The President Speaks in Jerusalem

and of course on the Bloomberg. Right now, in Jerusalem, President Trump meeting with the President of Israel, Ruben Rivlin. He fought in the Six Days War fifty years ago. Here is the President of the United States together and now today being in Israel is just very very special for us. So we expect to have some very interesting talks. Absolutely, we are praying for peace, and we are pushing for peace for the last one other tears and with God's head,

somebody will bring us peace all together, all together. Thank you, Thank you very much, thank you, thank you, thank you. Yeah, a photo opportunity. Now you can hear the cameras going behind the United States and Israel flags. Israeli flags and attendance. UM can't really guess the crowd size. I would guess maybe a hundred journalists as well. And we're again shifting to another scene where perhaps we'll have more formal comments by Mr Trump. He is in Jerusalem, landing at Tel

Aviv earlier today and by helicopter to Jerusalem. Uh and uh. Right now with David Gurray in Boston. I'm Tom keenan New York Jerome Schneider with us with Pimco in our New York studios. Jerome, thank you for all of us for being so patient with the news flow up this morning. Let's get basic here on a Monday, we've seen the Trump trade fade, steeper yield curve we've rolled over clearly based on news events. To a pro like you, what

does curve flattening mean? Ultimately, it means that we should be expecting rates to move higher over the over the new yer term. And I think that you know with that mind, it's also a relatively healthy economy that one could point to, and and and and ultimately that what we see in the market is very different, very different

than what we should project to the market. Let maybe be clear about that ultimately, when you look at short term interest rate expectations, that we've seen a very drastic move over the past week or two in terms of the expectations of a June rate hike. The reality is is that when you look at the ottening of the yolker, specifically over the past few days, we should expect those rates to move higher more more probably probability awaited than

the market is expecting. So simply put, rates are moving higher and we should be preparing for that. Well, we should be preparing for that, and I guess I see it with a one point two nine percent two year yield as well. It's away from your remit in short term paper. But nevertheless, I know you're wired at PIMCO on weaker dollar, stronger oil. Which is the horse and

which is the cart? Well, ultimately, you know, I think you have to look at the dollar because that, ultimately is what the FED is going to key off of. When you look at the Fed's transition from this data dependent model to more of a conditions dependent model, financial conditions dependent model back in two thousand sixteen, that's really

what we have to focus on. The data is there for the for the rate hike The only reason that the FED doesn't increase rates over the next six months or so by one or maybe even two times is that the financial conditions tightened. So being being conditions dependent is simply driven by data, I'm sorry, driven by volatility and currency, specifically the view of the dollar. So I put more weight on the dollar than oil right now.

But it is interesting, Tom, and this is noteworthy, is that we basically have seen whatever it takes policy from OPEC and and some of the producers, and that sort of found a floor and that could have actually pretty positive implications potentially for not only global comedy but really the domestic economy as you looked forward to that stabilization, it could lead to other things including capex, capital expenditures increasing, and ultimately you know that that creates stability and upward

propensity for the economy. Let's play that a little bit here. We saw news from the Saudi oil minister over the weekend. That's Audi rabing other participants in that OPEQ and non opic dealer willing and eager to continue it. What does that mean for the economy going forward? Well, ultimately, the downside risk if you will, to lower oil prices, UH is something that domestic producers are going to be willing to increase their capital expenditures or at least maintain it.

We've seen it sort of seen it in Rigg growth here over the past few months. But ultimately it's sort of been a seesaw, you know, when when one when one party producing party has cut the other sort of

increase slightly or vice versa. And I think, what we what what the goal is to try to achieve a healthy balance centered around fifty dollars, maybe it depths slightly below, but ultimately create that stability and that and that's ultimately what all producers want so that they can forecast and maintain profit margins without being whip sled in terms of putting out lays that may ultimately prove to be at

least in the near term, unprofitable. I want to go back to that distinction you were drawing between data dependence and conditions dependence. Is this something that we see the FED embracing talking about. Help me understand just the difference a little bit more well, Yes, And and ultimately you can look at even you know, the speeches from you know Cleveland President Meister and and and others, you know, from even the most dubbish to the to the most hawkish.

Everybody points to, here's the situation, but if this happens, then we may not be moving. Everybody wants to normalize the balance sheet. Everybody wants that normalization process to continue, but if that you know, does if a certain situation at all, then they might have to react. So that conditions dependency is critical to the markets, and we can we know, generally speaking the data it's sort of firm.

