Latest / Bloomberg Intelligence / Fed Could Lose a Tool With Balance Sheet Cut, Kocherlakota Says

Transcript

Fed Could Lose a Tool With Balance Sheet Cut, Kocherlakota Says · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. This Wednesday,
• 0:32
  Speaker 1: we are going to get the minutes from the latest
• 0:35
  Speaker 1: Federal Reserve meeting where they talked about everything from the
• 0:38
  Speaker 1: economy to potential risks to the downside uh for the US,
• 0:43
  Speaker 1: but most important, what everyone is looking for is guidance
• 0:46
  Speaker 1: on how the FED is going to unwind it's four
• 0:49
  Speaker 1: point five trillion dollar balance sheet. And for somebody who
• 0:53
  Speaker 1: knows quite a bit about this is former Minneapolis FED
• 0:56
  Speaker 1: President uh Nriana coach Lakota, who joins us now by phone.
• 1:02
  Speaker 1: He is also a Bloomberg View calumnists as well as
• 1:04
  Speaker 1: a professor of economics at the University of Rochester. Uh Marianna,
• 1:08
  Speaker 1: thank you so much for joining us. You wrote a
• 1:09
  Speaker 1: recent column saying that the FED is making a two
• 1:13
  Speaker 1: trillion dollar mistakes, saying that they really should not be
• 1:16
  Speaker 1: considering whether to shrink their balance sheet at all, it
• 1:19
  Speaker 1: is the wrong question. They should not go that route.
• 1:21
  Speaker 1: Can you explain why? Yeah, thanks for having me on, Lisa, UM.
• 1:25
  Speaker 1: So why thinking there is that? I remember when we
• 1:29
  Speaker 1: were hit with shocks, when I was back on the committee,
• 1:32
  Speaker 1: even the dark days of eleven UH, one of the
• 1:36
  Speaker 1: things we wanted to be able to do was to
• 1:37
  Speaker 1: lower interest rates UM, but we didn't have them. Couldn't
• 1:41
  Speaker 1: do that because the interest rates were pretty much as
• 1:42
  Speaker 1: low as they could go. If the FED were keep
• 1:45
  Speaker 1: keep their balance sheet at the current size of four
• 1:48
  Speaker 1: and a half trillion dollars or even potentially growing with
• 1:51
  Speaker 1: the economy UM, they would over the longer run, also
• 1:55
  Speaker 1: be keeping their short term interest rate tool higher because
• 1:58
  Speaker 1: they're already providing a lot of accommodation through UM that
• 2:02
  Speaker 1: balance sheet. The way you would offset that is by
• 2:04
  Speaker 1: keeping your your interest rate tool higher. So that means
• 2:07
  Speaker 1: when you go into a recession you're facing shocks, you've
• 2:10
  Speaker 1: got your interest rate tool that you're familiar with, you
• 2:12
  Speaker 1: know how it works. That's the one you're gonna belonging
• 2:15
  Speaker 1: on to two offset shocks. So I think the FED
• 2:18
  Speaker 1: would just be better off just as I say, keeping
• 2:21
  Speaker 1: the balance sheet constant or even uh I suggest my
• 2:24
  Speaker 1: post um keeping that um growing over time as the
• 2:28
  Speaker 1: economy grows. So another words, just to make sure that
• 2:31
  Speaker 1: I understand what you're saying. You're saying that if the
• 2:32
  Speaker 1: FED keeps the big balance sheet, then they have more
• 2:35
  Speaker 1: room to raise interest rates and then have that sort
• 2:38
  Speaker 1: of the more well known tool to deal with upcoming crises,
• 2:43
  Speaker 1: whereas if they shrink the balance sheet, they're going to
• 2:46
  Speaker 1: have a harder time raising rates just because the level
• 2:49
  Speaker 1: of accommodation is going to be less on the balance
• 2:52
  Speaker 1: sheet side. Am I Am I getting that right? Said?
• 2:54
  Speaker 1: Exactly right? Thank you for thank you? Okay, no, no, no,
• 2:57
  Speaker 1: I just want to make sure. I mean, I guess
• 2:59
  Speaker 1: that the ads an argument, and what a lot of
• 3:01
  Speaker 1: people are saying in the market is well, the Fed's
• 3:03
  Speaker 1: going to move at such a glacial pace, and because
• 3:06
  Speaker 1: demographics are changing to such a degree where you have
• 3:09
  Speaker 1: people aging and cycling their money into more reliable investments
• 3:14
  Speaker 1: like bonds, you're not going to end up getting that
• 3:17
  Speaker 1: big of a move, if anything at all. In fact,
• 3:18
  Speaker 1: yields on the on the long end might even go
• 3:20
  Speaker 1: down even as the Fed on wind's balance sheet and
• 3:23
  Speaker 1: then they'll have this tool as well open to them
• 3:25
  Speaker 1: in the next crisis. What do you say to that? Yeah,
• 3:29
  Speaker 1: I actually I've heard actually some speakers in the fom
• 3:32
  Speaker 1: C make this argument. I just don't understand it. Um.
