Surveillance: Vital Monetary Response With Dudley

president of the New York Fellow Reserve. There are eight, nine, ten topics that we could speak to William Dudley about, but there is only one topic for those of economics, and you've seen it percolate. We've done it on this show as well, and that is a new governor at the Felleral Reserve System. Her name is Judy Shelton. She has an education degree from Portland State University, which is

six four miles from Bill Dudley's PhD at Berkeley. This is a delicate conversation, Bill Dudley, but let me begin with a blunt question. How does this system deal with a potential governor this uniquely qualified. I don't think it creates huge amounts of problems. That there have been governors in the past that have been outside the mainstream. And Wayne Angel, as someone who comes to mind, uh and fed you know there's more than there's there's seven governors.

There will be seven governors if the Waller and Shelton are confirmed, and I think you know they will. They will have a voice, but they will not actually set the path for Monterrey policy or regulatory policy. I'll be set by J. Paul and Randy Quarrels. The heart of her theory is the yearning to go back to another time of a more closed American system, a more static economy.

To the many people that support Judy Shelton and that desire that feeling of another time and place, how do you respond in this time of an open America, an

open economy. Well, she has advocated returning to the gold standard, and returning to the gold standard resulting tremendous increase in the volatility of interest rates because basically, my gold prices were going up, the Federal Reserve would have to rage rates when gold prices would have to lower interest rates, regardless of what was happening in the real economy, regardless of was having to inflation, regardless of what was having to The gold standard is not a good anchor for

US monetary So let's talk about the real economy. How would you be reacting now to the data that started to come through in America? We saw in the high frequency day, so we've got a flavor that things were starting to store to roll over, and now we see it in jobless claims as well. They're starting to pick up again. I said a couple of months ago that it looks like the right wing of that v's starting to break. What would that mean for you? It's a

policy make for the Fed again. Well, I think what's happening is the recovering economic activity is flattening out is as shut sounds are recurring, and social distancing is increasing again. And I don't think we're gonna see a fall back to where we were, uh, you know, in March, April and May. But the recovery is going to be quite subdued. The unemployment rate's gonna stay high for quite some time.

And as a consequence of that, Monterrey policy is going to be on hold, and the Fed Federal Reserves be looking around for what things can they do to provide additional Monterrey pals. What things do you think they can and should do in the months to come. Well, I think Unfortunately, they don't have a lot of great weapons. I think they're going to continue their large scale as it purchases, buying treasuries and it is mortgage backed securities.

They may come forward with more definitive forward guidance in terms of keeping interest rates until low, for long, until the unemployment rate falls below a particular level or inflation clowns above particular level. But the real, the real focus right now should be on fiscal policy. That's what the U S economy needs. We're basically right at the edge of a huge fiscal cliff with the expiration of the six hundred dollars a week unemployment conversation benefits at the

end of this month. And if that's not, you know, replaced by something significant soon, the commun is actually gonna be weaker than participate. Bill Fedger Fedger J. Powell also agreeing with you coming out and saying fiscal policy is necessary. But the FED has control over monetary policy, and right now monetary policy is pushing investors into equities. We're looking at futures right now unchanged or a little bit higher on the day ahead of the open, even after these

worsening labor statistics. How much should the equity market be a gauge of financial conditions for the Federal Reserve something to shoot for, with higher equity values being a good thing. I don't think the Fed wants the equity market to go to any particular level. They do want financial conditions to be accommodati if they want markets to work. They want markets the open and will functioning, and I think

that's what they've achieved. I think there are some people on the Reserve that are a little bit concerned about how high the equity market in the last sea minutes, because saw a couple of people talking about financial stability is jees. I personally think the stock market is high mainly because bonnyals are low and bonniles are low because Montreal policy is going to be very accommodative for a

number of years. Well. But to the extent that the Fed is worried about the widening gap between wealthy and poorer individuals, how concerning is it that their policies have pushed up asset prices, have created easier financial conditions, but clearly are not leading to a better labor market. Given the fact that we're seeing a reversal in the claims numbers. Well, I think they are frustrated by the fact that they don't have good tools to address the issue of income

and equality. I think they wish they did have better tools. But Montrey policy is not well suited for the fiscal policies. So it's really for Congress and the administration to do things on fiscal policy that help address the fact that the burden of the of the pandemic is falling disproportionately on low and moderating communciles. Bill Dudley Wethers, and we will continue with the former president of New York FED. We welcome all of you on Bloomberg Radio and Bloomberg Television.

