We're Concerned About Fixed Income, Cohen Says

govern into the Japanese yen. We have a one oh seven handle on Dolly yen. We dropped to one oh seven spots sixty four, down by one four percentage point almost. And to round things out, in the treasury market for you, yields creeping high yesterday this time yesterday now lower by about three basis points to two point eight eight percent. And for the vix watches out there, Tomkine being one of them, we bleed higher back to seven handle on

the VIX. I'm really placed to say that joining us now is harm band holds of course the UNI credit chief US economists, or not just the year ahead, but on as well. Harm Do we need to start thinking about already. Sure. I mean, it looks like two thousand eighteen is shaving up to be a pretty good year for the global economy, for the US economy, um not

not least two to this huge fiscal fiscal deficit. But you know, then you talk about next year, I think, what is what the fiscal similar is doing is bringing some gross grows forward plus next year, the the recovery will be one of the longest on record. And and we we are worried that growth starts to slow down next year and we may actually downturn in two thousand and twenty, which makes in well not least yesterday's budget forecast by the President. You know something that looks way

too rosy. It's the good news becoming bad news. Your colleague for in Europe, Eric Nielsen wrote the following eye of the weekend, what if the conclusion of the effects of the tax concer is wrong? What if markets attention has shifted to see the tax bill as a big piece of seriously irresponsible policy, with a key effect being

high yield. It's it's an important question to ask, are we seeing a shift in the interpretation the market bias towards what we're saying in the United States that there was a bit the impression that we that we had over the last several let's call it weeks. You know when when better numbers both on the inflation and economic front, I mean better meaning higher numbers on the inflation side were interpreted by the market that the FETE may actually hike more and that at some point started to scare

market participants. So so yeah, you're right. Um, if we also talking about tomorrow's CPI print, I would think a higher number would be worse for the markets than a weaker number. Her bundles with us the Cretic. Good morning everyone, I need to rip up the script, folks. This is so profoundly important that we've got to do it. We just heard the gentleman from England says the gentleman from Americas as Adidas. We would not What do you say in your Germany? Is it really ADDI Das or do

you say Adidas? No, it's Adidas. And are you offended that I say no, I got used to it here. You're the only one that cast about this time. No, No, this is like you know forever, folks, and we you know what we do in surveillance is whichever fractured language I wanted to do. When I say Sheffield or you know the unpronounceables in England, I written Lester very good and and John Farrell. You know Addidas, that was very good. Okay, thank you. That's an import into the United States. Audi

Das is coming here. Tell us about the import dynamic of Adidas shoes and BMW's as well well. I think BMW is first of all the biggest car export of for the U S as well. We must not forget that, thank you. So with all the best thing about all these foreign companies, we must not forget it's its biggest plant. It's on the East couset somewhere. All the all the X models, I think all of them are produced here, and well they are. They're doing pretty well. You nail

as you do harm. You're famous for this. You nail it with facts. The shock like BMW is our biggest X. We we we try to convey the message that facts still matter. So so yeah, it's important. We can, you know, as economies, we just can't help looking at these numbers,

and and some from time to time emphasize them. But but to your question, um, the US problem, as we know, is a huge trade deficit, current account deficit, and if you look at the real trade deficit without petroleum goods, um we have just hit a new record high in terms of deficit. So the situation has never been as

bad as it is right now. And then I mean that has in part to do with import dynamics, because we have we talked about we have the fiscal stimulus, which supports the domestic economy domestic demand, and part of that additional domestic demand is satisfied by increased imports. At the same time, the global economy is also doing very well. But the America's real problem is that is not exporting, that is not producing the stuff that the rest of the world really wants. So in other words, it's import

necessity is much bigger than its exports ellisticity. So it's so so with that in mind, harm to what extent does the weaker dollar of the last twelve months plus rebalance the trade deficit? If it's so, yeah, if it well, it helps out to margin, there's no doubt about it.

