Surveillance: Workplace Is Changing Dramatically, Nobelist Says

of course on the Bloomberg. Um, we're gonna speak with the Nobel Prize winner we begin this hour. We're speaking to someone who um is a Nobel Prize winner in football. When the NC State Wolfpack do it to Trade Dome, that gets your attention. One Dennis Gartman joins us. He's footballed out with his NC State. Mr Gartman, good morning, Good morning, And we did indeed beat not tre Dome and we are two and now against the Golden Domers. And then let's let's hear it for the wolf Pack

and it's four and one. Is this a better than good season or you know it's like easy games that you're gonna get crushed later on? Which is it's been easy games, and we're gonna get crushed later. We have we will and Clemson coming, so it's it's not pretty. So we're we're happy to be four and one, but logically we're at three. One of those one of those years, Dennis, speaking of crushed, Let's talk about trading in a range bound market. It is a contact sport, isn't it. Yeah,

it really is. I mean, it's interesting whether one talks about the the the S and P, the NASDAC, whether one talks about the Russell, or whether one talks about the Dow Jones International Index itself. We have been in a trade range for the past months and one half. It looks like it breaks up to the upside, the next day it break it moves lower, and then one day it looks like it's breaking to the downside, and

the next day it moves higher. You get stopped into long positions and taken out, You get stopped into short positions and taken out, and at the end of two weeks you've gone nowhere, and you've been stopped in and out four or five times. It's one of those periods that make it very difficult to be any kind of an investor or. A trader. This UH, This U n C. Tar Heel is looking forward to the day after Thanksgiving when my heels take on the wolf pack, but will

leave it. It was it was very politely mute during that top of the UH. Dennis, let me ask you about oil. We have had all of this news out of oil as this congress is underway in Istanbul. It seems like there was there were signs here that that agreement in principle was going to become a real agreement. And then you have the CEO of Russia's biggest oil company saying he doesn't intend to cut production. So here we are a few weeks away from, yes, the the

tar Heels versus wolf Pack game. But all so that meeting in Vienna, what are the odds here that that something goes on to scuttlet before then? I think there's a lot that to say for the this agreement to be scuttled, And I think that not enough importance is being put on Mr Secheon's comments this morning. Secon is a fellow that most Americans, I would say one in a thousand Americans know who he is. But born sechion

Is is the head of ross Neft. He is a former KGB agent, has been a very close friend of Mr Putin's, and as I've always said, once KGB, always KGB. This is a very savvy but I think the disturbing gentleman. And when Mr Secheon said that he has no intention, why should he of cutting production? If Russia's largest producer of crude oil has no intention of cutting production, no

one else shell either. I think that it's always been a tenuous idea to think that OPEC could put forth and agree upon and then follow through on an agreement to curtail production. Sechion has simply put a top to it. Given that closeness between him and Vladimir Putin, professional closeness, how do you explain the dissonance there between what he said today and what Vladimir Putin said in his stumblom yesterday saying that that he saw a freeze as as

the only way forward here. It's been interesting because until about a year ago, what Suction said, Putin said, and what Putin said Section said, But for all of a sudden in the course of the past year, it's as if they have become demonstrably less friendly. Now one has to be a reader of Russian tea leaves to be certain that that's true. But no longer can one say that as goes such and so so goes Putin. There

has been a seeming divorce between the two. Maybe I'm wrong, but that's what I have read, or that's what I read in the comments of following both these gentlemen over the course of the past year. So I think there is some sort of dichotomy, some sort of divorce that has occurred. And I put the credence in what suchtion has said. He has no intention as the president of ross Enuf to curtail production. Dennis, let me get the two trays. We'll come back and talk about gold. You've

gone long corn. Corn has been ugly, ugly, ugly. I'm looking at the chart right now. Give me the y. How do you go stochastic on corn? You don't have a trend. It's ben down, it's been flat since July. How can you go long corn? What do you see if? If for no other reason, corn refuses or has at least not made a new low in the course of

the past month and a half. Yes, the chart. If you put the chart on the wall, walk twenty five ft away from it and were asked what is that doing, you would say, my word, it's moving O my word, my strategy. Yeah, it's from the upper left to the lower right. But it has failed to go to new lows even as the size of the crop has gotten egregiously large. I mean, this is a record crop. Whether it's fifteen point one or fifteen point two or fifteen

point three billion books. Everybody everywhere knows that fact, and I have to think that that's fairly well discounted in the market. Is that a structural record crop or is it a one off? That's a critical question. I think West listeners, well, I think it's a a structural record crop every year, every year year, except for except for that,

you know, except for usually after outs. One of the things that you can count upon is that we are going to produce more and more corn, more and more soybeans, more and more cotton, more and more wheat on less acreage. We just are very good at what we do. Our con farmers are extraordinary. So yeah, I think it is structural. The Dennis Gartment, you're where I am, which is yeah,

