'The Heat Is On' Goldman Sachs, Mayo Says

tour of duty with President Ronald Reagan. Let me start with the what if? What would Reagan do? I think Regan would be tough, but he wouldn't talk the way that President Trump has done. He'd recognized it as a superpower. We don't have to ratchet up the pressure. He'd make very clear any attack on the America's America would be responded to. But I think he'd also looked for negotiation. I think he'd looked for that back door channel. He

did that with the Soviets. You know, regular is a man who understood you had to be tough, but you have to look for diplomatic solutions. We have to have both those possibilities and also suggested he had a respect for the intelligence community. Chosan Hung has without question the read of the Morning. It is a link the article on the leader of North Korea in the New York Times. It is a spectacular read of his Pulitzer Prize winning

history in Korea. Doug, do we know who this guy is and his President Trump have a clue who he's up against? I'm skeptical of the President does. I mean, at least his reputation as somebody who doesn't particularly like to be briefed and particularly doesn't like to have long briefings. So my guess is that he's responding much more kind

of out of his gut in many ways. I think there are certain similarities, oddly enough, between Kim Jong Hoon and President Trump and the they respond more emotional, more impulsive, and that that that's the reason that's caused for concern. I don't think either man wants war, but you get a couple of guys kind of being tough against one another, things could spire a lot of control. The question here

about Reagan's rhetoric. We talked so much about his sweeping rhetoric, his ability to give a speech that would galvanize the the the American people. Uh. Compare the speeches. He gave his appreciation for rhetoric to what we're hearing from from President Trump. I look at look at the tweets. I certainly I'm still focused on that fire and fury line. How much of that was was Reagan himself? How much of that was a very closely coordinated communications team. Well,

it's both. I mean Reagan had a very good sense. I mean he understood, for example, you know, joke calling the evil Empire. He was trying to reach you, Soviets, he was trying to reach especially Eastern Europeans. He had an audience in mind, but under Gorbitsav At one point he was asked, do you still consider the Soviet an evil empire? And he basically said that was in the past. I'm looking forward, you know. And he had a communications

team would monitor things. Very concerned about dealing with the Soviets, but Reagan was quite willing to buck them when he thought it was necessary, being prepared to make a deal. But he was prepared to be tougher as well. And for example, the Berlin Wall, the line, you know, Mr Gorbachev tear down this wall, Reagan kept putting that in when staff members were taking it out. His view was, this is a clarion call we've got to make. But

compare that, I think to President Trump. Reagan had a specific objective there in terms of who he was trying to reach in a way that I think President Trump is kind of blustering. I think that's the difference. Doug. I draw a line here between what you've written what Ambassador Susan Rice writes in the New York Times this morning. You've said, there's plenty of evidence that the leader North Korea is ruthless and cruel, but none that he's blind

or suicidal. She writes, by most as sentiments, he's vicious and impetuous, but not irrational. Does the rhetoric that we hear here match the risk? Well, I think illogically there should not be much of her risk. That is the northers response got a weakness. They're scared. I mean, they point to Afghani stand, they point to a rock. Frankly, they point to Libya where the dictator made a deal, gave up these nukes and missiles, and look what happened to him. So this bluster, I think covers that up.

You know, they don't want to start a war, they want to keep America out. On the other hand, if you start calling one on one with the United States you start talking about dropping missiles near American possessions, I think they've kind of underestimated Americans. You're willingness to put up with this stuff, David Girl bring back the esteemed uh Mr Bando Cato. But I'm trying to put in scope and scale North Korea, which is difficult with the data.

But the economy of North Korea is on first order, two percent the size of New York City's economy. And that's just some back of the envelope, back of the bow time math. It maybe fo but my quick math is two percent the size of the New York City economy and greater New York Tug Bando, senior fellow with the Kato wins Too, former special assistant to a President

Ronald Ring and Doug As. I understand you were in North Korea rather recently, and just give us a sense of how that visit has has shaped your sense of this conflict in particular. Sure, and if you're thinking about comparisons, it's about the economy of Anchorage. I mean that's the economy North Korea. Thank you, you're welcome. I was I was there twenty five years ago, so I had a point of comparison. I mean, kiel Young has more money today than it did twenty five years ago. The countryside

remains desperately poor. As you pointed out, it's got about five percent of the economy of South Korea. I mean, you know, you compare Soul, South Korea, and you know Kyong Young. I mean, there's no comparison, at least today. There's some private cars in North and Killing Young. There's cell phones. They're not supposed to reach outside of the country,

but they are there. If fashionists come to Pyongyang, women dressed nice, minister pretty plain, you know, so it's you can see a little bit of economic life there that Kim Jong un clearly wants economic development. His father, I think, viewed it as being destabilizing and frankly didn't care very much. But it were means desperately far behind the US. I mean desperately far behind South Korea. That's one of the things that fuels this kind of rabid nationalism and the bluster.