• 3:35
  Speaker 1: The estimates we've had from the effect of the balance
• 3:38
  Speaker 1: sheet are pretty clear. It's it's basically substituteable with our
• 3:43
  Speaker 1: Like I laps in the hour because I'm still thinking
• 3:45
  Speaker 1: about myself being on the committee, but it's it's comperbebly
• 3:48
  Speaker 1: substituteable with the FED typical tool of the Fed funds rate.
• 3:53
  Speaker 1: UM So, as you reduce the size the balance sheet,
• 3:56
  Speaker 1: you are substituting for interest rate increase is and in
• 4:00
  Speaker 1: fact President Dudley and the New York Fed has made
• 4:03
  Speaker 1: this point on a couple of occasions. UM So, I
• 4:07
  Speaker 1: think that's the right way to be thinking about it.
• 4:08
  Speaker 1: If you scale back the position you have in in
• 4:12
  Speaker 1: long term assets, you're removing demand stimulus from the economy,
• 4:16
  Speaker 1: and um you're gonna have to make that up in
• 4:19
  Speaker 1: some way, and the way you'll be making it up
• 4:20
  Speaker 1: is by keeping your short term interest rate, the FED
• 4:22
  Speaker 1: funds rate, lower than you would otherwise be doing. So
• 4:25
  Speaker 1: this brings us to another column that you recently wrote
• 4:27
  Speaker 1: about forecasting growth, because when you talk about short term
• 4:31
  Speaker 1: interest rates, let's leave aside the balance sheet, right, because
• 4:34
  Speaker 1: let's say the FED decides to keep it at four
• 4:36
  Speaker 1: and a half trillion dollars for the time being, puts
• 4:40
  Speaker 1: off any discussion of ceasing to reinvest any proceeds that
• 4:43
  Speaker 1: they get from that, and they just focus on raising
• 4:46
  Speaker 1: interest rates. Um. There's a lot of questions about how
• 4:50
  Speaker 1: much they could really do that based on growth and
• 4:53
  Speaker 1: the potential for growth. And you know, when you look
• 4:56
  Speaker 1: at what the Fed is talking about, do you think
• 4:59
  Speaker 1: that they're measuring growth the right way? And given what
• 5:02
  Speaker 1: they're looking at, what's the sort of end rate for
• 5:05
  Speaker 1: overnight benchmark borrowing costs that you think is is feasible
• 5:09
  Speaker 1: in the near future? Oh wow? Okay, so that last
• 5:12
  Speaker 1: question is really hard, um, And it would depend on
• 5:15
  Speaker 1: where you end up with a balance sheet. Um. You know,
• 5:18
  Speaker 1: I think if you you were to to shrink the
• 5:21
  Speaker 1: balance sheet, you're it's really going to put much more
• 5:24
  Speaker 1: of a cap on where you can end up with
• 5:26
  Speaker 1: in the longer run with your your interest rate tool,
• 5:29
  Speaker 1: I would I wouldn't be surprised you would end up
• 5:31
  Speaker 1: with a number that starts with a two. You know,
• 5:33
  Speaker 1: in the in the longer run, FETs if if you
• 5:35
  Speaker 1: do end up shrinking the balance sheet to keep the
• 5:36
  Speaker 1: balance sheet where it is, then I think you're you'd
• 5:39
  Speaker 1: be able more feel more comfortable with the probably the
• 5:42
  Speaker 1: longer run, with the number that would start with a three. UM.
• 5:46
  Speaker 1: But let me talk. I think I think you've hit
• 5:50
  Speaker 1: upon a really important point, which is how hard it
• 5:53
  Speaker 1: is to gauge the growth opportunities that are out there
• 5:55
  Speaker 1: in the US. UM. There's a lot of pessimism out there,
• 5:58
  Speaker 1: UM that maybe the US two percent is all we
• 6:01
  Speaker 1: can hope for, UM, something in the two to three percent.
• 6:05
  Speaker 1: Rangel here some optimism as well from from certainly from
• 6:08
  Speaker 1: the administration is more optimistic about growth opportunities. But it's
• 6:12
  Speaker 1: really hard for us to as economist, to get that right.
• 6:15
  Speaker 1: And I think the Fed would be safer UM to
• 6:20
  Speaker 1: calibrating their interest rate increases to what's going on in
• 6:22
  Speaker 1: the inflation to mention they're better forecasting inflation. They'd be
• 6:25
  Speaker 1: understand inflationary pressure is better UM. And the whole question
• 6:30
  Speaker 1: of capacity, how much growth opportunity there are there are
• 6:33
  Speaker 1: in the US is about how much can we grow
• 6:35
  Speaker 1: the economy without running into generating too much inflation. So
• 6:40
  Speaker 1: I think the FED will be better off holding back,
• 6:43
  Speaker 1: being cautious about raising rates until we actually saw, um,
• 6:48
  Speaker 1: real clear signs that we're going to get back. We're
• 6:50
  Speaker 1: at two percent their target and staying there. So I know,
• 6:53
  Speaker 1: I'm sure that you're still friendly with people who are
• 6:56
  Speaker 1: on the INFMC right now, and do any of them
• 7:00
  Speaker 1: kind of feel the way that you do and just
• 7:02
  Speaker 1: feel like they the tides moving toward reducing the balance sheet.
