wages across the board by tem percent, that's what the competitive market is. But this is broader than sort of tailoring wages to the competitive market. This is UH saying we're

going to be a responsible employer. We think the low wage workers deserve a higher higher income um and I think one of the reasons they weren't having that higher income in the past is because companies have stronger bargaining power over their workers. Alan Kruger just quickly immigration. Do you have any thoughts on how immigration affects wages and unemployment,

especially when the labor markets type. Immigration is an important source of labor supply, especially in some fields like construction, and I worry that we're going to start to see some bottlenecks in the US economy because we're changing our immigration policy and making it much more restrictive. Alan Krueger, thank you so much. Look for much more on his professor. Krueger of Princeton University. Of course, always helping us out on matters of economics. 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