Sterling's down, folks. It's brutal. It's what on a curve basis is called log quadratic brutal electric says, and nobody's paying attention to Euro one tense seventy eight. Are you there yet, um Dennis, where you can short euro? And is it a short through parody? Oh? I think it's a short towards parody. As I said in my news letter this morning, we've broken through one eleven fifty, we've broken through one eleven. Now we're about to break through one.

And as I said, under one O nine fifty there be monsters, as they used to say on the old Mariners maps, under one nine then that is critical. That leads to dollar strength. Is it at a dollar strength that impinges the American corporate system? It makes it we are going to continue to see a dollar strength. I don't think there's any question about that fact. And it does make it difficult, especially if you want to be bullish of corn, which I want to be to allow

for exports of American agriculture. I mean, that does make the game that much more difficult. It also makes us that much more we we become more competitive because the dollar is getting stronger and it's likely to continue to get stronger. Can can the euro trade the parity, Well, I think it's over the course of the next year

or two. I think that's a given the political circumstances, of the economic circumstances, the technical circumstances of the psychology mandate a stronger dollar a much weaker euro, And if you have to pick on one currency, I think that's the one to continue to pick on. Real quick, here you were talking fifteen point three billion bushels of corn. Where's that corn going? To have this conversation about about exports? Where where farmers sending that corn to? Uh tigs, cattle, livestock.

Of course, ethanol, which I'm not, I've never been and never shall be a great proponent of ethanol, but it's bill in ethanol production and it goes into exports trade. I mean is that we are now at a point where the supply of of corn is not that is not the determining factor. It's the demand for corn which will be the determining factor. And the problem shall be A strong dollar makes the exports, of course, that much

more difficult. One thing Dennis Gartment and I have talked about, folks and speaking engagements we've done is what I call position sizing. Actually Van Thorpe callset position sizing. I call it the how much idnus. Mr Gartman recently learned about the how much idness of being in gold. I know that Tom is very eager to ask about gold. That just indulge me a second before before we get to that.

I wanted to ask you about the Sterling flash crash that we saw last week, and you said it's taking up far more of our time than we think it merits. But indulge me a bit here. And if you peg this to sort of temporal liquidity, are you worried it could happen again? I mean this this is something that would be recurring. Then well, I'm woray that can happen in the bond market. I'm woray that can happen in in the grain markets. I'm worried it can happen again

in the equities markets. We have the markets seem not to be nearly as liquid as they used to be. Graham Dot I think has had a great impact taking any large number of banks out of the markets that used to be able to make markets on both sides. I fear flash crash is happening on a rather consistent basis in any number of commodities, uh, in any number of markets. So I was not surprised that it happened. I was surprised it happened in the forex market, however,

where there usually is greater liquidity than any place. Out Come on, you're the next or ocean made a fortune? And now Dennis Gartman on the one way bet or the one trick bet. Dennis, You're in gold? And boy, who has it been an ugly number of weeks? How did you know? First of all, you know what's your biggest percentage exposure at any time? Uh? And I probably am there in gold and should not have been no question. How does one respond well after one stops throwing up? Uh? Well,

one one gets smaller. One hasn't any choice. Thankfully, at least I was not long of gold solely in US dollar terms. In fact, I don't own any golden dollar terms, at least somewhat. The the loss was mitigated by the fact that I own golden euro terms, which is down the down, demonstrating less than golden dollars. Let's let's be honest, but was it Has it been fun? It was fun early in the year. Has it been fun in the

past within a half. Oh lord, No. If it's range bound and you go down two point one or two point two standard deviations, do you rationalize regression to the mean? Do you go to cash? How do you reframe it down to standard deviations? You get smaller, you reduce the size of your trade. You have no choice. That's what pros do. That's how you have to respond. You may you may come back and and own it again later, But the first thing that one does is one gets smaller.

