U.S. Markets Are Ignoring Risks, Yale's Roach Says

Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course, on the Bloomberg We've been aving this morning a spirited discussion with Stephen Roach of Yale University his wonderful book The Next Asia Francine. Why don't you jump in here with Dr Roach? I was you know, I guess got so much FaceTime with him on television. Why don't you lead it off here this morning? Oh? Thank you so much, Tom. Gentlemen, Tom, Stephen Roaches want to

hear once a year. I'm going to take advantage of the Stephen Roach. Um. It was great to speak to you on TV a little bit earlier from Yale University, from our uh Morganstown. They give me a sense of what you're seeing out there that the market is miss pricing. So we're seeing a little bit of movement on yield's political concerns, We're seeing a little bit of dollar movements up higher, and yet we don't really have the economic plan of President Trump yet. Well you're getting close, Francine.

I mean, the markets are ignoring, possibly miss pricing or possibly brilliant in being able to anticipate what these policies

are going to look like. And there's there's a fair amount of uncertainty that will be resolved in the in the next few months over the direction of fiscal policy, which is very very important for the market outlook, but for this whole um complex of geopolitical, global trade and political shifts that are at risk I think of coming into focus, uh in a way that leads to a very disturbing conclusion for the global economy and the markets

that ultimately will be shaped by the global economic backdrop. So, you know, markets are it's a one way bet right now in terms of US equities, the dollar, and implications for other major currencies around the world. Uh. And uh, you know, the history of markets suggests that one way bets don't always end in a particularly easy fashion. Why Mark, It's largely ignoring all the risks out there at the moment. It's um you know, it's it's a study in human

behavior of belief in um. Uh. You know, the message as opposed to the reality. We've had a real political upheaval in the United States, followed by similar uh disruptive political events in the UK and potentially in in in Europe. Uh and uh. As those political upheavals sort of shatter our view, the markets want to say, wait, oh, wait a second. You know the guy is pro growth and growth is good, and you know we'll but we'll buy

growth and uh, you know, it's a it's a knee jerk. Ultimately, I think an overly simplistic assessment of the prospects that are out there. Is it a guilded age? And do you see any end of the guilded age? I go back to the backdrop. The president has that bright gold back drop. I know we got that idea from you when you used to give press conferences in China. But the idea of a gilded age gold back dropper or others, how do you get out of that? How did we

get out of the first guilded age? I believe we did it with the war. Yeah again, Tom, You know, these periods of excess don't always uh, and in a in a rather comfortable way given given the widening income and equalities, the polarization society and political systems, there's a

lot of tension that is building right now. Uh. And you you combine that with a theme we talked about on television this morning, this um America first emphasis on protectionism, and it does have some unfortunate antecedents in a in a darker period. It in our his from the talk of the moment, and folks well deserved. I can't say enough about commentary magazine Nicholas Eberstat, where he talks about the cultural fabric Steve Roach of America, even going into

our new reduced life expectancies ever so slightly there. I don't want to overplay that the opioid crisis that that's so much of America is facing. Is it a miserable century that we're in? Well, you know, I've certainly been accused of being um from time to time, overly negative in my assessment of the world. But even I am not gonna extrapolate for an entire century. I think what the Everstat piece UM identifies are some real tensions in

the social, political, and economic fabric that must be addressed. Yeah, I'm Francy. I want to point out that Dr Roach is pushed more than anybody breathing against hard landing in China. He loves to play the doom and gloom pessimist that he is, but he's been the arch China optimist all

the way. Yeah, and you still are. But we're looking. So. I have a Bloomberg story today which is amongst our top breads for our Bloomberg terminal customers, and it's saying China maybe about to embark on a very ambitious and very perilous campaign to convince investors that they shouldn't depend on a bailout when markets go south. How do they convince investors that China is safe when it comes to