• 7:05
  Speaker 1: But uh so we'll go along with that, but we're
• 7:08
  Speaker 1: kind of a little worried about that. Yeah, I know
• 7:11
  Speaker 1: nothing beyond page I'm just another outsider, like like everyone
• 7:16
  Speaker 1: else listening to this. I so, but I but when
• 7:19
  Speaker 1: I track um, you know, I you know, I think
• 7:22
  Speaker 1: the person who has probably been most cautious about the
• 7:26
  Speaker 1: interest rate increases, there's obviously, uh President cash Cary in Minneapolis,
• 7:32
  Speaker 1: and so you know, if you're asking me that question,
• 7:34
  Speaker 1: I guess I would point to him as being the
• 7:36
  Speaker 1: most obvious person on those lines. Marianna Coucha Lokotta, thank
• 7:40
  Speaker 1: you so much for joining us. Marianna Coutcha Lokotta is
• 7:42
  Speaker 1: a Bloomberg View columnist and of course the former Minneapolis
• 7:45
  Speaker 1: Fed president, currently professor of economics at the University of Rochester.
• 7:49
  Speaker 1: Really glad you could join us. President Trump did land
• 8:04
  Speaker 1: in Israel earlier today and we are already heard comments
• 8:07
  Speaker 1: from both President Trump as well as Israeli Prime Minister
• 8:10
  Speaker 1: Benjamin Natanya. Who to give us a better sense of
• 8:13
  Speaker 1: what we can expect to learn from this trip, I
• 8:16
  Speaker 1: want to bring in Michael Arnold, who is the bureau
• 8:18
  Speaker 1: chief for Israel and Palestinian Territories for Bloomberg. Michael, thank
• 8:23
  Speaker 1: you so much for joining us. I would just like
• 8:25
  Speaker 1: to first get a sense of what President Trump plans
• 8:29
  Speaker 1: to do while he is in Israel and Palestinian territories
• 8:33
  Speaker 1: and what the goal is here. Well, he's got quite
• 8:36
  Speaker 1: a full itemperary already. As soon as he landed, he
• 8:38
  Speaker 1: was whisked by helicopter to Jerusalem where he met with
• 8:41
  Speaker 1: the President. Then he took a tour of holy sites
• 8:44
  Speaker 1: in the Old City, both Christian and Jewish. Uh. Now
• 8:47
  Speaker 1: he's meeting with the Prime Minister and later he's going
• 8:49
  Speaker 1: to have dinner with the Prime Minister. Tomorrow is going
• 8:51
  Speaker 1: to head of the Palestinian Authority, areas to meet with
• 8:54
  Speaker 1: Mahmud Bas and then back to Israel for a major speech. Um.
• 8:58
  Speaker 1: In terms of what he's trying to accomplish, I think
• 9:00
  Speaker 1: if there's a few things, um, you know, he may
• 9:02
  Speaker 1: make some kind of of a statement on the peace
• 9:04
  Speaker 1: process that would give some clarity as to what the
• 9:07
  Speaker 1: Trump team's vision is for that, because until now he's
• 9:10
  Speaker 1: given really conflicting signals. Um. And I think also Israel
• 9:15
  Speaker 1: is going to be looking very closely to see if
• 9:17
  Speaker 1: there's really any substance to these these hints about closer
• 9:20
  Speaker 1: cooperation for Israel with the wider Arab world, including a
• 9:23
  Speaker 1: Saudi Arabia. You know, I'm struck by the tone. I've
• 9:27
  Speaker 1: been watching some of the a lot of the coverage,
• 9:30
  Speaker 1: particularly President Trump being in realit and being just with
• 9:34
  Speaker 1: all the Saudi Arabian princes and the incredible ceremonies, and
• 9:38
  Speaker 1: they were tracking his visit otto the minute of when
• 9:41
  Speaker 1: he would arrive. What kind of reception has President Trump
• 9:45
  Speaker 1: gotten in Israel? Uh, It's it's funny. Israel certainly can't
• 9:50
  Speaker 1: compete with the Saudi Arabia in terms of extravagance or
• 9:54
  Speaker 1: in or in hospitality. This is a place which has
• 9:58
  Speaker 1: has many good things, but customer service is not really
• 10:01
  Speaker 1: one of its strong points. So there was a very
• 10:03
  Speaker 1: simple welcoming ceremony at the at the airport, which um
• 10:07
  Speaker 1: uh Prime Minister Natanya who had to you know, had
• 10:10
  Speaker 1: to twist his his cabinet minister's arms just to get
• 10:12
  Speaker 1: them to go uh. And then there were some some
• 10:15
  Speaker 1: snaffoos with one of the connected members trying to take
• 10:17
  Speaker 1: a selfie with Trump to nothing. Who's chagrin um. But
• 10:21
  Speaker 1: you know, I think that this kind of, you know,
• 10:23
  Speaker 1: this is kind of the homely atmosphere of Israel. I'm
• 10:26
  Speaker 1: not sure if that's um quite up Trump's alley. You know,
• 10:29
  Speaker 1: you get the sense from his own um real estate
• 10:32
  Speaker 1: career that he might feel more at home in the
• 10:34
  Speaker 1: type of guilded palaces that he saw in in Saudi Arabia.