And that's exactly what I did. I got smaller. Do I wish that I had gotten smaller before we had the the collapse in gold prices in dollar terms two weeks ago? Of course I do. Have I increased my position since then? No? I have not. I am I interested again? Yes, because suddenly golden in euro terms, I see the euro getting weaker and gold in the course of the past forty eight hours has begun to show signs of strength. But is my confidence level high enough

to say let's go back and do it again? No? Not yet. So where do we go from here? We we broke that twelve fifty barrier, if fleetingly on on Friday, when you're looking at gold, what's what's your path forward in order for its turn for the better. And in gold, I think has become solely a technical circumstance, not a fundamental circumstance, because let's be honest, in dollar terms, it's still up for the year rather markedly. In Euro terms

it's up for the year very markedly. But I need to see gold trading above twelve seventy to say that that the low has been seen. The fact that we broke under twelve fifty and saw no real new selling, uh there. And I think most of the selling that occurred a week and a half ago or two weeks ago was predicated on one, maybe two large funds being taken out by their own margin clerks. If we get about twelve seventy, I think you've started. I think you will have been able to say twelve forty eight was

the low. Time shall tell. But this is this goes also separately to the idea of trying to be informed and in place in the markets. But you're in a range, is you know range dissipates capital? How does Dallas gartment adjust when it's an obvious dollar range, oil range, gold range. You get smaller, you get smaller, you get smaller and you get smaller. There's really I wish there were some secret that that I I could grant and say this

is how one does it. But I think the only thing one knows how to do is get smaller and weight. That's that's what one does. And I can't emphasize enough folks of reading the literature on trend based mathematics dynamics to know what to do in critically, to know what not to do. That is half the battle. Dennis Gartman has always thank you so much, love having you on.

I will remind people that, unlike most in the game, Mr Gartman on a daily basis puts the gold in the gore of his trades in the back of his newsletter. That's our point. A very few people do that. Dennis Gartment Gartman UH letter joining us and there's like eight ways to go here, including the Nobel Prize on contracts. Man holds them to join us. In the next hour from the Massachusetts Institute, Technology Professor Stephen Ratner joins us and will it uh advisors and professor, I've got to go.

Your cards are and even your most largest critics would like you to be. Debates are or politicals are with your broad reaching skills. I'm trying to make it up as we go. What would you do to our broken political process? Do we just get beyond the first Tuesday of November? I think we at this point, certainly for this cycle, we get past the first Tuesday in November. There's uh, whatever momentary thoughts people might have had that there would be a different Republican nominee are certainly by

the boards. Mr Trump is going to finish this race. Hillary Clinton is going to finish this race. Presumably Hillary Clinton is going to win. That's what all the polls seemed to say. And the Republican Party will have a lot of soul searching to do with within this is we just mentioned with the nf I report, the angst over a type of economy. Did you hear any policy and debate uno or debate dose about economic policy and placing the nation on a better track or vector? Shockingly

little this has been. This has been like like a smoke free zone. This has been a policy free zone this campaign. There were two questions really in the in the second debate that we're pretty directly on policy and then a few others have touched on it. One was of course, about Obamba Acare and the debate they in, the discussion they had about whether to keep it uh and and and the second one was about taxes and what to do about taxes and the difference between their

two approaches. And then there was some happy talk about how we have to get the country moving again. And Trump would talk about unleashing regulation and and and letting the free enterprise system work. Hillary Clinton will talk about programs to help those left behind and retrain them, to get them back in the workforce, to invest in infrastructures. A little bit of that around the edges. But for somebody as who's a policy guy as opposed to a polite local guy, these debates are are are not are

not very satisfying. It was back in made that you wrote, I'll bet there's plenty to learn about Donald Trump's taxes. Since then, the New York Times obtained the first three pages of his return that came up at the debate. He commented on it, what have what have we learned since? And in that broader conversation about taxation where it might head under a president Trump for President Clinton, where do

we stand? I think Trump has done a pretty good job I have to give him credit of of having a line of response on his tax returns, which is to simply say, of course, I used all my DIDI wouldn't, don't you. Does anybody in this room not use their deductions? I do. Then he goes on to say, but I'm so therefore I'm the only one who can fix it. But if you look at Trump's tax plan, it would

not fix it. It would make it worse. He's proposing a five point a trillion dollar tax cut over ten years, which would vastly disproportionately go to the wealthy, including potentially, though they haven't really clarified it, giving the so called passed through the LLCs that many businessmen hedge funds, everybody operates through tax rate, and so, in fact, you make it worse. Now, what's interesting about the two candidates is

that neither of them has actually proposed tax reform. Hillary Clinton has proposed raising taxes on the wealthiest to pay for her programs. Donald Trump has proposed this massive tax cut, but nobody's actually talking. With some small exceptions, Hillary Clinton's