their investments? Well, what type of investments are you? Are you referring to, like domestic investment for asset management products, right, which may make it clear that they don't have government guarantees. Well, you know, there there certainly are some moral hazard risks in China, whether it's the wealth management products which has been very very popular in UM the last few years. UM or whether it's the the state on enterprises which

continue to get um enormous support from the government. And in both of those areas, I think, um, if the government is going to put a floor under the uh, the asset values, it's also going to interfere with the efficient allocation of capital, which China needs to go to the next step of its development journey. So I wouldn't say, uh, you know, this is particularly good news for a rebalanced,

more of a market driven Chinese economy going forward. If in fact this is correct, is it a zero some society? I want to come back and talk about the bigger immigration picture and some trade theory here. But you know, going back to Ricardo, we all read it cover to cover. It was always a difficult read. I thought to read the original Ricardo. But from the original Ricard to where we are now, is it a zero sum society? Is

it just mercantilism that's going on? Well, you know, the big globalization debate talks about you know, massive poverty reduction over the last fifty years, and um, that is there's nothing zero sum about that. That's a positive sum development. And and you know, as poverty has been reduced and his education levels and once impoverished countries are increasing and work where skills are growing, then there's a lot of competition to do the things that we used to do

and we used to do alone. And you know that, coupled with a secular decline in our manufacturing sector, has created this drumbeat for viewing the world in a tougher zero some way, and that's unfortunate. David G. Francie Laquire very kindly has come in for our American four day work week. Um, Steve Roach with this, Stephen, it is the President's day. I believe the papers is February twenty seconds. You know the number of younger people, Stephen Roach, that

don't know. February twelve is Lincoln's birthday and today is the first President's birthday. It's just because you get both those days off. We were in school. Martin van Buren did that. That was when you were in fifth or sixth grade? Was no, I voted for him? I'm sure you did. Time. I just need to correct one answer to the question Francy asked me on the wealth management

issue in China. I misheard her question. It looks on the basis of the story that the government is going to really introduce more of a two way risk perception into these markets. That's a good thing. And I think I missed it and said the office okay, okay, well that's a good We call that a surveillance correction, which we do I do too often. Fancy has never made a mistake in her years here. That would be true,

um Our President. I just got a note from Mike Well in Austin and he says, dr Roach, please discuss the border tax. It's tossed around like you know, a tequila whatever one of Michael and Austin's parties and sware's what does a border text due to this nation and due to the fabric of our trade, it's it's another you know, in this long stream of protectionist moves Michael in Austin. It taxes imports UH and UH subsidizes exports.

So it's a functional equivalent of raising the price of goods that we purchased from overseas under the guise of well everybody does it, well people, not everybody does it in in the fashion that's being contemplated by the tax

reform measures of the U. S. House of Representatives. UH. And so when you you couple this with the the other UM initiatives that are being talked about, whether it's currency manipulation, charges outright tariffs on major training partners, backing away from TPP, renegotiating NAFTA, building a wall, the America

first mantra of protectionist trunk administration UH. It's it's part and parcel of the same UH story and inward looking isolationist America that UH is not facing up to the consequences of what this means for the prices of goods purchased UH in UM Walmart's either UH in stores or online or uh in in in broader platforms. So this is a real reversal of the forces that have been shaping and driving America's role in the global economy over

the last thirty five forty years. Stephen, is there one initiative from the new administration that you would applaud or that or that you would use well and and they haven't really rolled out fancying any initiatives yet that we can speak to. There's there's been a lot of feelers

and ideas that they've talked about. And so when when the President gives his State of the Union message next week to the Congress will have a little bit more clarity in terms of concrete proposals that he's looking for. Can they do anything? Is there anything the good that could come out of the tax reform? Well, you know, I personally, I think that the the debate that we're having right now in tax reform in the United States putting the relief of corporate America ahead of the UH

the queue here is is misplaced. UH. Corporate profit tax Corporate profits are are high, corporate profit taxes are low if you look at them historically. UH, there's an image that UM is being painted of a US business sector that's lost its competitive edge, that we just you know, have dropped the ball, and that's why we need protection. Yet, if you look at the results of the World Economic