Is John Farrell notes a flip in the market here, you just come back dollars stronger. And John, we've got to look as we as we continue with Bill Dudley, John, we've got to look at the substantial curve flattening. It's really broken down long end and buy two basis points to about on a thirty year Bill, talk to me about the QUE program and the scope for adjusting that to sit at the long end just a little bit more.

The front end is already so well anchored. What can you do with the long end and what did you learn coming down to the last crisis. Well, the historically as used their large scale asset purchased to buy treasuries

across the yield curve. They could decide to buy more longer matority treasury since, as you point out, the short end of the treasure market is well anchored by expectations move for next for for several years, that has indicated that they're going to shift their large scale asset purchase programs from focusing on market function, which is now good for focusing on how do you actually stimulate econmy I think that it does imply that they're gonna buy a

greater proportion of longer dated treasury. But before we let you go, I need a message for fiscal policymakers down in Washington. There's a real discussion about perhaps allowing the enhanced unemployment benefits to expire, maybe to taper them aggressively. Maybe that's the best case that we can hope for

at the administration and Republicans. If that happens, what you expect August and September data to look like, Bill, Well, again, I think it's going to depend more on the course of the pandemic and what social distancing that then requires. But if there is no extension of unemployment, conversation benefits, and I think you will see consequences for consumer spending. The consumer spending is held up reasonably well in part because household incomes have been well supported by fiscal policy

that supports ends the consequences. What we're seeing in the liver market, You're gonna start to become more important in terms of outlets. Bill, appreciate your time this morning. Appreciate your patients to great to catch up you William don't be their former New York Fed president right now joining us, And I'm really looking forward to a good conversation with a guy who has put together a firm of continued success. It is ever cord as ever Core I s I of course with the great at Himan and he is

Ralph Schlastein. He is co chairman and co CEO, looking like he just played a folk act at the Dennison College Michael Eisner Performing Center, and we are thrilled he could join us this morning. Ralph, I want to talk first about your senior chairman, Roger Altman. I think it is under appreciated how lonely you guys were when you set up ever cor. What did Altman and schlo Stein do at that time that was so different? Well, I wasn't there. Roger was there for the first fourteen years

without me. I joined eleven years ago. But he literally, uh came back from his stint at the Treasury and thought that the world needed a more old time investment bank, one that focused purely on advice. Uh. And the very first presentation he made twenty five years ago, the first page had the words quality and integrity on that first page. And I've been here eleven years. The one thing I was allowed to do by Roger is I change quality to excellence. And so now it's excellence in integrity. But

it's it's a great business model. We have very senior people. They actually do the work rather than just show and the board meeting. So well, that's a huge distinction, and certainly we've seen that with Ed Hyman and with the others of your your principles. Okay, let's cut to the chase. How do you readjust and recalibrate out of this pandemic

given the competition of the major banks. Well, uh, what we have done over the last several years is to dramatically broaden the things that we can advise our clients on. So we have the number one activist fence practice. We're the only independent firm with an equity underwriting capability, and in the quarter we just finished, we did more underwriting revenues UH than we did all of last year, which was a record for US. We have debt advisory, we

have restructuring UH advice on hedging. So what we've done is we've built deep capabilities in everything that a company would want to do. Big firm as a counterpart Ralph. One important question, and this has come up with Lisa Bramwis and John Farrell day after day. You guys have been massively benefited by the stimulus of Jerome Powell and

by the leadership of Congress. How do you how do you move forward with the American public Where we see New York Wall Street and indeed global Wall Street benefiting so much from the stimulus, That's a I think a really really important issue. UH. There's clearly been a uh massive effect on the capital markets, both the equity market and the debt market. UH, and that has certainly benefited the trading activities and the shares of the large firms and of all all firms also, So we have this

massive inequality. It was necessary to stabilize the economy, but it's had a much greater effect on the wealth of the wealthy than it has on the well being of those in me. Does that compromise your ambitions in any way, shape or film, Ralph, No, I think we have to continue to do what we do, but it does, UH, in my private life make me some bard of of UH people and of policies that are focused more on