We sort of no idea sure. Q one GDPs was a bit disappointing, but jobs data, even even even wage pressures are are relatively stable, although inflation, immittedly from the headline perspective is a bit disappointing. Those are things that they can quote look through and we're all well aware of that. But this conditions is the factor that toggles the decision making process of the Fed. This June, within the debate, drump sider of PIMCO with us within the

debated PIMCO about how the American economy will prosper. We can all agree their gains occurring right now, but once again, are the gains going to the few versus being spread across a wider part of the American populace. Well that that has to be Ultimately, there's gonna be a few policy implications in this, and you can look at it and from retrospect, and clearly, you know, since the financial crisis, it's been skewed one way. But I think ultimately we've

looked tom about what the policy is looking forward. You know, we have a period of time here where animal spirits have been relatively constructive. Therefore, you know, they've basically been fermenting over periods of time, and we see that in both the corporate world and also in the retail the individual investor world. But as we move forward, we have to really look and see if there's risks on the horizon.

You know, we were very concerned about at the beginning of the Trump presidency about things like protectionism and trans to deglobalization. But it's quite possible those don't materialize to the severe point that people had expected, and so those are positive implications ultimately that that sort of tilt to the positive site. I'm not being I'm not being pollyannish here, and I'm not being overly optimistic. It's not allowed, of course, not if you've been to any one of our investment

committee meetings. You know, we we we all, we all have to put our real hats on and sometimes our hard hats. But at the same time, this is something that is going to be the tradeoff. If animal spirits are going to continue, how does it off? And policy implications of one of the key factors in the next six months to drive that. Final thoughts with Jerome Schneider of PIMCO this morning, are are we just clipping coupons?

Is is the gold chrome? Given all the noise that's out there in your statement of a higher rate environment, is a goal just to make the coupon and defend the goals preserve capital, the goals to preserve capital with the notion that inflation is gently increasing, so purchasing power and preserving and purchasing power is the essential element of proper investing these days, specifically with those bent for fixed

income allocations. And I think once you moved to a higher rate paradigm, which we're clearly moving and edging towards that over the next one to maybe even three years, you know, it becomes ever more apparent that that becomes attractive. So maintaining optionality to defend against higher rates by having limited exposure to effectively two interest rates at the same time.

Ability to embrace those higher interest rates predominantly through items such as hedging and even as simple as owding floating rate floating rate notes is essential. One thing just to highlight tom here is you know, we see libelar and sort of the money market instruments, although it's clearly not a harbinger of doom or stress in the marketplace, but one month libelar crossed one percent for the first time

since December of two thousand eight. Last week, and so it's a noteworthy that we are finally seeing some tip of the hat at least to a normalization happening in front end markets as we moved to to the FED. That is, obviously, as I mentioned previously, more conditions dependent. Jerome Pimco had this big confab a couple of weeks back, the secular form uh Newt Gingrich was there, Larry Summers

was there, the whole lot. What did you take away from that about where things are headed in Washington, How that's going to devetail with the work that you do. Yeah, well, you know, once every year we'd like to bring in bringing folks on the outside to help help show shut some light on the corners of the realm, corners of the universe that we normally don't see. And as you mentioned, and we did have our normal normal lineup of you, uh, Bernankey,

Entriche and Gordon Brown. But at the same time, we're really focused on how the world will evolve, looking at ultimately at animal spirits with that and how they'll effectively move move the economy going forward, both domestically and globally. Implications of things we obviously are well aware of populism, political populism, uh ebbing and flowing, you know, obviously France and the election outcome there was very was very it was very pointing in that and then ultimately, you know,

figuring out where we stand in the world. We're at a point where clearly we've been utilizing monetary policy in excess for the past seven eight nine years and is that remain or or how do we evolve out of that situation? And those aren't uh, those aren't concurrent clearly as the Fed debates one side of it and other another. Uh, monetary policy committees are debating the other side. But ultimately that quote endgame will be very important so we debated

that as well. So those ideas will be forthcoming, and we encourage everybody to look at the PIMCO website for them to be published in the forthcoming days. There was a shameless plug I teed that up. But we get a budget tomorrow, We're headed toward a government shutdown in September if we don't have a spending figured out by that. How worried are you about all of that? Yeah? Ultimately

am I worried right this second? No, But this is a sort of festering in the background, and ultimately, you know, you cannot overlook the debt ceiling implications later on this year. So when we come back later on this summer, you know, while we might view it as a quiet summer, uh, you know, this is going to be at the forefront of the implications for us to pay attention to Truro. Thank you so much, Rup Schneider. I'm more than patient

with the global news flow this morning. He is with Pimcom, impatiently waiting in Boston with the Red Sox one game above five, losing three straight grow to the Oakland A's. He's up there to assist John Ferrell, David Gurral yes, Tom, thanks a much here with her and timber Of the director of Global Macro Fideli Investment. He was given me the lay of the land here, beautiful bureau. You are Bloomberg Studios, high up overlooking a lot of the city. You're great to have you with us. And let's start