Forums competitiveness sweepstakes, we're at number three. We're behind Switzerland and Singapore, but you know, big deal, and we've been a number three for a decade. We we don't score well on taxes, but we score well on innovation in our market structures, and UH, you know, we're as competitive today as we have been UH in in a long time. We don't need special uh protectionist measures to UM UH enhance our role in the global economy. Steven Rhodes, thank you for the time to the dr Roach is at

Yale University, and this is a great pleasure. He has single handedly taken credit for the victory of the Chicago uh Cubs joining us. He is Chicago, Sam Zell, where were you in the Chicago Cubs? Were you at the park the night they wont No, I don't. I thank you for the for the compliment. I don't take any role in that. I owned the Cubs for a while. Yeah,

for a cup of coffee. You owned him. And it's just great for the city and terrific, terrific for this is an historic day, and like there's always good days to talk to Sam's l and you and I should talk about commercial real estate. We should t talk about internal rates and return Maybe we'll get to that. I'm looking at the cover of the New York Times or the cover of Chicago Tribune. Your parents showed up in Chicago from Poland two years before you were born, right

four months four months before you were born. You you grew up in all American immigrant household with great academic achievement in etcetera. Through your filter, how do you observe Trump immigration policy. Well, I'm a big fan of immigration. I believe that immigration is a self selective process. So in effect, the people who have the guts to leave where they are and start anew our entrepreneurial stronger and have been the core of what I built this country.

Can you affect policy as a president suggests to throw the bums out and keep the grain producer from Poland that prospered in Chicago. And I believe your sister was a valedictorian as well. How do you keep the zells and throw the bums out at the same time, I think my parents came to this country legally. They followed all the procedures and they did what it took to get a visa. I think the importance and of America in the past and in the future is all about

the rule of law. And consequently, I think we can't we can't have a two systems where half two people apply and and become uh Green card or whatever, and others just do it so illy like. That's the challenge and it's a serious conundrum. Mr. So let me bring in my colleague in London, Francing Laqui, with us this morning. Francing Hi, Sam's l I see it tire with exit. I hear it is here with marine lupin in France. Why is it easy and why is it acceptable now

to bash the foreigner. I don't think that this is a bashing of a foreigner. As far as the United States is concerned, I think the challenge in the United States is what do we do to quote, make our country a rule of law and have everybody abide by the same rules. I think that's the issue in the United States. I don't think it is foreigner versus the

anti foreigner, but what do the economics tell us? So I'm looking at some research saying that actually some of the moves the crackdown on undocumented immigrants, first of all, will strain a very tight US job market, but also would cost economy some five trillion dollars over ten years. I'm not familiar with the statistics that you're referring to, but I would yes to you that I could come

up with other statistics that would show other objectives. I think when it's all said and done, the question is what is or isn't legal? And you know what precedent do we say? Uh? In the past, we've had administrations that have ignored the issue. That's why we have as many illegal immigrants in this country as we have. I could go for hours with you, but I've got to ask about commercial real estate. Your first property was until you don't right, um afrihanah, Yeah, I mean a few

a few years ago. Can you do commercial real estate in the financial distortion of our low rate environment? Or is commercial real estate heading for another crisis because money is free? Um? I think the answer is yes, you can be in the real commercial real estate business in this environment. I think low interest rates might encourage people to do things they shouldn't do. I think the issue in commercial real estate today is not rights but availability.