for the Buffett rule. They both want to get rid of the carried interests for private equity, which is kind of a small dollar amount, but in terms of fun the kind of in terms of fundamental reform to prevent people like Donald Trump from doing what they did, nobody's talking about it. Could I say that maybe giving them benefits doubt here that's because they have some awareness of the fact that Congress has not been working in concert

with the administration for for some time. Here, I wanted looking ahead to to whomever is elected president, what's going to make that relationship between the White House and Congress measurably better? That is the absolutely most important question. Everybody is focused on this election, and not very many people are focused on what's going to happen after the election, which is at someone going to have to try to govern, and you're almost certainly going to have divided government regardless

of which one wins. You're nobody's going to have sixty votes in the Senate, which means that filibusters can occur. Paul Ryan is still going to have his hard heart right caucus that won't pass anything. Uh, And it's going to be really, really tough for who's ever president. And that's the most scary part of this. How did you respond when Secretary Clinton cited Spielberg and Lincoln in uh, the the Amazing Congress at that time. I'm sure you

saw what I saw the movie. And what she what she didn't say, is that the way that Lincoln got that amendment passed was by doing stuff that today is illegal. You cannot appoint your brother in law, whoever it was the friend of the brother in law, to be postmaster general in Ohio. You just can't. You can't hire two bag men from all mony to go around with bags

of cash to persuade people who results. But but, but the important point here is there are many people who feel that changes in the procedure up there that were meant to cleanse it, like getting rid of your marks, actually may have made the problem worse because now the leadership has no way to reward people who actually do what they want them to do. And this is actually contributed to the gridlock. So what what Hillary Clinton was saying was interesting, But there's no way to go and

be linked anymore. It doesn't work. Stephen Ratner with us with willowed advisors, as we look at any number of linkages here, Stephen, within the equity market, you've always made clear you want to find good companies and hold them if they're working with a new terminal value that's lower, if they're working with lower nominal GDP, if they're working

with lower revenue growth. Is there loads of room to go down the income statement and cut costs to get to better margins even in a low single digit world. I'm not sure that there is. As you know, corporate profit margins peaked a year or two ago and then i've been coming down, obviously heavily driven by energy, but

other sectors as well. And if you look at corporate profits as a share of GDP, if you look at corporate profit margins, none of it's suggests that there's a lot of room, a lot of room at this point. And so we think, we think our view has been and we've we've acted on this, that the equity markets are very fully valued, that what is mostly propelling the

US equity market anyway has been lower interest rates. As and when that reverses itself, we think that the US equity markets are going to be challenged, and so we have been actually reducing our exposure to US equity markets. You mentioned energy, and we've had a whirl of interest here in a production freeze over the last couple of weeks from OPEC participants and and and talk that that might be formalized at the meeting in Vienna at the

end of of November. What effect is that going to have on equities do you think here in the next couple quarters. Well, you can see already obviously in the in the energy markets that the price of crewed has now gone up above fifty uh I think for the first time at least certainly for the most sustained time since since the whole collapse and in prices, and it hasn't really had any delaterious effects so far on the

equity markets. I think what would hurt the equity markets would be if it appeared that there was some dramatic escalation energy prices. But you still do have a supply demand imbalance in favor of supply in terms of what's being produced every day. Maybe they'll succeed in cutting that, but after that you have huge inventories and and those have to be worked down before they can really be

a major impact on price. We're talking with Katherine Man of the o E c D about economic participation, the degree to which people in the global economy feel left out by what gains we have seen. Let me try to devetail this with with politics a little bit. A few weeks back, there was polling indicating that Donald Trump was doing well with voters in places like Ohio, Pennsylvania. Uh, I wonder what you make of that in your experience with the auto industry. These are places where that continues

to play a large role. What more could Hillary Clinton, your candidate, due to to speak to those voters. Why has she been able to reach them? Why has Donald Trump been able to get those voters on the matter

of participation highlighting the fact that there's been some exclusion here. Look, one of the one of the most shocking things to me from my experience in autos was to find out what was going on in Ohio, what was going in Michigan, what was going on in Indiana, What was going on in these states with these workers, and what's happened to their standard of living, What's happened to their real incomes as as auto companies have closed or moved jobs out of the country and so forth, and so the effect

is real. And the question for these auto workers and former auto workers are for all the people down there who are suffering, is which which candidate do you think is most equipped to help you. Do you think closing the borders, putting thirty five percent tariffs on imports and so on and so forth is the way to solve the problem or do or do you think we simply need to invest in the economy, invest in infrastructure, retrain

these workers, and get the country moving again. That's the choice that's in front of the American people right the second, Steve, I know you like to paint, and you know you've painted your apartment like fourteen times. Um, if you want to watch paint dry, go to the I I F meetings, at the I M F meetings. Is that enough alphabetical soup? But as you know, Steve, all the bankers get together in wax philosophical that happened this weekend. Mr Diamond and

