We Will Get a Different Fed During Next Seven Years, El-Erian Says

and of course on the Bloomberg. Welcome Morning on Friday, the twenty one of July. Happy Friday, everybody. This is Bloomberg Surveillance on Bloomberg Radio. David Garrow with Tom Keene in New York, joining US now in our Bloomberg eleven three year studios here in New York as Chris Ferroni is the head of Technical now US as its fatiguous Research partners, and it's great to see. I want to start broad if I could hear talk about the markets.

If I could. On Monday, you wrote it's difficult to get negative with all the major induscries at new highs. Let's start just with with your perspective on Uh, the induscries here in the U S and globally, I know you look at them all an aggregant. Yeah, exactly. When you look at when the big top formations typically take shape, it's when participation has gotten very very narrow, not when all the groups and all the industries and all the

sectors are making new highs. I mean, just think about the last week or so, We've had everything from the Russell two thousand, to the SMP to the equal weighted SMP, the Value Line Index, most global induscries at or near new highs. That is a confirmed backdrop where we're not seeing the narrowness that typically accompanies a bigger problem. So I recognize where we are here in the calendar. I recognize the next twelve weeks are often the toughest stretch

of the year. But we have to make a differentiation between a pause or a consolidation and a big top and we just do not think on the verge of a big problem here. You talk a bit about that, that calendar you mentioned it it is a short term risk. Why is that the case historically? Why is that? Why is August in September so problematic? You know, I think you come up with a lot of reasons. It's kind of a lull in the calendar as you get through July earnings that tends to mark the top and seasonality

at least until late September early October. But what's important, what we've learned in our work is how the trend of the market can really influence seasonality, and when you're in an uptrend, the weakness in September and August is often less pervasive than when you're in a downtrend. Those months are worse when you're already in a bear market or in a downtrend. That's obviously not the case at

the moment. Tom and I've been talking a lot about of volatility here over these last few weeks and needed a chart of corporate spread against the cbo E. Let me let me talk Chris. Never in girl's life did he think you'd be talking? No, I didn't, or did I You've got you've got corporate versus the CBO VIX. What do you what do you get when you chart those two against one another? I think you know, we hear a lot of how extraordinary volatility here is being

as low as we've seen over recent months. When you look at it as a function of credit, and that's how we think about volatility. When credit conditions are stable, volatility should be low. So when we look at the relationship and when we regress b double a corporate spreads versus the vix, the vix is actually right where it should be. It's on that line of best fit. The VIX should be low when credit conditions are behaved, and that remains the case when you when you look at

the credit markets generally, is there stress? What do you what do you see? Uh, we certainly don't see stress. I think the more important question as we kind of moved through the back after the year, is do we see signs of complacency. It's possible that may be starting to build here a little bit. Um we've certainly, you know, we watched stuff like put calls to get a cent the options market. Um, I would be a little bit reluctant saying that the environment is terribly complacent just yet,

but will certainly watch that. I think the bigger messages if this market is going to meaningfully deteriorate, my guess is that credit would weaken as well. What's the bet of institutions? Everybody? You know, on the modern day loves to talk about hedge funds. What's long only by side doing boring mutual funds? Are they two percent in cash or they twelve percent in cash? Well? I think this is where some of the sentiment data can really be

helpful in answering that question. And you know, there's two types of sentiment data. There's data that measures what people say they're doing surveys, and then there's data that measures what people are actually doing your money, And we prefer to look at the latter. We want to know what people are actually doing. I would describe the street as modestly net long. I don't think they are as aggressively

long as they may like to be. Now, whether it's concerns out of Washington or concerns about earnings that maybe inhibiting that, But I would not say we're aggressively long. Look at a chart. Here, they're flipping through the chart book Tom in real time, looking at get On, saying what this is. We've got a liberal arts clown Cornell in a political economy guy from Villanova, and we're flipping through a chart book. I'm looking at your chart of t j X. Here, he sputter h tread break fade rallies.