And we are growing our commercial real estate size in this country very significantly. I mean we're I think in two thousand and sixteen we uh started three hundred and seventy eight thousand multi families. I believe if it's not the largest single year in history, that we're seeing that in New York City right now, Sam's I gotta ask one final question. The bloodshed and your Chicago is a

national tragedy. Everybody's focused on it. Take me away from the political rhetoric, what do the people of Chicago want is a solution to the gang violence in Chicago. I think the in the whole issue is extremely overstated. Yes, there is very serious gang violence. It's very serious, uh killing of people. But the impact on the rest of Chicago, other than this very narrow area is relatively limited. So I think it's much more a story of the press than it is, uh, you know, some kind of degradation

of the city. The city is operating beautifully and frankly it's one of the best places in the country. List to speak to you. Sam's eel on this day of an immigration to paid across all of America. Mr zell is from Chicago, brought you by Bank of America. Mary Lynch dedicated to bringing our clients insights and solutions to meet the challenges of a transforming world. That's the power of global connections. Marylynch, Pierce Federan Smith Incorporated, Member s

I P. C. Francine. I see negative yields and I see a little bit of migration negative in Switzerland is well. And the linkage to euro what would it mean for a parody euro Franccene, Well, I would mean that people believe that the Fed is ready to hike rates pretty soon, and they believe that something ugly will rear its head here in Europe. So what would it take political risk people, I guess getting you know, freaked out about the Eurozone possibly breaking apart, or the election of Marine le Pin

or something happening in grease. Yeah, I like the way you put that in this, folks. It's not just about the euro, but it's always pairs in dollar strength. Off of February one is two point one percent up on d X well excuse me, yes, and d X y the blended currency. So we're not out to the dollar strength at the end of the year, but we're getting

there quickly. Stewart, where they're where this with b mp uh Perry, but inequities and deruveds right now all of a sudden, negative rates Again, is this negative rate conversation different than the negative rate conversation of a year ago? You know, Tom, thanks for having me on. I think it really is, especially because now we're in an environment where potentially, you know, over the last few years it's been a policy divergence environment where we have really the

FED being the only bank heading towards normalization. But now we're in a situation where um, yes, there's a you know, access risk premium embedded in a lot of these zero assets because of the French election, other things kind of on the horizon, the German election, the Dutch election, etcetera.

But you know, as we go to the end of this year, we're going to see that the Bank of Japan is uh, you know, potentially raising its tenure target, the ECB is potentially tapering towards you know, kind of picking up that conversation in September and December, and we're in a we're in an environment where it's really a two sided coin, what rather than a one sided coin for the last few years. I mean, I mean within this is the whole jumble of oil and the equities.

But the overwhelming observation is equities are a movie shot. I mean, that's your specific focus. When we talk about convexity or acceleration in a given curve. How accelerated is equity the equity vector right now? Is it like you've

never seen or is it just another bowl market? So I think one way that we gauge this is kind of you know, when we get to these levels that are so elevated, we go back all the way to the basics and think, Okay, let's look at earnings expectations, and let's look at multiples um and then compare that to where where we are on a spot level right now. And what surprises me is that the dividend futures, which are a great way to kind of gauge the market's

risk adjested expectation of earnings over the next few years. Uh, these have actually outple formed equity spot market. So if you look at the dividend futures contract, it's pricing in eight point three present a competent annual growth rate. So if we apply that to earnings, we get to somewhere around a hundred forty dollars a share. And if we apply a seventeen a half multiple to the equity market, we get to something like now that gives us about

three and a half percent outside. So I think we're getting to fully priced. But if you kind of put all these things together, if you have a constructive view on tax reform, then the equity market still makes sense at this point, right your how do you model the trade war? Right? And what I kind of understand is the market doesn't seem correlated anymore. You have a two year yield in Germany at a record level in negative territory, and then on the flip side you have these record

highs for U S equities. It makes little sense if you look at risk capitite. Yeah, no, I understand that, And I think part of this has to do with the fact that UM, head of Brexit, for instance, all risk assets around the world, UM, We're sorry, access risk premium was kind of price into all assets around the world, and that's what's happening right now. So that's what's happening. You see in the V two x curve in eurostocks, which is essentially eurostox equivalent of the Vick's futures curve.