All they have to do is look south. I mean, any North Korean who visits another country, almost any other country knows how far behind they are. We talk a lot about the trade relationship between North Korea and China, given given the focus of that relationship as we talk about sanctions at the UN Security Council, and we certainly hear the present talking about Chinese and the need for China to do more. How does that play out when you're on the ground there. How evident is the is

that trading relationship. It's actually not very evident at all. What's interesting is despite the trading relationship, the relations between the two governments is not good. You know that. I mean tradition. The North Koreans are very independent. They don't want to be a province of China. Back in the fifties, the dictator took out kind of the pro China faction within the North Korean Communist Party, to the consternation of the Chinese. You know, what you find is a lot

of dismissiveness and complaints about China in their media. And what was striking. I went to the war museum, they call it the Victorious Fatherland War Museum, and basically you would think that Kim Il sung won the war on his own you wouldn't be aware that somewhere along the line a few hundred thousand Chinese troops showed up. I mean, this museum presents this is almost entirely a victory of the North Koreans. I mean, China is not even mentioned.

That kind of thing irritates the Chinese, especially because the son of the dictator, Mause Dung died in North Korea. You know, I was buried there. I mean, it's a very strange relationship, and that that economic side, they don't advertise that there the Chinese are involved. They buy minerals until recently, call and other stuff, you know, but they don't highlight that. Doug I returned to this op ed in The Times this morning by Susan Rice from a

national security advisor. She she writes about preventative war, a phrase that we've heard a few times here over these last couple of weeks, and she writes that would result in hundreds of thousands, if not millions, of casualties metropolitan souls twenty six million people are only thirty five miles from the border, within easy range of the North missiles

and artillery. She also notes twenty three thou United States troops plus their families live between Seoul and the demilitarized Zone, and total at least two thousand Americans reside in South Korea. Give us your sense of of the calculus policy makers in the Pentagon are going through right now. Of course, we had Secretary Maddis on the West coast last evening talking to reporters about this, talking solemnly about all the preparation that he's been doing, because indeed that is a

huge component of of his job. What's happening in the policy planning department at the Defense Department right now, Well, my sense is that, I mean Maddis is until recently has talked about how diplomacies deans. So this is not a guy looking towards some kind of preventative war. I mean he understands the seriousness of it. I mean Matdis is a very serious guy and understands the costs of war.

I think that his statements, though tough, I think in many ways you're trying to calm things down a bit by making it very clear that you know, we would retaliate against anything we're capable of doing it. The North had better not act. I don't think that he expects North Korea to do so again. I don't think people have seen North Korea as being suicidal. I like to tell people Kim Jong Oon, like his father and grandfather,

wants his virgins in this life, not the next. This is not a guy who's thinking of wouldn't it be wonderful to go out in a bit of glory. He wants to preserve the regime. So I think they're looking at particularly the questions of mistake. They're worried about escalation. I mean, if you wanted to try to take out nuclear sights as they're a way you could convince the North Koreans it was not the beginning of regime change.

To me, that's the biggest problem. If the North Koreans merely thought you were taking out, say their missile, they might decide it's not worth starting a war. But if they're convinced this is merely a prelude to an all out American attack all Iraq, then I think the lesson they learned is you don't wait for the US. You go. You started. What you know, if they do a missile or whatever they do, I don't want to sound like

a no ballistics or whatever it's called. And they point the things self you know, usually they pointed east if you will, in the vicinity of Japan with a capital J. What would you expect would be anyone's response if they change the vector of that missile launch and pointed selfish in the vicinity of Guam, and I mean a thousand miles of Guam. But what would be the vector change that we would see. Well, my guess is that they've

monitored very closely. What they try to do is get a sense does this look like another test that's going to land the ways away or do you actually think there's a possibility this could hit. I mean again, one missile being shot off. It's almost impossible to imagine that would be an attack on Guam because that would be the craziest thing imaginable, very unlikely, but still, I mean, at the Pentagon, you have to watch that stuff. So

I think that's what they would look at. And then they decide that they think they could take it down. The question they do have a sad battery there, you know, an anti missile battery. They have to decide could they take it out in the terminal phases is coming down and if they thought it was coming too close they might try that. There's been a lot of criticism of

previous administrations for not having done more. Eli Lake a columnst for bloom Review, writting about that this week that you know, there was opportunity in the past before North Korea got to where it is today, miniaturizing a nuclear weapon, testing these intercontinental ballistic missiles. Take us back to when you were in the Reagan White House. To what degree was North Korea then on the radar? Oh, it really wasn't at all. I mean, the Soviet Union was the

big issue. I mean, we were still dealing in the early days with the Soviet Union as the evil Empire. We had bression of you know, I mean the the the kind of general secretaries. You got Andropov, who is a former KGB chief. You know, so the US is worried about a real chance nuclear exchange with the real nuclear power. If we weren't even talking about nuclear weapons for North Korea, then it was a very small subset that it became kind of the bigger issue. In the