We've heard so many good things about t J t j X, t j X in contrast to other retailers. What are you seeing here when you compare these childings? And that's kind of what worries me about the chart about the stock is that it's been a place to hide for so many investors in a really bad sector for now so many years. And um, I have just never seen a bear market in a group where ultimately every stock doesn't go down and ultimately they hit the best ones last, and they fit all the bad ones,

so they're onto the best one. And I think t j X ross Shore's h is an example of names that have been good that we need to be more careful with her. How do you technically synthesize the raging debate of bricks and mortar retail with Amazon? It makes every It's on the Bloomberg Business Week this week, folks, fabulous analysis of the big big tech companies. But technically, what do you see when somebody says bricks and mortar and Amazon, Well, we know where the weakness has certainly been.

And you know, we could have said a year ago or two years ago that that relationship was so stretched with strength from Amazon and weakness from the retail names. My sense is that the traditional brick and mortar stocks, the consensus uh the view there has now gotten so negative. Well, we may want to start fishing around for some opportunities. Now. What strikes me is some of these probably will be zeros,

others will not. I wonder if central bank policy, frankly, over the last seven or eight years, has probably prolonged this when we have lost some of these companies already. Exactly, David Gering, time me, David. I'm over here calculating how much more expensive and Martini is at Hemingway's bar in Paris. Since the first round of the elections, the dollars gotten weaker. It's gone from thirty five dollars to thirty seven dollars. Nine cents. Have you that's a week dollar. That's a

week dollar. Let's have you? Do you have a dollar chart to save me? I do have all the calculation myself to save you. And I think we need to remember something. The dollar has been weakening here for fifteen months. This is not a new story. And if anything, the dollars responding precisely as it tends to respond in periods when the FED is raising rates. In five of the last six cycles where the FED has raised rates, we

have seen the dollar go down, not up. I know that sounds counterintuitive, but that that is typically have a dollar reacts to a rising rate, uh environment, And I would just say one point further, looking at the d X why, I actually think it's a very poorly constructed in dept. It's about se euros. We prefer to look at an equally weighted dollar index. We put about twenty different pairs in there, and that deteriorated long before, uh say,

you're a strengthened. This really important point. And I would point out, David gurl that the Bloomberg d X wise a lot better, different blend precisely much much just just equal. Weay to just like Chris talks about, but the d X wise would people quote but often pros use a different index, David, Chris, let me ask you about golden What you're seeing there is this a twelve fifty level when you look at the gold chart. What stands out to you, well, what stands out to me is what

hasn't happened. We've had a week dollar and gold can't seem to respond, um. I think the most interesting things in our business are when something doesn't go up when it should, and this is an example of where gold probably could have rallied as the dollar has weakened, and its inability to do so really leaves me questioning the trend I think is ultimately a tough level. I'd say

the same thing on the silver chart. I mean, these are uh, really two things that are in different trends at best, and I would be inclined to fade rallies in that environment with both gold and silver and copper continuing to break out. Yeah, copper is better here, I think personal stand out and we like to look at the ratio between copper and gold um, and that ratio

has firmed here as well. Now interestingly, when coppers up, when iron ore is up, when they're outperforming gold, you tend to see rates go up in that environment as well. I know we're kind of stuck in this twenty to thirty range, but I wouldn't know that. The street is

very very long bonds. I think there's an element of complacency there, whereas if something goes right, you can get a pretty quick move wire in yields that's the second time you've mentioned that today, and is you and I know bonds are generally out front of shocks than equities. So if I'm going to play bonds, which bonds do