You also see it in German to your yields, but you don't see it in US equities because potentially the spillover from a French election fallout or something like that is not necessarily apparent on how that would happen in the U S at least, So I think this is a really good way to think about it, at least as far as kind of pricing this excess premium V

two x March April May calendar spread. So if you look at the two times the April contract, one times the March contract, and one times the May contract is pricing at thirteen points. Ahead of Brexit, that was only pricing at eight points. So what is that signal? So the market is extremely concerned about a fallout from a French election, but only in European assets. That's not being priced into the U S curve. That's not being priced

into really anything else outside of Europe. All right, but how do you measure if you look at earnings and let's not talk about tariffs, but let's just talk about a dollar strength. Let's talk about people being a nervy in America first, actually meaning France first and UK first.

That should automatically impact your models when looking at earnings. No, exactly, So you know, I think the rule of thumb that we operate with is an increase in the trade weighted dollar of one percent yields roughly in earnings response in the negative side of just under fifty basis points. So um,

that was a key concern. However, what I think is different now than versus maybe a few months ago when the Trump shade really started to gain steam, is that real rates have actually gone down from their peak they're down about months from their peak, and that's keeping the dollar sub dued. And this is this is brilliant And the heart of the matter is is the rate of

change of the inflation dynamic versus the nominal dynamic? Are we going to get a set of outcomes as you've just described, of reduced real wages because wage growth doesn't go up as fast as inflation goes up. I mean, nobody can control or time inflation. Maybe maybe sure yelling can, but nobody else. But as a joke, folks, but the basic idea here, as you've just observed, is in the inflation adjusted space, you get some really bad outcomes exactly.

And this is what actually is surprising me in the fact that the energy sector is underperformed year today, discretionary consumer stocks have actually outperformed. And if you look forward a year from now, what really is kind of the risk scenario is that headline inflation goes higher, core inflation moves slightly higher, and then real wages are actually compressed. Exactly what will it mean for oil BNP Perryabo has

done a lot of work on this. Yeah, so actually, right now, what's interesting that the market is if you look at kind of positioning in oil, it's extremely long, so like net managed money is extremely long. And on that basis, um, you know, I think there was an interesting statement today as far as from Tall CEO regarding the need for OPEC to continue their supply cuts, um and so on that basis, it's it's a situation where

oil can trade sideways even slightly positive. But this could be actually massively positive for oil producers, especially given that there have this positive convexity when oil prices are above their break evens. You got ready to phrenzy, this is critical, Stewart. Further BMP Perry, you have to take the cool a you're supposed to say in the Totel interview today led by your John Michelis. Wait then that's how you do it, okay, Frenzy, all right, thank you for the correction. There's a shameless

plug from our very own Tom Keene Stewart. When you look at oil, how much does OPEC actually have to cut for it to make a difference given what we've seen with shale oil. Well, you know, I think that's

the key question. So far, it's been a net positive, but you know, part of the issue is, especially when you're looking at uh, you know, non OPEC cuts like Russia, for instance, there is a massive seasonal decline that generally happens in January, and I think that partially helped in the overall compliance UM as far as cuts so far. But on a going forward basis, we have seen a massive response to supply response which is likely to continue

both in the Permian basin and in golf oil production. So, you know, I think if we look at like the last i e A estimate, expectant production in the US was supposed to be up about a hundred twenty thousand barrels a day seventeen and roughly three hundred thousand barrels a day UM. But I think the risk is to the upside in this scenario, and in that scenario we could have multiple years of range bound prices. This is brilliant.

