Surveillance: Trichet On Negative Interest Rates

because it's short and right to the point. And Seema, you have some wonderful phrases that I need you to explain to our audience across America and worldwide. I love the idea of the vertico of equities. This is at Alfred Hitchcock. Is it? What is equity vertico for next year? So what it means, Tom, is we're expecting equity to continue to rise next year, really inflated by central bank easing,

not really inflated by very strong economics. And as they continue to rise and those valuations become more and more expensive and disconnected from weak economics, it means that you're going to get to the point where investors are getting increasingly scared of the heights of equities. Now that's not mean to say that we expect an ectingmarket correction next year, but we are certainly getting closer with that vertigo and people start to feel a bit sick. Is it a bubble?

Is it? By definition? I think of Steve Roach, the legend from Morgan Stanley now Yale, or even chairman Bernankey. You know, I hate this phrase when it works here are is it on the edge of bubble territory? I think there's a fair number of people who would say that. I would say, however, that you have got the prospect of economics catching up, So it's not a done deal that the bubble will continue to inflate, inflate, inflate, but

you could get economis catching up with it. But at this stage certainly valuations are very expected, but they will be continue to be supported by central banks. So I want to go someplace else. Is the shift international? Is the shift to stay with us big cap? Something work this year? Is it a year of stick with what works? Or is it a year of shifting to new ideas? So it's a little bit of both. You stick with some of the stuff that has worked really well, such

as megacaps. As you said, some of the defensive areas like real estate, we also continue to like. But also as we go into next year, there's going to be increasing opportunities, which will be important because investors need to have a stake in the upside, which we do think there will be opportunities for I look at the rest of your note and and again, what's so great about it is it's really brief. But you talk about risk velocity, you talk about I guess what is this a quickening

of risk? Yeah? What is? You know? We we tend to look talk about the number of risks out there, but we never think about how quickly it transitions to portfolios. So that's what we're expecting next year. There's a number of different factors, but at least from this perspective, governments and political interference and a number of things we've been seen increasing over the next two last two years, and we expect that to continue as governments take a larger

role than central banks have. And then you see a lot of the risks, she's a trade war. Eventually transitioning to the portfolio is very quickly. Seema lease over here in New York and one thing when we're talking about bubbles, I have to say it's not all stocks, because there have been certain stocks that have been beaten up, the stocks that resemble bonds or do best when bonds are rallying. Uh. Some people are concerned that the valuations there have gotten

incredibly inflated. I'm talking about utilities or real estate investment trust. How concerned are you about a massive dried out, a massive sell off in those particular stocks. I mean, I think it is a concern. And I think that as we see those valuations that disconnect between some which extremely overvalid, which is some which are relatively cheap by history. If you do get that very technical shift, you could see a very very sharp move. So was that risk velocity

coming through very sharply? And a number of the areas that have performed extremely well, and you've named a couple of theres such as utilities, Sama, I'm just wondering who's

participated in this particular rolley this year. The Wall Street Journal out with a fascinating article yesterday referring to some data from Refinitive lip A that said investors have pulled one hundred and thirty five point five billion dollars from US stop focused mutual funds and etf so far this year, the biggest withdrawals on record Seema, who's been in the

market to take advantage of this. You know, when we talked to investors, actually, even looking back to the first quarter of this year, when there were still a lot of concerns, the first question we would get from investors was when can I put my money back to work? They were desperate, So as soon as there were any indications to come in, that's when people started plowing in. And we've seen movement from from from hedge hedge funds.

There's been a lot of the momentum trading and a lot of the e t f s as well, playing on this on this game, well, this is a really important idea. Though Cliff first quarted in zero Head yesterday it was brilliant about the cliche there's money on the sidelines? Is there money towards to shreds? Is there money on the sidelines? I think there is. You know, from our perspective, as long as you don't see a recession on the horizon,

you should be invested in risk assets. Of course, you should protect on you on the downside and the defensive space and That's exactly why defensive especially equities, have performed so well this year is that people want to put their money to work. Now, there were some who didn't get back in on the rally at the beginning of the year when equities really bottomed um, and so for those people, they didn't put it in cash, but they just waited desperate to put it back into work. They're desperate.

