Surveillance: This Fed Is Data Dependent, Zentner Says

lending quotes as commodities breaking down. The Federal Reserve does not look like it's for turning right now? What do you make of all of this put together? Well, I was pretty happy last night, right, I mean, the Dow was up six percent year to date, the max it was a month ago was up eight and a half percent, and so we climbed back. I was up in the black again, up six percent here to date. It was only eight and a half percent year to date. And now what happened? The market went pear shape, had a

little wabi overnight. You have something to do with China. As you say, I don't know how this happened, but it's we're only down. I'm kind of used to the new volatile. I don't want to make too much of the staff moves. I want to have a look at what is happening in China specifically, there is a deceleration taking place. Is it made in China or made in America.

I think the tariffs are having an impact, and um, you know we're not all there yet, right, I mean, the the final two billion of tariffs has a ten percent is a ten percent now January one, it goes to. That's nine night and day different when we put the tariffs up to. That's going to cause a major change in some of these import export patterns. So you know, the trade wars are is interesting from the U S standpoint for a trade war and the I m f S warning about it. But for a trade war like

ninety nine, you need trade volume to go down. But imports and exports to China this year visa the US are up eight nine percent. Yeah, so it's going the wrong way. It should be following going up a percent. I hate the nineteen twenties nineteen thirties comparison. Well, you are the paras pretty bad? Neither were you, Chris. I'm sure it was terrible looking at the history books, but the comparisons just don't make sense at all to me, at least, I look at the desderation in China and

I see signs of desperation. Now the Chinese implementing lending quotas that we've learned in the last so now, large banks will need to have a third of new corporate loans to private companies. Small and medium banks will need to have two thirds of new loans will have to go on the corporate side, will have to go to non state entities. At the moment, loans to nonstate corporates currently less than a quarter of the total. These are gonna have to be some big moves by Chinese banks

to get extra loans to private entities. That's a recipe for trouble, isn't it. Yeah, it doesn't look great. I mean it does. Part of me kind of says that, you know, they're GDP numbers, they're interesting, rout interesting. Remember back in two thousand and sixteen, we thought China's economy was going down and they said, no, real GDP is running six and a half percent, and that's our target

over the next five years. Now, at the worst, I think I m F has six two, China growth slowing from six and a half percent roughly to six point two percent next year. Uh, that doesn't sound like it's all that dramatic, right in in I mean going from six and a half to six point two. The worry is it's going to be much much worse, of course, So we'll have to see what happens. You know, Trump before the midterms was saying maybe he can get some agreements.

So that's the key, whether some of these tariffs can be taken off the track they're on. The twenties and the thirties, John was all upset about the twenties and what was the worst year in the twenties and the thirties? Seven The Yankees played seven four baseball, well understood to be one of the best teams in the history of all of sports. They went eighteen and four against the Red Sox, who enjoyed last place. The Red Sox played

John what we call three thirty one ball. They won fifty one games and lost a hundred and three games. That was the worst year in the twenties, and that's one of the causes of the Great Depression. It was reminded me that in our last conversation is, well, Chris Rupki, when you look at China, when you look at these dynamics, I've noticed this week very quietly, John Burry, in all the Washington headlines and all that was imports from China

into America. What are we exactly import from China into America? Is that a Is that an internal dynamic of manufacturing and services or is it is it something simpler than that? Yeah, I mean it's a lot of consumer goods and it's a lot of capital goods. So the capital goods are going into the supply chain here. That's what It's never made sense to me because I remember the trade wars we had with Japan. You know, I'm at MFG Bank, the trade wars that we had with Japan in in

the late eighties that it was night and day different. Right, So we're cars coming from Toyota Honda to the US. So it's kind of like US versus Japan. Now this is trying to be like US against China the country, but it's really US manufacturers. We're battling with ourselves. US companies have done this. This is one of the most important in such on the weekend when we're doing politics, seven,

