Two Percent Inflation Target Is Achievable, Plosser Says

called in. It's an honor actually for me my all time favorite radio show, Bloomberg Surveillance. I happen to be in from Berlin for a couple of days, and U Joe Wisn'tal joins me here in the studio anchor of What You Amiss? Now, I want to get to a very special guest. I'm sure Joe also is a cred excited to talk to Charles Plosser, former Philadelphia Fed President um joining us from Washington, d C. Charles, thanks so

much for your time right now. Let me first ask you about a question I was talking about earlier this morning on my television show The European open um. Why is the FED we're losing Stanley Fisher now and their questions about who's going to replace Jenny Allen? Why has the FED never been completely filled over the last ten years. It seems like we've never had a full fedboard. Well, it's good to be with you, And I think that's

a very interesting question. It's a difficult question. What I'm concerned about is it is that it reflects in part the politicization of the FED um and the fights, contentious partisan fights over nominees and who gets nominated and what they're what's expected of them and um. I think that's very concerning, and it's it's obviously a huge workload on the remaining three governors. I mean, we knew, we knew pretty much that stan was not going to stay around.

His term ended what will would have ended in the spring, and he probably wasn't gonna stay. So the fact that he's leaving is not a huge surprise. It's happening a few months earlier than it might otherwise have, but that's not a big surprise. It's it's the concern about who's gonna who's gonna be on the board, and what's the criteria being used to select him, and what's the criteria being used to to uh, um, you know, uh confirmed them and in the in the political process. And I

think that's the some troubling aspects to this. Obviously, these sort of questions about who will replace all these vacancies is of utmost important to investors. But I'm curious about what something you said in terms of the workload on the remaining FED Board members. I read today something that Lyle Brainer now on about seven different committees. What is that like for someone on the FED Board in terms of workload to have to carry so much? Well, I

the workload goes up tremendously. There are lots of committees that have things to do that go beyond just making monetary policy or regulatory poddle policy. It's a huge institution that where um, the committees and as you say, the Layle and and J. Powell, I mean all these people now are used to have workloads of not only regular workload, but committee two or three committees there were on and now they're on five or six and maybe chairing two or three of them. I mean it's um, it's it's

almost a distraction in some sense. And therefore makes that makes it harder for them to focus on policy issues in some in some cases than it should be. I wonder about the structure structural changes that we've seen in the economy, not only here but in Europe as well around the world. Is it still um do you think two percent is still a good inflation target? And is

it achievable as far as the core is concerned. Well, I think the actual inflation target, whether it's two percent, one and a half percent, one percent, two and a half percent, you know within a range there the two percent is is not um it's not that critical one way that what's critical is having a target and uh and not manipulating that target or changing it very often.

So I think that's what's the important part here. I mean, when we created the two percent inflation target, I was involved in that, and I would have argued for one and a half I have been perfectly happy with that. But um, I think it is achievable. I think it is um. Uh is important that in an international context that central banks around the world, whether it be the e c B or the or the Bank a Billion, that they have something close to the same inflation target.

All right, Well, great to get a chance to talk with you. Created that Charles Ploster, a former president of the Federal Bank of Philadelphia. This is Bloomberg June. We're back here on Bloomberg Surveillance. I'm Joe. Why isn't they along with Matt Miller, who's in form in from Berlin. Uh And I want to bring in our next guest, Greg Lemcow He's co head of investment banking at Goldman Sex Gregg, thank you very much for joining us here.

Thanks Joe. UM. In the wake of the election, I think there was a ton of optimism about deregulation and animal spirits and how this would get all kinds of business investments and deals and I p O s and stuff really surging again. I think some of that story in general has faded. UM, But what how is the landscape right now? Do people feel today about the deal making landscape versus say December? It's so it's interesting we've actually seen UM. I'd say that the deal environment is

good and building momentum, you know. M and A activity year to date is roughly flat. It's up about one percent in terms of overall volumes, and the number of deals is up about six percent. So that the difference between those two has been actually a lack of really big transactions. You've seen a I think, you know, the ninth biggest transaction this year. The biggest transactiontion would have

been the ninth biggest transaction last year. And so we've we've seen a lack of confidence to pursue big deals. And that's a change and probably out of line with the expectations we would have had coming into the year.