But I think the impact is relatively relatively small. I mean, we must not forget the US has had large current account deficits as well, when the when euro dollar was at one, you know, so that shows us that there's much more to it to the issue than than than just the currency. So the currency is always seen as the easy fix, but it doesn't fix it, you know it. It helps to mitigate the impact. It makes it looks a little bit better maybe, but overall there there there

are underlying problems that take much longer to fix. And that's why I think politicians always try the not not always sometimes try the easy way out. There are two deficits to speak of, and the trade deficit is not the one on everyone's mind right now. The deficit on everyone's mind right now is the budget deficit. Why all of a sudden has the budget deficit become such an

issue for so many people? Harm? Because what we are seeing right now is is, I would say, is probably the most reckless deficit that the US economy really has has had. It's not the highest, but I mean there were periods, the periods where we had higher deficits where

we were also facing big crisis. Right now, the unemployment rates at four percent, We are at or below full employment or very close to whatever um and that is the time where you actually should start repay some of your debt, right and what the US is doing right now, Um, we're not only not repaying that, but we are blowing up the deficit. And what makes things worse if you mean it is relatively easy to forecast demographic that's one

of the really easy long term forecast. And we know that demographics are against us, are against the deficit because the baby booms are retiring. So if you look at the CBO's long term forecast, it shows already without all the stimulus, that we had a debt to GDP right almost doubling over the next thirty years. So this is the time to prepare for that. But that is coming, but we're doing the opposite. Is it okay? John Fair? If I do a chart out the Bloomberg radio before

I'm doing that right now? Why you asked for my permission when you've basically done it all rendic because you say how it does it's a real non petroleum trade Have I ever looked at a real non petroleum trade deficite? No hard bundles. I'm sorry it borders on a jump condition. Why is our real non petroleum trade deficit jumping to a worser statistic. Um, Well, I mean I know, well, I know the chart so so so the the latest

jump that looks a little bit suspicious. There's some volutility, but the underlying trend is very obvious, right if you have it in front of you look at it. So it was very high in during the housing boom the deficit, than it narrowed because of the crisis, and when the christ when the recession was over in the middle of two thousand nine and started to widen again, and it looks like there is no end to it, right and again,

forget about the monthly volatility. You just put a six months moving ever to what's rout and there's a pretty linear downwooded any credit chief. US economists really appreciate you catching out with us, and without question, the most important interview of the day. Stanley Calendar has helped us so much untangling the fiscal dynamics of Washington and the nation. Right now, we get perspective here on Twitter at the budget Guy, he writes for Forbes Magazine Corpus Group as well.

Stan I want you to some how CBO will deal with the tax cuts the congressional budget that was passed and signed by the President and the Trump budget yesterday. How does an institution that we all rely in, the Congressional Budget Office, how do they synthesize those three events. Uh, it's it's actually pretty simple, Tom. First of all, they're going to reject the President's notion that this pays for

it that the tax cut pay for itself. Uh. That's pretty much common wisdom and everywhere but the White House these days. So they're gonna they're gonna talk about the tax cut as uh as as a substantial contribute to the deficit and debt. Uh. Second, they're going to add four to six hundred billion dollars in additional spending, an additional debt and deficit because of the spending bill that

was passed and agreed to last Friday. UM. And they're gonna reject all the President's proposed cuts because they're not likely to happen. Uh So, So what they're gonna do is, while the White House is saying the deficit will fall below a trillion dollars next year, CBO is probably gonna get there to about one point for Tuly and projected really up further. Oh yeah, there are. Now this is really important because we're working with one point one one.

You're already out at one point four? Do I understand that correctly? You understand that absolutely correctly, especially when you take the president overly optimistic economic forecast and stuff to do something that's more realistic. Um and and and so so you're gonna you're at one point for julion. And you know what, Tim, I know you and I have talked about this for weeks or months or years, but I'm not sure that's going to have the big impact

on the politics. That's right where I would you explain the why of this, whether anybody's a liberal Democrat they say Adidas or Adidas, would you explain to me the why we've lost any sense of frugality in our political Washington. Um, Because this is a mixing goes to China's situation to a certain extent. You had Trump who was promising the world to everybody that I can you know, I I can spend more, I can tax less, and I can balance the budget. Uh saying now saying it doesn't make

any difference. In besides, it's only temporary. Um. If the Democrats go after the deficit to they they will end up maybe having to be responsible for it and being hoisted on their own guitar. And then you've got groups like the Committee for Responsible Federal Budget that have lost this debate and have no impact whatsoever. So to a certain extent on this is everybody's saying, I want what I want, what I wanted, and something bad happens, I

will take care of it later. Stand. Certainly there's some politics that play here, a whole lot of politics. But something I want to ask you about, stand is what's changed because for years a lot of people said, take advantage of low interest rates, stop worrying about the deficit. The deficit doesn't matter. We have a party in power that's basically said just that. But now, all of a sudden, a lot of concern. Why Well, look, for Jonathan, I'm going to disagree with your your premise a little bit.