and I get it all. You know, the news flows when extraordinary, but what Mr Ruskie just said there's incredibly important. We're fighting the emotional war of the Japanese trade battle of years ago. It's not it's different this time. It is different this time. But I will say I think we've got to stop viewing the global economy through the prism almost exclusively of US policy. You would say that trade,

monetary policy, fiscal policy. I would say that, look at what is happening in China right now, that has nothing to do with trade. One fifth, one fifth of China's housing is empty. Let me say it again, one fifth of China's housing is empty. This has nothing to do with a trade war. They have a real problem of over capacity. They have a real problem with decelerating growth

in the country. Everybody can agree on that. The thing nobody can agree on is when the pain is going to start, because they keep finding a way to put this off, to put this off. And I think the reason some people are worried this morning, because they wake up this morning and see a government that's trying to introduce lending quotes, is because they trying to play the game again. They're trying to boost credit and keep the party, keep the music going. There are serious problems in this

economy that have nothing to do with try disputes Chris. Yeah. But yeah, I mean, but part of it is it's still is very much when I was over there. Uh, it's a developing nation. I mean it's one point four billion people. Uh, the the amount of talk about income inequality. We're talking about income inequality with Tom. I mean, income inequality in China is unbelievable, right, I mean there's very

very few people. When when I was over there, I didn't meet meet that many people who who owned a home, right, I mean, they can't afford that. The incomes aren't there. So it's a very complex society, and I think we kind of generalize sometimes I don't. I mean there's still people coming from the rural areas to the cities that they're being It's very complicated. So I don't know how much in trouble their economy is My offspring cash flows living over there. He's got like three units, he bought

vet bill units. So what you say you've got, afterthought, which is the youngest cash flow? Cash you squeezed four years into five? That is beautiful college. You've named pretty much every one of your kid name to him. I mean, it's his middle name, but we don't use this formal and we got lovely Chris. Thanks for dropping by, Chris mufg Bank Chief Financial Economists, John, I want you to bring in our next guest, truly esteemed here as a president travels to UH to Paris in the commemoration of

the hundred anniversary of World War One. But I would just say John that if I've read in all my readings and all my interviews, there is forever a distance of America from these great twentieth century wars. It's something

I know. You grew up in Covenedry with the blitz of World War two and in Coventry, and yeah, they totally flattened it a very very different looking city now, but we should mention for American audience a manufacturing heart of the United formally, um, not so much anymore, in a very different looking city than what it looked like before the war, That's for sure. I can see why you've got me to introduce Stuart, because it's the longest

title I've ever read. Stuart Patricks, CFR, Senior Fellow in Global Governance and director of the International Institutions and Global Governance Program. There we go, Did I do? Okay? Yeah, you did well. That that good morning to Stewart. Important weekend for so many reasons. What are you looking for

this weekend? Well, what I'm looking for is um. Obviously, there's going to be the gathering world leaders, including Donald Trump, in Paris at the Arc de Trient on Sunday, the eleventh hour of the eleventh day of the eleventh month, basically commemorating armistst Day UM, the alleged war to end all wars, where the President is obviously going to be moralizing the more than a hundred thousand American troops that died there, many fewer obviously than died in your own country. Uh,

more than seven hundred thousand. I believe Brits died huge proportion. And uh. And and the memory and the residents and the gravity of the of that conflict in instill in the memory of of people who's who remember their parents

talking about it, etcetera. In Europe is huge. But it's also a time to reflect on the fact that a lot of the forces that were unleashed during the Second World of first World War and its immediate aftermath are really really have echoes in our current day and um that's why President Emmanuel mccrawl is hosting what he calls the Paris Peace Form during that time to try to to counteract this the rising nationalism, rising authoritarianism and UH

and rising protectionism around the world and a really interesting story with hegemonic power. Those two wars marked the decline of British hegemonic power and the upringing of American hegemonic power. From long, long time, we talked about what would happen with American hedge many I don't think many people thought that America with withdraw from its role voluntarily. Absolutely, it's

not what is happening right now. Absolutely. Colleague of mine, Jim Lindsay, with another writer Evo Dalter, have just written a book called The um Uh, The The The Empty Throne of the American abdication of world leadership. And that's that precisely what's happened. You know, Normally, when you have these sort of power transitions, you have one power overtaking another, sometimes defeating it in war, sometimes sort of graciously passing the batons, as in a sense Britain did to the