• 10:37
  Speaker 1: But this is what Israel has to offer, I'm wondering.
• 10:40
  Speaker 1: You know, we've heard a lot right before President Trump left,
• 10:43
  Speaker 1: there have been a lot of right articles written about
• 10:45
  Speaker 1: how he's escaping the turmoil of Washington. He's leaving the
• 10:49
  Speaker 1: the difficulties at home to go abroad. And one of
• 10:52
  Speaker 1: those difficulties came when President Trump perhaps inadvertently gave more
• 10:56
  Speaker 1: information or than than perhaps some in eligence officers wanted
• 11:01
  Speaker 1: him to to the Russian Foreign Minister, and included information
• 11:06
  Speaker 1: that allegedly was given to the US by an Israeli informant. Um.
• 11:12
  Speaker 1: Has there been any discussion about that, if not out
• 11:15
  Speaker 1: loud in back office discussions, have you gotten a sense
• 11:18
  Speaker 1: of what the reaction is like? Uh? In Israel? Yeah,
• 11:22
  Speaker 1: you know, certainly, you know, there was a lot of
• 11:24
  Speaker 1: consternation here. UM. I would note that it hasn't been
• 11:27
  Speaker 1: confirmed that the information came from Israel. There were also
• 11:29
  Speaker 1: some reports that it came from Jordan's, but you know,
• 11:31
  Speaker 1: the working assumption is that it did come from Israel. Um.
• 11:34
  Speaker 1: You know, people here are upset, but in the other hand,
• 11:37
  Speaker 1: you know, they don't really have much option other than
• 11:39
  Speaker 1: to continue sharing intelligence. Um, you know with the US. UM.
• 11:43
  Speaker 1: And in terms of you know how people here are
• 11:45
  Speaker 1: reacting to Trump's domestic problems. Uh, you know, the Prime
• 11:48
  Speaker 1: minister here is also under police investigation. So um. You
• 11:51
  Speaker 1: know this is something which Israeli's are are kind of
• 11:54
  Speaker 1: used to. It's it's the kind of background noise against
• 11:58
  Speaker 1: which you know, government is is conducted here. It's interesting
• 12:01
  Speaker 1: to note, you know, with with both of these leaders,
• 12:03
  Speaker 1: you know, kind of facing such such problems and both
• 12:06
  Speaker 1: feeling that they're hounded by opponents and are and are mistreated.
• 12:10
  Speaker 1: You know, perhaps this could push them to make some
• 12:12
  Speaker 1: kind of a breakthrough. And you know, we've we've certainly
• 12:14
  Speaker 1: seen leaders in the past, like you know, Nixon going
• 12:16
  Speaker 1: to China, you know, being able to make important breakthroughs
• 12:19
  Speaker 1: when they do feel that their their backs are against
• 12:21
  Speaker 1: the wall. You know. One other big issue here, possibly
• 12:24
  Speaker 1: the biggest is I ran, right. I mean, we just
• 12:26
  Speaker 1: had the election in Iran. The more moderate uh person
• 12:30
  Speaker 1: want candidate one? And uh yeah, President Trump has continued
• 12:34
  Speaker 1: with his more hardlined rhetoric, which frankly, my understanding is
• 12:37
  Speaker 1: that Israel would like to see more of. Can you
• 12:39
  Speaker 1: give us a sense of what might come of these
• 12:42
  Speaker 1: meetings that President Trump is having with Prime Minister Nathan
• 12:45
  Speaker 1: yah who and what the implications for Iran could be. Sure,
• 12:50
  Speaker 1: it's interesting because here, you know, even though so much
• 12:52
  Speaker 1: of the headlines, uh, you know deal with the peace process,
• 12:54
  Speaker 1: really Iran is the number one issue, uh and you know, uh,
• 12:58
  Speaker 1: I think it's really officials have have been really gratifying
• 13:00
  Speaker 1: to see the very strong statements that that the president
• 13:02
  Speaker 1: has made on this trip. Um the the speech that
• 13:05
  Speaker 1: he gave in Saudi Arabia which was presenting the the
• 13:08
  Speaker 1: war and terror as uh you know, as as you know,
• 13:11
  Speaker 1: not a not a clash of civilizations or class of religions,
• 13:14
  Speaker 1: but rather uh, you know, people of goodwill versus you know,
• 13:18
  Speaker 1: versus villains. Um you know. So I think that you
• 13:20
  Speaker 1: know that they've been quite hardened here. Um we you know,
• 13:24
  Speaker 1: we we were told, you know, by by a source
• 13:26
  Speaker 1: close to Natanya who the other day that he he
• 13:28
  Speaker 1: is going to really push hard for for new sanctions
• 13:32
  Speaker 1: on Iran that uh, you know, he wants to create
• 13:34
  Speaker 1: what but this advisor termed a dirty Harry moment, referring
• 13:39
  Speaker 1: to um, you know, to the clinice Wood films where
• 13:41
  Speaker 1: he would dare the bad guys to shoot him so
• 13:43
  Speaker 1: that he could blow them away. Uh. So that you know,
• 13:45
  Speaker 1: Israel's really hoping that the you know, that the that
• 13:47
  Speaker 1: the president can can really insist on Iran changing its
• 13:51