with with oil. We heard Karen Mosko a few moments go talking about the potential for an exten extension of that opaque and non OPEC production freeze agreement. Gives your sense of your optimism for that and sort of what that means for for markets going forward. Yes, well, a very good morning to you. You know, I'm pretty bullish on oil. I think eventually we're going to go higher. The oil complex will be trading indeficit, which will be a big change from where it has been. And most

people probably agree with that. It's just a matter of timing and how long does it take to work off all of that excess inventory. So certainly the news out of OPEC is helpful if you're if you're bullish, and you know, one of the communicators I tend to look at is a CRB ROW industrial CRB. You know R I N D on your Bloomberg again, that's been in a pretty sustained up trend, and I think it's a better measure than for instance, coppera iron or which have

been under pressure lately as well as oil. So um, I think commodities are in a good place here to continue to rally. Is in a good place You look at the the U S economy overall, what's your sensitive what's what's still lacking? We're lagging when you look at

it now. So there's so much noise and headlines and you know, tweeting and this and that, and um, I think a lot of people tend to attribute everything that's happening to the latest headlines, and the way I see it sort of sort of the force through the trees, if you will. There are really two major issues that we have to get right. One is China. You know, China just pumped a lot of credit into the system

to reflate yet again. Uh, there are credit impulse, which actually is an indicator that you guys developed on Bloomberg is running at airt of GDP rate. But the year over your change has gone from plus ten to now minus one, so that credit impulse has come and gone. So one question is what is the aftermath that I'm going to look like? My sentence at the global reflation is still intact. And I have liked non US equities

all year and I continue to do. And the other one is what kind of late cycle in the US are we actually heading in? And this is where the fiscal stuff comes in, because the wrong fiscal kind of stimulus that foot pushes the demand side could actually shorten the cycle, which is kind of ironic because they could push the FED into overdrive and therefore earth the cave and then lead us into a recession. But less actually could be more in that sense, you're in timor with

us with fidelity. Out of Babs in colleges, you know you're in. There is no bad house in the neighborhood around Babs in college. It's in a pretty fancy climb of Boston, Massachusetts. I like in your note you provide clarity by saying the US is the best house in the neighborhood, but there are other places to buy right now.

Why the shift, because we are in a global reflation from since about five quarters ago, so from twenty from the US was the best house in the neighborhood, but now it's actually only one of a number of good houses. And this is why non US equities, whether it's developed or emerging markets, have actually done very well. They're actually up more since the election in the US market, which very few people would have would have predicted six months ago.

So I do think this is a global story. China is very much behind it, and as long as China can sort of keep it it's it's stuff together, I think global equities will continue to not only go up, but actually I'll perform the US. Do you see cash flows sustained? I mean one of the big surprises here has been UH the rise in UH earnings and revenues. I mean they were pretty good, weren't they. Yes. Q one earnings for the SMP are of four year over

year UM, and that's in that that force. Those are easy comps, of course, because the Q one of last year was the bottom of the cycle when earnings were falling at seven. But it's a global story. Earnings are inflecting higher everywhere, and you have a pretty significant p discount you know in e M at twelve, which of course is is justified. You just have to look at

Brazil last week to know why. But even non US um equities are training at a fourteen multiple, whereas the US is at an eighteen multiple on a forward earning spaces.

So the earning story is good if if you look at the county year numbers for seventeen and you adjust for the normal downward drift that happens to estimates, earning should be up eight percent over sixteen, and in twenty eighteen, which of course is still miles away, would be up six percent on on that math, And those numbers don't really reflect any potential boost from either tax cuts and or deregulations. So UM, I don't think it's fair to say that on the earnings estimate side people have um

unusually optimistic expectations. If there if there's a premium built in, it's on the valuation side, which I do think can be an issue going forward. There was for such a time for many months now political risk driving so much has that dissipated. Now are you returning now to to a sense that monetary policy, central banking is back in

the driver's seat once again? It's political risk off the table to agree that it was with France with the French election now over with Yes, I've been very bullish on on Europe, sort of expecting that to be the

sleeper hit of teen. And you know, but people were very focused on election risk, certainly after Bregson and after the U S election and when that didn't materialize, and actually the Dutch election a few months earlier was already a hint that that populism might actually be contained in Europe. And I suspect that that seems to be that that

is the case. So but there is political risk always, of course, but when we're seeing on the trade front, which is really where the international risk is, so far, things have been pretty benign. You know, We've had summits and meetings with international leaders and uh, it's been kind of dovish on the trade side and on the fiscal side. Domestically, we're we're still waiting and there doesn't seem to be a lot of momentum. So it's steady as she goes