Soviet Union went away, it's China went away. They're kind of left is the real bad guys. I've never asked this question because it's never gone through my puny little brain. My experience of so called nuclear is either movies, cinema, Hollywood. I guess we dropped two bombs on Japan a few years ago. Have we ever done a supposed modern nuclear exchange? Is this like to the military people? Is this all

as new as it is for us? Oh? Yeah, because I mean certainly our nuclear weapons and the hydrogen bombs are far more powerful. I mean what you find is people occasionally say this warhead has the power of say ten of the bombs that were dropped on near Hiroshima or something. I mean, we are in a different world the father than of multiple nukes falling. We have merved warheads.

We have multiple warheads on a missile. I mean, you know, we have miniaturized, we have tactical We're in such a vastly different world here that you know, the US has a quite an arsenal. I mean North Koreans we think might have about twenty maybe nuclear warheads of you know, we have no idea really how how they could to be toployed and presented. The US has a vast arsenal. You get into a nuclear it's change, and you know the North can do some harm the U S can

wipe out the North without any question. Great to speak to you, very valid briefly this morn. Yeah, Doug Band from Anchorage. That's very good. That parallel useful as well. Doug banda senior fell at the Cato Institute, former special assistant to presidents around Reagan on our phone lines. Always good on a Friday to speak to Jeffrey Rosenberg. He synthesizes the financial and the mathiness of what we do with where do I get some yield? Among other great services.

He writes a note for black Rock with uncommonly smart charts. Jeffrey, if we get inflation today in twenty eight minutes, if we get another inflation report comes September and then we staggered was September twenty FED meeting? Do any of those inflation port reports really matter? Yeah? Thanks Tom. You know they do matter because the FED is telling a narrative

of transitory weakness. So the inflation prints that come in inform the markets expectations as well as the FEDS and the FMC members expectations just to whether or not that story actually playing out, and so to the extent that we don't get big disappointments in today's print, and that's going to hold up the expectation that transitory story works, and that's about keeping the December rate hike in play. September in the balance sheet is about growth. The rate

hikes are about infltation. I mean within this and I don't believe I've ever asked this question. Let's try it out, David and Mr Rosenberg h the idea, do you know ahead of the certitude of a CPI report or is it like the jobs report where we sort of go

into it blind. Well, we we go into it with a out of expectations, and we do a tremendous amount of analysis within our within our sorry, within our inflation team, and looking at the components, analyzing trends in pricing and building up bottoms up forecasts, and so there are just like there is in the case of the payroll report, and in some sense, because roll and payroll volatility has been so low, the inflation prints have actually taken on

as great or even great or important. So there's a lot of expectations around a point two point one eight in terms of the number today. So you have built into the market same kind of dynamic of expectations and then disappointment or um excitement over the you know, the number that we're gonna get a few minutes. How does this relate to the PPI numbers that we got yesterday? And they compliment one another, what do they tell you about?

Rosenberger has no idea how smart that question is, given the worship for PPI numbers twenty and thirty years ago. You know, there is a little bit um. They're they're very different in terms of components in the short run, right, so when we're talking about the short run market expectations and short run movements, there's not a tremendous amount of correlation. What you do have is you have it's feeding into

the narrative. And again Tom, back to your comments about comparing it to to pay roll employment, it's kind of like initial jobless claims or a DP. It feeds into the narrative around the data over longer periods of time that are really kind of outside the day to day market movements. There's there's obviously connection between purchasing purchase prices UH, producer prices and and and consumer prices, but in the in the short run UM, it really has a very

different set of drivers. There's overlap, but but there's a there's a very different set of near term drivers. What's your sense of how wetted this feed is to to raising rates again this year? In other words, are they on a tract that necessitates that or is there really some flexibility or chance here of reversal in light of these data and others. So you know, this is where the market gets a lot of cross currents because it's

a diverse group of people that we hear from. And so it's a committee and there's a committee day based

decisions and there's a spectrum of viewpoints. But what the central message of the committee is that we should get on with normalization, that the goals of the Fed have mainly been achieved, and that they want to move on with normalization at a gradual and predictable pace to not unlind financial market conditions that would unlind the benefits of what the accumulated benefits of normal of of accommodation have given the economy. But they want to get on with

normalization because they don't want to overheat. And part of the payroll story is these unemployment rates are real. Every measure of the labor markets is pointing to the potential that we are or are on track to an overheating economy, and that's classic business cycle overheating that eventually becomes the roots of your next procession, and they want to avoid that, so they want to get on with it without disrupting banana market. T want to rip up the script here.