  Speaker 1: behavior and if it doesn't, you know, perhaps set up
• 13:53
  Speaker 1: a confrontation that that would improve the situation to Israel's advantage. Mclarnald,
• 13:58
  Speaker 1: thank you so much for keeping tabs on this and
• 14:01
  Speaker 1: I'm sure we will hear more about the trip. Michael
• 14:03
  Speaker 1: Arnold is a bureau chief for Israel and Palestinian Territories
• 14:07
  Speaker 1: for Bloomberg News, speaking with us about President Trump's trip
• 14:11
  Speaker 1: to the Middle East. We want to take a moment
• 14:22
  Speaker 1: to let you know about something new from Bloomberg. Starting
• 14:25
  Speaker 1: right now, you can use our io s app or
• 14:28
  Speaker 1: our new Google Chrome extension to scan any news story
• 14:31
  Speaker 1: on any website, instantly revealing relevant news and market data
• 14:35
  Speaker 1: from Bloomberg and other sources related to companies and people
• 14:39
  Speaker 1: you're reading about. So no matter where you're reading the news,
• 14:42
  Speaker 1: you can bring the power of Bloomberg's news and data
• 14:45
  Speaker 1: with you. It's pretty amazing. Download our Io s app
• 14:48
  Speaker 1: or search for the Bloomberg extension on the Chrome Store
• 14:51
  Speaker 1: to try it out. Learn more at Bloomberg dot com
• 14:54
  Speaker 1: slash lens. We've heard a lot about stagflation, but what
• 15:04
  Speaker 1: about stagulation? That term was coined by David Service, chief
• 15:09
  Speaker 1: market strategist at Jeffreys ll l C, and he joins
• 15:13
  Speaker 1: us now on some of his latest comments. David Um,
• 15:16
  Speaker 1: thank you so much for joining US. I was really
• 15:18
  Speaker 1: struck by your latest miss if you're talking about how
• 15:22
  Speaker 1: regulation is really, uh stymying growth in our economy and
• 15:27
  Speaker 1: in a way that people don't really recognize, and you
• 15:29
  Speaker 1: had a statistic that was pretty mind boggling to me.
• 15:32
  Speaker 1: You said that data suggests that nearly ten of US
• 15:36
  Speaker 1: g d P is associated with the cost of federal
• 15:39
  Speaker 1: regulation intervention. Really well, that's according to the Competitive Enterprise
• 15:44
  Speaker 1: Institute Lisa and UM. There's a lot of different studies
• 15:47
  Speaker 1: that The problem I've had in digging into the costs
• 15:52
  Speaker 1: of regulation is that, unfortunately, it becomes quite political quite quickly,
• 15:57
  Speaker 1: and so the think tanks that are associated with the
• 16:00
  Speaker 1: right come up with some numbers, that think tanks on
• 16:03
  Speaker 1: the left come up with other numbers. The economics profession
• 16:06
  Speaker 1: in and of itself is not particularly good at measuring
• 16:09
  Speaker 1: these things, and so you're really kind of, you know,
• 16:12
  Speaker 1: sort of throwing throwing your hands up in the air
• 16:14
  Speaker 1: a little bit and trying to trying to play some
• 16:16
  Speaker 1: guessing games, which by the way, is pretty true about
• 16:20
  Speaker 1: everything in the economics profession, frankly. But but it's just
• 16:23
  Speaker 1: says the chief market strategist at Jeffreys love it, but
• 16:26
  Speaker 1: it's particularly acute in this study of regulation. And I
• 16:31
  Speaker 1: think also it kind of um, you know, it gets
• 16:34
  Speaker 1: to the heart of a debate between you know, traditionally
• 16:36
  Speaker 1: interventionist economists and those who favor, you know, much less
• 16:40
  Speaker 1: government interventions. So it really gets to the heart of
• 16:43
  Speaker 1: the kind of Chicago School freshwater saltwater debates that have
• 16:47
  Speaker 1: gone on from all. Right, so let's put aside the
• 16:49
  Speaker 1: exact rigor with which some of these estimates are established.
• 16:53
  Speaker 1: A lot of people would agree that regulatory burdens have increased,
• 16:57
  Speaker 1: particularly since the two thousand and eight financial crisis. And
• 17:01
  Speaker 1: you make an argument that this has materially limited growth,
• 17:05
  Speaker 1: regardless of whether it's ten percent or not. Uh, And
• 17:09
  Speaker 1: that these regulations are largely nonproductive. In other words, they
• 17:14
  Speaker 1: don't really add anything to the economy, and that it
• 17:17
  Speaker 1: has these have reduced competition. Um. Do you think that
• 17:22
  Speaker 1: all regulations are nonproductive and that all regulations reduce competition? No? No,
• 17:28
  Speaker 1: And I think, look, there's other forces that can reduce
• 17:30
  Speaker 1: competition besides regulation. What I guess I'm poining. By the way,
• 17:33
  Speaker 1: that was a great question that we could probably talk
• 17:35
  Speaker 1: about for the next five days or more. But let
• 17:39
  Speaker 1: me let me just let me just try to get
• 17:41
  Speaker 1: to kind of the heart of the regulatory burden story.