I play? If I'm going to get a reversal, well, I think where you've seen positioning get very crowded is more towards the longer end uh tens and thirties, where uh that's where I think the trade is most crowded. UM watch very closely this two level on yield. I think if we hold that and we get some surprise,

you could see that squeeze play at very quickly. I would point out that someone Engross out on the West Coast agrees with Mr Bruins analysis bills out at too forty is being much more key and before that's a fair amount of noise as well. Christopher Ron, thank you so much greatly, really really value add not only in TV, and we'll send the charts out here for radio as well. As we get through the morning, you're gonna, you know,

do our planning for them. Looking at this bar Hemingway in Paris, it says he drank fifty one dry martinis in a row. I didn't do that. He did that that you know did. It's it's you know, and it's one of one of the great things. This is the Riz Carlton Folks in Paris. And what's great about it is they just redid it and they didn't screw it up. So many famous hotels and all that when they redo them, they're never the same. And we went and its way

in the back tuck to the corner. It's absolutely packed from the mom what they opened the door, it's packed, and it's got all of the Hemingway memorabilia. And it happens that the bartender takes great pride and you know, the squeaky clean glasses and all that. But for anybody jetting to Paris, UM, it's an extravagance. It's it's comically expensive, but I got to admit it's worth it, just for one. We'll go there sometimetime. We are so privileged here with

the quality of our guests. UM. And then at I'm and uh, Nicholas Salman's give me, I'll get it right. Nicholas Salman with earlier and right now of equal quality. Jeffrey Sprague with US with Vertical Research Partners, legendary in Wall Street looking at industrials, any number of companies that particularly notice work could Cohen a number of years ago, Jeff, you've got a very on Jeff Sprague word in your research report. Please define for Mr. M L listening, what

are disk synergies? Well, dis synergy is in a good morning Tom would really be the you know, the inverse of what we think about when we put companies together, and and it's you know, enjoy synergies from maybe removing redundancies and corporate costs or other things. And so I was addressing to the idea of dis synergies along the lines. If you really pulled ge apart entirely, you start getting a lot of leakage in terms of tax and the

need to put in place re done to corporate costs. Now, obviously companies do spinoffs and things all the time, so these are things that would be overcome. The point I was trying to make though, is that to do some kind of wholesale break up into many pieces I think becomes very inefficient. Is there a risk here, I access earlier, Nick, Is there a risk here? Of finance ancial engineering? They bring out their report, they're all cash flow this return

of shares, return to cash share buy back. That is there a risk that they're doing in IBM redux of financial engineering substituting for firm excellence. Well, that's part of what's gotten used to the you know, the concerns that we have. I think when I was on your show a few weeks ago, I talked about the weakness and the cash flow, and so we've we've had this disconnect materialized over the last couple of years where accounting earnings

are better than the actual cash for the company. And uh, you know, I think that's still a very clear investor concern. And so you know here today the cash flow is better in the second quarter, but still worse than expected for the half. So they're you know, they're in a

bit of a hole on cash flow. They maintain their guidance for the year on cash flow, but they've got a pretty big hill to climb now to to get to that target, and I think investors are going to be rightly concerned that there is some risk that they don't get there. Jeffson, certainly, June, we've learned a bit about John Flambery, who's coming in his CEO. You know, he likes the Almond Brothers. He wishes he knew how

to play the blues guitar. He said that to employees in a in a Facebook life, what do we know about how he's going to run this this company? You have that merger of the oil and gas division and Baker Hughes now completed. What are you what are you looking for from this new CEO when he takes over

in August. First, I think we're going to see a you know, obviously there's gonna be a reevaluation in the portfolio, and I do think things will get done with the portfolio, and notwithstanding by the synergy common I think there will be a mover too, perhaps with the oil and gas, perhaps with some other businesses. But I think he's really gonna dig in and buckle down on cost execution. You know, this is something that the company obviously as has done, but I think there needs to be a higher sense

of urgency. I think it's notable that when he took over the healthcare business, he ended up replacing of his direct reports um and he tied this to the fact that people just weren't, you know, moving as quickly as he wanted or their behaviors really aren't what he was looking for. So I think it's going to be clear. There's a new sheriff in town. Obviously this is a