right now, Very good room. You're into timor with this with fidelity in Jerusalem at the Presidential Residents with the garden is assembled, the US delegation with President Trump, and this includes comments by Reuben Rivlin, the President of Israel, not the Prime Minister. Mr you know, the president and of course with Mr Trump, it is UH to podium with the U. S. Flag on the left, the Israeli flag on the right, UH, and the President's flag I

believe in the center of the national flag. I should state as well, it is a spectacular backdrop at the presidential residence. And of course this creates great residents within Israel, really pretty much in the heart of Jerusalem. So the President President Rivlin uh speaking right now. I think we'll wait on that and wait for Mr Trump to begin his comments. Uh. Here in a moment, David Gura, all of Washington is watching his trip, but busy on an

airplane returning as Mr pre Mr Bannon. Do we know David this morning wide Prebous and Bannon are returning to Washington. I don't think that we have a great sense of that. The White House is saying that that was in the plans all along. Secretary of Commerce S. Woolber Ross also heading back to to Washington as well. Marty Shank and I were talking a little earlier about the complement of

staff the President brought with him to Saudi Arabia. Of course, through a number of big business deals that were announced there. The President cave that speech to regional leaders on Sunday afternoon. So the White House maintaining here this was in the cards all along for those two men to have back. But you're right in pointing out the drama that exists

in Washington continues to exist and persist. Uh. There will be the reports here that there could be hearing with James Coby this week on on Capitol Hill, the former FBI director. So that story, which the White House had desperately wanted to leave behind, is certainly continuing in Washington, d C. This week. Now, the symbolism from Saudi Arabia to Israel and then on to the Roman the Vatican

on an extended trip. I will point out that the President, just as a casual observer from a distance like all of us, looks a lot more rested today than he did when he gave his speech to David in Saudia. There's no question that he looked exhausted here twelve and twenty four hours, a nine day trip with two summits.

Marty Shanko commenting earlier as well, you know, foreign travel is difficult, as is the first foreign trip that the president has taken, the first official trip that he's taken overseas. It has jam packed, involves a lot of geographical breath as you're as you're mentioning, and just it's a lot to get one's head around. Anyone who's traveled with the government official at that kind of rank knows that everything

is tightly scheduled. You're in a bubble um. Everything, every minute is taken kind of like when you go to Davos, tom every minute is pre scheduled in. But I I will take issue and that I once to the trip where it was every day day here, day yere day there. The moving city to city is a whole another level exhaustion, whether it's Asia, Europe and North America. As a presence doing and of course many of our listeners, particularly C class officers are doing as well. Yeah, thank you very

much and shalom. I'm honored to be in the great State of Israel, the homeland of the Jewish people. I am awed by the beauty and majesty of this sacred and very holy land. President Rivlin, Mrs Rivlin, thank you so much, thank you, thank you for opening your wonderful home and welcoming Milani and myself to your amazing country, and that's what it is. It is an amazing country. What you've done is perhaps has virtually never been done before.

When my first trip overseas, I've come to this ancient land to reaffirm the during friendship between the United States and the State of Israel. And it will always be enduring. And that's number one to me. We're not only longtime friends, we are great allies and partners. We stand together always. This moment in history calls for us to strengthen our cooperation as both Israel and America face common threats from

ISIS and other terrorist groups. Two countries like Iran that sponsor terrorism and fund and foment terrible violence not only here but all over the world. Together, we can work to end the scourge of violence that has taken so

many lives here in Israel and around the world. Most importantly, the United States and Israel can declare with one voice, the Iran must never be allowed to possess a nuclear weapon, never ever, and must seize it's deadly funding training and equipping of terrorists and malicious and a must cease immediately on those issues. There is a strong consensus among the nations of the world, including many in the Muslim world.

I was deeply encouraged by my conversations with Muslim world leaders in Saudi Arabia, including King Solomon, who I spoke to at great length. King Salmon feels very strongly and I can tell you would love to see peace between Israel and the Palestinians. Many expressed their resolve to help and terrorism and the spread of Radicalizai. Many Muslim nations have already taken steps to begin following through on this commitment.