And so, as you said in December, post election, coming into the year, you had a reasonable amount of momentum and optimism around in an expectation of tax reform, corporate tax reform, which would include some element of cash repatriation, of which there's a lot of US cash overseas that could come back in and be used for M and A, and then a much more friendly regulatory environment than I

think we saw under the Obama administration. And so most companies and boards had spent the first couple of months of the year waiting to get clarity on this, with the expectation it would launch a big wave of M and A, and that clarity just hasn't come. We saw a study out or we put to they're a study here at Bloomberg rather that showed deregulation could lift bank profit UM by about across the board, with Goldman sacts

about six. These are some UM calculations Bloomberg did with analysts and and banks disclosures and analysts um UH looks at this. Where do you think deregulation would be the most helpful greg, I mean from your business perspective investment banking, What could Congress do that would be the best for the bank and for a growth so MICUs, I've not seen the study. My guess is that most of the

deregulation will impact other parts of the business. Might might free up capital and allow us to deploy it more actively in our investing parts of the business or securities business within investment banking. I think the biggest impact the deregulation could happen is more going to be on deal flow UH and the greater likelihood of larger transactions, larger consolidating transactions happening, which tends to create clearly M and A and M and A fee opportunities. It creates securities

around that UM and financing opportunities. Sometimes it creates devest when they can't get all the transactions approved without selling off pieces. So it's the biggest impact on deregulation is likely to drive enhanced deal activity, which can drive revenue in the investment banking side of the business. Um. You know, it's funny because I think, like UM, obviously, the sort of traditional expectation is or Republican president comes in, you get this wave of deregulation, as you said, maybe a

wave of deals off of that. But this particular Republican president has some ways in which he's different. He calls out companies by name. He there are concerns when it comes to deals that perhaps his own preferences could get in the way of a deal, perhaps being chief among them the A T and T Time Warner deal, where people are concerned that his own political beliefs could be uh an issue or that's been a concern at times.

How does that play into this and does that go against or cut it, you know, as a cross winds against the sort of benefits of deregulation. Yeah, I think the biggest challenge UM or this administration is the lack of predictability. So I think you're right. I think the general wave of deregulation should be a positive I think again, the expectations at the beginning of the year, would there would be less regulation, a more friendly environment around transactions.

You know, heck, he had a president who wrote the book called The Art of the Deal. You think it would be friendly towards deal making. Um, But it's the lack of predictability that has people pausing. We'll see what happens on at and t time. Runner, I've got every expectation that deal closes, notwithstanding all the rhetoric around it. Now.

We heard similar rhetoric around Amazon Whole Foods because the key principle of Amazon also wants the Washington Post and people said it's not going to be an impact now that deal got approved, and so I think for all the rhetoric uh that we hear out there, you know, so far, the results have been reasonably positive. I think the more results like that we see put on the board, the more people would feel comfortable and confidant to go out and do transactions. What do you think about the

interest rate environment? How does that affecting your job? I mean, obviously we're in a fairly low and straight environment here, and we're looking at negative rates in other major markets that you play in does it make it easier to do deals? Yeah, the the the low interest rate environment definitely helps transaction activity. And you've got an unbelievable amount of capital available just in terms of the aggregate sums

for companies to do transactions at historically low levels. And so from a pure mathematical standpoint, almost every transaction that a company looks at that has earnings is going to be a creative to earnings for shared just by definition, because you can borrow money so cheaply. Well, and when when you when you are doing the math for a deal, um, what's your outlook like? I mean, it looks like the Fed isn't going to move as quickly as maybe they