United States. Here you have instead a country that still is by all measures the most powerful in the world, in a sense abdicating its role. And that's why the very the Versailles that the Paris Peace Conference era is so appropriate right now to think about, because that was a time when the United States had a chance to join the League of Nations that President Woodrow Wilson had

had created. But instead, in a sense, the United States decided to absent itself in many ways during inter warriors, from from any effort to try to have a machinery to organize the piece. I see this trend in the United Kingdom as well. Many people can identify with this across various countries in Europe. Is this a consequence of populism in America that many people in the electorate know what, no longer want America to have this role on the

international stage. I think there's a huge amount of exhaustion. I think when you look, I think the vast majority of Americans remain internationals. There's a bunch of recent opinion polling very comprehensive from the Chicago Council on Global Affairs, that is that is U testified to that. However, I think a lot of Americans, uh, think that the United States has for a long time done more than its

fair share. And they also equate sort of the promotion of democracy with an indignation building exercises around the world. So the Americans are exhausted, and so there's a sense that others, and Donald Trump has picked up in this, that others are free riding on American American efforts. Stuart Patrick where is with the Council on Foreign Relations Just terrific spective out of Stanford and Oxford where he was a Rhodes scholar, and of course his work, uh as

well on sovereignty has been important. There's been technology. I'll go back to the American Civil War. We struggled with it. They're certainly in World War One. John Keegan talks about the stalemates of World War One, the technology of or to just John, the advent of radar alone was or or or for that matter, penicillin is being extraordinary within all the synthesis of the consolant foreign relations. What do we underestimate about the technology now is nation's clash? What's

the the present thing you're studying about our modern technology? Well, it's a couple of things. So one of them is UM, the the growth and the implications of the growth of sort of lethal autonomous weapons systems. UM. We sp you spoke about technological advance and and obviously and the impact of that taking people by surprise, right, the exact lethality during trench warfare, making any possible to have the sort

of wars of movement. But then, of course than the invention of sort of cavalry in the sense of tanks uh in in the Second World War, wars of movement, etcetera.

What we've really gotten into now is a degree of sort of remote control and was video game warfare, in which increasingly, as robotics gets more advanced, many of these things are gonna be and already are you see it with drone technology being outsourced to sort of in a sense terminal jockeys in Nebraska for instance, being able to that is too clinical and too surgical and avoids the

human condition absolutely absolutely well. First, in two ways. One of them is it certainly UM creates a situation where UM there are major hazards in terms of who's making those lethal decisions. But it's going to become even more of a problem. Uh. This distancing when uh, these weapons systems are actually able to make those decisions on their own.

And more broadly, the artificial intelligence revolution is also another it is it is creating huge problems for the future of warfare because you have situations where, um, you know, the the as it's been described that if that if a country like China, which is competing all out to try to dominate artificial intelligence, ends up getting only a few months advantage, that could be the equivalent of having an entire revolution in military affairs that the Unit States

falls behind. I'm gonna watch you with a very big question, and I imagine you won't have a definitive answer, but I do wander we witness thing and emerging cold war between the United States and China. I think we are. I don't think it's going to be necessarily a shooting war. Um Uh. The China and the United States are definitely in one of those sort of hegemonic transitions as they're

sometimes called in the academy. But basically, one power is there's a rising power and then there's a power that's declining, not not in absolute terms but in relative terms, And the question is can they accommodate one another um unlike the Cold There there's a few differences between the United States and China, and the United States versus the old Soviet Union. But one of the biggest ones is that this is by and large not really an ideological contest.