There is a growing realization among your Arab neighbors that they have common cause with you and the threat posed by Iran, and it is indeed a threat, there is no question about that. I thank both you and Prime Minister net for your commitment to achieving peace between the Israelis and the Palestinians. I also look forward to discussing

the peace process with Palestinian President a Bus. Young Israeli and Palestinian children deserve to grow up in safety and to follow their dreams free from the violence that has destroyed so many lives. The United States and Israel can also bring safety and greater presberry to our people through stronger ties of trade and commerce. Already our two countries do a great deal of business together. We have a strong foundation on which to build an even closer trading

relationship that benefits both of our countries. I'm gonna try and narrow that trade deficit just a little bit. Is that okay? Unless he doesn't mind. He wants to keep it the weather. As I understand today, we have so many incredible opportunities before us, and my hope for this visit is that we seize every single one of them. I am thrilled to be here on behalf of the American people. I know Israel and America share the same goals, and I have great confidence that we can achieve tremendous

success together. We can achieve all of our goals together. President Rivlin, I look forward to working with you and just seeing more of the sacred land and getting to spend time with the remarkable people of Israel. Thank you very much. Thank you the President United States, shaking hands

with the President of Israel, Mr Rivlin. This at the Presidential Residence in the heart of Jerusalem, in the rows and chairs, the first Lady in the front row listening to the comments, with a beautiful backdrop of flags and artwork in Jerusalem. President uh looks more spirited than he looked in Riad. To be honest, it looks like he's had a little bit of rest, which you can do on air force one miles roughly from Riad to Tel Aviv and then thirty six miles by helicopter from Tel

Aviv to Jerusalem to the UH southeast as well. The President just now making comments with Mr Rivlin, is some people gather, not too many in the first lady we see as well. I saw Secretary Tillerson as well in the front row out for what appears to be photo opportunities with flags right down a sun drenched patio in Jerusale. I'm enough of the travel UH lawd Greg Delier just out with his note. We had the courtesy of speaking with him earlier this morning. He says, an epic battle

over fiscal policy begins this week. Urian Timor is with Fidelity. Urian, how do you link fiscal policy and the raging battle to come on it into investment? How does that work? Well? When you look at all the things that are unfolding in the markets of the dollar, nominal yields, real rates, tips, break evens, financial conditions, commodities of the relative performance of

the Russell versus the SMP. They're all manifestations of the same theme, and that theme is what kind of late cycle will the USC So we've been in this prolonged midside expansion of the Goldilocks period really from two thousand and ten until now, and we're still in it, and I don't expect to transition into late cycle, you know, tomorrow, but it is usually the next phase in the business cycle. You go early, mid, laid down, and the late cycle is when things get kind of messy, because no late

cycle is is the same. And so where the fiscal question comes in, um A, when is it going to happen? Is it going to happen? How much? What kind right?

If it pushes up the demand side with an economy at full employment eight years into an expansion, the risk is that the FED has to offset that and therefore not only lower the fiscal multiplier of that stimulus, but also raise rates and you know, get us closer to the risk of an inverted yield curve down the road, and then you know, you know the relationship between inverted

curves and recessions. So that's one potential playbook the other one is that the fiscal either is less than we think or it's more supply side oriented, because we need productivity to go up in order for the economy speed limit to go up. And if that happens, the FED doesn't have to offset it as much, and we may have a more benign environment, more benign late cycle environment where the curve is not overred. So this, I think is the big question other than China and it's stimulus.

This is really the big question. And that's why whenever we see headlines going to or fro in terms of when we get how much fiscal all of these market components move in unison because it's all one trade. Basically you're in termor where this fidelity And we will continue the President of the First Lady Walking where the President and Mrs Rivlin within the Presidential Residents, they visited the garden. They take immense pride in Israel with the Presidential Garden

at the Residents. It was completely restored in two thousand nine to represent the flora of the land of Israel. Looks now like a red carpet in flags assembled as a president moves on to the next moment. Believe I see a car in the distance, Urine. When I look at investment right now, do you know where the risk free return is? It's so important to your managers, your portfolio managers in the great distortion? Do I know where

the risk free rate is? Yes? And this is no, we don't act well, we can guess right because we're supposed to say, Peter Lynch knows, but no one else does. Where is it? So when you when you look at valuation right, valuation is driven by the numerator in the discount of cashlow model, which is earnings growth, and then the denominator which is the discount rage which rate, which is the sum of the risk free rate and the

equity risk premium. And right now, one of the issues that I have in the market is that not only is the equity risk freamum very low because it basically collapsed after the election. The risk preum is about two point three percent, which is almost half of what it historically has been. But also the rest free rate, as you just indicated, is depressed because we had multiple years of financial repression. And you know ZURP and QWI and

where does the ten year yield belong? Because that is the risk free rate, and once we know that, then we can sort of figure out what the valuation is

of of all these other asset classes. But because the risk free rate is artificially depressed, all asset classes become you know, more highly valued as a result, you know, from bonds to cash, to equities to credit, and so we can we can make some analyses on where the term premium is and should be if the FED was completely in a normalized environment where GDP growth was historically at trent, which of course it isn't. You know, real GDP growth over the last ten year ten years is

at one point three percent. It's very very low. Um So, but if if growth returned to something normal three four percent real or five six percent nominal, you could argue that the ten years should be you know, four percent or four and a half percent. But but we're not there. Uran, thank you so much, and particularly for the back and forth through the President in Jerusalem, Mr timur Is with Fidelity in Boston. Runch you by Bank of America, Mary