I mean, did you sense that desperation right now? I mean, we're up twenty. I haven't even looked John, I've been so busy over here. Arsenal last night against west Ham, Oh mg, that was exciting. Did you watch that gang? I watched it. I went to it. The SP five so far this year, and you're telling me people are dying on the sidelines to get in. Well, not necessarily equities, because as you said, they are extremely overvalued, but there are you know, people want to get something for their money.

Where am I going to get that something? That's the money question? Yeah, absolutely. So. The couple, the couple of areas that we really like for next year is emerging market debt. Now that hasn't performed as well as the rest of the equity space or the fixed income space, and we think that the macro fundamentals for next year do look pretty good. The same thing with stuff like

prefer securities, cocos, they are looking really good. They have the banking sect has been beaten up in a number of possible well, but they are protected by government, so that's another upside. But we also really like some of the liquid assets, specifically private real estate. Sema, thank you so much, Semach just wonderful. Well, really I love it. I get these fifty page two thousand twenty things. It's

got time to read that, Thank you so much. With Principal Global Investors, five themes that will shape the markets. And now the most frustrating rest we have in all of Lubrick surveillance because when the journalist John Fenby walks in the door with his prolific writing, you don't know what to talk about. Should we talk about France and its classic one volume on France? Should we talk about his new effort Crucible about coming out of World War Two?

Or the new edition of your classic Penguin book on China? Lisa Bramwitt said, go there. So that's what we're gonna do. On China. We have a president gy is it a fallback to Mao. Is the new leadership of China a redux of Mao? It's not a redux to Mao in terms of ideology and so on. He still believes in the reforms, the economic reforms, post things, things shaping, but he believes in the kind of power and the power

centralization which we had on the Mao. So it's it's a term in terms of how China is run from the very top, but not necessarily in all the details of how it's run. There are three or four people that had the courage to write on all of China, like you have of course the giant Jonathan Spence, and and you Mr Fenby as well. Within writing on China is the response of the restaurant world. How do you

synthesize President Trump's response to China? His China to his It's very erratic, i'd say, is the phrase, what we don't have from the United States is a coherent policy towards China, whereas She jinping is pretty coherent. I'm not a great fan for the idea that China always sets things in very very long term planning, but they are doing that Visa v. Trump at the moment and the clearest memories of being in Hong Kong with Governor Cheng the day the w t O began to splinter apart.

Now we're really talking about the end of that multilateral experiment. How critical is it that we see how crucial is it rather that we see the w t O drift away? Well, China likes likes the w t O, and the danger if you get into a series of bilateral arrangements on trade rather than having an overarching organization like the w t O is that China will make an awful lot of deals around the world using its economic cloud quite

nakedly to gain political influence. Jonathan, giving your vast experience in China and with China, i'd love your perspective on a question that Jonathan Faro has been asking all morning, which is a really good question. Is the silence that we've been hearing around the December fifteen tariffs a good thing or a bad thing in terms of them actually reaching some sort of accord. It shows I think that they are down to very serious negotiation at the moment.

This is less the negotiation by tweet and silence from the Chinese side, and it's more a sign that they are getting down to real nitty gritty elements here, and that involves, of course increased Chinese purchases of American goods, particularly agriculture, but also it will require some indication from the U S side that they're willing to consider tariff rollbacks or further delays in tariffs to keep the Chinese happy. Another big question sort of overhang all of these negotiations

is who has more to lose? And there was data coming out overnight about China's consumer inflation accelerating to a seven year high in November. This largely rides in the back of higher pork prices, but you see factory prices declining. This raises the specter of stagflation, of a concern for the PBOC what they are going to do in order to juic growth without causing a sort of hyper inflation that that impedes the economy. How should we view this?