There was, there was an absol you know. It's a much more of a traditional great power contest, a little bit more like you know, the Anglo Anglo German antagonism a hundred years ago, right that led to the help lead to the First World War. What you have, with the respect to US and China's you don't really have, you know, ex desire for territorial aggrandizement. Right with the exception of you know, the South China Sea and a few and and Taiwan, you don't really have a territorial dispute.

What you do have, um is uh is the Chinese desire to dismantle the U S alliance system in in Asia and get the United States to be much more offshore than it is. But the good news is that this is not going to be a you know, three hundred and sixty degree effort to try to pick up clients states around the world and try to win them over to ideologies because the Chinese Communist Party, despite its name, has one ideal gene that is making money to keep

its population happy. That was great, it was It was fantastic. Can he come back? Yes? Can it before? I don't know, we do, you know, we do this a lot. I had an extremely wonderful interview the day of Normandy, the day President Obama visited, Uh, Normandy with the name escapes you right now. He's written a fabulous three volumes on World War Two at Dawn's Last Light and in others.

Rick Akinson, Yes, Rick Atkinson and I talking about Normandy, and this is what we try to do on surveillance, John Tucker and John Farrew and I and pen Fox, Francine Loqui. We're living this every day. Talk to people that actually know what they're talking about. This morning was Stuart Patrick, Fellow Global Governance and of the International Institutions and a Global Governance program. There is also velocity to

the debate. Is it easy? As a media person, I could say it's Goldman versus Morgan Stanley, which makes for you know, it's fun and all that. But the basic idea is the FED on a path to many rate increases and then a crew that is said, and in the case of Allen Zentner Morgan Stanley has said early wait a minute, there will be a moment of data

dependency where the federal pause. We get an update on this Friday with Ellen Zentner of economics at Morgan Stanley as well to go into your weekend note as you published from Monday, you're gonna reaffirm caution about the FEDS path. Yes, so I think what we do know is they're definitely going to hike some more. Um. But I'm glad that you mentioned the data dependency because that is something that Chaipal has been very clear on. Right. If anyone's been

data dependent, um, it's this FED. And they're going to be even more data dependent than in the past. And so what that means is that the shape of orowth next year is going to matter greatly to how far they go with rates, and especially as they moved towards John Williams of the New York Fed, as you know, talked about his third phase of monetary policymaking, which is managing policy around neutral. So that's really true data dependency, knowing as the data comes in. As as Rich Clarata,

the new Vice chair put it. Uh, the data, the incoming data will tell them where neutral is. It moves around. You manage policy around that two frontline monetary works there in Williams in Clarada. That's not Chairman Powell. I want to posit an idea and I want you to discuss it. This is a chairman driven to take the crystal ballitis away. I mean clearly that's the pattern. Where is that pattern

going six meetings out? So Chair Pal did make it clear starting with Jackson Hole really that throwing out, throwing rules based policy making out the window, even getting his pal william M is on board with him, saying, look, even though my name is on the law back Williams model,

I don't necessarily subscribe to it. So he's really been pushing his weight around at the FED, trying to get the hundreds of PhD economists at the FED to eat some humble pie, so to speak, and say, look, there's not a lot of precision um in the forecasting that we do and we need to recognize that. And so that fits in with that data dependency. Just letting the data tell you rather than being on some clear path

now do find it? Uh So Pal I believe he's been a really great communicator, and the market understands him and reacts very well to his communications. He has made one misstep, though, and that was when he said we are far from neutral. Because if you give a speech at Jackson Hole and say we don't know where our star is, it's like guiding by the stars, and let's be clear that there's not a lot of precision in these things, then how do you know how far from

neutral you are? I think that's the only only communication he's done where I would a he probably could have framed it in a different way, and I think Clarida did a good job on the back of that, saying, look, it's just about the incoming day. Guided by the stars. You reminded me of Contiki and they're trying to figure out which I can't remember which way they went in the Pacific, but they went west to east or east. They got lost. They got lost. Okay, that's the big

risk out here is we're guided by the stars. Can't we just be guided by jobs and wage growth in like like the timber Lake School of Georgia and just wait to see what the data is. Why can't we do that? Well? That and I think that's what the FED is going to do. But I mean, what you've got is, uh, you know, based on our GDP tracking in the fourth quarter two point eight percent, we're gonna come in the three point one percent GDP growth this year.