Mr Gorman, among others, said, Okay, London's challenged. The assumption is we moved to continental Europe or we moved to Dublin. Wait a minute, we Jason may move back to New York. Kid New York compete for London's business against Frankfurt and other Paris and other European destinations. Look, I think there's a couple of questions here. The first, I'm not convinced they're leaving Britain self fast agree full disclosure. Okay, so

there we are. This is yet yet unresolved. Secondly, I'm not an export on the so called passporting and where these banks can operate from. But I would not have guessed that they could operate from New York for the same reason they won't be able to operate from Britain if they don't pertain that passport part of the basic idea of future growth. Okay, but if you passporting is not a problem, then why would they leave the UK

in the first place. I I don't disagree, but I just thought it was an idea of saying New York can compete within the the philosophical capitalism of Europe, I would say. I would say as a former banker, it is hard, and it's not hard necessary because of philosophical issues. It's hard because it is a It is a basic rule of banking and my experience that the closer you are to the client physically, even in the modern world of technology, the better the better job you can do.

Retaining can you do a better job in Helsinki from London? Or from US. I don't I'm just Amsterdam or Brussels or someplace that has good train service all over the rest of Europe. I don't know where they're going. I don't think they know where they're going. Well, come out this. The train service New York City can't compete. It's a

long way across the Atlantic in the train. David, ing back to what we heard from from the O E c D. The fact that the fallout from that breakit vote has not been as great as man you head for fear, Let's talk about the psychological followed from what it says about the notion of globalization going forward to fallout on the pound has been pretty signature. Um, look the Brexit vote and what got people scared here until

Donald Trump began his self immolation campaign. What scared people here is there clearly is whether it's in Columbia, South America, or in Britain, or in the US, or or in France where you have ms Lapen you know, doing very well on from the left, there is an undercurrent of people who are being left behind in the in the in the course of globalization. That's a fact. You can't

you can't get around that. And so the question is, are are saying people are going to offer a better alternative to avoid having people who are less stable implementing solutions that are almost certainly going to be disastrous. Stephen thanks always always been Have you here? Who you put your trust in? Matters. Investors have put their trust in independent registered investment advisors to the tune of four trillion dollars. Why they see their role is to serve, not sell.

That's why Charles Schwab is committed to the success of over seven thousand independent financial advisors who passionately dedicate themselves to helping people achieve their financial goals. Learn more and find your independent advisor dot com. It is not often, Tom, you talk to a chief investment strategist who is a

classics major Magicum law of graduate of Princeton University. We're talking about Scott Clemens, chief investment strategist Crivate Wealth Management, Brown Brothers Harivan Eager to talk about that biographical trajectory if we can, Scott, but let me start with with the foot see one hundred today, reaching an intra day record. That's, of course, on concerns about the government's approach to to Brexit. What we've seen in the pound as well, a sign of more to come. Do you think I think it is.

It reminds us that Brexit is a process, not an event, and it's a process that's going to unfold in very unpredictable ways for the next couple of years. You know, the background Britain is not yet triggered Article fifty, which starts the two year clock to negotiate what Brexit actually means. As that happens, it's going to create more disruption along the way. I think, you know, I think I think about the conversation surrounding the Brexit referendum. It was about immigration,

certainly was about the economy and regulation. As you begin to see these market focuses, market factories in play here, I wonder how that has shifted the conversation as you've as you've observed it in the UK, seeing the kind of reaction we've seen in the pound recently, well, it's

certainly it raises the prospect of disruption. The uncertainty alone raises the prospect of disruption and reminds us once again that that risk as investors, as our stock and trade no pun intended, it's our bread and but a risk is analyzable. Risk is something that we can measure and deal with. Uncertainty is a different creature and because there's no precedent for what Britain has embarked upon, that uncertainty