How concerned is the PBOC at this point? It is pretty concerned, I think, and it's traditional transition mechanisms aren't working as well as they used to, and you have a leadership in Beijing which doesn't want to go for the old fashioned stop go big stimulus packages that we've seen since two thousand and eight. They want a more managed, more stable economy, and they're trying to do this in the middle of the trade war, and that's difficult, and

we can't let you go without a discussion. A crucible, You're right, prolifically, Jonathan Fenby. Crucible is about a time. It seems so important right now. Is it the end of World War two? It's the end of World War two? And it's the really the emergence of the new World system, both through the US involvement in the world and lots and lots of other things happening all across the globe.

What's the distinction there? I mean, I think of the starvation in Europe, those difficult years of literally famine before the Marshall Plan, is well, did the US get that right? And can we get that spirit back? The US I think got that right. In fact, they were quite helped by the Soviet Union and the way that Starling got it wrong for most of the time. The US got it right through the Marshall Plan, through NATO, the establishment

NATO and so on. And it needs that kind of commitment which you saw from the Truman administration to get things going again. I've got another two hours of questions another time, Jonathan Fanbi, thank you so much, folks. I'm going to cut to the chase. His one volume in China is absolutely definitive. It is a sprawling history, particularly

of modern China. His one volume on France is just the single best thing out there, particularly on the cultural aspects of what make the French different and crucible thirteen months that forged our world with the emotion of awe after World War Two. It is always a joy to speak to Jean Claude Triche. There are too many things to talk about, including European central banking. Lisa Brando, It's would like a three hour interview. I guess we can't do that today, Lisa, but we will try forward with

President Tryche on too many European topics. First, Sean Claude Triche, we must speak of the legacy of Paul Voker. We know of his courage in the late seventies in the early eighties to make tough decisions to force recession and to bring down inflation. But then there was a story afterward which was almost a study hand uh forward through the nineteen eighties, how does Europe find a vocer like presence for the next ten years. Well, let me let me say, Tom, how sad we are to lose Paul Vulcar.

Until I would say his last days, he was still active. He was still very very keen on giving advice and sentiments. And the last book he published, Keeping Arid, has been absolutely incredible in terms of lessons to be learned from his whole life. He said the three verities are stable prices, sound finances, and good government. And he was not putting his punctions to say that on sound finance and good government. Practically all advanced economy where I'm not up to the

challenges stable paces. We are still living in the legacy right as regards the stable prices, which which gives a measure of his own influence and his own achievement. You can't say enough about the book keeping out And of course this is Mr Foker writing with Bloomberg News. Is Christine Harper, great honor of Christine write that book with Chairman Walker in his final two years of life. Sean claud triche the new phrase. I know John Farrell wants to jump in here on it. Let me get the

conversation started, how does Jean Claude Triche define fiscal space. Well, I would say a lot of countries have some fiscal space in the advanced to me, and should utilize their physical space as resolutely as possible with great determination in their interest and in the interest of the continental and global economies. Others are in a totally different situation. And that's all the difficulty with the concept of physical space at the global level as well as at the European level.

There is a tendency to over simplify the recommendation and to say either you should be very sound and reasonable as regards the fiscal position, or you should be as expensive as possible. But it's not correct to simplify oversimplify the recommendation for for a number of countries like Germany and the Netherlands as examples, the idea that there should be much much I would say aggressive utilization of physical space is absolutely right and go without saying in my opinion,

But others it's not the same. And I hesitate on the United States of America to tell you my my understanding, because the fiscal position is not signaling a lot of physical space in the US, at least in my view, Jean claud Le's trying and focus on europe An area that you had to oversee as the ECB president since twas and at three that was the last time that we had a Monechy policy review at the e c B. Christine Legard is now undertaking that task. What do you

think needs to be done well? I think she's right to to look at it exactly like the FED looked at it in the very recent allions. Still continues if I'm not missled. So we we have a number of issues that are at stake. Which which are the judgments that you are i would say making on non conventional measures that have been so so heavily applied by all