That's right in the pocket of the Fed's expectation. You've got growth in the first quarter of next year that's going to be boosted by a record high tax refund season. So that's certainly not gonna have something in the data telling the FED that they need to stop or that

they are at at or have gone past control. They'll hike in June as well, but we believe that by the time they're going into that September meeting, the shape of growth is going to matter a good deal and GDP is going to be tracking low and most likely much lower than potential, and that will tell them we need to pause your calendar. Publishing in Forbes, one of our great fiscal experts, he says, it's two miserable years if we get an ellen Zentner g d P. What

does that do to our deficit vectors? And the answers they worse, they get worser. Well, they're they're they're all they're already worse, right, because tax cuts do not pay for themselves, and so revenue is dropping at a time when the economy is growing at its fastest pace. Uh. And so when the economy slows, it only means definite deficits get even worse. Uh. And so staring trillion dollar deficits deficits in the face, it means don't count on

another round of stimulus anytime soon. And in fact, outside of just automatic stabilizers that kick in whenever we go into a downturn, there's not a whole else the fiscal government can do. I would point out that John Taylor out at Stanford makes a big deal about the efficacy of automatic stabilizers as well. Ellen, if we look at the p p I data today, you're too young to

remember when pp I was gospel. Everybody just stopped. If you're looking, No, I'm looking at Ms. Zentner, you and I remember a p p I crystal clear and then it's drifted to look. I gotta go see a stars porn this weekend. Please leave me on. I mean, I'm getting major heat, and I'm culturally deficient because I haven't seen Bradley Cooper Me Bradley Cooper Ellen, We've got p p I. It's coming back. Should I care about business inflation? Does it really matter like it mattered long ago and

far away? Uh, Well, it does matter because margins are getting squeezed and put costs are rising, UM, tariffs are going to worsen. That part of this is just from natural organic tighten in the economy, and it's something that tends to happen as you move later into the business cycle. And interest rates are rising. Uh, and so businesses have to uh, you know, they have a couple of choices. When margins get squeezed. You can either uh invest more,

do some capital deepening that drives productivity. Productivity drives profits, and it keeps your labor share of costs the same. Uh. You can pass on the cost to the consumer, But then you take the chance of dealing with the drop in aggregate demand because prices have gone up. So you take the hit on the top line or on margins or the dreaded third option is that you control labor costs, which leads to softening in job growth, possibly even job shedding.

Jobs were not at that point yet, but that's how a cycle typically plays out. It's something that we need to watch a sandor. Thank you so much with Morgan Stanley this morning and again caution three four five Federate the hundredth anniversary of World War One, we are honored to bring you the author of Presidents of War, the epic story from eighteen o seven to modred Times, the historian Michael Bashlovt. Michael, it is a path from Edmund

Randolph to the Senator from Alabama. It is the attorney general always fractious, and there's that delicate and historical independence of justice from six D Pennsylvania Avenue described that modern independence of the Justice department. Well, we've always assumed that even presidents who can be pretty partisan have attorneys general who are different from that, and there's a layer of separation.

And I would tend to be pretty critical of the new appointment of Matt Whittaker as the act the attorney general, because this is someone who has not only been a partisan.