you know, a very big ship to turn. But I think there's gonna be a you know, a very blunt message that the company needs to, you know, buckle down here and drive performance. Is there many billion dollar backlog a thing that's not going to go away anytime soon? Well, you have a very good backlog. I think the the question that we really have, like when you look at some of these margins is really uh, you know the

margins in backlog. You know what was done to you know, capture those orders, right, Uh, you know, to to be extreme, right, you could if you want to give stuff away, it's

easy to get in order. And I'm not suggesting they've given stuff away, but I think there's you know, when you look at the margin pressure that there's been and kind of a cash flow disconnect there, there is some concern that well, although the backlog is big and a nominal value sense, that the profitability invented in it perhaps is not that high. We gotta get you back. We got lots to talk about. Jeffrey Sprague, thank you so

much this morning. Vertical Research Partners. Uh really truly legendary on General Electric. A lot of different stories here. I I hope, folks you heard the distinctive differences there between Mr Hayman more optimistic than Mr Sprague. But that's what makes for a market. We like that runt you by Bank of America Mary Lynch. With virtual reality, virtually everything will change, discover opportunities in a transforming world, be of a mL dot com, slash VR, Mary Lynch, Pierced Fenner

and Smith Incorporated. Right now speaking of team coverage, UM a gentleman who drives the story for it. And what's so great about Tim O'Brien, folks, is he does and do like the star turn Trump essay once every four weeks. He's really grinding it every day. And there he was last night with Anderson Cooper and Mr Tuban grinding it up. How come you dress better for Anderson than you do for us on radio? What's that? I want to tell you have exactly the same clothes on as I did

last night. That's how it tower. That's disgusting. I don't think you want to know that I have not changed my word we got next time, I think we should get Anderson in a bow tie and that would move things forward. Okay, So you know, it's been a fabulous forty eight hours for Bloomberg News and driving the story forward. And what's great about your work, Tim O'Brien at Bloomberg View is you've always gone back to the original Mr Trump. Does the last four to eight hours surprise you of

the president knowing the original Mr Trump? No, it doesn't at all. I think this is a guy who under pressure lashes out. He's uh. At the end of the day, there are two things I think that drive the president's thinking, uh, self aggrandizement and self preservation. And I think what you have now in the midst of this investigation is pure self preservation. And now we know that they're looking at trying to pardon as many people in the administration as

they can. He's, apparently, per the Washington Post, inquired about pardoning himself. And I would add our great Bloomberg News reporters yesterday broke a very significant director Stephen Dennis this morning. Uh, yeah, both and Christian yesterday on the scope of Mueller's investigation expanding in a direction, the President said he doesn't want

to go all of Trump's business deals. Tim, You're right, as Mueller certainly knows by now, Trump's business history doesn't merely have a closet full of skeletons that has warehouses full them. What can you tell us about the bay Rock group at Felix Sater and how they might be the focus of Mr Mueller's investigation. Well, you know, the tricky thing with bay Rock and the compelling thing about it is they were development firm two floors beneath the

Trump organization's own office is in Trump Tower. A principal at the firm, Felix Sader had longstanding ties to both Russian organized crime groups and American organized crime groups. UH. The Trump family, the eldest two children and the president. We're in business with bay Rock for several years, from about two thousand and three to two thousand and eleven. They ultimately built the Trump Soho hotel together. And there's an issue around how bay Rock was funded and where

it's funding came from. A big chunk of its funding came from overseas. UH investigators have been concerned that it possibly involved money laundering and all in all these relationships, the issue is whether or not there were representatives of the Kremlin or other foreign interests using these guys your classic Trump Nation. You have City Group in the index. You've got Chase Manhattan in the index. You don't have Deutsche Bank in the index. Is Deutsche Bank interesting here?