alone is going to create a lot of disruption. Having said that, for a disciplined investor, particularly a value driven investor, disruption creates opportunity. UH, it's certainly something we're watching for in in UH in the UK markets. We haven't acted on it yet again because I think this process has got a while to play out, but I think it will create some opportunities. There will be winners, there will be losers, and valuations will give us the opportunity to

take advantage of that. Where are you on international investment right now, whether it's blue chip investment or something more obscure and e M like it's been a debate on surveillance about the the amount in the further amount that should be put into international Where are you on that scot You know, Tom, we've we've there aren't any low hanging fruit opportunities and equity markets worldwide. Where we are finding them is in select emerging markets. And you guys

know this. Emerging markets is the broadest of all possible brushes to paint with. It's a paintbrush we should have put down because those markets could not be more different. But where we are finding opportunities selectively in emerging markets rallocating capital there for the time being, the single largest equity exposure we have remains the US market for reasons related not only uh to to currency, but related to just the opportunity set on offers. You mentioned your holding,

you're holding fire in the UK until something happens. Is that when Article fifty is triggered? What what's the what's the point at which you're going to be comfortable making a move there in the UK and maybe a bigger move in Europe well, So, to be precise, we have some exposure to the UK and Europe already. What we would like to see in order to raise that exposure is disruption that comes from possibly a misstep in in in government decisions or something that hits the pound even

for of than it's already been hit. I'm not entirely sure what that would look like, but it would express itself. We're very much fundamental bottom up investors who would expressed itself in a broader set of companies trading in a discount what we believe to be the fundamental value of the intrinsic value of the business. So it's really more of a bottom up indicator that we are anticipating than it is some macro effect that's going to show up

on the calendar. You've got a great chart in your research, and folks, I can't say enough about the density of the research from Brown Brothers Harriman. We protect their copyright, don't email us for it. But with that said, the chart is extraordinary. How this is not the nifty fifties, We're almost beyond that. Some people say, no, it's not the valuations we saw. Then you've got equity pe ratios just after World War two. Two now wanted to standard

deviations and we're basically there, Scott, aren't we? Yeah, Thomas, things that you can do a one one, even if it's radio um. The two things that worry me about the market right now is the combination of sluggish earnings growth and lofty valuations. The valuation concern is mitigated somewhat by low inflation and low interest rates, but I think the low interest rates are somewhat artificially driven by Fed policy, and I'm not sure I trust the low inflation numbers either.

So from a top down perspective, it concerns us. The bottom up perspective, I think one of the graphs you're referring to points to the narrow leadership of the market, which indicates that there are a wide variety of companies that are not trading at lofty valuations that do have earnings growth. I think this is that cliche stock pickers market. Uh and uh. It's uncomfortable, to be sure, and the opportunities are not a stick on the ground as they

were three, five and seven years ago, but they're still there. Scott, I want to crowbar out of you one really important topic. You're married to a music teacher, and how do you get how do you need kids to do the instrument? What's the what's the secret sauce of getting offspring to actually do the given instrument? You have to model it

for them. They have to see you play in practice and struggle and succeed and enjoy, and that will be infectious and they'll get it to Scott clements with us with Brown Brothers Harriman who writes just a terrific, terrific thoughtful equity piece across all market. Scott, help me with

the banks and the presumed cash flow. When we talk to the cullth side, whatever their nuances of this bank or that bank, there's a general idea that the cash flows spigot opens X months out after penalties, etcetera, etcetera, and it is a nirvana for banking. Do you agree? Uh, well, that's that's a subtle question. But if I had to answer in a binary way, I would say no. I think the banks and again we'll be picking up a

broad brush to paint with. The banks are still struggling to figure out what regulatory environment they're operating and we're not going back to the pre two thousand and eight type environment. That's still a process that's unfolding. And um, I think it's still unfolding. So I don't think it's as easy as just now that the penalties are done, the cash flow is back on. So it's it's an area where they're selective opportunities, but nothing, nothing wholesale that

we see as terms the tide coming in. David, you understand that Mr Clemens didn't understand. It's binary Tuesday here. That's what we do on Tuesday zero and was very let me ask you here, didn't get that memo. Here we are, you know, at the beginning of of the courtly artic season, and in your most recent note you said the ultimate fuel for equity markets as corporate profits, and the fuel is running low. Give us your outlook

here for these next few weeks. As these earnings reports start to roll in, well, I think we're going to get yet another quarter of year over year declines UH in earnings, which by by our numbers, will be the sixth quarter in a row, which is unprecedented in the absence of an economic downturn. There are reasons why we're late in economic cycle. Corporations have exhausted the easy cost cutting exercises. It's very difficult to grow your unit volumes

when the economy is modestly expanding. It's very difficult to increase your prices when there's not a whole lot of inflationary environment. So the the the next boost to earnings growth, in my opinion, comes from the top line from corporate revenues. And that's why I think the linkage to UH to an economic variable is really important. Wage growth is probably the single most important economic variable to watch over the next twelve to eighteen months, I think you'll start to increase.