thought they were going to. And it even looks like drag hands are kind of tied a little bit by the strength of the Euro. When you sit down and do the back of the napkin math on a deal, what do you factor in? So I think the expectation will be that will have a slow and steadily rising interest rate environment, um, but it will be foreshadowed well enough, and the increases will be will be slow enough and small enough that it's not going to create a rush

to activity. I think I think you're still at his historically low levels over any longer period of time. Uh. And people are able to lock in rates uh at transaction announcement as their ability to finance things immediately or put hedges in place to lock at interest rates. And so it's it's interesting. I think people are attracted by the low interest rate environment. They're not that anxious about

an increase in rates, although everyone expects it. But no one seems to be rushing to do a deal today because because rates are gonna be higher six months from hour, twelve months from now. Let's talk about I p o s because we had some We've had some high profile I p o s this year, most notably I would say Snap Inc. Which has been a real flop since it got on the public market. Blue Apron not that

big of a deal, but also a flop. And then some of these silicon valleys, so called unicorns that people are very hyped about, uh, you know, losing some momentum or uber would be chief among them, at least a sort of internal issues, where do you see the I p O market? People always sort of see it coming back and then push back that date for in the big pipeline opens up. But what do how do these stories affect, you know, the prospects for more I pos.

So it's interesting. I think the expectation is that the IPO market will come back. It has been a lot slower to return, and I think a lot of that has been just the evolution of the private capital market. These companies, as as private entities, are able to raise significant amounts of capital and delay into for the need to go public. Used to have to go public to

raise capital. Um. There's lots of capital available. There's even secondary capital available um for lots of these companies, and so for the most part, they've delayed going public as long as they can to try to build their businesses

privately and they have not been constrained by capital. At some point that changes, And I think there's a number of of unicorn companies out there, really big private companies that will be attracted to the public markets that will come over the next one to three years, but none of them seem to be in any rush to get public. Is there anything unhealthy or bad about that development that companies can get much bigger and stay private for longer, or is that just you know, markets change over time.

I think it's a markets change over time. I think there's there's lots of smart capital that's that's chasing those investment opportunities, including many of the public market investors who've crossed over to become private market pre I p O investors. So I think it's it's healthy. I think the companies would tell you it's given them the flexibility to build their businesses in ways that they might be constrained as a public market quarterly reporting business. And so I think

it's been healthy for the growth of companies. UM. But I do think ultimately for the public markets, there's value in being a public company, and these companies all recognize that and we'll get there. They'll just get there at thro own pace. Greg, let me ask. We got a lot of students who listened to Bloomberg Surveillance. I know, and your career has been a strong one. You're you're part of what a lot of people referred to as kind of a new generation of leaders. At Goldman Sachs

Um just promoted to run the investment banking unit. Um, what would you tell a kid who wants to get into banking today? What should he do? Where should he go? Well? If he's if he's talented, if he or she is talented's smart and hard working, I tell him to go to Golden Sacks. No, No, I mean do you want should he be IB should he go for trading? You know?

I mean we which area of financial So I get, you know, biased by my own history, but I would say I think there's no better job out of university than the the analyst job analyst program at an investment bank. I think the skills you learn, the ability to analyze companies, understand businesses, understand balance sheets, see CEOs and boards, and actually understand how companies work is second and none there. It's a it's a heavily war intensive job, and I

guess it is in two years. You may get four years of work, um, but the benefits you get out of that are incredible. In the platform it gives you either to continue on a career investment banking or to go anywhere else in the finance world or anywhere else in the corporate world is fantastic. So I I am, you know, again biased by my own experience, but I think that program for anyone coming out of university is fantastic.