Deutsche Bank is very interesting. They post date my book basic because I published the book in two thousand and five, and Trump's relationship with Deutsche Bank as a major Lennard had just begune around that time that they financed his his hotel and condominium project in Chicago and have since then become a major I think presence in his financial life. Tim, what are you gonna be listening for? Next week? Two

days of of big hearings? Of course, Jared Kushner testifying and closed session before the Intelligence committed them, before the Justice Committee. We've gone Paul Manaford and Donald Trump Junior? What are you gonna be listening for? I suppose on Wednesday you're gonna be listening for whatch on on Monday

when those doors are closed. Well, I think everyone wants to know if other quid pro quos in any of these relationships, just to cut through all the noise, I think there's been a lot of conspiracy theorizing about Trump and Russia. I think there's been a lot of misguided focus on certain Russian related topics. At the end of the day, I think what people have to care about was issues like sanctions on Russia, where those traded off for financial favors in any way to ump Cushing or

anyone else in the administration. Tim m'brian, thank you very much. Appreciated Timbrian graduations also executive editor of course if Bloomberg View and bloombergafly, I mean it's been reporting for Bloomberg has been extraordinary. What are you guys gonna do Monday? I think Monday, we're just going to get back at it, to get back at it. In years, the story here is the grind of reporting, getting back at it every day, like three thousand people or whatever working on this story.

It's it's it's a good show. Tim O'Brien, thank you so much. Bloomberg View and he publishes today. I'll get that out on social media here in a moment right for Bloomberg View rights all over the street in worldwide with Alian's Muhammad Larian, Dr Larry and my read of the summer is Olivier Blanchard at a conference in Naples, who went right back to blench Chard Summers went back to Blanchard Fisher and really dug into the oddities of

wage dynamics and labor supply. This is a whole a font of interesting academic wisdom, folks, over thirty years from Professor Blanchard. You wrote about this in the Only Game in Town. Help us with this absolutely new wage dynamic we're in right now. So let me just first say, Tom, thanks for having me. And Olivia Blanchar is incredible and things that he writes are always worth reading. We don't understand well three things today wage determination, inflation dynamics, and productivity.

And when you put all three together, it shows you that we really don't comprehend the economy as well as we used to. Why. First, there are significant structural changes going on to to work place, to how the economy functions, and we may not be measuring well, let alone fully understanding that's the first reason. Second, we have distorted the way the economy functions through years of well intended experimentation,

and and third, global relationships are changing. So Tom, this is a period of either incredible uncertainty and or excitement for economists as they try to understand these new diynamis within these mysteries is the idea, and you've always been wonderful about this, the idea that we want to aggregate our model together into one lovely model. Does Muhammad al Ayan or Professor Blanchard or Lawrence Summers with histories? As do?

We want to finally say we're done with one model because of inequalities and because of the segmented nature of wages in our society, we're certainly done with one school of thought. I think this is a time for a more eclectic approach. You want, of course, traditional economics, but you also want a lot of behavioral economics. Um that's become more and more important, especially after the Great Recession. So yes to to a general idea, which is we can no longer rely on a single model, let alone

a single school and economics. We need a much more eclectic approach. Let me ask you, on the subject of monetary policy about this movement toward or those agitating for

a more rules based approached to it. We saw the formal tendering of a nomination for Randy Corals to become the vice chair, a vice chair rather for supervision at the Federal Reserve this week, as you look ahead to that to what the Federal Reserve might be, what is your counsel to investors about what could change if we do, in fact get a more rules based approach my council, David would would be be careful not to extrapolate too much what has been an except no period for central banks,

including the FED. The FED felt morally and ethically obliged to step in because other policy making entities were paralyzed by he cannot buy political gridlock. Now the FED is coming to the point where it wants to exit, So you investors would be very careful not to extrapolate too much the Fed of the last seven years to the next seven years. We're going to get a different FED. Over the next seven years, We're going to get a

different FED. We've heard a lot here from this FED, a lot relatively speaking about what this balance sheet unwind is going to be like, or what Fed your Janet Yellen would like it to be like, Mohammed. But given the fact that we're going to see such rearrangement of the personnel here over these next few months. How confident are you that whatever she sets up and sets into