santo bags in the world. Is it something that you would consider permanent and structural or is it something which was really transitory, waiting for the economies of the advanced countries going back to normal themselves. Uh. You have also the way how do you run your definition of price stability? The United States Fed looked at it through a certain

angle and concluding provisionally. To my knowledge, we don't change the definition of price stability to percent, but we are we will be more symmetric in utilizing this uh, this definition of price stability, So the same questions might be asked in Europe. My own understanding is that the most important one is certainly the definition of price stability and how do you run that? And I would personally, i would say, provisionally, conclude that a change of the figure

would not be appropriate. Personally, at the time I was called myself to go to four percent instead of two percent, I don't think it was. It would have been a good idea, and today it would appear strange. I don't spouse the idea that zero percent or one percent would be better. It seems to me that we should not forget that the central banks are there to anchor medium and long term expectation. And that being said, it's clear to me that this running of monetary policy with this

definition should be symmetric. Of course, I have no hesitation on that, but again I don't want to anticipate on the meditation of the Governing Council for our lessons to worldwide and placed decide that Johning us Humblinberg Radio, John Calatricia, the former President of the European Central Bank. Jean Claude, the former president of the e. C. B. The one that came after you are a Dragon used to say that for rights to be higher in the future, then

needed to be lower. Now that's the argument for negative interest rates for much of the last five years or so. Do you think we need to reassess that argument? Well,

again the problem. Of course, it is clear that extraordinary accommodating monetary policy, including negative interest rates like in Switzerland as minus zero points seven five, or in Sweden, or in in some respect in Japan or all this of course is extraordinary and associated with very very abnormally low level of inflation and also of growth in in the advanced economy. Uh. There are of course negatives that are associated with this negative interest rates or re accommodating policies

as well as positives. But the positives, and I share the view of the major central banks that considered that the positives higher than the negatives. But the negatives should not be forgotten. And therefore I hope very much this very low it's will not be compulsory for eternity, and I hope and I expect that we will go back to a more normal situation. But that thing said, it is it is not an arbitrary decision of the central banks to embark on these accommitting in policies. It is

because the situation is very demony. This has been wonderful, Jean clau Touche, thank you so much, particularly those thoughts on Paul Poker this morning. He is the former president of the European Central Bank. Please decide that joining us here in New York City is David coustin Government Sex Is, Chief US equity strategist. Good morning to you, Mr Corston,

Good morning, optimistic about the year ahead. It give us the y. Why is the U S economy is continuing to grow and that is important because of the economic activity is what drives consumer spending. Consumers of US economy, that's what drive earnings, and that's what's likely to take the U S stock market higher in aboff average, in rising profit margins that will boost EPs by five percent. Where the rising profit margins coming from? Why are you

looking for that type it? Well, the rising profit margins really is the fact that this year they came down by almost sixty five basis points. Kind of particular, But if you really want to look at what's happening, it's ultimately revenue growth. And revenue is the story. The unemployment right now is the lowest in fifty years, continuing to fall,

likely driving overall business activity. Technology margins is what really distinguishes the United States equity markets from global markets, and the tech margins are now above and so in some cases you'll see them come down, but really coming down from a very very high levels compared with every whe else in the world. I know, Tom is over there in London. There's very low profit mars over there. Tom,

you want to have more profit margins come here. Well, I will say that there is some concern about a bubble in a specific slice of the stock market. I'm talking about utilities and reads and other interest rate sensitive sectors. Ce CETA General has said that the world's largest stocks that win from low yields are near their most expensive relative to the losers in at least fifteen years. Do you think that they are set for a big sell off? Well, the dispersion of valuation is how you want to think

about that. That's the separation the spread between the uh highest valued stocks versus lowest value stocks are as at an extreme and that is typically associated with value stocks outperforming, but economic growth in that modest level somewhere between zero and three percent, not a recession. Nor you're having rapid expansion. So that roughly the great rate of growth you've had in the last ten years. That suggests that growth ocs

too better. So answer to your question, you think about value versus growth, Value should do better based on some of the metrics, growth likely to do better, and so as a as an investor, but following managers should be thinking about growth at a reasonable price kind of GARB the proverbial GARB strategy, and the idea behind that and intuition is not to own the most expensive companies, which

are in fact over valued. I would certainly concur with that view um, but rather also you need always have some growth because value stocks are likely to trail if the economy continues to grow. So, hey, we call type it increasingly the consensus cold its value worth of growth, your growth of a value absolutely increasingly the consensus cold is the rest of the world of the United States. I don't hear that from you this morning. Why not?