• 17:45
  Speaker 1: One of the things that we've seen added significantly in
• 17:48
  Speaker 1: a lot of businesses are hours worked associated with things
• 17:51
  Speaker 1: like compliance and regulation. In the financial industry, for example,
• 17:54
  Speaker 1: I think the latest count has city banks compliance departments
• 17:57
  Speaker 1: somewhere in the neighborhood of which is the same size
• 18:01
  Speaker 1: as Golden Sas. That is a marked increase, significant increase
• 18:06
  Speaker 1: over what that department looked like prior to the crisis.
• 18:09
  Speaker 1: Those hours worked are are serving a purpose. We're we're
• 18:13
  Speaker 1: overseeing a systemically important institution and theory uh in a
• 18:18
  Speaker 1: better way to stave off financial crisis in the future.
• 18:21
  Speaker 1: But those hours work don't actually produce returns. They don't
• 18:24
  Speaker 1: produce GDP, they don't nobody's making a widget in that
• 18:28
  Speaker 1: in that compliance department. And so I think what you
• 18:30
  Speaker 1: have to come to grips with. And this is true
• 18:31
  Speaker 1: of environmental regulation, that's true of health care regulation. We've
• 18:36
  Speaker 1: added an enormous amount of hours worked to the menu
• 18:40
  Speaker 1: of of of job creation in the United States post crisis,
• 18:45
  Speaker 1: where a lot of those hours worked aren't actually contributing
• 18:47
  Speaker 1: to final demand in a traditional way, so we don't
• 18:50
  Speaker 1: get a lot of GDP per hour work, which is
• 18:54
  Speaker 1: my opinion one of the reasons why productivity, which is
• 18:56
  Speaker 1: output per hour work, has actually been slowing quite substantially,
• 19:00
  Speaker 1: and why returns on capital have been lower or our
• 19:03
  Speaker 1: star has been lower in the BEDS model, and why
• 19:06
  Speaker 1: potential growth appears to be closer to one and a
• 19:09
  Speaker 1: half two rather than two and a half three. So
• 19:11
  Speaker 1: I think a lot of that adds up. Now. I mean,
• 19:14
  Speaker 1: I'm not making a statement about is it good or bad.
• 19:17
  Speaker 1: I'm making a statement about what it means for interest
• 19:19
  Speaker 1: rates and what it means for economic growth. We don't
• 19:21
  Speaker 1: measure environmental quality in economic growth. We don't measure the
• 19:25
  Speaker 1: quality of our groundwater, or the likelihood or unlilihood of
• 19:28
  Speaker 1: a financial of financial instability event Those don't get put
• 19:32
  Speaker 1: into GDP, and so you have to make some u
• 19:36
  Speaker 1: you have to make some assumptions about well about whether
• 19:39
  Speaker 1: those things are good or bad. And I think a
• 19:41
  Speaker 1: lot of people would agree they're pretty good. Right well,
• 19:43
  Speaker 1: But but look, so let's bring it down to the market,
• 19:45
  Speaker 1: right because that's that's why this matters, is because if
• 19:48
  Speaker 1: you think that this is going to be uh, a
• 19:50
  Speaker 1: story of aging demographics and just sort of the change
• 19:53
  Speaker 1: in the overall economic global climate, then it's going to
• 19:58
  Speaker 1: be hard to change that, right, and therefore interest rates
• 20:01
  Speaker 1: would remain low no matter what any government almost does. Right.
• 20:05
  Speaker 1: But if you believe that there is a step like
• 20:07
  Speaker 1: cutting regulation that could materially boost growth, then we would
• 20:10
  Speaker 1: move away from this dag inflation uh kind of picture
• 20:13
  Speaker 1: and towards one where you could see interest rates rise
• 20:16
  Speaker 1: more substantially and stocks get a boost more substantially. Correct.
• 20:20
  Speaker 1: I mean, that's the reason why this matters for markets. Well,
• 20:22
  Speaker 1: I think you're exactly I think I think you're exactly
• 20:24
  Speaker 1: right on the first. And that's why we're talking about it. Um.