An attorney's general can set aside partisan tests. That's not as worrying, But this is someone who's coming in with an attitude on the Mueller investigation, where he has written and said that he thinks of his illegitimate, should be defunded and essentially stopped, and very hard to escape the conclusion that the reason that he was put there is essentially shut down Mueller. And that's something that we don't normally see in presidential history, and usually when presidents try,

it doesn't end very well for you. If I speak to you or Doris Karen's goodwinner, James McPherson, the phrase is so tried, and I speak as an amateur. Is this a constitutional crisis? Are we at that point? Or

does that await us in the future. I think if if Whittaker as Attorney General shuts down Robert Mueller and we cannot see that report, and remember that Rudy Giuliani has talked out the possibility that President Trump would use executive privilege to make sure that all are some of whatever report Mueller submits is kept away from public eyes, I think that's going to initiate a constitutional crisis. And the other element of this is that you know it

might then go to the Supreme Court. And you have a Supreme Court now where President Trump has appointed two of those justices, the fifth Brett Kavanaugh, fine man Man in many respects, but this is someone who by the time of his confirmation, got very close to this president in a way that you normally don't see what justices.

So I think one question one would have to ask is if Brett Kavanaugh will feel that he's in a position to call this one way or another without considering whatever relationship he has had with President Trump and his people. Michael Beschloss, maybe to combine history and current events mentioned immigration policy. I wonder if you could speak about immigration, refugees and the changes in national borders as a result of World War One and whether we have improved at

all in dealing with these challenges. Yeah. Well, this has been an issue as as you know of him, that goes all the way through American history, immigration back and forth, and after World War One, we had huge changes in immigration policy in the nineteen twenties. Then it came up at the time of the fact this is this week, This is the anniversary, the eightieth anniversary of Crystal nine, the program against the Jews of Germany that led many

of them to seek refuge in the Western hemisphere. At the same time, you know, it's hard to think of a time that a president has used this issue in a political way as President Trump did during the last weeks of the last campaign. Uh, it always creates controversy. Lyndon Johnson signed an immigration bill in nineteen that opened the doors to allow of the immigration that we've seen over the last half century. That was controversial, but not of the order that we have seen in recent years.

Based on your reading of history and your analysis, do you believe that the factors that contributed to the First World War present today? I think they certainly are. And the biggest and most dangerous omen is you both. I know, read The Guns of August by Barbara Tuckman, which talks about how World War One came, and the big lesson of that book is that wars like this can start by accident, you know, by miscommunications and by accidents and so forth, by people who did not even intend to

go to war. A lot of things are happening right now that unless we've got wisdom and judgment from our leaders, beginning with the President of the United States, this could happen again. And unfortunately, we're now operating in a world of nuclear weapons, which was not happening a century ago. Michael Besh Laws, we have this phrase progressive, which I believe is new talk for liberal. What are the liberals

learn in this election? What are the liberals learn about the certitude of being out of power in being liberal? And if you really want to win, you got to move to the middle or any Scoop Jackson lessons made there, I don't think so. I mean, for instance, at the time that Bill Clinton ran in, I would say that the dominant number of Democrats felt this is a fairly conservative time and if Democrats want to win, they're going to have to become what Clinton called new Democrats and

moved to the middle. I mean, Clinton was more centrist than any Democrat in years. Was before they began using the word progressive, and they really avoid it, as you well remember using the word liberal because it was an epithet. Now I would say say, there's going to be a controversy within the Democratic Party that will really see in the presidential primaries of two thousand twenty, which is and

you know what it is. You know on one side, you'll have strong progressives say the only way you can win the presidency back and win congress fully back is if you have strong views and you go hard left and you bring out your voters, and then the old new Democrat people who will say that's going to alienate a lot of people. You've got to move to the middle. That's where the votes are. What Richard Nixon used to say. I don't think within the Democratic Party either of those

views is dominant. So we're probably going to see a battle Royal in less than two years. Thank you so much, Michael Beschlott's generous amount of time today. The book is Presidents of War, the epics story from eight seven and modern times. And what's so cool about this book? Folks? It was brought out a number of months ago and it was important then, and with the news flow that

we've been seeing, uh, it becomes important. The American historian Tom Hanks says of Michael's book, once again, fasch Loss captures our presidents in terms both historic and human as well. Presence of war. Can't say enough about it. 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