We trust Jeff Rosenberg enough to be very adept at going outside every min and actually commenting on the state of our world. Punham Gyle, Jeff Rosenberg and Bloomberg Intelligence just reported and publish a scathing note on J. C. Penny and the idea of a stock going from thirty to ten, migrating eight, cratering to five, and enjoying three

dollars and nine cents this morning. Help us with what you observe of the disruption as you mentioned of Amazon, we we are when you look at yael C plus I plus G plus n X, do you really have a handle on consumption as you see something like J. C. Penny blow up an Amazon prosper so well to so to put it into today's you know, ten minute fifteen minute attention span, uh conversation. This this is about the impact of technology on inflation. It's about the tech on pricing,

So you J C. Penny, the retailer's Amazon, what is that? All? Part of technology is the dominant force in our era, right the technology curve has gone vertical, the tremendous dramatic changes, the second machine age, everything that we've seen, even in the last five to seven years, the incredible acceleration and the macro implication of technology is technology is disinflationary. And

that's the challenge, and it's a huge challenge. Back to our earlier conversation to the FED, which is still operating with nineteen sixties technology of Phillips curves that anticipate that there's a trade off between unemployment and broad based price inflation. But in the technology we're we may not see that to the same degree. So it's a huge impact, you know, Jeff.

One of the high points yesterday was our conversation with a very distinguished Brigadier General Mr. Kimmitt, who has not only given public service to the nation, but he's had the ability to get up in front of a mic at the State Department and be the smooth guys a C F A, etcetera. And I said to him, I said, why did you get your c f A. And he said, because they went to Harvard Business School and didn't learn anything. And I mentioned Temper, I mentioned Cardigi Mellon where you went.

I mean, does the underlying mathematics of m I T. Sloan Cardigi Melon. You know some of the great public schools that we've got, Penn State as a rigorous economics program, and on and on Michigan where Diane Swunk went. Does the mathematics of the sixties even work now in a in a in a in a bimodal American world. So so, one of the things that you know, quantitative tools give us is they give us a rigorous way of thinking. They of us a systematic way of thinking that allows

us to test the logic and our understanding. But there's limits to those tools, and they are best fault of these tools. And when we listen to our policymakers who are very um wedded to these tools, it's interesting to see the debate about how much reliance is there, Like, for example, the estimation of our star. There have been five papers in the last five months written on this

and they come to very different conclusions. And it highlights that in many of these areas the application of rigor hard science to what is essentially a social science doesn't always work, uh as well as the rigor of the models would like us to believe. And so there's a place for judgment, and there's a place for human understanding.

And that's the important balance that that we should get out of, you know, using our tool Kain, and I think we hear that from from many of our policymakers, and and when we lose sight of that, and and we get two wedded to a dogmatic view of the world and loose sight of the balance, and that things can fail. Uh, you can, you know, really see things come unraveled. So I think that's an important, you know,

sort of balancing point to the quantitative tool kit. And the point about inflation is is to sort of highlight that you have structural change. So if I fit a bunch of historical data and it worked in the past, I gotta understand how the structure of the economy is changing and what these influences are that might challenge that happening in the future. Jeffrey Rosenberg with us, and we have a luxury with an adept and quite festile Mr

Rosenberg to change the script. Jeff Rosenberg in the equity market, the VIX eleven twelve, and then we have a jump condition to seventeen. What does a jump condition in the VIX? I mean, still below the long term average of twenty, but what does that reset towards a little more angst than the VIX signal? Well, Tom, it's a really really interesting conversation and an important conversation. You know, what that jump says to me is there has been a very very large build up over a number of years of

people selling volatility. That that seems kind of a strange concept. How do you sell volatility? But one of the new developments. You know, every financial cycle is sort of characterized by some new development something we had really never seen before and so don't really know how to ausit, track it, understand it. It's the confluence of, you know, some very unique characteristics of this cycle and what is the productive

characteristic of this cycle. It has been a perverse and persistent lack of income, zero interest rates, negative interest rates, and so one of the strategies that has been incredibly successful has been to generate income through selling options, selling volatility, and it's been was successful that the sizes have gotten

bigger and bigger and bigger. So when you see a relatively small move triggered by the stuff we're talking about in the in the tweets and the geopolitical risk, that small trigger results in a much larger reaction in and that larger reaction should be telling you something. It's telling you something about the build up of these positions in the market and the vulnerability that build up creates to a very small geopolitical risk in this case, but to

any small spark. And it's a very kind of important data point to to keep an eye on today and Monday and Tuesday, and as we roll forward into the fall. You have a noe doubt on on on bank loans, looking at bonds and bank loans and concert with with each other. Uh, give us, give us your your sense, your take on on the degree to which bank loans should be considered at this point. Well, thank you for

mentioning the note. Let me I hate I know you guys. Hey, when I do shameless plugs shaming is we we have a noe doubt. It's my fixing theme strategists publication. I do it monthly, It's on our website. But the notice is not just about bank loans. And and it's interesting, David. You know, every media person who's read my note talks about bank loans. And the whole point of putting out the piece is that it's the title of the pieces.