Because the economic activity in the US is still very strong. You've had two hundred sixty six thousand job print. Again, that's obviously last month, but the idea of the EU US economy continue to grow at north of two called to a percent on average. The Golden Sacks Economics forecast is certainly well above the can sensus consensus like one eight percent or something like one point at two point three.

The idea of the way you make money is to have a view that's different from consensus and have consensus move towards you. Having a view in a lot of consensus is gonna make you necessarily a whole lot of money. The idea is to find the opportunity where there's a there's a gap. What's your view on what the participation

has been through SMP five hundreds up around about. The Wall Street Journal came out with a well read story in the last couple of days about the amount of outflows that we've actually seen from equity focus funds here in the United States. Who's been buying, who's been participating. So when we look at the major owners of the U S stock market, we can look at households directly,

mutual funds indirectly, foreign investors, and pension funds. Those four categories own around of the US stock market, and so they both benefit to the extent that they're buying even if they just own their positions and their positions right now, they're around the eighty five percent of coincidentally, their own most of the market, and they are also relative their own historical allegations very very high, and that is a result they've all benefited. And some good news for U

S equities this morning. US Chinese negotiators planning for a delay of the December terrorists. That's according to Dow Jones. So we do finally have a report. The silence over the last couple of days has been absolutely definite, deafening. No official report, I have to say, but the Dow Jones reporting the US and Chinese trade negotiators allaying the groundwork for a delay of a fresh round of tariffs set to kick in on December fifteen. That's according to

officials from both sides. Lisa and Futures are race losses earlier and are heading into the green ahead of the US Open on the heels of that news. So spiking upward I indirect response up four points on the SP five hundred. David Coston a special thanks to you, sir Goldman, Sex chief US equity strategist on the year ahead, and slightly contrarian, I must say on some of those calls

as well. Great to see it, David. If you study a Matt Winkler essay, he is the founder of Bloomberg News, our former editor in chief, I should point out the one that gave me that fancy badge and says Bloomberg on it. If you study the methodology of Matt Winkler, it is paragraph after paragraph of density of show, and he does that on tariffs, on trade, on exports and imports of the United States of America. And Matt, what is so extraordinary about your new essay on all the

confusion of tariffs is smack dab in the middle. You go back to nineteen sixty nine I was a few years ago, and say that the five year average of global exports has finally declined. That's the ultimate price of this trade war, isn't it? It looks that way, tom Uh. You know, you can't obviously be certain, but everything points to a deterioration of not only global trade, but particularly

as it affects the US and US companies industry. You do this the methodology, Maunt that you use with your colleague chen Pei is to really dive into the data and find what matters in the density of this important essay. What was the thing that surprised you, Well, that was, without a doubt the biggest that suddenly we're looking at the end of what has been a very long trajectory

of greater trade, which has benefited the United States. And one aspect of that is if you just look at the five largest companies in the world, you know more than of them are made in America. So trade has been the elixir for corporate America for more than half a century, and now we're reaching a turning point and it's not encouraging for American business. So Tom, I am you mentioned them Matt's column. I'm reading it's probably twenty

years so paragraphs. Every single paragraph has at least one number. So it's a winkler that come out heritage. You haven't read the Bloomberg Way, Paul Sweeney let assignment this weekend. Boy, if I'm a cub reporter, you know at Bloomberg News, I got my work cut out for me. But so, Matt, my simple question is it's globalization dead or it is just just a blip in the road, And what is a global trend? Okay, so China, by the way, continues to export. And the five year rolling average for China