a more equal distribution of wealth in this country. Give us more detail on that, Ralph, Is that a shift to the left for you politically speaking ahead of this election? No, I actually, uh worked for Hubert Humphrey in the Senate and then worked for President Carter in the White House, so I've always had a I wouldn't call it a left. I'm a conservative on fiscal policy, but I do believe that we need to do more for those who are

underserved in terms of income, health care, housing in this country. So, Ralph, given the fact that you're a fiscal conservative, what would you say to companies right now raising record amounts of debt in order to survive this period of time becoming more indebted ahead of a period of slowing growth. Well, I think the the most important thing for every company to look at in the period that we've just been through has been liquidity. Uh, do we have the cash

to survive? Because? Uh? In O eight O nine, we learned that financial institutions fail not because of capital, but because of liquidity. And in this UH recession, deep recession, we have learned also that that phenomena is more widespread. So we spent a lot of time in the last four months encouraging companies to put more cash on their brown sheets. But here's here's the conundrum, Rouph. Because we're heading into a period of slowing growth, we have a

more fragile economy, and we have more indebted companies. Why not just file for bankruptcy? Why not renegotiate the debtloads now with creditors to reduce the obligations rather than putting their entire capital models in a more precarious situation. Well, there's some of that going on as well. Uh. I think the real issue, UH, in terms of how to solve one's balance sheet issues, depends upon the outlook for the business. If if it truly is a the uh

type uh downturn and then recovery. Uh. Then it's just a matter of having the cash to survive to the other side of the chasm. Other businesses obviously are going to be more seriously uh and permanently impaired, and for them,

you know, bankruptcy and recapitalization is the right model. Well, if the heritage of ever Core Forward is on John Weinberg and you and of course Mr Weinberg, that name is magical and always associated with Golden Sex, I'd be honored if you'd comment Ralph on the retail experiment at Golden Sex. Can institutions be all things to all people? Uh? If do you really want me to comment on that, he'd love you take if I were in their shoes, It's not the path that I would choose. Uh. I

think that. Well, there are two parts of their retail experiment. One is collecting deposits. That makes sense because deposits are much more stable funding source uh than going to the institutional market. And I think that is a very sound thing to do. And they're you know, they're paying up a little bit, but they're paying for much more stable liabilities or borrowings. Uh, the lending side of it. I'm not a big fan of It's a very crowded business.

Uh and uh coming late to the party. In my view, as you know, Ralph, Bloomberg, surveillance is all about the conversation with experts. Of course, we all know your acquisition of that Hyman Services a number of years ago. Tell us the value, the intellectual component value of the future Wall Street, the future global Wall Street. How much does it matter that experts will be needed? I you know,

it's it's interesting. I often say, uh that we're We're in every business that Goldman Sacks is in that meets the following criteria. You compete solely on the basis of your ideas, your intellectual capital, and your relationships. And the only source of revenue is f income. So we are we are the walking example of an intellectual capital firm. We have two major businesses, the research business which you just asked about, and the investment banking advisory business, and

both of those are fundamentally driven by intellectual capital. Ralph. One final question, this is a critical importance. We have a viewer that emails in right now, John from of indremed and he suggests. I asked you, do you think I could pull off the beard? Relf? I mean this was a point of debate pre pandemic. Did you think you know? Does my face say beard? Tom? You're asking about you? Yeah, do you think I should grow a beard? What do you think? I don't know. You should probably

ask those near and dear to you. Yeah, I did. Hell from New Jersey said no, Ralph, last I go away. Congratulations, Congratulations, Ralph, last time with ever talking to you. Thank you, Ralph, appreciate it. Right now our conversation of the day on China, Meredith Sumters eraise your group had a research strategy and operations in a move from Bill Ackman over to the authority of Meredith Sumters important out of LSE and a course with a profound knowledge of China. Meredith, what can

you add to the conversation? You see the punditry, it's in the zeitgeist right now. But what can you add on this Thursday morning about this consulate tip for Tad. Great to be here with you, Tom. I would say, like, look, this is a remarkably unusual escalation. A closure of a conflant outside of wartime is rare and It's really just one of a myriad of US actions, as you've noted, to pressure China and to try to put the ballateral

relationship on a fundamentally different course. And we heard comments that this is strong, but the question is is it effective? And what's key here? As you see this unswerving US pressure in speeches of Trump administration officials over the past several weeks, National Security Advisor O'Brien hitting out the ideology of the CCP, the Communist Party, train General bar calling China's ambitionism to trade with the US but to raid the US, and of course Secretary of State Pompeo who's

called the relationship fundentally detrimental to the United States. All this tells you is that you should expect the US to continue this escalation with China up through November, even as most US officials recognize that President Trump, accordin to Whole Night numbers, is currently on track to potentially lose in November. Their actions. Bottom line, what we're watching here is their actions could fundamentally alter the course of the