Float like a butterfly. And so when I say floating rate, you say bank loans, I say floating rate, you say bank loans. Right, But there's more to the floating rate universe than just bank loans. And one of the critical things that I'm highlighting here, going back to the earlier part of our conversation about what inflation means for keeping the feed on its path, is that very quietly here, the FED has been raising interest rates and raising the

attractiveness of achieving income results by taking less risks. And I just talked about is people are taking huge, inordinate amounts of risk to generate into selling volatility. You can do it in the front end of the yield curve, and it's still lower yielding than taking out a lot of risk. But the reduction and risk for what's becoming

more attractive something investors should be taking a lot. Okay, And I love the idea, and you write it much more than floating paper the idea than from Stanley Fisher is the Openers Economic Club of New York speech a year and a half ago, the Ultra Accommodator speech, folks is Jeff Rosenberg to your point on floating and bait change behavior. He talked about the percent change from a

low interest rate level. How much should we wait percent change from a given unit of of of yield versus the absolute change back to what's supposedly normal, So you know, the percent changes get very large. I don't think it's the percent change, though that matters here time. I think what it is is it's more of a bit of a tipping point argument, meaning that when you're at zero interest rates, you will do anything for income, and that's what we've been in. When you're at negative interest rates,

you'll you'll do even more to reach for income. But when you start to bring interest rates back from zero, the first it's not worth it, The first fifty not worth it. But we could be looking at very shortly here a hundred and twenty five, hundred and fifty, a hundred seventy five, and slowly and quietly the fundamental backdrop that has dominated the last eight or nine years of zero interest rates is no longer there and that kind

of development has been happening. And I highlighted in this figure the flattening of yield between high risk yield which you're going down in yield and low risk yield which is going up and yield that's unsustainable. You can't have this going on wherever. We're out of time. I got twenty seconds. Does that lead to instabilities? By definition, if you have that conflation of yield, does it lead to

unstable outcomes? It doesn't, It doesn't have to it. People's portfolio are relatively balanced and the recognition of that yield shift and people are paying attention, which is the point of my pay look at some of this lower risk ill This stuff is actually attractive to be balancing. This is we gotta go. This is way to euclidean. Dr Rosenberg, thank you so much. At black Rock. Coming up, we do more geometry. This is Bloomberg, a little bit of move in the bond market, lower yields by just a

basis point of shift, if you would. I'm in here looking at the many lines of data, David guru before you bring in our steam guest, and I'm trying to figure out what's transitory and what's not it's transitory that the Chicago Cubs are in. First place that I would say is is probably tobacco. I've got a negative. I think I've got a negative. The waiting on tobacco is less than one percent, and it is a negative statistic.

For the second month in a row, we went positive point for positive point five, a huge jump whatever that anomally is positive point one. And then last month we went negative zero point four and now we're negative zero point one. If tobacco's transitory and I don't even know somewhere and here's wireless cell phones, will have to look for that as well, transitory transitory. Uh. Diane Spak joins us now. She's the founder of DS Economics. He joins

us on our phone line sponsored by Spectrum Enterprise. Your nation might provide her of scalable fiber network services and managed cloud solutions. And Diane, let me just start by asking you, sir, of what you're looking at beneath the headline numbers here. I know you flagged shelter is something you're gonna be paying particularly close attention to. Here it looks like shelter up here point one percent. Give me

a sense of what you're looking for this morning. Well, actually, one of the interesting things is, as Tom has already point in it out there is the issue of the increase in UH cell phone the cell phone cellfire continued to fall, and that's something that's supposed to be a one off, but now it's we're several months into that one off. Yeahs a multiple on that tobacco issue that

you mentioned, that's important. It came off of a surge in taxas in California and California so that's a large state that that's why we saw that fall off there. But of course this is more bad news for the FED even if we keep looking at these one off incidences. At the end of the day, the Federal Reserve is dealing with inflation. That's too cool. This is you know, the porridge is too cool. Goldilocks is not quite here yet.

She's not happy with sitting at this, you know, at this particular place at the table, and neither is the FET. And I think that's the real issue is didn't expect this to make or break the FETs decision. I think what we're going to see is the data we see from September and October, which is going to come out. Um, that's the September and October inflation data that comes out

before the January, the December mean and in January. Um, Dad, the data is going to determine whether or not we get a turn of the year move and turned to your rate hike. Um. So we're still a little bit always there. But you got to see a pickup, a couple of tents of a pickup in now time, folks, we sell the advantage of the Bloomberg terminal. David, I just brought up with a great search engine search. Thank you Thomas Seconda for that gift and David Timborelli, among others.