is very different from the US. The US has leveled off, it's unchanged UM, whereas China is increased. UH. That suggests that trade goes on with or without the United States, and it also suggests that relationships with trade are going to change, but that global trade will continue. It's just that the US won't be the leader that it has been UH for much of you know, the past seventy

five years. So, I mean, we have been a leader, you know, since the end of World War Two, and I can't imagine that we're not going to be a leader going forward despite what we're seeing right now. What's the what's the risk to our economy? UM, if we are not in fact a leader. So you're seeing that in a decline in business investment. For one thing is that the chaos that is created by these tariffs has essentially paralyzed Corporate America and ceo s are not committing

themselves to new plants and equipment in the US. UM. Farmers we don't really have to talk much about because it's obvious that they're in a perilous state because of the those cash payments aren't helping. Well, they're helping to some extent, but that's a version of chrony capitalism. Really, that's not what farmers want, um, you know, the Trump gentleman farmer, you know. And bilateral deals go only so far, um.

You know, when you're up against say, the EU, which is, as you know, more than two dozen countries, UH, that that's not an easy negotiating UH position to be in because the EU UH is going to be obviously multilateral, and the US can't negotiate with any of those countries one by one, has to do it with all of them, and that's not going to be easy. One final question,

this is just so important. There's an understanding Republicans and Democrats are essentially on the same pray page on unfree trade. Do you see in your study any window to get us back to a multilateral US approach? Or do we are we cornered by two parties that to stay elected, given the popularity the spirit of UN free trade, they've got to go in that direction or can we reverse that? Well, if the pain UH is great enough, and it may be UH in the years ahead for American business, the

politics could shift right now You're absolutely right. The politics have gone and eighty degrees from where they were ten years ago. Okay, let's leave it there. Matthew Winkler, congratulations

on an exceptionally important essay. This is a essay, folks that you read paragraph to paragraph on the dynamics of trade, and I should point out at Bloomberg Opinion and it dovetails nicely with my chart of the year, which is the income and custom tariffs into the United States, which shows that this is a extrainary six standard deviation move and I can't tell you how uncommon that is in Bloomberg Opinion. Uh, Matt Winkler writing on Tariff's Paul. Thanks Tom.

You know, let's get a little us quite a morning this morning with the impeachment. We had the announcement of the two articles of impeachment this morning from uh Democratic congressional leadership. Let's get some additional analysis. We welcome Emily Wilkins, Bloomberg Government congressional reporter. Emily, thanks so much for joining us.

What were your key takeaways this morning? So the key takeaways is that they have finally announced that we are going to be seen two articles of impeachment and they will be abuse of power and obstruction of Congress. UH. Chairman Jerry Nadler of the Judiciary Committee also mentioned today that he is planning on having the Committee vote on the articles of impeachment that potentially tease us up for

a vote next week to impeach President Donald Trump. So emily timing, so you think we will get an actual vote next week on the House floor. Nothing has been officially announced yet, but there is a thought that they do want to get this done before December twentieth, that's the last day of session for the year. If they do get it done, it then kicks over to the Senate or the Senate trial. Emily, just following up on that. So we're gonna get a vote potentially in the House

next week. Give us the timing that is expected from the Senate. Sure, So the Senate recently released the calendar, and the entire month of January is gone. They're expecting to use all of that month for this trial. Uh, it could potentially go into February as well. Um, but it sounds like it probably will be wrapped up near sort of the first quarter of next year. Do we

know what a trial looks like? I mean, I have a recollection of the Clinton trial in that, But do you have a visual of what the quote unquote trial would look like? Sure, I mean it's going to be very interesting. You're going to see all in the Senate sitting in there dust, not saying a word. They are the jurors in this process, and so they are the ones who are listening to the argument from either side and trying to decide whether or not they're going to vote.

We gotta drag you back because there's a lot to talk about here, to inform the public, including myself, and really what we're in for, knowing that each impeachment is its original character. Emily, Thank you so much, Emily Wilkins, Bloomberg Government. 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.