We're gonna come back. Stewart were the folks. I really hope you like this if it's a little bit technical what he was talking about there, but sometimes I let him go. He's so damn smart that Global Wall Street loves it. And maybe it's the idea that we've failed and it got a little bit too technical, But nevertheless interesting on the equity markets, there doesn't seem to a belief. Does sentiment matter to a guy like you? And what

is the sentiment right now? Um? You know, it really does because in an environment like this, it seems like the market. You know, when the market breaks out and starts trending, there is a degree of serial correlation on the market, and all of a sudden, UM, you know,

trend following becomes more important than potentially macro fundamentals. However, UM, I do think that a number of things such as sent positive sentiment about fundamental factors such as both you know, UM upticks and p M I s better GDP that folds into it when you dovetail equity research into this, does that good feeling actually fall down to a better free cash flow? Um? It does in the sense that

corporations do more capex right. UM. One of the things that was suppressed during SEEN was equipment investment and structures investment, and that was one of the reasons why UM, you know, g d P UM was not stronger than it was even though we had some very strong personal consumption measures, and that very strong was that the Q three export sprint. But aside from that we saw that, you know, investment

overall this very week. Now, if that picks up because of better sentiment, because of better intentions to UM to do CAPEX, then I think that has a positive implication on the bottom line and a positive implication for SMP rings. So on that basis, it is it is something that matters, maybe not as much as hard data, but it is a great forward looking indicator. But Stuart, what would be the catalyst of this? We can go back to animal spirits.

You spend capics when you feel very comfortable about the future exactly, and I think you know in the U S at least that is somewhat being constrained by the fact that we don't have a good outlook on what infrastructure spending plans might be in place or what kind of tax environment will be in But you know, the expectation is that both of those environments will be better than they were right And if that's the case, then there still is potentially some positive ramifications UM before we

get a final view on what these items might look like, and when do you expect these animal spirits and so that this capics to actually start when we can see it in the numbers, does it take six months from now or a year? So, you know, as far as corporate taxile form, that's something that I think the market

is beginning to price in. As far as happening in seen but effective in and as far as infrastructure spending, I think this is actually one of the key areas that potentially could have a disappointing effect on markets as it may not be larger or have as much take up as expected. But our economists are actually really pricing that in twenty rather than seventeen, so it's still kind of a year ahead. And that's what I think we

see as well. You know, as mentioned before in dividend futures, where the pickup in growth, the compundent annual growth rate for eighteen is higher than it is in seventeen, which is higher than it was in twenty sixteen. So is going to be the climactic year. As far as um both corporate tax reform and infrastructure spending potentially meeting together within your mathewness, can you pick a correction? Can you

pick a bearer market? That is the million dollar question, and I think, um, you know, the corrections that we've had over the past few a few years have been very event driven and related to a single asset class or a single driver. For instance, you know, in two thousand fourteen it was the high yield market um crashing um. In two thousand uh sixteen, it is the fact that we had a dollar strength weakness, the same thing in two thousand fifteen as well for that matter, And then

we had a couple of events like Brexit. But as you see, the kind of the half life of the events continues to shrink and shrink and shrink until all of a sudden we got to the election and it's just an overnight move to John Michael twit's interview whether to tell ceo or for you know, our Buyer interview today. That was hilarious folks that the new CEO from Buyer suggested he hadn't taken a phone call from Mr Buffett, which I thought was was was really was outrageous that

I brought that up. I was so rude. But Stewart, what a shock Stewart uh to me? The corporate guys are almost reviewed removed from the politics news flow. Do you buy that idea or will it finally come back to haunt him? You know? Um, I think here's here's a little anecdote. I was actually listening to an advertisement will listening to surveillance the other morning. I was listening

to an advertisemental life. I hope Cone Resnick it was, I think actually, and there was an advertisement about you know, talk to us and will help you guide you through

the tax reform. And I think, for I love it an impact on the real world outside of a Wall Street analyst research report, and I thought from that perspective, it is something that you know, if we're spending I'm spending this much time talk thinking about it and putting together custom baskets and trade ideas around tax reform, then I'm sure CEOs are thinking about it as well. And so you would suggest that people go to Cone Resneck Accounting Tax Advisory, uh so their business can break through.