The log chart of wireless cell phone Diana, I'm gonna put this out on Twitter so you can see it. And as Diane correctly states, as always we get that from Dr Swank the vectors in the ugly yelling direction. Let me do that when I put that out right now, folks, Uh, Diane, pay so close attention to to what FED policymakers are saying. We've alluded to the transitory comment that the FED chair

made a few months ago. Now. We heard from Jim Buller earlier this week, our colleague Kathleen Hayes sat down with him in St. Louis for an interview, and his pessimism about a rise in inflation was reeled and think we'd see much change here by by the end of the year. What's your sense of how much unanimity there is among FED policymakers on the issue of the transitory nature of the so called transitory nature of inflationary headwinds.

I think there was a lot of hope that they were transitory, and I think what you're seeing is that shift over to if it's transitory or not it's been it's being becoming too long. It certainly is too long and has already postponed to September rate hike. I frankly thought we never had a September rate hike in there. But the next determinators do we have enough for December

rate hike? And what's a real challenge for the SEED is even though many of them believe this is transitory and it could work out by next year and their medium term outlook is still fine, what they're concerned about is that without inflation, it's hard to have the cover they need to raise rates against the backdrop of additional financial easing. You know, who would have thought some you know, some kinds of access to credit would be much easier to get today than it was when the FED started

raising rates. And so this is still highly accomminative FED, but it's even more so, you know, a credit market that's beginning to finally loosen up, which we you know, would expect normally, but there's been nothing normal about this recovery. Let me let me put a question to you that I put to Jeff Rosenberg just a moment ago, and that is how you regard the CPN numbers in concert with the PPI numbers. What does one tell you about

the other? If anything, Well, you know they're they're related, Um, they are a different waiting. The pc numbers are really important and the PPI the PPI numbers are sort of a pipeline number. They've redone them, so our history on them isn't as good in terms of how much they really give us in terms of a leite time in terms of overall pipeline inflation, and how much that's actually

translated into what consumers spend. I think it's important to note too, is this division we're really seen, is it's more structural and it's really reminiscent of the late ninety nineties. We had Walmart back then hit critical mass in hit in rural areas and really brought down prices. Now we're having Amazon phenomena. They're very similar in terms of pricing. Do you hear a dog in the bat reacting to the latest one? I think that's that's that's Maynard Kane's

Maynard kin be good. I'm doing this from home today. You asked me to be honest. Family. That's okay. I gotta face for radio because I had I watched myself carefully. Thankfully, everything's benign, but I have to get Okay. We'll continue with Diane swunk in our dog Maynard Keynes this morning. Just that's what you've been thinking about. More broadly, here

we can talk a bit more about these inflation reads. Uh, if you want, but I just want to when you look at the economy generally, what's what's giving you the most pause, the greatest concern at this point. Well, clearly it's policy uncertainty, and we're seeing that pick up globally as well as in the United States. Many people that were betting on tax reform, health care reform, and the

whole broad spectrum of the agenda. Are now putting a lot of projects on the shelf that they thought that they would be moving on this year because of that uncertainty and that dappen's growth, and so that's something I'm very concerned about going forward. Also, looking at these inflation numbers, I do think, you know, the core number is held

at one point seven percent. We did see you asked me earlier about the relationship between the p p I and the cp You know, really interesting is that we saw a surge in accommodation costs in the p p I. We did not see that the opposite happened in the July accommodations portions for the CPI, And so you really are seeing some disconnect there. That could be squeezing margins, That could be Airbnb providing a lot of competition for

these accommodations, more narrowing margins. I mean, all of the above is a little bit rough, and it gets to how much um pricing power do we have any even what is a tight labor market economy, and it's still very limited for the Federal Reserve. You know, one more rate hike. I think they'd like to squeeze in this year, but it's going to be difficult for them. They're really

concerned about easing financial conditions. At the other end of the spectrum, they're also worried about the fact that there is a lot of uncertainty. We're now talking about an expansion that we're eight years into and you're starting to see some things that are very similar to the nines

and those that that seems almost impossible. But there is some tight labor market conditions where some produce there's and some service providers in particular saying we don't have enough qualified individuals, either low skilled or high skilled to fill the jobs and we're having to curb what we do. We haven't heard that since and that's something to be concerned about, especially when we talk about pulling back further

on immigration as well. That's a big concern among whether they're large, medium, or small manufacturers and um service providers out there. We're really seeing people having a hard time finding workers that they once thought were easy to find. Help me with the role that energy is playing right now in the in the US economy. We see oil here hovering around forty bucks a barrel w t I barrel what's the role that energy is playing. Well, you know,

the interesting thing is that we've gotten so efficient. That's one of the places we've seen extraordinary productivity games. We can produce oil in this price range now and we're a world player. That is amazing. We are still adding jobs in the oil industry. It's about eight thousand or point five percent of the total labor force um a month. So it's not a big sector. You know, we have to keep that in mind. But it has spillover effects that have yet to come through in terms of investment.