play is going to continue in perpetuity. So when it comes to the balance sheet, I think that what we're going to get is something very gradual and at the end of the day for investors is going to be like watching paint draw It's not gonna be very exciting. It's not going to be the basis of a major short term trade, but it is going to change the dynamics of the marketplace in terms of who owns securities,

in terms of rates, it's much more interesting. And here, David, it comes down to whether you are just a traditionalist, which who believes that the FED will only look at employment and inflation is to mandate, or like me, you believe that the FED and other central banks are also going to pay a lot more attention to future financial stability. That is a fundamental difference, and I think that the FED and other central banks are going to worry more

about future financial stability. You see the regulatory role, the regulatory responsibilities of the FED changing. Here. We're having a conversation earlier about where you do see action in Washington these days, and it seems like there is some movement on the issue of of regulation. Obviously, you know how Stephen Monution sharing the Financial Stability Oversight Council is the Fed's role visa v. Regulation set to change? Do you think I think it's going to evolve. I think we've

entered a period of less regulation. It's going to be gradual. Um. I think we're going to see less economic regulation for sure. In terms of financial regulation, that's going to be a more cautious process, and for good reason, and that is because we still have the memory of the accident fresh in our minds. Do you can you link dollar weakness to the lower yields that we've seen. That's been the

correlative moment of the week. We've seen lower yields and also a week dollar Are they attached or are they separate? So what we've seen tom in terms of yields, and it's something that I look at every single morning, the differential between US treasuries and German boons. And you've seen that narrow significantly to around a hundred and seventy basis point. It's not so long ago that that differential was two thirty.

Why because markets are repricing growth expectations and in favor of Europe versus the US, and markets are also repricing relative monetary policy stances in favor of the ECB being tighter than they thought before. Add to that is significant portfolio flow into Europe and out of the US, and you get exactly what you've seen, lower yields, a shrinking yield differential, and a stronger euro, a weeker dollar, you got a weaker dollar as well. David, jumping around politics,

politics and trade. We saw the the calendar get filled up here for later in August. We're going to have the US reopening these and after renegotiations. What have we learned about this administration's trade policy? What are you what are you looking at? What are you concerned about going forward here as we undertake a rewriting or a renegotiation of NAFTA, and as we hear more rhetoric about what's going to be the trading relationship between the US and

other major economies, including China. Of course, we had this big meeting in DC this week of the leadership from the U, S and China. So as both of you know, from day one, I've been saying, don't expect a major protectionist phase that when push comes to shove. The administration will not dismantle nafter, will not impose huge tariffs on China, will not change in a major way bilateral trade agreements like with countries luck career. But what you will get

is tweaking. And I suspect that over the next few weeks and months, that's what you're gonna see. You're gonna see the US tweaked naughter, and I think Canada and Mexico will be willing to do that. There was an argument to update it. A lot has happened since NAFTA was agreed to, and you're gonna see see see lots of little tweakings left and right. But this is not going to be a major protectionist war. It's not gonna

be a trade war. It will be tweaking of bilateral and multilateral trade agreements to favor somewhat more the US. We've made it through this, I'll point out without a single New York Jets reference. Tom, You've been remarkably rest remarkably Yeah, and I'm worried more about reference right now.

That's that's the one that worries anymore. I watched some Mets balls, I think it was last night against the cardinals, and you know why you yet our producer held my hand and said, don't go there, Momed, thank you so much, greatly, greatly appreciate it. Dark Larian there with really important comments on this great mystery of wages in American frankly and across all of Europe is what I really can't say enough about the intellectual challenges are central bankers have with

where we are on wages. Thanks for listening to the Bloomberg Surveillance podcast. Subscut ribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio runt you by Bank of America Mary Lynch. With virtual reality, virtually everything will change. Discover opportunities in

a transforming world. Be of a mL dot Com, slash VR, Mary Lynch, Pierced Fenner and Smith Incorporated