And one of the big conundra of this economic cycle is as and as unemployment has fallen down to four point nine, as we're adding jobs a pretty healthy clip, you haven't seen any wage acceleration, almost as if the laws of supply and demand have been repealed. I just think, like so many other dynamics in this economic cycle that's been protracted and delayed and prolonged, I think we're on the verge of beginning to see it. We may already be.

Wage growth is up to two point seven percent. That doesn't sound like a very big number, but it's the highest year over year number since two thousand and ten. So as long as we get a modest acceleration in wages, the psychological benefit to consumer spending will be good for the economy. That will be good for corporate earnings as well. I think that's what's going to unfold over the next twelve eighteen months. That modest ray is something that we

were definitely talking about the last monthly employment report. Uh. I'm I'm wondering how this all plays into what the FETE is thinking to degree was you were thinking about what the vet is is thinking about. At this point, we we've been consumed with central patent right, And I think the growth is important is a wage growth is important as an influence on FED decisions as well for

two reasons. One, I think they would read accelerating wages as proof positive of tighter labor market conditions and success on the labor market front. And they would also see in it hints of future inflation. And I think those two things together would push them to raise interest rates at a more rapid pace than they have been, which

isn't saying much, by the way. As I look at the FED funds market this morning, the futures markets putting about a sixty eight percent probability on a hike in December, I think that's likely to happen. I think the FED would like to raise interest rates. You saw at the last the September meeting of the f O m C a vote of seven to three to keep interest rates stables of three voting members wanted to raise interest rates

in September. So I think you're going to see higher interest rates over the course of I'm sorry, And accelerating wage growth will give the FED the rash Chanel to warrant those those hikes. It's fascinating to me. And this is Scott with with your with your great experience with this. How our audience with rising rates are good or bad for stocks? That's as basic as it. Guess how does it depends it? Historically, the answer to that question depends

on why rates are rising. So, if rates are rising because the FED is increasingly confident in the stability of economic activity, that's usually good for corporate earnings. That's usually good for stocks. Stocks tend to rise in that environment.

I believe that's the environment which we're likely to be If, on the other hand, rates are rising because the market has concluded that the FED is behind the curve on inflation, the FED has lost its handle on on the inflation part of the picture, that tends to be bad for stocks. I think we're more likely in the former environment there's not a whole lot of overt inflationary pressure, there is sign of economic stability, there is rationale for the FED

to raise rates. I think the market will interpret that positively and that will be that'll be a tail win for it for equities. When when you're when you look at the cycle. Where we are in the cycle right now, Position us and give us your sense of of where we're headed next. Well, typically equity, usually the equity market cycle, David, or the economic cycle equity, I mean, typically the first stage of an equity market cycle. And they're all different

than details. But the first stage is driven by by lower interest rates. We we've and that we've been through that, I mean, that's that's been again very protracted in this cycle. The second stage of the cycle is one in which the market is more driven by rising earnings, even in an environment which interest rates begin to tick upwards. We're poised right now between those two cycles who interest rates are fall and fall and fall, and they've risen the

tiniest bit with the FED rate high class December. What we desperately need to see is that acceleration and earnings growth to power the next leg of this equity cycle. I expect that one fold over the next twelve day months. That's what I'm watching very carefully, and I think the primary driver of that is going to be this acceleration in wages that I'm anticipating. Wonderful. We love to have you back, Scott Clemens. Thank you so much with Brown

Brothers Harriman greatly appreciated today. David Gura and Tom Keene in New York. Um, David. Some years the Nobel Prize is given in economics, and it sounds wonderfully accessible. I find it hilarious that Paul Krugman one year took the Nobel Prize and most people didn't realize what it was for. Yeah, his first work with Donald Trump. No. Um, the Professor Krugman redefined so much of our international economics and the

discussion of it. Or some year maybe somebody far more accessible, like Robert Schiller of Yale University, who has an esteemed career but of course is acclaimed not only for the case Shiller real estates issues, but also of course irrational exuberance and gaming cycles and behavioral economics. We are honored to bring to you now worldwide. Bank Holstrom of the Massachusetts Institute of Technology, Professor good morning and congratulations to

you and Professor Hart of Harvard. I loved the Nobel Price summary of contract theory and what was so great about it, and folks I highly recommended. I'll mention this in our time here this morning. The Tyler Cowen op ed for Bloomberg View is lovely in explaining the importance of this award. To me, Professor Holstrom, what's so important here is the exhausted state of America's workforce. We have a contract with employers around something you speak of incentive intensity.