Lynch with virtual reality, virtually everything will change. Discover opportunities in a transforming world, be of a mL dot com, slash VR. Mary Lynch pierced Fenner and Smith Incorporated. There's something new from Bloomberg. It's called Lens. Starting right now, you can use the Bloomberg iOS app off your iPhone or iPad, or our new Google Chrome extension to read any news story on any website, scan it, and then instantly see the news stories relevant market data from Bloomberg.

In addition, see all the bios of the key people mentioned in the story. It's called Lens, and it is just that, a lens into the people and the data of any story you may be reading. Again. Lens brings you the power of Bloomberg's news and data. Download or io s app or search for the Bloomberg extension at the Chrome Store to try lens out. Learn more at bloomberg dot com slash lens. Michael McKee a studio with us right now. Mr Guras on assignment in Boston. Good morning, Michael,

Good morning. It's nice to be back in Richard Truman Is is produced. It's like the old day. It's like nostalgia. They put back together. It's final tap. This show goes to eleven. It may go to eleven. Uh, We're gonna get to Bruce Barlett here in a moment. I just want to continue with the day's events. In Jerusalem. We're seeing images now on our feed of the Church of the Holy sepul Curve back to the fourth century. Mr Trump and the First Lady schedule to visit, as well

as the Western Wall. No activity there's yet, but we'll bring you a dialogue of that as we see uh it on our images here right now. A dialogue is necessary on the future of the Republican Party. I turned to our care and Buchanan a week ago and I said, I want to talk to one person only, the guy that helped Jack Kemp, Bruce Bartlett a few years ago out of Georgetown, assisted Mr Kemp in moving tax reform forward. Bruce, take us back to that moment. How impossible was it

to do tax reform then? In his same impossibility now? Well, for one thing, a lot of people knew a lot more about the idea of tax reform because we've been talking about it since the late nineteen sixties. We had a big tax reform bill in nineteen sixty nine and another one in nineteen seventy six. So in the nineteen eighties when Kemp started talking about doing another tax reform,

the ground was pretty well plowed. People had an understanding about the problem of tax loopholes and how they could be UH harmful to the economy by causing investment to be misallocated and things of that sort. And UH and he started working on a tax reform plan with Senator Bob Caston of Wisconsin, and simultaneously Senator Bill Bradley of New Jersey and Congressman Dick Gephardt we're working on something similar. And they were both Democrats. Kemping uh casting we're both Republicans.

And when they finally came up with their legislation and put them, people put him side by side. They discovered there was a lot of overlap, and I think that was the real impetus that got things going, the the idea that this was potentially a win win bipartisan deal. Since course Congress has meddled in the tax code, you won't get any argument I don't think from any economists that the tax code exemptions and UH and loophole's distroyt

economic activity. So what's the difference between two thousand seventeen and the early eighties when this was just dating in terms of why we need to do taxes? Why why are people in so much disagreement about tax cuts now compared to them. Well, the problem is that the Tax Reform Act of eighties six was essentially a deal whereby taxes were raised on corporations and that revenue was used to reduce tax rates on individuals. That's a political deal

that that worked. The problem today is almost everybody in the tax field thinks that the most important thing we need to do is lower the corporate at tax rate. But there aren't enough corporate tax loopholes to pay for more than a small reduction in rates, which means that in principle, you'd have to raise taxes on individuals to pay for a corporate tax cut, assuming it was done revenue.

Neutrals want to come back on the Republican Party, but just one more tax question, if we could, do you have any optimism we can see, Speaker Ryan Ronald Reagan, tax reform not really. I think we're still at too earliest stage of discussion, and you're seeing to be to a fault line of a group of Republicans say screw reform,

we just want another style, big tax cut. We don't give a damn what happens to the deficit, and then you have another side which says, you know, we're concerned about the deaths that we want to pay for this tax reform. But more wortantly, there's a rule in the Senate which says, if you pass legislation that reduces that increases the deficit in over a ten year budget window, uh,

it can't be made permanent. And and so this is a very powerful argument for doing something reform that would be paid for that would be revenue neutral, because then it would be permanent and businesses could plan beyond that ten year window. Bruce Bartlett is a Republican, and he has been harshly critical of modern Republican theology. Bruce Bartlett is the president a Republican. Well, of course he is.