Cone Resneck can help guide Stewart Worther and b MP Perry forward find right by doing Okay, I think that was the gist of the that was called the shameless plug in this world. Stewart Worther, thank you so much with BEMP Perry. And of course I might point out Mr Whether is not advocating that BMP Perry or others a tend Cone residec we'll do that for you. We think Reisdick for their support, and we think Stewart Worther for smart, smart conversation on oil and on the equity markets.

Vincent Reinhart joining us right now is standish as we dive into the economics and we've not done enough in the FED. We need to circle back to that. Vince wonderful to speak to you. The the immediate surveillance debate is a well known vice chairman telling me that we're fully employed in a large number of economists pushing back and saying, no, we're not. Why does the FED look at conventional statistics that discuss and observed fully employed America

versus the reality that so many Americans see. They're conventional statistics for a reason. They helped explain the Kime series relationship between resource flack and inflation. And in some of the sense, the FED is looking under the lamp post to find its keys. Uh, it works. It is true that you know, Cherry Yellen has said on many occasions

there's no single measure to summarize labor labor markets. But at the end of the day, UH, something beats nothing, and the conventional measure of unemployment helps explain inflation in the US. But the idea of two America's, I mean, it's not the unimodal single mode state that you worked in school. There's two stark Americas out there, isn't there uh,

no question about it. We've had, you know, increased inequality, we have a marked decline in labor share of income, uh, And that there are dislocations associated particular with the form of our technological progress. And in some sense, I think the big story is when the pie is not growing very quickly, people arguing more about how it's sliced up and potential output is growing slowly on the order of

one and a half percent. Both Terry Allen and Vice Terry Fishers, you know, uh, you know noted that it's it's fundamental to the political discourse. Vincent, talk to me about how the FED would look at these Donald Trump deportation threats. After all, I don't know whether they would, whether the crackdown would put a strain one and already taught US job market. So I think there's a couple issues there. The one is what does it mean for

the macro economy? And the second is what does it mean for your assessment of risks for the maclar economy, Why is potential output growing slowly? We have an aging population that isn't increasing that much, and we're not adding much to output per hour. If you are deporting people, you're actually making the labor force grow even more slowly. And so that's not a recipe for growing the economy faster.

So that's the macro part of the story that, however, in the scheme of things, is small because we're a big place. And uh, even if we deport people at the rate of the Obama administration, it's going to only change the needle pretty slowly. From the cold blooded macro calculation. Uh, the more uh, immediate concern is about risks. What does it due to um investor's attitude toward risk taking? What does it do to foreign investor's attitude towards the for

the US? And remember, you know, over the last couple of years, the FLMC on several occasions heighted highlighted heightened geo political risk or heightened of financial strains as a reason not to deliver policy renormalization. So I think it's at the risk part that is more considerable, Right, And Vincent, what does dollar strength, or does the dollar strengthen from here? And what does that mean for FED policy? So dollar

strength is the good news. It's a mechanism and a market economy in which you get to share some of your strength or your trading partners. The reality is data have been running on the strong side. Uh, look at the Bloomberg Surprise Index. Economic data have been running stronger than economist expectations. We're growing stronger, we're sharing some of trading partners because stronger growth is kind of associated with a tighter fit policy than you might have thought a

couple of months ago. Why should you listen to Vincent Reinhardt. He drove research for Chairman Greenspan and did it grinding out research item after research item at the FED. Tell me about just Vince just quickly here, Mr Orphan did a series of papers. I believe it was under your watch about the toolbox and the tool kit that any given central bank has. How how did those papers come about? It is a toolbox still extent. Well, luckily Athanacio has got to use him because he was voting on ECB

monetary policy when the Governor of the Bank of Cyprus. Uh. And it was a lot of staff working on it for a couple of reasons. One is, we saw the Bank of Japan's brushed with the zero lower bound in the in the first party exactly the century after basically a decade and a half of bad macro economic performance,