• 20:28
  Speaker 1: We're talking about it because, um, is it a demand
• 20:32
  Speaker 1: side problem or is it a supply side problem. Is
• 20:34
  Speaker 1: it a lack of aggregate demand, as my friend Larry
• 20:37
  Speaker 1: Summers would argue, because of aging demographics, because of income inequality,
• 20:41
  Speaker 1: because of a number of other issues that have created
• 20:43
  Speaker 1: this savings glut globally, or is this just that people
• 20:47
  Speaker 1: have underinvested, not because there's you know, there's some sort
• 20:51
  Speaker 1: of you know, you know, demand side problem. But they're
• 20:54
  Speaker 1: actually under investing because the supply side restrictions, the regulatory
• 20:59
  Speaker 1: environment made it very complicated to invest heavily in the
• 21:02
  Speaker 1: United States and in many other countries post crisis. And
• 21:05
  Speaker 1: I think, look, I think you can make an argument
• 21:07
  Speaker 1: for a demand shock pretty early in the crisis. There's
• 21:10
  Speaker 1: no question there was one in A eight nine. I
• 21:12
  Speaker 1: think what happened is starting in ten we started to
• 21:14
  Speaker 1: see this demand shock dissipate, but a regulatory environment emerged
• 21:18
  Speaker 1: that created a much more stagulatory outcome. If that's a word,
• 21:24
  Speaker 1: um that I'm going to create, uh, stagulatory outcome then
• 21:27
  Speaker 1: otherwise would have happened. And I think the exciting thing, um,
• 21:31
  Speaker 1: you know, there's a lot of exciting things about watching
• 21:33
  Speaker 1: our current political environment, um, notwithstanding you know SNL skits
• 21:37
  Speaker 1: in late night TV, which are pretty exciting to watch
• 21:39
  Speaker 1: as well. But I think the one exciting thing I
• 21:41
  Speaker 1: would say is, and what I've talked about with our
• 21:44
  Speaker 1: clients mostly is you know, it's not the trade, it's
• 21:46
  Speaker 1: not the immigration, it's not even the fiscal and the
• 21:49
  Speaker 1: tax stuff. That the exciting thing about these policies is
• 21:53
  Speaker 1: that there's a there's a sort of a move toward
• 21:55
  Speaker 1: deregulation which is being implemented at the departmental levels to
• 22:00
  Speaker 1: put me at the Interior Department, at the Commerce Department,
• 22:03
  Speaker 1: at the Treasury Department. It's not even a congressional push,
• 22:06
  Speaker 1: and I think that's a tailwind for exactly what you
• 22:09
  Speaker 1: were talking about, higher real returns to capital um, higher
• 22:13
  Speaker 1: productivity growth. Now, wait, David, David, just a real quick
• 22:17
  Speaker 1: one one line yes or no? Do you think that
• 22:21
  Speaker 1: the regulatory reform is happening right now? I do. I
• 22:26
  Speaker 1: think that these departments are changing the business environment so
• 22:30
  Speaker 1: that less regulation is coming down every day from those
• 22:33
  Speaker 1: in charge of pushing that regulation for which the department has.
• 22:37
  Speaker 1: David Service, thank you so much for joining us. David Service,
• 22:39
  Speaker 1: the chief market strategist at Jeffreys based in New York.
• 22:55
  Speaker 1: Ford shares up about one and a half percent after
• 22:58
  Speaker 1: news emerged at the former CEO, Mark Fields, was being
• 23:03
  Speaker 1: removed from office and being replaced by Turron specialists Jim Hackett.
• 23:07
  Speaker 1: Keith Notton has been following this and is at Ford
• 23:10
  Speaker 1: right now. Keith Noton is auto editor at large for
• 23:13
  Speaker 1: Bloomberg in Detroit. Keith, can you tell us did this
• 23:17
  Speaker 1: come about? Kind of suddenly, because it seems to take
• 23:19
  Speaker 1: a lot of people by surprise. Yeah, it happened very quickly.
• 23:23
  Speaker 1: We've known for a couple of weeks that Mark Fields
• 23:26
  Speaker 1: had been on the hot seat. The board had, um uh,
• 23:29
  Speaker 1: kind of grilled him at a meeting a couple of
• 23:31
  Speaker 1: weeks ago in advance of the annual meeting to find
• 23:34
  Speaker 1: out what was going on with the strategy because as
• 23:36
  Speaker 1: you said, the stock has been way down, profits are
• 23:39
  Speaker 1: falling this year. But then they had another board meeting
• 23:42
  Speaker 1: on Friday and decided it was time for a change.
• 23:45
  Speaker 1: So Bill Ford, the executive chairman, then went and met
• 23:48
  Speaker 1: with Mark Fields, who said he would resign. And then
• 23:51
  Speaker 1: Bill Ford turned to Jim Hackett and said, you're on
• 23:53
  Speaker 1: new man. So they focused today and talking about this
• 23:57
  Speaker 1: about how they need to speed up decision making. And
• 23:59
  Speaker 1: I think this was an example of the first one.
• 24:02
  Speaker 1: So let's talk about Jim Hackett. What do we know
• 24:04
  Speaker 1: about him? What's his background? Well, so he was for
• 24:07
  Speaker 1: years at the office furniture maker Steelcase, which is based
• 24:10
  Speaker 1: in Grand Rapids, Michigan, and um he really kind of
• 24:14
  Speaker 1: institute a cultural change there. He got them to think
• 24:18
  Speaker 1: less about, you know, just making furniture and more about
• 24:20
  Speaker 1: how people work and how offices should be designed, which
• 24:24
  Speaker 1: kind of ushered in the new era of more collaborative workspaces.