He used a nominee of the Republican Party, which means he is a Republican insofar as the Republican Party itself is concerned. Is he a conservative, I guess is the real question. Well, he's certainly much more of a populist, I think, than a traditional conservative. On the other hand, it's quite clear that he is pursuing an agenda that is very much in the mainstream of the conservative movement

as it exists today. Which may or may not have any connection whatsoever to historical conservatism or the conservatism of the Reagan era, which was was my era. Well, that's an interesting um point you make, because in your book in two thousand nine, UM, The New American Economy, the Failure of Reagonomics in a New Way Forward. Um, you suggest supply side economics was appropriate for the nineteen seventies

and eighties but doesn't do not work today. Um. Do you still feel that way, And if so, tell us why given that that's being cited by many people around the administration for what they want to do. Well. I don't believe in cookie cutter economics, Okay. I think you look at the situation, you analyze new developed policies that are appropriate for those circumstances. And I think there's a lot of people out there, such as my old friend Larry cut Low, who just say task cuts, task cuts,

task cuts. No matter what the situation is, you know, it's always time to cut taxes. And I think sometimes, uh, it isn't. And I think cutting taxes in the early eighties was something that was clearly necessary. The fact that we had inflation, uh, was was strong evidence that the supply side of the economy needed to be built up. But I think in the in the twenty one century, we've had mostly the opposite problem. We've had a very uhh. We have not had inflation, We've had a borderline deflation.

I think we're still suffering from a lack of aggregate demand. I think we need different policies for a different situation, Bruce. When you look at the present dynamics, in the present politics, it's out there. I guess it's great luck. I've called it Trump luck as well. It's good luck, a good thing right now. Or do you feel there's a huge pressure by Republicans to actually find the compromise you've called forward for decades. Uh, it's hard to see Republicans compromising

even with themselves at this point on some key issues. Uh. Taxes is a key one. Uh. It looks as if the administration has adopted a let's just cut taxes and forget about all this reform stuff. But the House of Representatives at least seems to be quite determined to do a meaningful tax reform bill. And H it's not entirely clear where the House or the Senate is. And again, I think you've got differences among the Administration, the House, and the Senate on health reform and a number of

other issues. So I think just getting Republicans on the same page is going to be an enormous effort. Uh. Before we let you go, I have to go back to Texas for a second and ask a question. I've been dying to find an expert who could tell me, and you're probably exactly the person. The administration goes out, we want to cut taxes. They put out a rough idea of what they want to do, and everybody says, tax cuts for the rich, tax cuts for the rich. And when you look at obviously the rich pay more

in taxes, so dollar wise, they pay more. But why can't somebody design a tax plan that gives the same percentage gain to everybody. Well, for one thing, you've got a huge percentage of the population that pays no federal income taxes at all. So you've got a problem with how to in effect give them a tax cut when they don't pay any And the answer has been over the last several years, let's give them refundable tax credits. Uh. And so you you and once you do that, you

blurred the distinction between taxes and spending. You're sending checks to people who pay no taxes and saying we're going to give you a rebate on your taxes, and and and this has kind of opened the door to a spig at a spending that that many Republicans in fact are concerned about. First, thank you so much for your time, and a busy newsday, Bruce Bartlett, UH of Virginia. And

of course a Republican symbolism. And at the Church of the Holy Spolker right now in Jerusalem is remarkable the President and Mrs Trump entering the church along with their daughter and Mr. Kushner as well, and a few of the American dignitaries. And they are surrounded Michael McKee by that imagery of Jerusalem, of the Greek Orthodox, the Armenian Orthodox, and the Catholic Church joining us now in Boston. Karen Mills. She is a former Small Business Administration Administrator three head

of s p A now at the Harvard County School. Uh, Karen, good morning. What did you learn in small it's a small business administrator? What was the shock? If there's always a shock when you enter the bureaucracy, what you learn? Oh, Tom it's it's great to talk to you. I think the thing that UM I learned in that we really learned in the recession in this country is how important small businesses are to the economy, because half the people who work in this country own to work for a

small business. So I used to say, I woke up at night worrying about half of America's jobs. The issue is that small business doesn't really have a big voice in Washington because big businesses voice is much more at the table. So my job was to be allowed voice at the table for small business. Karen, We're going to interrupt right now and go to a big business. Eight miles west of Detroit is Dearborn, Michigan. Here is Bill Ford. And he did that and of course they still made

furniture throughout the whole and they still make furniture. But in doing so, he grew the company, took them to first in the in the industry UM worldwide. Uh. And the culture was one of optimism and a feeling that they could get things done easily because they had a very clear view of the future. Then Jim went to the University of Michigan, and you can say, well, is that relevant to Wentford has got going, I would say yeah, and a couple of respects. Look at what again? What