I don't think there's a lot of concern. If there was, the tax bill wouldn't have been enacted to the extent that it was, and that the spending bill that they just went through, well, let me start against stand the concern not within the Republican Party, the concern outside of the Republican Party. I read ophad after ophed through the weekend about how it was dangerous what they were doing for the US economy and ultimately the deficit was going

to get out of control. These concerns not coming from within the Republican coming from outside the Republican Party when those concerns did not exist several years ago. Well, all right, First of all, remember the uber conservatives, the Freedom Clark has hated this this spending bill, not the tax bill, but the spending bill in and criticized it heavily because of what it would do to the debt and deficit. So there is some internal Republican dissension about this. But

to a certain extent, this is just pure politics. This is the party out of power criticizing the party in power. Um and and I'm not sure that the the the concern doesn't exist. It's just a little taken a backseat.

Trust me, when interest rates start to rise, the same people who aren't saying anything bad about the debt and deficit increases will be the ones pointing the finger at the politicians saying, you should have told us, you should have done something about it, you should have prevented this will stand help me take away the politics train, the politics out of it. I don't want to politicize the deficit anymore. I want to talk about the economics of it.

Why should we be concerned about five percent of GDP? UM? Well, first of all, it's coming. It's not just five percent of GDP. It's adding all that aditional fuel on top of an economy that's already pretty much heavily stoked. Um. I'm not sure from a Kindian point of view, you would you would want it, you would recommend that this type of additional stimulus we do it done at this

particular time. Um. And And second, um, it really is going to limit I'm I'm looking a little bit longer term for from economic and policy point of view, it's really going to limit the ability of the United States to respond to any new needs, whether it's a forest fire or a tornado, or a nuclear holocaust type situation, or even an economic downturn, unless there's a stomach a willingness to accept eficits in the two to three trillion

dollar range. John brings up an important point stand which we got to walk through right now, which is this tip point of five GDP. It don't buy it for a minute. My study of this and listening to guys like you for the years is three GDP is in the realm of fruit normal whatever. So we go from three to five, which is I believe a fifty or six increase in deficit. The g d P isn't five a pretty moldy number? Yeah, I think so, Tom. And

part of the new normal is what you were just saying. Um. You know I because I know you commented on it. I wrote a column in Forbes that said, the new normal is is exactly what you're saying, which is, first of all, tolerance for higher deficits annually. Yeah. But the markets won't quote unquote have tolerance, will they? Well, right now we're seeing a little bit of gyration and we're

blaming it without any real proof about higher interest rates. Um. But you know, it remains to be seen whether the bond market vigilantes are going to be coming back and force These are the folks who forced Bill Clinton to revise his budget both plans because with higher interest rates, Um, that is the political statistic. That's the one that will

cross the economic and political back. I know John wants to dive in here with wisdom, but what it happens of Pharaoh's wrong and we get the six percent deficit to GDP, what's the difference between five the new normal in six? Um, Well, it's look, and I got to tell you, since we've never really been here before, that is, in good economic times getting to that level. I'm not

sure that we know the answer definitively. But at some point, whether it's six or six and a half or five and a quarter, at some point the markets are going to respond and respond negatively to what's going on. At some point foreign investors are going to say enough, I've had enough to us that I can't I can't be sure you're ever going to pay it back at all. I want to be clear here, it's not about the

concern of say five or six. It's a direction of travel Tom and I think that ultimately should be the concern. There was a budget deficit to GDP in the UK of five percent just a couple of years ago, but the reason the market would give the UK to benefit the down was one the Bank of Englis still had a big presence, and two there was an effort to close that gap. I think too stands point the real concern get rid of all the political drama, all the hysteria,

around this deficit of one trillion dollars. The real concern it's not now, not potentially next year, but the next downturn, when the fiscal options are exhausted at a time that the monetary policy options have been exhausted as well. Stan, is that way you're thinking as well. It's not in the here and now. It's the direction of travel, and the ultimate destination could be messy and exacerbated by the

next downturn. No, no, exactly right. Um. That is in fact, Bick Malveny, the O and B directors said yesterday or the day before that there was likely to be a sugar hide with the economy short term. But remember politicians in the United States only think short term. They're only thinking until the next election. And at some point it's going to be someone's problem, but maybe not the current office holders to deal with the next downturn of some kind.