Biloud relationship on the eve of a potential administration change. Well, Mary, to let me ask you this from your perspective of these decisions surgical or they reactive and unpredictable. You mean that the decisions from the U S and Jonathan, Yeah, I'm just wondering if there is an ultimate objective here and there are some surgical decisions which are going to come together in a bigger picture, there's a bigger strategy,

or whether this is just ad hoc. I wouldn't call it necessarily ad hoc, but I wouldn't call it part of a grand strategy at all. Talking to Trumba administration officials, what's clear is the President has given a green light for his officials to get how on China, thinking it might help him in the polls, although so far his campaign has been disappointed by that, with voters focus more so on pandemic than on China. But President Trump has been very clear that his Phase one trade deal is

off limits. So you see this tip for tat escalation being pushed by the U S side that gets right up to that breaking point, but it's not meant to go over the line, and the risk is that they could go over the line without knowing that they're doing. So what happens then, what happens if the Phase one trade deal gets rejected, is basically dead in the water, as Leland Miller China Beige Book thinks it probably will

be soon, you know, at least. What's really key here is that, well, obviously you know in the immediate term there's going to be negative market reaction and fallout. This is not what President Trump wants in his side, neither is it what for his president she wants on on Beijing side, which is why we still have a sixty five percent probability that that deal last through the November election.

But what's really key here is that Phase one deal is increasingly a relevant barometer of the U. S. China relationship. Even if that deal provides, the broader relationship has pretty much fallen apart, and that that is going to be the case with regardless of whether you have a second term compan administration or if you have a Joe Biden administration who will come into office and inherit uh quite

a challenging by that of relationships. I mean, we can go all day on this and the different theories of game theory, Meredith Sumter, but it comes down to a game of chicken. Maybe you go back to Cuba and the Cuban missile crisis, mutual assured destruction. It comes down to who's gonna blink first. How does that play out? What is the process of how you get through a

game of chicken? Well, I would say I think that from from Asians perspective, they're just trying to manage that game of chicken through November, looking at poll numbers and hoping that they're going to have a change in US political leadership that they don't think will necessarily have a fundmently different view of of that that um uh sort of confrontation with China, but it will be handled in a much different way and a much more manageable way for Beijing murder. If we've got to wrap up by

talking about the response from Beijing. Last week, the United Kingdom is freezing out announcing plans to freeze out Huawei. What we've learned in the last twenty four hours is that China is responding by having a blackout for the English Premier League this coming weekend, the last game of the season. I'm just wondering why they keep going towards sports. They did this with the mp A and the last

twelve months as well, they're doing with English football. Now in the last twenty four hours, how effective do you think the strategy actually is? Jonathan talked about a game of chicken. You think you have problems with the US China relationship, and China has problems across the whole host of its relationships externally. And the question is does Beijing

realize the strategic error that they're making. In other words, at a time when the US positions vis the China and frankly Vius to be, the rest of the world has been at odds with with what the worst of the world want, this could have been an opportunity for Beijing, but really Beijing has fundamentally failed to capitalize on that on the part of using politics in its own political

insentives to try to course other countries. That's going to have negative fill over, John, are you telling me that China is gonna blackout Crystal Palace and the tots that massive game that you're so excited about, they won't be able to see. Meredith, were gonna say thank you, Meredith somethday you write your group had of research, strategy and operations.