His digital technology is the modern workplace changed our contract with our employers. His digital technology changed your work of thirty years ago. To the first question, I would answer yes to the second question. No, you know the second question. I believe that the workplace is changing dramatically, and that that the old style contracts that have prevailed arounder a

lot of pressure in a number of professions. So but the book I did, audios ago have have have actually they are explicit contracts, as we call them, and and so they are incentive contracts and and their relevance may be actually increasing now within this in folks, this goes back to Holstrom Milgram of nineteen needed seven permeate simplicity.

What I love about your work. And we've been making jokes this morning, Professor about thie beta equals f plus cape beta is Sanford Grossman is involved with your work with Professor Hart of Harvard, with Joe Stiglets, of Columbia with with Joe Stiglets great work. Simplicity is everything. What is the simple message of contract theory that our audience

needs to know? I think the simplest messages that that narrow incentives can be very damaging, and sometimes no incentives, that's financial incentives shouldn't be used because there are a lot of other mechanisms for incentivizing people and motivating them, having relationships, uh, just observing them and making judgment and

moving them, promoting them and designing their jobs. And so one of the things I think has been my contribution, mainly be Paul Milgram, actually has been to explain things in terms of a systemic approach to incentives as opposed to a single this rate or something like that. Is your work been forever changed because of the consultant based madness of corporate CEO con uh consulting and lawyers and

management people. They've taken your simple original theories and trust and principle and agent and turned it into a cottage industry. Is that a problem? It is a problem what they

are doing, But I don't see it as them. They may be having paid that much attention to my book and and and they certainly have not paid attention to the basic flaw in the incentives games that prevailed after Ron Endron, you know, Andron revealed already, which was that they were just too shortly vested, that you should vest them for a longer period. Instead, they started tampering with options, and they blamed options and not understanding that the stock

is actually an option itself. So so so you know, they didn't either read it or misread it or whatever it is. But the CEO compensation as I knew it in two thousand and twelve, and I I left left, you know, boards corporate boards, that it was a sorry state. Well, let's let me bring in my colleague David Girl with the Laura ben Holstrom tome of m I T. Tom. I'm looking at the front page of the Boston Globe

this morning. It is a pantheon of hometown heroes. You have bets and orties on the upper left, and just below that you have heart and homes of smiling. More broadly, I think, than than the other two. You know something that that Tyler Cowen flagged in the column that Tom mentioned a moment ago, Professor, is that you have built a technical framework for other researchers to oilled on. You

have been at the vanguard here of contractory. When you look at your colleagues, when you look at your students and what they're doing, what are you most excited about in this field going forward? I think the dynamic incentives that people are studying now the young Clowd that that analyzing you know, even more techniquely complicated, but ultimately simpler mechanisms.

I think that's the interesting book. And then applications of of this what we call multitasking understanding that you know, the job portfolio that people have greatly determined what you can do with the explicit incentives. Professor one final question and we'll let you go. You are of Sweden and particularly of Finland. What did you learn from the challenges of Nokia and Ericsson? I learned that technology companies are

vulnerable to change. Well, we'll leave it their Professor Holmestrom, congratulations, greatly appreciate where the Massachusetts I Institute of Technology. We'll do a lot more on this. I'll send some articles out. I just sent out the It's forty nine pages, David, and it's a absolutely spectacular walk through of how we got from early heart and early Holmestrom and even Robert B. Wilson who was at Stanford Ages before Holmestrom. How we got to where we are today, which is John Tucker's

five hour work week? And was it eighty two last week or five? It's it's going on in the contracted in the the the incentive intensity. Clickton went about Wednesday before that to click in. And that's interesting what the professor said there. I mean, this is a huge deal. Not the work weeks of all Americans, but a subset of Americans working John Tucker hours, the hardest working man at Bloomberg Radio. I think I'm I'm gonna fight him

for that. But you're you're all. Indeed, you're very good Time Tucker, thank you so much for opining after our conversation with Holmstrom of m I t the Nobel Laureate. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm out on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio. Who you put

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