And and our options, like you just said, are exactly limited. I want to expand that one more way. What do you tell millennials we're gonna end up having to pay for this. What do you tell them about the government's ability to deal with their problems ten or fifteen years down the road? Your SPA on standard Tom. This is

a big issue. It's the biggest intergenerational wealth transfer in history that were witnessing, not just in the United States for America, but across Europe and within the United Kingdom as well. And at some point someone's gonna pick up the bill, and the one that's got to pick out the bill would not have reaped the rewards of the of the last decade or sites on. Well, it'll be interesting.

Stent Calendar, thank you so much. The budget guy with Corvis mL MSL Group as well, Abbey Joseph Cohen of Goldben Sax wants to speak about the deficit a number of other things she sees in the greater American economy, but we must start with these markets. Abbey Joseph Cohene as Golden Sacks Advisory Director, Senior investment strategist, Abby, I want to get out of the gossip out of the way.

I have vetted to this and I know with your attachment to the Brookings Institution, you're familiar with Mr burn Hanky and now cherry yelling goes over there is well. I would think j. Powell get you to come down to be vice Chairman of the Fed by just giving you the right seats over all that skins shoulders for the Washington Capitals on a power play, I mean, would you think about being vice chairman of the Federal Reserve System. Um. I think it's fair to say, Tom that you and

I are not making those decisions. But but thank you for suggesting it. Um. When it comes to the Washington Capitals though, Um, why don't we talk about the Olympics instead? It's a difficult year to say the least. Yeah, Um, you know, we're seeing phenomenal figure skating. The women in

particular are just absolutely extraordinary, their artists, their athletes. Um. And when it comes to the Capitals, there were four figure skating coaches who recently watched the Caps play and they said only one and that's the center of Jenny Kuznetzev might might make a good figure ski skater, and the rest of them just didn't have very good technique and their power A window into Abbey. Joseph Cohen, I think your combination of financial acumen and economics would put

you on the list with Dr Larin John Farrell. Who else is on the list for vice chairman, Rich Clida and others? And San Francisco FED President Mr Williams up there as well that they gets helped three ti Abby. Let us address the markets. Uh, they were clearly over exuberant, if you will, and down we go. Have you changed your long tone on owning equities at this time? Well, let's begin with fundamentals, which is where we always began. How is the economy doing, corporate profits? How does that

feed into valuation and so on? And just a reminder that for the past several months, the estimate from Goldman Sachs has been that the year end price target for the SMP five hundred would be about fifty based upon our above consensus view on corporate profits and so on.

And before this correction began, let's assume it maintains status as a correction the SMP was so we were there, and I would just remind your listeners that you need to have valuation support to be at sustained high levels, because if it's already priced for perfection, there can be any number of factors that will knock you off kilter. And I think that's what has happened. And there are a number of factors. Some of them they prove transitory, some of them, Uh, may have longer legs and and

I think it's important to to chat about them. So, for example, there are some people talking about the technical aspects of what happened over the last week or two. The absence of share buybacks, for example, because corporations weren't able to step in and buy back their shares um because of legal restrictions where they were in reporting season. The role of e T f UH, the role of individual investors who may have panicked in to the market at the end of two thousand seventeen and then got

a little skittish. I prefer, as you well know, Tom, to look at the intermediate and longer term issues, and those to me, uh, there are some concerns. Um. You know, when we get within this range of what we think fair value is, we really need to focus on what some of the catalysts might be, both positive and negative, and on the negative side quite frankly, government policy coming out of Washington, to my eye, is not supportive of

sustainable intermediate and long term economic growth. UM. Combination of changes in the tax policy, the new budget proposal, the infrastructure proposal, and recent changes in trade policy, these are not beneficial in my view for intermediate and long term growth. Jonathan, here, before we get into the long term fundamentals, I do

want to ask you a question about investor psychology. Hammered An Aaron and others asking this question after the volatility of last week, whether the conditioning of the last few years by the dip, by the dip get rewarded to buy the dip has punctured dramatically and changed enough that we break out into a new regime where investors aren't conditioned rewarded just to buy the dip all the time.