he did? He walked into an athletic First of all, it shows his loyalty because having played football for boun Bechler UM, he loved the University of Michigan and when they asked him could he come fix the athletic department, Jim said sure, you know I'd be happy to Um. You know, walking into a very difficult and very public situation. So what did he do there? Um? He first got the students back because they were feeling alienated. Then he got the all the volunteers that are the heart of

any program like that they were feeling alienated. He got them back. Um, he negotiated UH and brought home the Nike deal, which was groundbreaking for any university. UM. He then hired Jim Harbaugh UM and UH, and then he helped select his successor and then left the athletic department in much better shape than he found it. So you say, well,

what does that have to do with Ford? Well, nothing directly except I think it shows that Jim can be successful and operate in multi environments m a corporate manufacturing environment and steelcase where he reimagined it and delivered a very uh not only solid set of results, but delivered a very convincing future. By the way, he also got them through oh eight oh nine, which in the furniture business was tougher even than the auto business. UM. So

it shows his operating acumen as well as his visionary thinking. Um. And then you know he's been a part of our board for he was for three years. And then I asked him, I said, hey, you know we need to um build a new business and you know, could you help us do that or frankly, would you go do that for us? And so again very selflessly. And you

see that there's a pattern here. He left our board, joined our management team when again when he didn't have to do that and life had more probably appealing options. But and he's in a year he's done an amazing job at Ford Smoth. Little technical difficulty there with Bill Ford and his discussion really something won a story of course. Uh. He was born like other's uh, with every advantage and

it was pretty much ignored. And then out of Hotchkiss Princeton and m I T has dazzled people with his ability to avoid bankruptcy a number of years ago, and of course with the ascendency and management of Mr Malally and then challenges as we hear from the board with Mr Fields and they go on to new management. This morning he mentioned in the University of Michigan UH linkage there we continue with Ms Mills, Karen Mills, the former

SPA administrator UH joining us UH this morning. Karen I, I look at all of this, and you know, whether it's Bill Ford in big business or Karen Mills and small business, at the end of the day, it's all about people, isn't it. How did you manage the expectations of you need people to make the sp A go. How did you do that? Well, you know with Bill Ford, this is actually really important for a small business too because UM, as you see there, you know they're making

a change there. So you're right, people are everything. But when you look at the number of suppliers for it has they have to get it right or we're in real trouble. And small business land, particularly in the Midwest. One of the great things UM I did was travel all around the country and talk to small business suppliers and what you really need in Washington if somebody who's got the sensibility of the small business owner and can help Congress figure out how to make a bill that

actually works for small business. It's not about the big top headline. It's about the nuts and bolts and how much you know, pain and suffering the small business owner has to go through. There's a question what would help the small business owner? And I asked that because everybody says cut their taxes, cut their taxes. When you when you look at the list of things that small business owners tell, uh, you know the polsters on a regular basis,

that's not at the top of the list. Well, I actually have a list, but I have a plan for sort of getting it through Congress. So while the President is out traveling in um around the world, I think his economic team should get together and go to Congress and work with both parties in Congress and do a small business bill. And maybe we would call it the Small Business Growth Act of and we could stuff it

with all these things that small businesses like. Um, you know, start with a few tax credits, because that's the best thing for small business. Rather than wait for a big tax bill, small businesses really getting anxious. I think waiting for tax legislation. So let's do some taxes, let's do some regulatory simplification, and make sure there's taccess to capital

things that people agree on already. One of the things that Michael McKee and I agree on, Karen, and we can ask you this because you're living it, is the value of a liberal arts education. Bill Ford has a history degree out of a small school in New Jersey. I believe you did the right thing and took a ten at Harvard a few years ago, and you're you very much know the efforts of Bowden College. How important is liberal arts to small business and any business education today. Well,

I'm a big believer in liberal arts education. You know, it really helps you figure out how to think. And as you said, at Bowden and at Harvard and really around the community, you want somebody who can have a sense of, you know, what is what is the way the path forward? And that's not just figuring out how to do the numbers. That's about making judgments and studying history and thinking about how other people have coped um

with difficult situations. And when you look at Boden College, I think that's one of the reasons why they have its proportionate number of leaders Joshua Chamberlain, George Mitchell for a very small college in Maine. It's set up how you think about living a principal of life and making decisions. Plus you have to survive the black Frau flies every spring. Karen Mills thanks. Yeah, the winder goes some October to the third week of June. Karen Mills, thank you so much,

greatly appreciate it. Uh the former administrator for the Small Business Administration, 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 Gura is at David Gura. Before the podcast, you can always catch us worldwide. I'm Bloomberg. Ray. You brought you by Bank of America Mery Lynch. With virtual reality,

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