All right, Greg Well, I appreciate the advice. Appreciate the time Greg lem coow Co had investment banking at Goldman Sachs. This is Bloomberg. Welcome back to Bloomberg Surveillance. I'm Matt Miller. Just dropped in from Berlin for a couple of days and was given the honor of sitting in this seat with Joe Wisenthal Um for the co anchor of What

You Missed, formerly a colleague of mine. I used to be on that show with him as well, so it's kind of a reunion of sorts, and I'm really glad to be I miss you two, dude, and uh, I say, Surveillance has been for years and years my favorite radio show, so it's great to be on here right now. I want to bring in a guess, a tool late. He is Deltech International Group c i O. And he's gonna talk to us a little bit about, UM, the outlook

for investment. I guess. I don't want to be callous, but during this kind of national disaster, a tool you're a specialist on emerging markets, UM, what do you think about what we see going on? I was the human cost is tragic? What about the financial costs of Harvey of Irma and the three other uh hurricanes that are that are they're near your home in the Caribbean. Okay, thanks for having me. So, I mean, we're we're at

del Tech. Weere global macro investors. So we look at not only disasters as you put it, that the impact from a temporary perspective, but also we look at where the global cycle is. And as much as these issues are significant, what we're really more focused on as investors is looking at the broader cycle. And right now we can see other risks that are uh, you know, not as important from a you know, from the perspective of the world, but certainly from the perspective of the cycle

that is where global growth momentum is going. We can see that I s M manufacturing data P and MY data from around the world is peaking right now that should lead to a temporary slowdown in growth momentum. We can see that liquidity conditions are clearly changing, not only with the SCB but also with regards to the FED, and that's really what we're more focused on right now.

But do you get do you get a significant boost in activity after a big storm or a couple of big storms we know that people go and start up on stuff that got destroyed and then that growth is kind of taken up later. Um. What about the kind of disasters that we're seeing now. Yeah, so you typically what you do see is a sharp increase in activity, but that's really compensate commensurate with the sharp decrease that

you see in activity when such events occur. Uh. And so we are clearly seeing a sharp decrease in activity on the back of some of the recent issues that were seen. So with regards to Hurricane Harvey, we've seen it happen. With regards to army, you're likewise going to see a sharp decrease in activity. So, yes, there's a

sharp increase on the other side of it. Um, But we certainly don't take the view that, oh, look, this is going to be great for economic activity, but because there's just no way at all the characterized that it would be great for economic activity. Um, any natural disaster tool. Let's talk about the global macro landscape. You mentioned some signs that momentum maybe feeding a little bit based on the p M, is that the financial condition might be

becoming a little less favorable. What about sort of political and geopolitical headline risk. So far, you know, we get these small blips, but they tend not to last very much in markets. Markets more focused on the economic conditions. We could we have a period where suddenly people really do care about politics, or really do care about the situation with North Korea to the point where it affects markets.

That's a that's a really great question, because what we've been saying in recent months and certainly since the last November is policy uncertainty, and there's a measure of policy uncertainty that we use. Policy uncertainty, not only in the US but also around the world has been declining quite significantly, and that's consistent typically with a rise in risk assets,

which is what we've seen as well. But we are in a period now that is very very calm as far as policy uncertainty is concerned, certainly in the context of some of the event risks that we have coming up with regards to the US debt situation, the event we have in Europe with regards to Brexit as well.

So we are expecting that policy uncertainty is going to rise, but taking a step back and looking at things strategically, so from a three to five year perspective, this economic recovery and expansion has been driven almost entirely by the

private sector, more than almost any time in history. We're just not really that reliant on the public sector, and we haven't been reliant on the public sector for the better part of seven or eight years in the US or indeed globally, and we measure that by looking at the amount of fiscal stimulus that's been added into economies,

not in the US, but again globally. So from a shorter term context, I entirely agree with with what you're saying, which is that we are in this unusual lull at the moment in terms of policy uncertainty, and we are expecting that to pick up as we move into the end of the year, and that has the potential to cause friction and volatility in markets. But from a medium to longer term perspective, this is a private secretory and recovery.