Is that shifted a little bit. I don't deal directly with individual investors, so it will be presumptuous of me to to make a judgment. But I would basically say that beginning in the summer of two thousand and nine, what was priced into the stock market, if you reverse engineered the valuation models, was basically at least five years of recession. What was based what was baked in was at least five years of ongoing annual ten percent to

client in SMP earnings. What's priced in at fifty what's priced in at the prices we had a couple of weeks ago, would be several years of ongoing profit growth and no recession. So when you have an environment in which what's priced in is really ugly and what turns out to be is less up share prices and rise, I want to I want to pin you down on this abbey because of time. Are you fully invested or have you increased the abbey Joseph Cohen cash position. Um,

I never discussed, if you will my personal portfolios. That's what you're asking. If you're asking the Goldman sax, you know your position. Let me let me be very clear, and that is we remain concerned about fixed income. We think that bonds will be rising and yield i e. Declining in price, and we see this not just in

the United States but around the world. And so for us to see what has happened for the last couple of weeks in which fixed income prices declined and then equity investors said, wait, wait, that's not good for equity valuation. That should not have been a surprise to anyone. I would also point out interestingly that the Goldman Sacks interest rates forecast that they would likely be for increases in short term interest rates this year because we thought the

economy would grow, wages would rise, inflation would rise. That right now become the consensus view. But when we get to our next section, we want to talk bigger and rotter. But I've got to ask you about the sudden change in our fiscal policy. Our last guests called it a Nixon goes to China moment. Do you see the new fiscal legislation of this nation as a Nixon goes to

China moment? I do not Nixon goes to China, although I had not heard that expression before, was recognizing the reality of the growing importance of China and Nixon coming from the Republican Party, along with Mr Kissinger, who was very strong obviously in his views, could move forward on this. When I take a look at the changes in fiscal policy right now, I think that there is a high degree of um I'll call it a lack of responsibility. Well, that was delicate as well. Who's going to be the

adult in the room in Washington, abbe Joseph Cohen. We're going to need many adults, and we're going to need them on from both parties. Every Joseph advisory director at Gallman Saxon Senior Investment Strategistic. Right now, folks, and this is a great joy to bring in a book. I'm reading cover to cover. I will not mean words. It is likely to be my book of the summer. It is The Threat Matrix. It is six and fifty pages. It is thick, thick, thick, and joining us Garrett Graff

of the remarkable accomplishment. It is a page turner. Garrett Graff, wonderful to have you with us. How do you make a history of the Federal Bureau of Investigation that thick and a page turner at the same time? How did you go about writing The Threat Matrix? Thanks for the

kind words. So this book grew out of actually my fascination with Bob muller uh in the late two thousand, sort of long before he became a national figure, um, but sort of just as he was becoming the longest serving FBI director since j Edgar Hoover himself, and I was just sort of fascinated by the extent to which the FBI under him had, in the year since nine eleven, transformed from a domestic law enforcement agency into an international

intelligence agency and sort of what globalization and technology had done to change j Edgar Hoover's FBI one of the great things about him out of St. Paul's and with his work at Princeton and on is a singular moment early in your book where the Marine distinguished Marina with with true combat duty in Vietnam. His life changes in that warehouse in Lockerby, Scotland. How did the Special Council change when he walked into where they were reconstructing that

PanAm plane in Lockerby. Uh, this is this is really one of the big turning points in Bob Muller's career. Uh. You know, we sort of forget now, Jeff, how long

Bob Muller has been, uh involved in public service. I mean, he's spent almost fifty years of his life now working for the Department of Justice and was in the early, uh the years of the Georgia H. W. Bush administration, the head of the Criminal Division at the Justice Department, and so he was the person ultimately in charge of prosecuting the PanAm one oh three bombing and the investigation.