• 24:28
  Speaker 1: Uh and stead of the cubical farms that we used
• 24:31
  Speaker 1: to know and hate and now and then after that
• 24:34
  Speaker 1: he went to the University of Michigan al Modear. He
• 24:37
  Speaker 1: played football for Sembechler, and he uh he kind of
• 24:40
  Speaker 1: turned around their athletic department and made a very famous,
• 24:43
  Speaker 1: high profile higher in Jim Hobba the coach football team,
• 24:47
  Speaker 1: which then started winning. So he's had a couple of
• 24:50
  Speaker 1: turnarounds under his belt. Afford is not the sort of
• 24:53
  Speaker 1: classic turnaround where it's in crisis. It's expected to make
• 24:57
  Speaker 1: nine billion dollars this year pre tax, but is definitely
• 25:00
  Speaker 1: lagging its cross town rival General Motors in the product
• 25:04
  Speaker 1: lineup it has today and even in the electric vehicles
• 25:07
  Speaker 1: it has coming tomorrow. Well, what was the main problem
• 25:10
  Speaker 1: with Mark Fields. I mean, yes, he did make some decisions.
• 25:14
  Speaker 1: We've talked about this before about how perhaps he didn't
• 25:16
  Speaker 1: put as much emphasis on SUVs or light trucks that
• 25:20
  Speaker 1: other competitors did, and that sort of missed the mark
• 25:23
  Speaker 1: a little bit. With the increase that we've seen in
• 25:26
  Speaker 1: the sales of those vehicles in the past year or two.
• 25:29
  Speaker 1: But aside from that, I mean, investing in the future
• 25:31
  Speaker 1: doesn't seem like something that necessarily any successor would want
• 25:34
  Speaker 1: to change, right, Yeah, I think you know, he definitely
• 25:38
  Speaker 1: suffered by comparison to his predecessor, Alan Mollawley, who was
• 25:41
  Speaker 1: the rock star, but also in the sort of execution.
• 25:44
  Speaker 1: The magic that Molluley brought was this singular focus on
• 25:48
  Speaker 1: turning the company around. He called it his one forward Plan.
• 25:52
  Speaker 1: And then Mark Fields came along with this very complicated strategy.
• 25:55
  Speaker 1: It's you know about one foot today and one ft
• 25:57
  Speaker 1: and tomorrow or an automotive and mobility company. People had
• 26:00
  Speaker 1: a hard time understanding, you know, what he was aiming for,
• 26:04
  Speaker 1: and investors fled the stock. They didn't really understand where
• 26:09
  Speaker 1: he was going. And I think the employees as well
• 26:12
  Speaker 1: were confused and had a hard time kind of marshaling
• 26:15
  Speaker 1: themselves in all marching in the same direction. And so
• 26:18
  Speaker 1: what will I mean, I'm just trying to imagine somebody
• 26:23
  Speaker 1: with a furniture background and a football background coming in
• 26:25
  Speaker 1: to come up with like a really simple message for Ford,
• 26:28
  Speaker 1: we will the simple message be that we're gonna expect
• 26:30
  Speaker 1: from Jim Hackett. Well, he said today that it's not
• 26:34
  Speaker 1: about talking about these two different companies within one company.
• 26:37
  Speaker 1: That they're a singular company and you know they're going
• 26:40
  Speaker 1: to make money now and in the future, and they're
• 26:42
  Speaker 1: they're going to better explain how they're going to do that,
• 26:44
  Speaker 1: how they're going to do it with driverless cars and
• 26:46
  Speaker 1: car sharing and electric vehicles. But it's all part of
• 26:50
  Speaker 1: the piece instead of two separate pieces. And the key
• 26:54
  Speaker 1: and you can't underline it enough is they're going to
• 26:57
  Speaker 1: move quicker, move faster. For under Mark Fields has viewed
• 27:01
  Speaker 1: as having been a little indecisive and a little slow
• 27:04
  Speaker 1: off the mark, so they're going to try and change
• 27:06
  Speaker 1: that and just real quick. It seems like shareholders are
• 27:09
  Speaker 1: not swish. I mean, one and a half percent is
• 27:13
  Speaker 1: not that big of a move for such a big
• 27:15
  Speaker 1: change like this. Well, after declining under Mark Fields, I
• 27:19
  Speaker 1: think it's it's like a green shoot. There's promise, but
• 27:25
  Speaker 1: but yeah, they have a lot of ground to make
• 27:27
  Speaker 1: up for all of the value that's been destroyed over
• 27:30
  Speaker 1: the last three years. I'm sure that it's a very
• 27:32
  Speaker 1: interesting day to be at Ford Keith Noton, Thank you
• 27:34
  Speaker 1: so much for joining us from their Keith Notton is
• 27:37
  Speaker 1: our editor at large focusing on autos for Bloomberg News,
• 27:42
  Speaker 1: and he is based in Detroit. Thanks for listening to
• 27:47
  Speaker 1: the Bloomberg P and L podcast. You can subscribe and
• 27:50
  Speaker 1: listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast
• 27:54
  Speaker 1: platform you prefer. I'm Pim Fox. I'm on Twitter at
• 27:58
  Speaker 1: pim Fox. I'm on Twitter at Lisa Abramo. It's one
• 28:01
  Speaker 1: before the podcast. You can always catch us worldwide on
• 28:04
  Speaker 1: Bloomberg Radio