When you're running at these prices different than a hundred bucks per barrel and you're investing like crazy, we don't have all those spillover effects we'd like to see right now. Dan Dominiqunstam always brilliant at Deutsche Bank the other day suggests lower inflation, but yet a circuitous positive of real economic growth. So better real GDP combined with lower inflation and a mix it at you denominal g d P. The center tendency of that is you've got to have

investment at some point. You are hardwired. I can't begin to convey how unique miss Swank is. Besides, she has Chicago cub tickets, which is the basic idea. Diane. You are hardwired into investment decisions. When do they turn on the investment switch? You know, we really just haven't seen it yet. Outside of oil sector, which is coming act a little bit but clearly not booming. It's really very tepid.

And like I said, I'm talking to companies that were ready to go this year with corporate tax reform on what they thought would be an expansion for them to be able to do something. What what is holding it back? Don't give me this Washington malarkey. It's more than that. Why, you're right, it's also a slow economy. What's been interesting, too, is that you are starting to see some manufacturers talk about more automation because they're literally running out of workers.

And many of these small towns it's a very small labor pool, and they moved out to these rural areas because it was che high quality. Now they can't paint the picture. You're in Chicago and I know you're on the Magic Mile there with prod and all the other stores. Diane, you go, you go west of Chicago X number of miles described that small factory. Well, you know, It's interesting because actually they're they're further than that. A lot of the factories of the companies that I'm talking to are

in northern Wisconsin. There in northern Michigan. They're very far from urban centers. Unlike the Amazon um places we're seeing the million square feet in Kenosha, right outside of Chicago to get our you know, to get our Amazon deliveries really quickly. These are factories that are actually much further out and they're very very small towns which have um

they've kepped the labor force. But then anyone else that they try to bring in, every single one of them says they have a hard time passing the drug tests. I just looked at the Quest drug passing data, and if you look at the map, they have a great interactive map, the highest drug um positive rates are in rural America. You don't it's complete flip flop from the past where you saw urban cores and a lot of

drug uses. It's now very if you were the map runs hot on positive drug tests is in rural America, and that's where these factories moved to, and so they're having a hard time attracting I just the map, I just brought. Isn't it a great map. It's a terrific map. It's in It's in my monthly. Right up the darkest the dark or market David Garl. The darkest color is Brooklyn, New York. David Jump jump jump in here with it's great having you on. You give us. You know the

guy up in northern Wisconsin, David. All I know is he's sitting in three rows down from David heroind Green Bay pack Well, and he might be already working at a factory and great. But one of the things we're going to see is that it was overtime hours go up. But again that happened in the because they can't find additional workers, so they run him over time and then you start getting fatigue and risks of accidents off the

With that quest data, this is really interesting. You're expected to do the opioid stuff that's actually peaked off in the last two years. The biggest surge in drug US outside of the states that have legalized marijuana is cocaine. And that surprised me. And one of the main drivers of that is mandatory tests after an accident is cocaine.

And that surprised me. And that's something that I think is important is you know, you're seeing positive drug tests after an accident, and that's not something anyone can afford. I'm great to speak with you is always thank you very much and for helping us take part. Those numbers there in real time, just got them acrossing the bloomberg and they're going right into Diane Swamp, the founder of DS Economics, joining us on our phone line. Michael Mayo

is taking stagecoach lessons. He darkens the door at Wells Fargo after a story career of upsetting executives. What was it like when you met the senior manager at Wells Fargo? Did they was there silent? Is it like Game of Thrones where you go into that big room at King's Landing and you know you gotta watch your back? What was it like well at Wells Fargo Securities, the head of Research Global Research is Diane Shoemaker Creed, Yes, who's well known with the the industry. She's one of the

top ranked women in banking. And you know, she said, we're a very collaborative firm, and I'd say, yesterday, you know, we came out with our launch of banks at Wells Fargo's securities and part of the launched I DEALT collaborated with about a dozen other analysts within research and so the collaboration is just fantastic. So regardless of my my career tom so far week six at well Fargus secure

curity is so good. You've only insulted in California size group of people, Mike Mayo, your fiery and passion and let's get right to the house of Mr Corbett. People have been waiting and waiting, why now bank? So we expect City Group stock to double the next four to five years. That's partly because of what Michael Corbett, the CEO and City Group has done, and it's partly because

of what we think they should do. What City Group has done is they've reduction reduced structural risk, permanent risk reduction at City Group to probably the lowest level that I've seen since the merger with Travelers. This and that you know through the stock beta you're going to see

the big gest reduction the stock. They did, the biggest reduction and the cost of capital and the biggest reduction and risk premium for any bank stock around How much is City Group like Sandy Wilds City Group, is it completely moved on from the Wild years. It's so much moved on. Well. Number one, City Group can concentrate on being a large bank and optimizing what they have. No more big bank mergers. I'm not gonna you never say never with mergers, but the big mergers, the merger after merger.