So what we're seeing in global growth, medium global liquidity conditions will ultimately matter more from an e M specific context where find you know, obviously this has been a tremendous year for e M after several years of underperformance. Is the has the nature of these economies changed since the last time that e ms were outperforming globally, such that they're more robust, say, less dependent on US or Chinese growth, and have more positive domestic stories. Look that's uh.

The simple answer is yes, things have changed. But with emerging markets, it's very much an idiosyncratic story, as in, certain economies have successfully restructured their economies. Certain economies have become less reliant on the US dollar liquidity in US dollar capital influence to fund themselves. But then there's other economies which simply haven't undertaken those very difficult restructuring steps.

So the simple answer again is is yes, we are seeing a more healthy emerging market environment courtesy of the fact that global growth has picked up, and their leverage play on that courtesy of the fact that liquidity conditions are quite supportive and they benefit from that. UM But you know, it really is an idiosyncratic argument as to

whether emerging markets has improved them. You talk about the amount of growth that's driven by private investment, UM, I automatically think of how much debt the world central banks are holding and the fact that they seem to be at least some of them about to start to unravel those holdings. Um, how does that affect your investment outlook? Look, that's a great point. It's a central tenant to our

investment outlook, So Deltech. When we manage money, we look at the inter relationship between global economic growth, global liquidity conditions or money supply, and global asset prices. And so what you're discussing is really hitting very hard at that second point, which is global liquidity conditions. As liquidity is withdrawn from markets and from economies, you start to see, uh, really carry trade sensitive assets, whether it's emerging mark, its

commodities high, your credit underperformed. So from an investment perspective, those changes that we're seeing in central bank policy have a huge impact on carry trade sensitive assets, which is why we're positioning right now towards more growth sensitive, productivity growth sensitive assets as opposed to liquidity growth and interest

rate sensitive assets. So if markets not I mean, obviously everyone is trying to figure out the exact timing of say the Fed's balance sheet wind down, whether it's this year early next year not totally clear. Are you saying? Would you argue that whenever it is that it hasn't fully been discounted the ramifications of what that will mean. Well, it hasn't been fully discounted because there's still a lot of uncertainty is to not only the Fed's next move,

but the moves beyond that. And there's a lot of things that play in the US dollar liquidity conditions beyond the FED. Because money supplies and only driven by the FED. It's also an U S dollar liquidity is and only driven by the FED. It's also driven by the US trade deficit. It's also driven by the amount of credit creation of a monthly multiplier existing in the banking system. And so the feed is a really important element and clearly the biggest driver, but it's these other elements that

we're watching very closely as well. The dollar obviously has gotten crushed of late. In fact, I'm just pulling out the index real quick to see I think if we're down again today on the Bloomberg Dollar in decks, it will be the first time it's fallen for seven consecutive days since two thousand eleven. How does that play into what you what you do around the world, because, um, it seems against any currency, the dollars down, but there's some currencies have done strikingly well, um like the EUR.

So it plays in a lot. As global macro investors, we look across all major asset classes and all asset types, and so it plays into the extent of how much that weakness in the US dollar benefits carry trade sensitive assets, emerging markets, commodities, high your credit. But it also plays into our security selection in terms of looking at those companies those sectors that are beneficiaries of a weaker US dollar,

and also looking at global flows. I mean, there's certain markets where you've just seen flows out of, such as Europe because of some of the strength that you've seen in the euro which is starting to weigh on their domestic economic conditions. So it weighs on not only our investment and asset allocation decisions, but also our outlook for economic growth. So real quickly, from a global perspective, what region is most interesting to right now? To US? Number

one region is Japan. It's it's it's it's a leveraged play on global industrial production growth. It's deeply undervalued relative

to the US and relative to its own history. It's a beneficiary of the fact that oil is closer to fifty dollars a bottle than twenty dollars about that it has a high oil imports as a percentage of GDP, and longer term, we're very focused on this idea that productivity growth should come through and Japan has been doing that and automating since their demographic bubble burst, so they are ahead of the curve on that front. Alright to literally del tech international groups. Ci Oh, this is Bloomberg.

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