and that gave a spurt of research. Uh. Also, remember that there was a new governor around that time, namely Ben Bernanke, who had a abiding interest in the topic because of his experience economic history, which turned out to be a good training. I'm gonna put this chart out folks on Twitter. I'll use it on TV tomorrow and in Facebook Live if we do it today. On remorse, and that is that Bank of Japan got the call wrong on inflation. Okay, Vince, I knew you were going

to go there. And it sets up beautifully the debate right now of March versus September. Goldman, Sachs and Janahatzis are talking about shifting the probability over to March. Morgan, Stanley and Ellen Zetner flat out don't agree, and they're looking for a delay, don't. I don't care about the guestimate of you on the parlor game. But set up the distinction between a March action in waiting, waiting, waiting

until September or even later. Okay, if you tighten in March, then you've got three more press conferences in which you can tighten some more. If your ambition is to close the committee up, then you probably want to delay the first action. It's as simple as that. If the passage of time, UH, the FLMC is indicated they'd like to

tighten about three times in two thousand and seventeen. I don't put a lot of weight in that, because they also told us they had wanted to tighten four times in two thousand sixteen UH and intact in the event they tightened only once. So the key issue is if you were a chair Yawn, if you were FMC Vice chair Dudley and probably would prefer a more gradual pace of renormalization. Can you slow up the committee when you can?

And March might be an opportunity to slow them up, because the more you backload the tighten names, the more they may never come events. Do you worry about inflation in the US, And if you do worry about inflation, would it not make more sense to start tightening earlier rather than later. Well, if you were worried about inflation. It might have made sense to tighten in two thousands, fifteen or sixteen. The fact is you can't look at the January print on the consumer price Index and not

be concerned. We've got core CPI and headline CPI above the f mcs UH prefer goal of two percent. Yes, I know it's not their preferred measure, but it predicts what they're where their preferred measure will be headed And so there is an issue how uh and by most estimates were we've exhausted all resource slack. But the bottom line is at the dollars appreciating some uh, the effects on resource slack on inflation is are pretty gradual and seem to be attenuated over the last decade or so,

so they probably think they have some time. I do think inflation is gonna overshoot. That's why we're telling our investors that break evens are are are are still an attractive investment. Uh And but it's a risk, and it's part of the reason why you have a lot of effluency participants trying to tug their chairman along to the tighten more right, what is the one what's priced in

the dollar right now? Are any trade wars priced in a tough question because you have you know how much of it is already there and how much of it is more to come. You can't look at the Mexican past so and not think that that there is UH, you know, concerns about trade UH embedded in that price

more generally, don't think so UM. I think the key issue here is how much of President Trump's interventions in trade are going to be on a case by case, week by week UH dealings with individual firms, and how much of it is going to be in across the board taraful border adjustment tax. If it's the former. If it's case by case, then the equity markets mediate that the price of the target very If however, it's tariffed in,

the exchange rate's got to change. Won't you start changing the exchange rate your effective balance sheets as well as tradefo was Vince? Let me ask one final question for my good colleague Michael McKee, the idea of how politics in the regime change of Cherry yelling out vice Chairman Fisher out whatever. Later in the year and in the early two thousand eighteen, does that fold into rate timing and just the daily posturing of good people at Defense.

I don't think it influences Cherry Yellen or Vice Chair Fisher's decisions in the least. I think that it. Uh it will matter when people actually show up at in board seats because they'll be voting and they'll be influencing, uh, the FMC president. So it's gonna matter over time. But they're not doing any strategic rate setting based on their knowledge that they won't be there in a year. Vincent, Thank you so much. Vince Reyner with Stanish mellon this

morning out of Boston as well. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm out on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio, brought you by Bank of America Mary Lynch, dedicated to bringing our clients insights and solutions to meet the challenges

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