It took City Group, you know, like a decade and a half to integrate these acquisitions. Actually, City Group had something called Project Rainbow, which is creating one global consumer platform. They finally finished that last year, and that stems back from the early part of last decade with Sandy Wild's acquisitions. That's one. Number two would be the credit risk. City Group has a lot more prime lending and super prime lending,

a whole lot less subprime lending. Now, some of that was put in the books after Sandy Wild left, for sure, but I'd say in terms of the credit risk, the overall risk profile of the firm, acquisitions risk is a lot less at City Group. And over the next five years, we expect City Group to buy back one third of its shares and the only thing that prevents them from doing that is messing up. So as long as they don't blow a big hole in their balance sheet as long as they don't you know, trip on the way

to work. We think they can buy backstock, so you can legally front run the biggest buyer, City Group stock. That is, you can buy shares a City Group stock knowing that City Group are based on our forecast that they'll buy back one third of shares over five years. I've never seen anything like that before. So that's what they've done. Now, what they haven't done is they still haven't generated returns above the cost of capital. You still have single digit return on equity. What do they do

get retail going? Well, some of this is in their plans. They had their first investor day in a decade a few weeks ago. And some of this will simply be a matter of time, getting a lot more efficient, getting a little bit more revenue growth. And some of that's the function of the major headwinds, you know, having you know,

played out. I would digress, Mr Girl, They've got some really stiff comp I was just waiting for you to make a joke about how you saw Project Rainbow performed live back in nineteen whatever it was, Tom, you didn't do, And let me ask you about the comparison between Goldman Sachs and Morgan Stanley. How useful is that comparison today and what does it tell you about both of those banks? Well, I think it's very useful. We did a major change.

I've been on your show in the past and we said Morgan Stanley was our top pick five years ago, and so for the first time in five years, we swapped. We now picked Goldman Sacks over Morgan Stanley. Even though Goldman Sacks is, you know, on their back. If I said, you know, terrible trading quarter, the heat is on calls for change in management, who would I be talking about. I'd be talking about Morgan Stanley, you know, mid two thousand and twelve, So role reversal here. I do think

the heat is on Goldman Sacks. One third of the company rating has performed worst in classroom look at you every year comparisons. How on their backs are they at this point? I think the intensity of Goldman Sachs is probably greater than it's ever been since their I p O. When's the last time you heard the CEO and CFOs say publicly as they've done the last month that you know, we've we have not executed. So if the CEO saying

you're not executing. I think there's a lot of vacations getting to happen, a lot of vacation of getting cancer at Goldman Sachs. This but I agree with this, but not just Goldman Sachs. David, I would agree this is one of those years in the street where you're just going Are we going away for eight days? I don't think so. There's a lot of that going on. Davids. One more question. I want to come back and ask him more general questions and ask him what's what's Morgan

Stanley's focus right now? Is it on growth at this point? Well, look, James Gorman was underappreciated five years ago. He agreed transformed Morgan Stanley's business mix as much as any large bank. I mean you look at wealth management, investment management, that went from one third to one half. So you know, he was, you know, skating where the puck is going to be, using their way in Gretzky analogy, and they

benefited through that for the last five years. However, I went to the annual meeting that was almost up and purchase New York. It was a rainy day and I asked almost all of the questions. But my key question was you achieved the savings with the brokerge integration with Smith Barney, you refinanced your high cost debt back from you know, earlier this decade, you achieved a lot of the project streamline expense saving, you redemployed the access deposits

and others. You've done a lot of yourself help. What's next? And they said to some degree, their their growth is a function of the economy. So I'd like to see Morgan Stanley better define the next stage of their evolution.

You know, it's all fine, but from my standpoint, they're a victim of their success when it comes to the stock price, at least relative to Goldman Sacks and since Goldman Sachs when public, Goldman has shown about twice as fast organic revenue growth with about half as much earnings risks, and they're cheaper. Made a lot of headline that year ago in governance in Bank of America? Are you choosing

to review Bank of American? Mr Moynihan's efforts. Look, we think that Bank America stock has upside over the next three years. We think this is the stage for national banking that they got distracted the nineties because they didn't integrate. That's just not got the move they got. They got distracted by financial crisis. They're growing organic deposits. We still think the Border Bank America should hold management more accountable, but we think man will get the job done anyway.

We're gonna come back with Mike Mayo. A couple of moments with Mr Mayo. Here he is with Wells Fargo security screen on the screen up thirty nine three and the VIX comes in fifteen point one seven and some real volatility of the VIX, some nice tense of a percentage point moves. It has an elasticity that I haven't seen in weeks and weeks, and of course much of that wrapped around the knock on effects of our geo politics. M H. 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 Keene, David Guras at David Gura. Before the podcast, you can always catch us World one. I'm Bloomberg Radio