Joining is right now a gentleman who it is important to speak to on the miles rounded up six miles from Manila west northwest to a set of islands with Chinese jets on them in the South China Sea, and that would, of course be James Trevinis. Admiral Stevinus has been a wonderful friend of the show, and of course has authored too many books to count, including the time his ship came out of San Diego and he moved out to sea for the first time. Admiral, thank you

so much for joining us this morning. How do we show the flag in the South China Sea? How does that actually happen? Tom? We take our ships as you would expect. Our big aircraft carrier's nuclear powered aircraft carriers are big amphibious carriers that carry thousands of marines and above all our destroyers like the new movie Tom Hanks Greyhound, those fast, lean ships that can go into these waters, and we simply drive them through these waters. We operate

the aircraft of them. And we do this to demonstrate to China that China's claim that the entire South China Sea is territorial Chinese waters is preposterous and viole. It's international law. These are called freedom of navigation patrols. It's the most effective way to physically demonstrate these are high seas,

international water. And well, let me ask the question, and I say this our attempt to say this with grace and that we all have a collective memory of the Falkland Islands where boats were floating around and all of a sudden there was a missile. In this case, there are some form of images of Chinese aviation within the vicinity. How do we know that our kids are safe on these ships? First of all, these ships have the most sophisticated air defense systems in the world. Having said that,

you're absolutely correct, Tom. In the nineteen eighties during the Falkland's invasion, number of British ships were sunk by Argentine aircraft. On the other hand, are AEGIS combat system is very sophisticated. Great are we have high speed missiles that go with it? We can defend ourselves re noably well. Part of this again, one final question. I know Paul Sweeney wants to jump in here as well. Admiral it is tit for tat diplomacy. You are toughs, I'm sure had to go through courses

on game theory. To our audience and to me it's just a game of chicken. How does a diplomatic game of chicken unravel? How does it end? Um it unravels. Those are two different questions. It unravels if the protagonists in the game on the point of the exercise UM miscalculate, if a Navy destroyer UH fires on a Chinese jet before it's in a firing position, and we have an international incidents, that's how it unravels. The way we prevent

it is create buffer zones, Tom. And the way to do that is negotiate with China for a set of protocols and see that keep our forces some set distance physically apart. We did that with the Soviet Union during the Cold War. We're gonna need to do that with China. Admiral, what is it? What is the state of the United States Navy in the Pacific as we speak here is because we think about the tensions rising with China. Good news,

bad news. Good news are carriers are forward. We have two nuclear powered aircraft carriers in the South China Sea right now. We have very capable forces in Japan Forward. About half of our fleet focuses on that vast Pacific water space. The bad news paul Is. For example, we just recently had a fire and lost one of our big deck UH amphibious carriers in San Diego, the Bonham Richard Um. We see some instances where the Navy needs to do better with its level of professionalism. That destroyer

collisions a couple of years ago. So Navy has some work to do. It's not perfect, but it's still the best maritime force in the world. I'm confident in the Navy. So, Adam, what you kind of mentioned that the fire for that ship in San Diego, We've we've all seen the images on the news, and you mentioned some of those collisions from uh some Navy ships over the last couple of years. Is there anything there to extrapolate from those issues? Is

there a is there something wrong with the Navy? Is there a breakdown anywhere you think the professionalism of the Navy or these are just kind of one off coincidences. Now I don't think they're one off coincidences. And and I just did a piece in Bloomberg Opinion, where I'm a columnist, as you know, on this exact subject. It's time for the Navy to kind of say all stop, let's take a hard look at how we're operating the Navy because there are too many, uh, individual instances of concern.

The new Chief of Naval Operations, and he is new. We have a new Secretary of the Navy. They both gripped this, and I think you're going to see some hard self examination by the service going forward. It seems to be such rough language. Secretary of Pompeo with comments this morning of the course in Denmark. I believe it was yesterday. I believe he has a speech of four pm this afternoon. Is moving so fast, folks, I can't keep up. This is almost ad hoc diplomacy. Is there

a theory here admalstra vitas? I think there is a theory with regard to China, which is, as we get into this twenty one century, our greatest challenge is not going to be Russia, which is what I focused on when I was Supreme Allied Commander of NATO. Instead, our greatest challenge going forward in this century tom economically, culturally, politically, diplomatically,

certainly militarily, is going to be China. So I think the administration would say they are constructing a strategy to compete with China to ensure that we maintain our sets of alliances around the world. That's why you're seeing Secretary Pompeo out on patrol all around the world making these points. And well, I've got too short of visit. We have to leave it there, but we look forward speaking to you again. Apples te Vidis James Travins with us today

with just wonderful books. I can't say enough, folks about the Leader's bookshelf. I just really can't say enough about its effort, particularly here within the pandemic. 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.