And it was for him walking into that warehouse as you mentioned in Lockerbie, where they were collecting the plain

pieces from that terrible bombing. Was was it a real turning point for him about sort of his search for justice in in the world, and then also an upclose and personal uh moment about the power of international terrorism and sort of what a what a force that was, and and most people don't realize that he has been intimately involved in that case ever since then, you know, even uh, would you know shows up on December twenty

one every year for the the memorial service at Arlington Cemetery. Garrett, you are asconced in Vermont as far as you can from the madness of wash Inton when you see the coverage of Mr Mueller's affairs is special accouncil with the President, with all the different players involve, just the Beltway noise that we see. How do you respond? What is the thing that all of the media gets wrong about the

gentleman that helped build the threat matrix? Well, I think the thing that is most important to understand, or that I find sort of most fascinating about Bob Mueller is just how clear his moral compasses and sort of just how straight it is. I call him, uh, you know, America's straightest arrow. And you know, sort of all of this partisans wrangling about him. You know, he is in Washington about as a political figure as there possibly could be.

I mean he was. He's held top jobs and have been appointed to top jobs in all five of the last presidential administrations UH Reagan, both Bushes, Clinton, and Obama. And his most recent appointment two year extension unprecedented Special Act of Congress to extend him for two years as FBI director passed the U. S. Senate one hundred to zero. Garrett, can you speak about the FBI and it's attacks on cyber cyber attacks now and what the FBI is doing

and what kind of constraints it works under. Yeah, it's a good question, and it's come up, you know, obviously a lot in in the context of Special Council. We're we're learning a lot more. Uh, the general public is learning a lot more about surveillance laws. And I think any of us ever anticipated the FBI is about ten years into taking cyber crime seriously. Um. The Secret Service was really the leader on cyber crime in the early years of the two thousands, after UH nine eleven sent

the FBI focused on terrorism. But the FBI is now very deeply engaged in cybercrime and h both on the nation state side. I mean, we've seen some fascinating prosecutions against Iranian hackers, Chinese hackers, Russian hackers, um and then also uh, some tremendous work by the FBI, of the Secret Service and actually h s I, the ICE Homeland Security Investigations Agency against sort of global cyber crime, which you know, for for a business audience is one of

the fastest growing sectors in business. Unfortunately, I mean, the Justice Department just this week announced the takedown of a five hundred million dollar cyber crime organization. Garrett, your most recent book, I Believe, Raven Rock. Can you just describe for people the essence of that book and why it

might be so compelling today. Yeah, this was a book that came out last year, Raven Rocks, the story of the U. S. Government's secret plan to save itself while the rest of us die that I had originally thought was going to be a real history book, and it's the story of the U. S. Government's doomsday plans during the Cold War, sort of all of the strange things that would have happened during and after a nuclear attack, and the Mountain bunkers and secret plans to suspend the

Constitution and other strange plans that the government came up with but unfortunately it has turned into a modern history, uh, you know, a modern nonfiction as we struggled with the North Korea threat and once again begin to try to remember what we're supposed to do, uh in the event of an incoming nuclear attack. M the modern version of the burn the turtle, duck and cover drills from the nineteen fifties and nineteen sixties. Garrett, We hope to speak

to you over the coming months and quarters. Is Mr Muller's and the news with this and that investigation. How did you respond when the President tried to parse the difference between the FBI agents and FBI leadership. That doesn't ring true through your book, does it. The FBI leadership is largely uh agents. It's it's people who have worked their way up through the ranks and came to the organization. Uh. You know, with that theme dedication to public service and

the pursuit of justice. H that that motivates the rank and file agents as well. UM. You know, I think sort of one of the the shames of the attack on Andy McCabe, the now uh former deputy directors. You know, Andy McCabe was a career, UH, nonpartisan public servant, you know someone who who dedicated his life actually to to all things of fighting Russian organized crime. Let's leave it there, Gart Griff to Gary Graft rather hope to speak to you again. I can't say enough, folks about the Threat

Matrix Full Disclosure, Bloomberg Surveillance Disclosure. It is a thick, thick, thick book, but boy does it read like a wonderful picture. Really can't say enough about it, and put it out on Twitter a couple of times. You're and we'll do so again. Garrett Graft with a Threat Matrix. 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 Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio